July 10, 2019

Summary Judgment of No Misappropriation Due to Failure to Follow Confidentiality Marking Requirements

Holland & Knight Trade Secrets Blog
Steven E. Jedlinski

A recent summary judgment opinion out of the Northern District of Texas provides a good reminder to trade secret stakeholders – follow the labeling requirements set forth in your confidentiality provisions or, alternatively, consider removing the requirement.

In Hoover Panel Systems Inc. v. Hat Contract Inc., the parties entered into a written confidentiality agreement that required the disclosing party to explicitly mark any materials that it believed to contain protected information with "confidential or proprietary or marked with words of similar import." After the execution of the contract, HPS provided Hat Contract with a prototype of a power supply beam for an office cubicle along with photographs and drawings of the component. At some point during the relationship, the parties determined an overseas manufacturer would need to be involved and HPS agreed the materials could be shared with that third party. During this process, HPS never objected to the sharing of the information. Ultimately, Hat Contract began sourcing a similar product made by that third party manufacturer and stopped doing business with HPS in view of quality control issues.

As a result, HPS sued Hat Contract for breach of contract and misappropriation of trade secrets along with other related claims. Hat Contract moved for summary judgment arguing, among other things, that HPS' failure to mark the materials containing its alleged trade secrets with a confidentiality design requires granting summary judgment in defendants favor. The Court found no dispute that a written confidentiality agreement existed requiring the designation of materials with "confidential or proprietary or marked with words of similar import" and that HPS failed to mark the materials at issue. Consequently, HPS failed to perform its condition precedent under the contract. Relatedly, the court granted the defendant summary judgment as to the trade secret claim. Hat Contract did not acquire the trade secret material via an improper means nor did it use the material without authorization. HPS argued that the defendant's disclosure of the protected materials to third parties was a violation of the confidentiality agreement; however, the failure to mark the materials with a confidentiality designation sank the trade secret claims as well.

While failure to properly mark protected information may be evidence of a failure to take reasonable security measures to protect trade secrets, to provide notice, or to comply with a non-disclosure agreement, the failure to mark alone is not necessarily dispositive of the issue. That said, it is better to avoid the question by properly marking. Companies can ensure compliance with such provisions by training their employees to be knowledgeable about the requirements of applicable confidentiality provisions to ensure they are being abided by – both on the disclosing and receiving end of protected information.

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