nClosures Inc. v. Block and Company Inc.

Filing 29

MEMORANDUM Opinion Signed by the Honorable Samuel Der-Yeghiayan on 1/15/2013: 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 a preliminary injunction. For the reasons stated below, the motion 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
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

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customer information.
In May of 2011, Greg Carlson (Carlson), the Chief Executive Officer of
Defendant Block and Company, Inc. (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 NonDisclosure 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,
Block allegedly informed nClosures that Block had terminated Carlson, 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
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would no longer sell products designed by nClosures, effectively terminating the
partnership 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). nClosures now moves for a preliminary injunction based upon the breach
of contract claim. By agreement of the parties, the evidence before the court relates
solely to Block’s alleged use of nClosures’ confidential designs and manufacturing
knowledge.

DISCUSSION

I. Initial Requirements
A party seeking a preliminary injunction must initially establish: (1) “that
absent a preliminary injunction, it will suffer irreparable harm in the interim period
prior to final resolution of its claims,” (2) “that traditional legal remedies would be
inadequate,” and (3) “that its claim has some likelihood of succeeding on the merits.”
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Girl Scouts of Manitou Council, Inc. v. Girl Scouts of U.S. of America, Inc., 549 F.3d
1079, 1086 (7th Cir. 2008). If the moving party fails to satisfy any of the above
elements, the court must deny the motion for a preliminary injunction. Id.

A. Irreparable Harm and Inadequate Remedy at Law
nClosures contends that if a preliminary injunction is not entered, nClosures
will suffer irreparable harm and have no adequate remedy at law due to its loss of a
head start in the marketplace. A party’s loss of status as an initial market entrant
with a new design, and its corresponding loss of prospective customers, can
constitute irreparable harm to a party. See QSRSoft, Inc. v. Restaurant Technology,
Inc., 2006 WL 2990432, at *11 (N.D. Ill. 2006)(stating that “assessing the monetary
value of [a plaintiff’s] head start in the market would be nearly impossible,” and
indicating that a plaintiff’s inability “to reap the benefits as the initial market entrant .
. . make[s] assessing damages difficult”). nClosures has presented evidence that it
invested substantial sums of money to develop its products, which include the Rhino
Enclosure. (P Memo Ex. A, Par. 8). nClosures has also presented evidence that the
tablet enclosure market is relatively young and poised for substantial growth. (P
Memo Ex. A, Par. 8, 18).
Block argues that nClosures does not have a head start in the marketplace to
protect. In support of its argument, Block contends that nClosures delayed seeking
injunctive relief, even though nClosures was aware of Block’s development of the
Atrio during the first part of 2012, and was aware of the manufacture and sale of the
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Atrio since at least August 1, 2012. However, nClosures has presented evidence
showing that its delay in bringing the instant action was caused by Block’s repeated
reassurances that a partnership existed between the parties. (P Memo Ex. 4); (P
Reply Ex. 2).
Block also contends that there are already many other companies
manufacturing and selling iPad enclosures. However, nClosures has presented
evidence showing that the design of the Rhino Enclosure is unique within the
industry, and evidence indicating that the Atrio designed by Block is substantially
similar to the Rhino Enclosure. (P Memo at 6); (P Memo Ex. 2); (P Reply Ex. 5).
Thus, nClosures has adequately shown that it has a head start in the marketplace with
respect to the design at issue in this case. In addition, the court notes that the parties
contractually agreed in the NDA that “the unauthorized disclosure or use of
Confidential Information or any other breach by the Receiving Party . . . of the
obligations [in the NDA] [would] result in irreparable injury . . . and shall entitle the
Disclosing Party to receive injunctive relief. . . .” (P Memo. Ex 1, Par. 9). Based
upon the above, nClosures has shown that, absent a preliminary injunction,
nClosures will suffer irreparable harm, and that, consequently, there is no adequate
remedy at law.

B. Likelihood of Success on the Merits
nClosures contends that it has a likelihood of success on the merits with
respect to its breach of contract claim. For the purposes of a preliminary injunction
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motion, as indicated above, the movant need only make a showing of some
likelihood of success on the merits. Girl Scouts, 549 F.3d at 1086. To succeed on a
breach of contract claim under Illinois law, a plaintiff must show “(1) the existence
of a valid and enforceable contract; (2) performance by the plaintiff; (3) breach of
contract by the defendant; and (4) resultant injury to the plaintiff.” Hess v. Kanoski
& Associates, 668 F.3d 446, 452 (7th Cir. 2012)(citation omitted). The NDA
provides that “the Confidential Information received . . . shall be used solely for the
purposes of engaging in [discussions relative to a potential business relationship] and
evaluating” the potential business relationship with respect to iPad enclosures. (P
Memo Ex. 1, Par. 2). Block does not dispute the fact that the NDA is a valid and
enforceable contract. However, Block argues that nClosures is unlikely to succeed in
proving that Block used nClosures’ confidential information to design and
manufacture the Atrio and that nClosures performed all of its obligations under the
NDA.
Block argues that the design of the Rhino Enclosure is in the public domain
and that Block made significant contributions to the design of the product. However,
Block does not address nClosures’ contention that Block used nClosures’
confidential manufacturing knowledge in manufacturing the Atrio, nor does Block
offer sufficient evidence to rebut such contentions by nClosures. nClosures contends
that in designing and manufacturing the Atrio, Block misused flat files, SolidWorks,
and Pro-E Files in breach of the NDA. nClosures has presented sufficient evidence
that such confidential information was used by Block to design and manufacture the
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Atrio. For example, in meeting notes taken by Carlson, he indicates that the “hinge
enclosure family [ ] leveraged off one design element of Rhino design.” (P Reply
Ex. 4, pg. 3). In addition, one of the Atrio flat files, which is a file used to instruct
the equipment that stamps, bends, and cuts the metal for the Atrio, references a part
name used solely by nClosures. (Yang Dep, DX 14, pg. 9). Further, there is
evidence indicating that the person identified by Block as the sole designer of the
Atrio, John Yang (Yang), updated the flats used to produce the Rhino Enclosure on
various occasions, and thus may have used or referred to them to design the Atrio
flats. (P Reply Ex. 6); (Yang Dep. pg. 23, 35, 42). Yang also testified at his
deposition that he was provided information upon which to base the Atrio design,
and that he did not know where the information came from. (Yang Dep pg. 64, 82).
Further, nClosures has presented evidence that Block changed its manufacturing
workflow, software, and equipment based upon confidential information shared by
nClosures. (P Memo. Ex A, Par. 12-15). The evidence presented by Block at this
juncture, which largely consists of declarations made by Block employees, is not
sufficient to overcome the evidence that has been presented by nClosures. In
addition, although Block also argues that nClosures may also have breached the
NDA by using another manufacturer to produce Rhino Enclosures, Block has not
presented sufficient evidence with respect to such a claim. Further, nClosures has
presented evidence showing it has been damaged by the alleged breach of the NDA
by Block. (P Memo Ex A, Par. 17). Thus, nClosures has shown a reasonable
likelihood of success on the merits with respect to its breach of contract claim.
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Based upon the above, nClosures has satisfied the three threshold requirements for
the motion for preliminary injunction.

II. Balancing Phase
If the moving party satisfies all of the initial requirements for a preliminary
injunction, the court must “proceed[] to the balancing phase of the analysis.” Girl
Scouts, 549 F.3d at 1086. During the balancing phase, the court should balance: (1)
the potential harm to the parties, (2) the likelihood of success on the merits, and (3)
the public interest. Id. The court should employ “a sliding scale approach: [t]he
more likely the plaintiff is to win, the less heavily need the balance of harms weigh
in his favor; the less likely he is to win, the more need it weigh in his favor.” Id.
(internal quotations omitted)(quoting Roland Mach. Co. v. Dresser Indus., Inc., 749
F.2d 380, 389 (7th Cir. 1984)).

A. Potential Harm to the Parties
nClosures contends that it will suffer more severe harm if the motion for a
preliminary injunction is denied than Block will suffer if the motion is granted. As
discussed above, if the motion is denied, nClosures will lose a valuable head start in
the tablet enclosure market with respect to the unique design of the Rhino Enclosure.
nClosures has presented evidence relating to the significant investment it has made in
developing the Rhino Enclosure. In addition, nClosures indicates that it is a young
company, and that the manufacture and sale of tablet enclosures is nClosures’ sole
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source of revenue. On the other hand, if the motion is granted, Block will be
foreclosed from continuing to market and sell the Atrio pending the resolution of this
litigation. However, as nClosures points out, Block will not be foreclosed from
pursuing the manufacture and sale of its other products, which are numerous. Based
on the above, a consideration of the potential harms to the parties favors granting the
motion.

B. Likelihood of Success on the Merits
As discussed above, nClosures has shown a reasonable likelihood of success
on the merits. Further, when the scope of the case expands and evidence is presented
relating to Block’s alleged misuse of nClosures’ confidential information relating to
the market, nClosures’ breach of contract claim may even be stronger. In addition,
as discussed above, the balancing of the potential harms also favors nClosures in this
case. Thus, under the sliding scale approach, a grant of the instant motion for a
preliminary injunction is warranted.

C. Public Interest
nClosures argues that public interest weighs in favor of granting the
preliminary injunction. It is in the public interest to enforce valid contracts. In
addition, it is in the public interest to protect confidential information since such
protection encourages design, innovation, and collaboration. Further, any current
customers of Block will not be significantly harmed since they can purchase other
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tablet enclosures from an alternative source during the pendency of this litigation.
Therefore, the public interest favors granting the instant motion. Based upon the
above, the motion for a preliminary injunction is granted.

CONCLUSION
Based on the foregoing analysis, nClosures’ motion for a preliminary
injunction is granted.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: January 15, 2013

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