Fail-Safe, LLC v. A.O. Smith Corporation (decided by the Seventh Circuit Court of Appeals on March 29, 2012) is a reminder how important it is to get the formalities in place before you engage in discussions about your proprietary confidential information with ANYONE. The Fail-Safe court found that a competitor company who used the technology it learned during possible joint venture discussions could legally use the voluntarily disclosed information.  In finding that the information was not confidential and there was nothing unjust about what had been done, the court noted that the plaintiff never mentioned confidentiality in its oral or written communications with the competitor or asked the competitor to sign a confidentiality agreement, even though the competitor had the plaintiff sign one, and despite the fact that the plaintiff had used confidentiality agreements in other situations. Since the plaintiff failed to take reasonable steps to protect its proprietary information, that information was not considered to be wrongfully taken.

Enthusiasm about the potential for profitable collaboration, lack of insight and education about legal issues, a fear of the awkwardness of insisting on formal “legalities” to be done first, and a focus on the substance of the deal are some of the reasons that businesses often disregard this important step. Don’t leave your company in this situation. You have invested a lot of time and money in developing y our technology. Invest the small amount in protecting all your hard work to avoid unintentionally handing it over to others for their free use to exploit.

Unfortunately, neglecting this formality happens every day. Representatives from two companies have informal discussions about the synergy of their businesses, and the idea for a product of interest to both of them is born. In a series of communications, they continue to share proprietary information as they discuss plans for the joint development of the product. Then the deal does not move forward for some reason or another. If the signed agreements are not in place, your collaborator can instantly become your competitor, using your own technology and proprietary information to compete with you. How will your company handle it when your potential collaborator develops and markets a product incorporating your company’s trade secrets? Can you survive this situation from a market position? Can you afford the cost of litigation while you are struggling to compete against your own product? Without have taken the required affirmative steps for trade secret protection, your company will have no claim for either appropriation of those trade secrets or unjust enrichment.

Fail-Safe was decided under Wisconsin state law, but the same principles apply under most state laws. A trade secret is any information that gives a business a competitive advantage over others who do not know that information. In order to claim that such information has been wrongfully used or disclosed, its owner must be able to show that it took reasonable steps to protect its secrecy.

Signed nondisclosure agreements by all participants must be exchanged before any detailed discussions take place. Additionally, the best practice is to always identify confidential information with clear markings and notices, keep it secure and available on a “need to know basis,” and educate your employees that it is essential on a written agreement before disclosing it to anyone outside the company.