nClosures Inc. v. Block and Company Inc.

Filing 140

MEMORANDUM Opinion Signed by the Honorable Samuel Der-Yeghiayan on 12/11/2013: Mailed notice (mw, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
nCLOSURES INC.,

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Plaintiff,
v.
BLOCK AND COMPANY, INC.,
Defendant.

No. 12 C 9358

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter is before the court on Plaintiff nClosures Inc.’s (nClosures) motion
for partial summary judgment and Defendant Block and Company, Inc.’s (Block)
motion for summary judgment. For the reasons stated below, nClosures’ motion for
partial summary judgment is denied, and Block’s motion for summary judgment is
granted.

BACKGROUND
nClosures alleges that it designed and currently sells certain tablet enclosures,
including the Rhino iPad Enclosure (Rhino Enclosure). Tablet enclosures are used in
retail stores, classrooms, and other places of business to prevent theft of or damage to
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tablets. nClosures has allegedly invested more than $300,000 in developing
confidential information relating to its tablet enclosures, including product designs,
assembly drawings, and summaries relating to the market, competitor pricing, and
customer information.
In May of 2011, Greg Carlson (Carlson), the Chief Executive Officer of
Block, allegedly approached the founders of nClosures, Daniel McKean (McKean)
and Daniel Gorman (Gorman), and proposed that Block and nClosures explore a
partnership in the tablet enclosure industry. On May 24, 2011, nClosures and Block
allegedly executed a Confidentiality and Non-Disclosure Covenant (NDA), and
thereafter nClosures allegedly provided Block with nClosures’ confidential
information, including designs, market knowledge, manufacturing set-up, solid
models, and assembly drawings.
nClosures alleges that Block used nClosures’ confidential information to
create its own iPad tablet enclosure, the Atrio (Atrio). Block allegedly reiterated that
a partnership existed between the parties on several occasions during the period of
time that Block was developing the Atrio. On April 13, 2012, after allegedly
receiving further assurances from Block regarding the partnership between the two
companies, McKean and Gorman allegedly visited Block’s principal place of
business and disclosed additional market knowledge to Block. On May 9, 2012,

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Block allegedly informed nClosures that Block had terminated Carlson’s
employment with Block but that Carlson would serve in a transitional role for a
period of time. On June 6, 2012, Carlson allegedly indicated to nClosures that Block
intended to renegotiate the partnership between the two companies.
On August 1, 2012, Block allegedly launched the Atrio, and on August 13,
2012, David Kaufman (Kaufman) of Block allegedly informed nClosures that Block
would no longer sell products designed by nClosures, effectively terminating the
relationship between the companies. Block allegedly has not shared any of the
benefits it has derived from the development and manufacture of the Atrio with
nClosures. In addition, Block allegedly continues to sell tablet enclosures to the
public that Block represents are Rhino Enclosures, which has allegedly caused
customer confusion regarding whether nClosures or Block is the source of such
products.
nClosures brought the instant action and includes in its amended complaint a
fraud claim (Count I), a trade secret misappropriation claim (Count II), a breach of
fiduciary duty claim (Count III), a breach of contract claim (Count IV), and an unfair
competition claim brought pursuant to the Lanham Act, 15 U.S.C. § 1051 et seq.,
(Count V). On December 3, 2012, nClosures filed a motion for preliminary
injunction based upon the breach of contract claim (Count IV), and the motion was

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granted on January 10, 2013. On June 24, 2013, the parties stipulated to dismiss
with prejudice the unfair competition claim (Count V). nClosures now moves for
summary judgment on Count I and Count IV, and Block now moves for summary
judgment on all remaining counts.

LEGAL STANDARD
Summary judgment is appropriate when the record, viewed in the light most
favorable to the non-moving party, reveals that there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law.
Fed.R.Civ.P. 56(c); Smith v. Hope School, 560 F.3d 694, 699 (7th Cir. 2009). A
“genuine issue” in the context of a motion for summary judgment is not simply a
“metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co., Ltd. v.
Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, a genuine issue of material
fact exists when “the evidence is such that a reasonable jury could return a verdict for
the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);
Insolia v. Phillip Morris, Inc., 216 F.3d 596, 599 (7th Cir. 2000). In ruling on a
motion for summary judgment, the court must consider the record as a whole, in a
light most favorable to the non-moving party, and draw all reasonable inferences in
favor of the non-moving party. Anderson, 477 U.S. at 255; Bay v. Cassens

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Transport Co., 212 F.3d 969, 972 (7th Cir. 2000). When there are cross motions for
summary judgment, the court should “construe the evidence and all reasonable
inferences in favor of the party against whom the motion under consideration is
made.” Premcor USA, Inc. v. American Home Assurance Co., 400 F.3d 523, 526-27
(7th Cir. 2005).

DISCUSSION

I. Fraud Claim (Count I)
nClosures argues in Count I that Block gave a false assurance of partnership,
that Block’s misrepresentation was intentional, that nClosures relied on Block’s
assurance of partnership, and that nClosure’s reliance was detrimental to nClosures.
Block contends that the alleged false assurance was not a statement of fact but rather
a statement of opinion, that there is no evidence that Block made assurances knowing
they were false at the time, that nClosures was already providing Block with design
files, and that nClosures’ fraud claim is preempted by the Illinois Trade Secrets Act
(ITSA), 765 ILCS 1065/1 et seq.
To establish a fraud claim under Illinois law, a plaintiff must prove that: “(1)
defendant made a false statement; (2) of material fact; (3) which defendant knew or

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believed to be false; (4) with the intent to induce plaintiff to act; (5) the plaintiff
justifiably relied on the statement; and (6) the plaintiff suffered damage from such
reliance.” Houben v. Telular Corp., 231 F.3d 1066, 1074 (7th Cir. 2000)(quoting
Williams v. Chicago Osteopathic Health Sys., 274 Ill. App. 3d 1039 (Ill. App. Ct.
1995)). In establishing a misrepresentation of fact, “[a] ‘statement which is merely
an expression of opinion or which relates to future or contingent events, expectations
or probabilities . . . ordinarily does not constitute an actionable misrepresentation’
under Illinois law.” Continental Bank, N.A. v. Meyer, 10 F.3d 1293, 1298 (7th Cir.
1993)(quoting Peterson Indus., Inc. v. Lake View Trust and Sav. Bank, 584 F.2d 166,
169 (7th Cir. 1978)).
nClosures argues that it relied on Block’s false assurance of partnership and
was deceived into sharing its confidential design and other information without
compensation. (P SJ Mem. 12). nClosures points to the statement by Carlson that
“there is nothing ‘going on or planned’ on our side to subvert our partnership,”
which was made in March 2012. (P Ex. 7), (R PSF Par. 21). However, the
undisputed facts show that Block received the alleged confidential information from
nClosures in August 2011, approximately seven months prior to the statement being
made. (R DSF Par. 16), (P SJ Mem. 8). Therefore, nClosures could not have relied
on Carlson’s statement in allowing Block access to nClosures’ confidential

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information, and the required elements of reliance and damages for a fraud claim
cannot be satisfied.
Block argues that nClosures cannot meet the elements for an actionable fraud
claim based on the undisputed facts. In response to Block’s motion for summary
judgment, nClosures argues that the statement allowed Block to elicit nClosures’
price information and to encourage nClosures to raise its prices. (P Ans. 5).
nClosures has not pointed to sufficient evidence to show whether Block received
pricing information prior to the statement made by Carlson. However, even
assuming that Block received new pricing information after March 2012 and
nClosures otherwise acted in reliance on Carlson’s statement, nClosures has not
provided sufficient facts showing that nClosures was damaged by providing Block
with pricing information.
nClosures has failed to point to sufficient evidence to support its motion for
summary judgment and to withstand Block’s motion for summary judgment on
Count I, and Block has pointed to sufficient evidence to support its motion for
summary judgment on Count I. Therefore, nClosures’ motion for summary
judgment on Count I is denied, and Block’s motion for summary judgment on Count
I is granted.

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II. Trade Secret Misappropriation Claim (Count II)
Block argues in Count II that nClosures’ design files are not trade secrets and
that the Atrio was designed independently and without use of nClosures’ design files.
A trade secret misappropriation claim under the ITSA requires proof that the
information at issue: (1) “was a trade secret,” (2) that “was misappropriated,” and
(3) that “was used in the defendant’s business.” Learning Curve Toys, Inc. v.
Playwood Toys, Inc., 342 F.3d 714, 721 (7th Cir. 2003).
For information to qualify as a trade secret under the ITSA, the information
must be: (1) “sufficiently secret to derive economic value, actual or potential, from
not being generally known to other persons who can obtain economic value from its
disclosure or use” and (2) “the subject of efforts that are reasonable under the
circumstances to maintain its secrecy or confidentiality.” Id.

A. Efforts to Keep Confidential
Block has provided sufficient undisputed evidence showing that the design
files were not the subject of reasonable efforts under the circumstances to maintain
the design files’ secrecy. Therefore, the issue as to whether Block has provided
sufficient evidence to support summary judgment on the issue of nClosures’ design
files being sufficiently secret to derive economic value need not be decided. As to

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the secrecy requirement, “only in an extreme case can what is a ‘reasonable’
precaution be determined on a motion for summary judgment, because the answer
depends on a balancing of costs and benefits that will vary from case to case and so
require estimation and measurement by persons knowledgeable in the particular field
of endeavor involved.” Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d
174, 179 (7th Cir. 1991). However, in determining reasonableness, nClosures did
not have to undergo “extravagant, productivity-impairing measures to maintain their
[design files’] secrecy.” Id. at 180.
The undisputed facts show that nClosures and Block entered into the NDA in
May 2011 “‘relative to a potential business relationship with respect to iPad
Enclosures,’” (R DSF Par. 8), that nClosures and Block unsuccessfully attempted to
negotiate a written manufacturing distribution and licensing agreement, (R DSF Par.
9, 14), that nClosures and Block did business with each other absent any written
agreement, (R DSF Par. 17), and that nClosures provided its design files to Block so
that Block could manufacture Rhino products for each party to sell to their respective
customers. (R DSF Par. 27). The undisputed facts also indicate that nClosures never
had a written confidentiality or nondisclosure agreement with nClosures’ designer,
Ian LeBlanc, (R DSF Par. 28, 70), and that nClosures did not have a signed
nondisclosure agreement with Dalsin Industries (Dalsin) when Dalsin was making

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the original Rhino tablet enclosure in May 2011 (R DSF Par. 72). Further, nClosures
fails to put forth sufficient facts to show that it took any reasonable efforts to
maintain the secrecy of its design files. nClosures’ arguments that it operated on an
understanding pursuant to Dalsin policy and industry practice that its confidential
information would be maintained in confidence, (R DSF Par. 72), and that
“nClosures has never disclosed the Rhino design files to a manufacturer without the
understanding that the files are to be maintained in confidence,” (P Ans. 8), are not
supported by sufficient evidence.

B. Misappropriation
Block has pointed to sufficient evidence that shows that the requirements for
misappropriation under the ITSA are not met. ITSA defines misappropriation as
“[d]isclosure or use of a trade secret of a person without express or implied consent
by another person who . . . at the time of disclosure or use, knew or had reason to
know that knowledge of the trade secret was . . . acquired under circumstances giving
rise to a duty to maintain its secrecy or limit its use.” Mangren Research and
Development Corp. v. National Chemical Company, Inc., 87 F.3d 937, 943 (7th Cir.
1996); see also Seng-Tiong Ho v. Taflove, 648 F.3d 489, 503 (7th Cir. 2011)(stating
that misappropriation “involves the acquisition of a trade secret through improper

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means, which requires the breach of a confidential relationship or other duty to
maintain secrecy”). In this case, it is undisputed that even though the NDA was
executed for purposes of exploring a possible business agreement, no written
business agreement was entered. Further, it is undisputed that no other manufacturer
operated under a confidentiality agreement with nClosures.
Block has pointed to sufficient evidence that nClosures failed to maintain the
secrecy of its design files or meet the requirements for a misappropriation claim
under ITSA. Therefore, Block’s motion for summary judgment on Count II is
granted.

III. Breach of Fiduciary Duty Claim (Count III)
As to Count III which is nClosures’s breach of fiduciary duty claim, Block
argues, in part, that no partnership or joint venture existed between nClosures and
Block because the parties did not share in the profits or losses made on their
respective sales. In addition, Block argues that it did not breach any such fiduciary
duty, and that the ITSA preempts nClosures’ breach of fiduciary duty claim.
The elements for a breach of fiduciary duty claim are: (1) that “a fiduciary
duty exists,” (2) that “the fiduciary duty was breached,” and (3) that “the breach
proximately caused the injury of which the plaintiff complains.” Ball v. Kotter, 723

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F.3d 813, 826 (7th Cir. 2013). The existence of fiduciary duties can be established
either “as a matter of law in certain relationships including partnerships and joint
ventures” or through special circumstances. Autotech Technology Limited
Partnership v. Automationdirect.com, 471 F.3d 745, 748-49 (7th Cir. 2006).
To establish a partnership under Illinois law, “the plaintiff must show that the
parties (1) joined together to carry on a trade or venture, (2) for their common
benefit, (3) with each contributing property or services to the enterprise, and (4)
having a community of interest in the profits.” Id. at 748. To establish a joint
venture under Illinois law, “the plaintiff must prove (1) an express or implied
agreement to carry on some enterprise; (2) a manifestation of intent by the parties to
be associated as joint ventures; (3) a joint interest as shown by the contribution of
property, financial resources, effort, skill or knowledge; (4) a degree of joint
proprietorship or mutual right to the exercise of control over the enterprise; and (5) a
provision for joint sharing of profits and losses.” Id. To establish special
circumstances, “courts consider the degree of kinship between the parties; the
disparity in age, health, mental condition, education, and business experience
between the parties; and the extent to which the servient party entrusted his business
affairs to the dominant party and placed trust and confidence in it.” Id. at 749.
The record does not indicate that nClosures shared its profits with Block,
which is one of the key requirements for establishing a partnership or joint venture.
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It is undisputed that Block manufactured the products for nClosures at a certain price
and nClosures would make a profit on units sold or Block could buy back units at a
higher fixed price. However, there was no joint sharing of profits and losses.
Moreover, the undisputed facts show that while attempting to negotiate a written
agreement, all drafts of that agreement contained a provision acknowledging that
nothing in the conduct of either party “shall be deemed to constitute either party an
agent, partner, joint venturer or employee of the other.” (R DSF Par. 9, 11). Block
has pointed to sufficient evidence that no fiduciary duty was created since there was
no partnership, joint venture, or special circumstances. Therefore, Block’s motion
for summary judgment on Count III is granted.

IV. Breach of Contract Claim (Count IV)
nClosures argues in Count IV that Block breached the confidentiality
provision of the NDA by using the Rhino design files to develop the Atrio, and that
nClosures was damaged by the breach because nClosures missed an opportunity to
earn a design fee and was forced to bring the instant action. Block argues that Block
did not breach the NDA because the design files were not confidential, and that
nClosures’ damages claim based on unjust enrichment is insufficient because no
actual damages were proven.
The elements for a breach of contract claim under Illinois law are: “(1) the
existence of a valid and enforceable contract; (2) substantial performance by the
plaintiff; (3) a breach by the defendant; and (4) resultant damages.” TAS
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Distributing Co. v. Cummins Engine Co., 491 F.3d 625, 631 (7th Cir. 2007). As to
the damages element, “a plaintiff must establish both ‘that he sustained damages . . .
[and] he must also establish a reasonable basis for computation of those damages.’”
Id. at 632 (quoting Ellens v. Chicago Area Office Fed. Credit Union, 216 Ill. App. 3d
101 (Ill. App. Ct. 1991)). While the “party claiming damage bears the burden of
proving those damages to a reasonable degree of certainty,” if the “party establishes
that it is entitled to damages but fails to prove the amount of those damages to a
reasonable degree of certainty, only nominal damages are recoverable at the
discretion of the trial judge.” Id.; see also Dynegy Marketing and Trade v. Multiut
Corp., 648 F.3d 506, 518 (7th Cir. 2011)(stating that “[p]laintiffs are not required to
prove damages to the exact cent” but “they must establish a ‘reasonable basis for
computing damages’”)(quoting Razor v. Hyundai Motor Am., 222 Ill.2d 75 (Ill.
2006)). Causation must also be established with reasonable certainty in the context
of the alleged damages. Id. at 633.
Under Illinois law, a confidentiality agreement will be enforced only “when
the information sought to be protected is actually confidential and reasonable efforts
were made to keep it confidential.” Tax Track Systems Corp. v. New Investor World,
Inc., 478 F.3d 783, 787 (7th Cir. 2007). While “[t]he information need not always be
kept under lock and key only for the viewing eyes of company officials with the
highest security clearance,” “[i]f the party seeking to protect its information ‘did not
think enough of it to expend resources on trying to prevent lawful appropriation of it,
this is evidence that it is not an especially valuable interest.’” Id. (quoting Curtis
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1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir. 1994)). Courts evaluate how much
effort is reasonable to keep information confidential on a case-by-case basis. Id.
(citing Rockwell Graphic Systems, 925 F.2d at 179). While typically this is an issue
for the jury, “[i]n some circumstances . . . it may be readily apparent that reasonable
measures simply were not taken.” Id. (citing Rockwell Graphic Systems, 925 F.2d at
179-80).
As previously discussed, nClosures did not have a written confidentiality or
nondisclosure agreement with its own designer nor did it have similar agreements
with its manufacturers. (R DSF Par. 28, 70, 72). nClosures’ argument that it had an
“understanding that the files are to be maintained in confidence,” (P Ans. 8) is not
supported by sufficient evidence. Since Block has provided sufficient undisputed
evidence showing that the design files were not the subject of reasonable efforts
under the circumstances to maintain the design files’ secrecy, the information within
the confidentiality agreement is not protected. Therefore, Block’s motion for
summary judgment on Count IV is granted.

CONCLUSION
Based on the foregoing analysis, nClosures’ motion for partial summary
judgment is denied, and Block’s motion for summary judgment is granted.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: December 11, 2013

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