A federal court affirmed the dismissal of a trade secret lawsuit where the plaintiff disclosed confidential information on a call with an interested buyer who used the information to create a competing product.
The plaintiff entered into a contract with an investment management company to help find a buyer for the plaintiff. The defendant’s obligations included protecting the plaintiff’s trade secrets by obtaining a nondisclosure agreement from any potential buyer.
The defendant found a potential buyer. The defendant drafted an NDA for the buyer’s signature before any formal discussions regarding the potential sale. Rather than signing as the buyer’s representative, however, a member of the buyer’s board of directors signed the NDA in his capacity. The plaintiff, believing both parties were bound by the NDA, participated in a conference call with the buyer and disclosed its confidential information. Shortly after, the buyer terminated discussions with the plaintiff, used the confidential information disclosed, and created its competing product.
The appellate court affirmed the dismissal of the plaintiff’s claims. Relying on the contract's language, the court held that the defendant was responsible only for its conduct, not the plaintiff's conduct, who ultimately disclosed its confidential information. In addition, while the contract excepted gross negligence claims from its indemnification language, the court found that negligent performance of a contract is not a legal claim. Even if it were, the failure to execute a binding NDA was a reasonable mistake of fact, not an outrageous act of folly.
What This Is Important…Merger and Acquisition is a field with many actors involved in every possible deal. Sellers need to understand the roles of each party and stay vigilant about protecting trade secrets. Relying on third-party nonlawyers to draft and execute NDAs can lead to real problems.