### In the



# United States Court of Appeals

For the Seventh Circuit

____________________

Nos. 13

‐ 3906 & 14

‐ 1097

N C LOSURES I NC

., Plaintiff

‐ Appellant/Cross

‐ Appellee

,

v.

B LOCK AND C OMPANY

, I NC

.,

Defendant

‐ Appellee/Cross

‐ Appellant.

____________________

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:12

‐ cv

‐ 09358

— Samuel Der

‐ Yeghiayan

, Judge

.

____________________

A RGUED S EPTEMBER 15, 2014

— D ECIDED O CTOBER 22, 2014

____________________

Before F LAUM

, K ANNE

, and S YKES

, Circuit Judges

.

F LAUM

, Circuit Judge

. In May 2011, nClosures Inc. and

Block and Company, Inc. began a business relationship in

which nClosures designed and Block manufactured metal

enclosures for electronic tablets, such as iPads. At the outset

of the relationship, the parties signed a confidentiality

agreement; nClosures then divulged its designs for the en

‐

closure device to Block for manufacture. The first device—2 Nos. 13

‐ 3996 & 14

‐ 1097

known as the Rhino Elite—entered the market for sale in Oc

‐

tober 2011. By March 2012, however, Block developed its

own competing device, known as the Atrio.

In November 2012, nClosures brought suit in diversity

against Block alleging, among other claims, breach of con

‐

tract and breach of fiduciary duty. The district court granted

summary judgment to Block on both claims. On the breach

of contract claim, the district court concluded that no rea

‐

sonable jury could find that nClosures took reasonable steps

to keep its proprietary information confidential, and there

‐

fore that the confidentiality agreement was unenforceable.

The district court also concluded that no reasonable jury

could find that a partnership existed between nClosures and

Block that could give rise to a viable breach of fiduciary duty

claim. However, the district court denied Block’s motion for

attorney’s fees.

nClosures challenges the district court’s rulings on sum

‐

mary judgment, and Block—as cross

‐ appellant—challenges

its denial of Block’s motion for attorney’s fees. We affirm in

both respects.

I. Background

nClosures is an industrial design firm co

‐ founded in 2011

by Daniel Gorman, Daniel McKean, and Kemper Barkhurst.

After its formation, nClosures developed metal cases for

electronic tablets, such as iPads. Designer and independent

contractor Ian LeBlanc designed one such device—the Rhino

Elite—for nClosures in early 2011. Later that year on May

24th, nClosures co

‐ founders McKean and Gorman attended

a trade show in Chicago to display prototypes of the Rhino

(a precursor to the Rhino Elite). There, Block CEO Greg Carl

‐Nos. 13

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‐ 1097 3

son approached them about a potential business relation

‐ ship. Block previously manufactured and sold metal devices

like cash drawers, but had recently identified tablet enclo

‐

sures as a potential new product line.

At the May 24th meeting between nClosures and Block,

the companies signed a confidentiality agreement wherein

they agreed to the following:

The Parties

... agree that the Confidential In

‐

formation received from the other Party shall

be used solely for the purposes of engaging in

the Discussions and evaluating the Objective

(the “Permitted Purposes”). Except for such

Permitted Purposes, such information shall not

be used, either directly or indirectly, by the Re

‐ ceiving Party for any other purpose

... .

The agreement defines “the Objective” as “a potential busi

‐

ness relationship with respect to iPad Enclosures.” Outside

of this initial agreement, nClosures did not require other

Block employees or engineers to sign additional agreements

in order to access Rhino or Rhino Elite design files.

nClosures also did not enter into confidentiality agreements

with Rhino Elite designer Ian LeBlanc, or with the manufac

‐

turers that produced Rhino Elite predecessors known as the

Lab Shield and the Rhino. However, a declaration by

nClosures co

‐ founder Daniel McKean states, “It is

nClosures’s policy to not share its designs, know

‐ how, or

market knowledge with other parties unless pursuant to a

non

‐ disclosure agreement. nClosures has a policy of grant

‐ ing employees access to this information only on a need

‐ to

‐

know basis.”4 Nos. 13

‐ 3996 & 14

‐ 1097

After signing the confidentiality agreement, nClosures

provided Block with the design files for the Rhino products.

Subsequently, nClosures and Block attempted to negotiate a

written agreement concerning the manufacture and sale of

the tablet enclosures. Although the companies never agreed

on a written contract, they exchanged at least three draft

agreements during negotiations. After these failed attempts,

the parties reached an oral agreement on the following

terms: Block agreed to manufacture the Rhino Elite and sell

the units to nClosures at $19.25 per unit. nClosures was

permitted to sell some units to its customers, and some units

back to Block at an increased price of $53 per unit. nClosures

therefore netted $33.75 on the units it sold back to Block.

In a June 2012 e

‐ mail, Block Vice President and General

Manager David Kauffman referred to this arrangement with

nClosures as a “license fee.” On the other hand, another

Block employee—Scott Nease—described these proceeds as

the “net profit” for nClosures in an August 2012 e

‐ mail. In

this same e

‐ mail, Nease also indicated that the buyback ar

‐

rangement was really just a formality by stating “[i]t would

be much cleaner

... to simply issue a purchase order and pay

NClosure [sic] for $33.75 @ and not go through the formality

of sales and buyback, when a sale never really occurred in

the first place.”

By mid

‐ October 2011, the first Rhino Elite device manu

‐

factured by Block entered the market. Shortly thereafter, the

parties became aware of various design problems with the

device, and Block’s engineers helped to re

‐ design the Rhino

Elite bracket to better hold tablets in place inside the enclo

‐

sure. Either subsequently or simultaneously, Block also de

‐ veloped a design for its own tablet enclosure, known as theNos. 13

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‐ 1097 5

Atrio. 1 In August 2012, Block terminated its business rela

‐ tionship with nClosures, and nClosures subsequently filed

this suit against Block alleging fraud, trade secret misappro

‐ priation, breach of fiduciary duty, and breach of contract. In

December 2012, nClosures sought a preliminary injunction

on its breach of contract claim, which the district court

granted.

On September 6, 2013, the parties filed cross

‐ motions for

summary judgment—nClosures sought partial summary

judgment on its claims for fraud and breach of contract, and

Block sought summary judgment on all four of nClosures’s

claims. On December 11, the district court granted summary

judgment for Block. 2 Block then filed a sealed motion for at

‐ torney’s fees under the Illinois Trade Secrets Act, as well as

28 U.S.C. § 1927 and the district court’s inherent authority.

The district court orally denied this motion.

II. Discussion

We review a district court’s grant of summary judgment

de novo, taking all facts and their reasonable inferences in

the light most favorable to the nonmovant. Hansen v. Fincant

‐

ieri Marine Grp., LLC

, 763 F.3d 832, 836 (7th Cir. 2014).

1 nClosures claims that the Atrio is nearly identical to the Rhino Elite,

while Block notes several distinctions. For instance, the Atrio is a one

piece design using a “piano

‐ type hinge” to join the top and bottom of the

enclosure, while the Rhino Elite is a two

‐ piece design where the cover

and the bottom of the enclosure are separate pieces that lock together

.

2 Although the district court granted Block’s motion for summary judg

‐

ment on all four of nClosures’s claims, nClosures only challenges the

district court’s decision regarding the breach of contract and breach of

fiduciary duty claims.6 Nos. 13

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‐ 1097

A. Breach of Contract.

To bring a successful breach of contract claim under Illi

‐

nois law, a party must show “(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 Distrib. Co. v. Cummins Engine Co.

, 491 F.3d

625, 631 (7th Cir. 2007) (citation omitted). Additional consid

‐

erations arise, however, when we assess the enforceability of

a confidentiality agreement. See Tax Track Sys. Corp. v. New

Investor World, Inc.

, 478 F.3d 783, 787 (7th Cir. 2007). In Tax

Track

, we held that a federal court applying Illinois law “will

enforce [confidentiality] agreements only when the infor

‐

mation sought to be protected is actually confidential and

reasonable efforts were made to keep it confidential.” Id. (cit

‐ ing Curtis 1000, Inc. v. Suess

, 24 F.3d 941, 947 (7th Cir. 1994)).

Thus, in order to enforce the confidentiality agreement be

‐

tween nClosures and Block, we must find that nClosures

took reasonable steps to keep its proprietary information

confidential. 3

In Tax Track

, we upheld a district court’s grant of sum

‐

mary judgment which found a confidentiality agreement

unenforceable, holding that no reasonable jury could con

‐

clude that Tax Track engaged in reasonable efforts to protect

3 nClosures argues that ILG Industries, Inc. v. Scott

, 273 N.E.2d 393 (Ill.

1971), governs because in that case, the Illinois Supreme Court did not

require a written confidentiality agreement in order to protect proprie

‐

tary information. However, ILG is not on point. The ILG court protected

plaintiff’s proprietary information on the ground that it constituted a

trade secret; there was no alleged breach of contract. See id. at 394. Hence,

ILG is inapplicable here.Nos. 13

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‐ 1097 7

its confidential information. Id. at 788. We emphasized that

no reasonable steps were taken where the proprietary in

‐

formation in question was a company memo distributed to

600–700 people, was not stamped with the word “Confiden

‐

tial,” and where only some of the recipients signed confiden

‐ tiality agreements. Id.

In contrast, in Rockwell Graphic Systems Inc. v. DEV Indus

‐

tries, Inc.

, 925 F.2d 174, 180 (7th Cir. 1991), we found that the

steps taken to protect the proprietary information at issue

were substantial enough to preclude summary judgment for

the defendants in a trade secrets misappropriation case. In

Rockwell

, unlike in Tax Track

, the engineering drawings at

issue were kept in a vault with limited access. Id. at 177. The

engineers who used the drawings were required to sign

agreements not to disseminate the drawings or disclose their

contents. Id

. Furthermore, vendors permitted to access cop

‐

ies of the drawings also signed confidentiality agreements,

and each drawing was marked with an indication that it con

‐

tained proprietary information. Id

. While this Court did not

determine whether the steps in Rockwell were sufficient to

protect the trade secrets at issue, we did find that these steps

were substantial enough to preclude summary judgment in

favor of the defendants.

The steps taken in Rockwell

, however, far exceed the

measures employed by nClosures, and more closely resem

‐

ble the steps taken in Tax Track

. While nClosures and Block

did sign a confidentiality agreement at the outset of their

business relationship, no additional confidentiality agree

‐

ments were required of individuals who accessed the design

files for the Rhino or Rhino Elite devices. Additionally, nei

‐

ther the Rhino nor the Rhino Elite drawings were marked8 Nos. 13

‐ 3996 & 14

‐ 1097

with words such as “confidential” or “contains proprietary

information.” Furthermore, the drawings were not kept un

‐

der lock and key, nor were they stored on a computer with

limited access. While the declaration of Daniel McKean

states generally that nClosures had a policy of requiring con

‐ fidentiality agreements, no such agreements were required

of designer Ian LeBlanc or of the manufacturers that pro

‐

duced previous versions of the Rhino Elite. These facts show

that nClosures did not engage in reasonable steps to protect

the confidentiality of its proprietary information, and there

‐

fore that the confidentiality agreement with Block is unen

‐

forceable. We affirm the district court’s ruling that no rea

‐

sonable jury could find otherwise.

B. Breach of Fiduciary Duty.

The district court held that Block and nClosures did not

share profits and did not form a partnership, and therefore

that nClosures’s breach of fiduciary duty claim lacked merit.

We agree.

To establish a breach of fiduciary duty under Illinois law,

a plaintiff must show that “(1) a fiduciary duty exists; (2) the

fiduciary duty was breached; and (3) the breach proximately

caused the injury of which the plaintiff complains.” Ball v.

Kotter

, 723 F.3d 813, 826 (7th Cir. 2013) (citing Neade v. Portes

,

739 N.E.2d 496, 502 (Ill. 2000)). A fiduciary duty may be es

‐

tablished through relationships such as partnerships and

joint ventures, as well as special circumstances. Autotech

Tech. Ltd. P’ship v. Automationdirect.com

, 471 F.3d 745, 748–49

(7th Cir. 2006). The Illinois Uniform Partnership Act defines

a partnership as “the association of 2 or more persons to car

‐

ry on as co

‐ owners of a business for profit.” 805 Ill. Comp.

Stat. 206/202(a). Considerations including the intent of theNos. 13

‐ 3906 & 14

‐ 1097 9

parties, as well as whether the entities shared profits, are rel

‐

evant in analyzing whether a partnership existed.

Sharing of profits is instructive but not always conclusive

evidence of a partnership. Illinois law states that “[a] person

who receives a share of the profits of a business is presumed

to be a partner,” 805 Ill. Comp. Stat. 206/202 (c)(3), unless the

individual received the profits as compensation as an inde

‐ pendent contractor or an employee. Id. at (c)(3)(ii). Evidence

of profit

‐ sharing, however, does not guarantee a partner

‐ ship. In Argianas v. Chestler

, the Illinois Appellate Court held

that no partnership existed—even though the plaintiff re

‐

ceived 40% of the profits from a particular account—where

the relevant agreement provided the plaintiff with a salary

and did not indicate that a partnership existed. 631 N.E.2d

1359, 1368–70 (Ill. App. Ct. 1994). The Argianas court ex

‐ plained that “[a]lthough a sharing of profits is an essential

test in determining the existence of a partnership, mere par

‐ ticipation in profits, does not alone create a partnership.” Id.

at 1368.

Our decision in Autotech is also instructive. In Autotech

,

we affirmed a district court’s determination that no fiduciary

duty was owed—and therefore that no breach of this duty

occurred—when a manufacturer and a marketer failed to

form a partnership under Illinois law. 471 F.3d at 749. Simi

‐

lar to the arrangement between nClosures and Block, the

parties in Autotech —ADC and Autotech—engaged in a busi

‐

ness relationship whereby one company manufactured a

product and the second company marketed it. Id. at 747. The

agreement between the parties specified that neither party

had the right or responsibility “to assume or to create any

obligations or responsibilities expressed or implied on behalf10 Nos. 13

‐ 3996 & 14

‐ 1097

of or in the name of the other or to bind the other party in

any manner whatsoever.” Id

. ADC then developed a similar

and competing product, and Autotech sued for breach of fi

‐ duciary duty, among other claims, and subsequently filed a

motion for a preliminary injunction. Id

. at 747–48. We held

that the district court did not abuse its discretion in denying

the injunction and concluded that no partnership, joint ven

‐

ture, or special relationship existed. We emphasized that

“the contract expressly prohibited joint control; there was no

provision for profit sharing and loss; the parties did not file

joint tax returns; and there was no evidence of intent to be

associated as a partnership or joint venture.” Id

. at 749.

nClosures argues that its recovery of $33.75 per Rhino

Elite unit demonstrates a profit

‐ sharing arrangement, and

therefore the existence of an nClosures

‐ Block partnership.

Block, on the other hand, argues that this arrangement was a

license fee or simply nClosures’s individual profit, but that

the two companies did not share profits. 4 Based on the con

‐

siderations outlined in Argianas and Autotech

, we conclude

that no reasonable jury could find that nClosures and Block

formed a partnership, and therefore that no breach of fiduci

‐

ary duty occurred. nClosures does not adequately support

its argument that the net gain of $33.75 per Rhino Elite unit

constituted a profit

‐ sharing arrangement with Block, espe

‐ cially because there was no agreement between the parties to

characterize the net gain in this manner. But even if we were

4 As previously noted, Block referred to the $33.75 as a licensing fee in

one instance, and as “net profit” to nClosures in another instance. The

record does not contain a statement regarding nClosures’s characteriza

‐

tion of the $33.75 per unit gain at the time it entered into the oral agree

‐

ment with Block.Nos. 13

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to accept that profit

‐ sharing occurred, Argianas demonstrates

that profit sharing alone is sometimes insufficient to estab

‐

lish a partnership under Illinois law. Considering the factors

outlined in Autotech

, there is no evidence that the parties en

‐ gaged in other activities suggestive of a partnership: the par

‐

ties did not sign a partnership agreement, did not file joint

tax returns, and did not hold themselves out to be partners

in any way. Thus, regardless of nClosures’s modest assertion

that its arrangement with Block constituted profit

‐ sharing,

other elements of the nClosures

‐ Block relationship do not

indicate a partnership.

Additionally, the record suggests that the parties never

intended to carry on as co

‐ owners of a business for profit,

and therefore failed to form a partnership under Illinois law.

See 805 Ill. Comp. Stat. 206/202(a). In granting summary

judgment to Block, the district court emphasized that all

three of the draft agreements between Block and nClosures

contained a clause stating that nothing in the conduct of ei

‐

ther party “shall be deemed to constitute either party an

agent, partner, joint venture or employee of the other.”

nClosures Inc. v. Block & Co.

, Inc

., No. 12 C 9358, 2013 WL

6498528, at * 4 (N.D. Ill. Dec. 11, 2013). 5 While this unexecut

‐

ed agreement does not legally bind nClosures, it is probative

5 nClosures argues that the district court incorrectly considered this lan

‐

guage, citing Matter of Holder’s Estate

, 355 N.E.2d 333, 334–35 (Ill. App.

Ct. 1976) for the proposition that a court may not rely on unexecuted

agreements as proof of a subsequent agreement or its terms. However,

Holder more correctly stands for the proposition that an oral agreement

to convey property cannot be enforced through specific performance

when the agreement was merely an agreement to reduce the terms of the

conveyance to writing. Holder

, therefore, is simply too distinct from this

case to be dispositive.12 Nos. 13

‐ 3996 & 14

‐ 1097

of the parties’ intent underlying their business relationship.

Illinois courts have held that when no written agreement ex

‐

ists, it is appropriate to consider the intent of the parties and

the facts and circumstances surrounding the alleged partner

‐ ship formation. See e.g., Snyder v. Dunn

, 638 N.E.2d 744, 747

(Ill. App. Ct. 1994). Therefore, we consider the language of

the unexecuted agreements between Block and nClosures for

this purpose. Because all three of the agreement drafts con

‐

tained a clause specifying that the parties should not be con

‐

strued as partners, and because there is no evidence that

nClosures objected to the inclusion of this clause, we are

persuaded that nClosures and Block did not contemplate a

partnership when structuring their business relationship.

For these reasons, there is a lack of evidence from which

a reasonable jury could conclude that nClosures and Block

formed a partnership under Illinois law, and thus

nClosures’s breach of fiduciary duty claim must fail.

C. Attorney’s Fees.

On December 26, 2013, Block filed a sealed motion seek

‐ ing attorney’s fees under three theories: (1) the Illinois Trade

Secrets Act (“the ITSA”), (2) 28 U.S.C. § 1927, and (3) the dis

‐

trict court’s “inherent authority.” Under the ITSA, a defend

‐

ant in a trade secret action can recover its reasonable attor

‐ ney’s fees if “a claim of misappropriation is made in bad

faith.” 765 Ill. Comp. Stat. 1065/5(i). Additionally, under 28

U.S.C. § 1927, an attorney may be required to pay costs and

expenses when he or she “multiplies the proceed

‐ ings

... unreasonably and vexatiously.” Furthermore, sanc

‐

tions pursuant to a district court’s inherent authority “are

appropriate where a party has willfully abused the judicialNos. 13

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‐ 1097 13

process or otherwise conducted litigation in bad faith.” Tuck

‐

er v. Williams

, 682 F.3d 654, 661–62 (7th Cir. 2012).

In denying Block’s motion for attorney’s fees, the district

court stated:

I know the case. I did not find anything that

comes remotely close that there was no basis

for the lawsuit or that it was in bad faith. I

agree with counsel for plaintiffs. I entered

summary judgment in this case. I understand

it’s on appeal. And I might be right, I might be

wrong on that summary judgment, but I’m not

going encourage any further litigation on that

issue. There’s been no bad faith on the part of

the plaintiffs.

Block insists that the district court’s dismissal of its motion

for attorney’s fees was improper, citing IDS Life Insurance Co.

v. Royal Alliance Associates, Inc.

, 266 F.3d 645, 653–54 (7th Cir.

2001) as an example of when we held that a district court

abused its discretion in failing to issue sanctions under 28

U.S.C. § 1927. In IDS

, the district court refused to issue sanc

‐

tions pursuant to its “own philosoph[ical]” opposition to

sanctions, even after characterizing the defendants’ argu

‐

ments as “dubious and disingenuous,” as well as question

‐ ing the “real motive” behind the defendants’ action to seek a

confirmation award in a different court from the one in

which the suit arose. Id

. Against this factual backdrop, we

held that the district court abused its discretion in failing to

sanction the defendants for unreasonably multiplying pro

‐ ceedings under 28 U.S.C. § 1927. Id

. at 654.14 Nos. 13

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‐ 1097

The facts of IDS are quite different from the facts here. In

this case, the district court did not deny Block’s motion for

attorney’s fees pursuant to any personal hostility to sanc

‐

tions, but rather applied a bad faith standard by stating, “I

know the case. I did not find anything that comes remotely

close that there was no basis for the lawsuit or that it was in

bad faith.” Further, rather than expressing doubt about

whether the claims in the lawsuit had any merit, the district

court acknowledged that its summary judgment decision

was a close call by stating, “I entered summary judgment in

this case

... . And I might be right, I might be wrong on that

summary judgment

... .” Simply put, the case before us is

too distinct from IDS to dictate a finding that the district

court abused its discretion by denying Block’s motion for

attorney’s fees. Furthermore, Block fails to offer any addi

‐

tional compelling support for this argument.

III. Conclusion

We AFFIRM the district court’s grant of summary judg

‐

ment in favor of Block and the denial of Block’s motion for

attorney’s fees.