Trade secrets are always at risk when engaging in corporate deals that require the disclosure of confidential information. Though there is no sure-fire solution to protecting a company’s trade secrets, if handled properly, there is legal recourse to help mitigate any loss and deter trade secret theft. In a recent decision, the 8th Circuit affirmed the grant of a motion to dismiss a breach of contract action between a company and its financial advising firm. The facts, as presented in the District Court’s September 29, 2020 decision (19-cv-03125-JRT-HC, EFC No. 73), are instructive:

Protégé specializes in researching and developing blood-clotting products and maintains its work as trade secrets. In late 2017, looking to sell its business, Protégé entered into an Engagement Agreement with Duff & Phelps. The Engagement Agreement required Duff & Phelps to keep confidential any of Protégé’s non-public information, as well as provided immunity for certain corporate and individual liability and disclaimed a fiduciary duty. Smith reached out to Doug Schillinger, a Managing Director at a private equity firm, and board member at Z-Medica, which is also in the blood-clotting products space, to coordinate a meeting between Z-Medica and Protégé.

Schillinger and Smith (on behalf of Protégé) entered into a non-disclosure agreement. Protégé’s team of lawyers reviewed, edited, and approved the NDA prior to Smith executing it. The body of the NDA neither mentioned Z-Medica nor the private equity firm. Schillinger signed the NDA as the Manager Director of his private equity firm. Believing the NDA was between Protégé and Z-Medica and that Schillinger was acting on behalf of Z-Medica, Protégé revealed confidential information about its products to Schillinger, who then shared the information with Z-Medica. Subsequently, Z-Medica applied for a continuation of a patent that allegedly incorporated Protégé’s confidential information and pulled out of the potential deal to acquire Protégé. Protégé sued Z-Media for breach of the NDA, but the district court dismissed the suit, finding that Schillinger was not an agent of Z-Medica when he signed the NDA and that Z-Media was not subject to the NDA. The parties later settled.

Protégé then sued Duff & Phelps and Smith for breach of the Engagement Agreement, as well as other state law claims, but the district court dismissed those claims because the Engagement Agreement disclaimed liability, as well as any fiduciary duty. Specifically, the district court held that because Protégé disclosed its own trade secrets, Duff & Phelps were not liable for breach of the confidentiality clause. On April 4, 2022, the 8th Circuit affirmed the district court. The costs for Protégé was a third-party patent allegedly using its trade secrets and the loss of a potential deal.

This decision presents a number of lessons and issues for corporate deals.

  • Be clear in the body of the agreement who the parties are to the contract
  • Confirm all contract fields are complete and accurately represent the parties’ intent
  • Before disclosing confidential information, confirm that the parties participating in any confidential communications are operating under, and subject to, the same terms of the agreement (this confirmation can be both verbal and written)
  • Should the parties decide to include terms that absolve another party of potential liability, consider leaving narrow exceptions for claims, such as willful misconduct, gross negligence, and breach of contract