08/24/16

Non-disclosure agreements (“NDA”) are becoming more common in commercial transactions. In the mergers and acquisition context, parties frequently enter into NDAs in order to allow a potential buyer to review otherwise confidential information. Manufacturers often require NDAs from suppliers who make parts or products for the manufacturers, and they are frequently used between parties contemplating a business relationship. While the general purpose of NDAs is relatively consistent, specific terms regarding the duration of the agreement, the scope of what is covered, and the limits on use can vary, and can often lead to disputes between the parties. Not surprisingly, with the increased use of NDAs, litigation over alleged breaches of NDAs is becoming more frequent as well.

The EDVA’s recent decision in T. and B. Equipment Co. v. RI, Inc., 3:15-CV-337-HEH, 2016 WL 3965208 (E.D. Va. July 22, 2016), illustrates a typical dispute. In that case, the plaintiff brought a declaratory judgment action seeking a declaration that it had not violated a NDA under which it was contemplating buying a business from the defendant. Prior to the execution of the NDA, the parties had discussed a potential purchase of specific products relating to indoor and outdoor event seating. The defendant had provided two written quotes for the product, one of which included a sample of the product. During the course of these discussions, the parties began talking about potentially buying defendant’s seating rental business. The parties subsequently executed the NDA to govern the exchange of information and materials related to the “potential acquisition of all or a part of company.” Although plaintiff sent a due diligence checklist, defendant provided no additional information. Plaintiff subsequently purchased the original product directly from the manufacturer without going through the defendant. Two years later, the defendant sent a demand letter claiming that the purchase constituted a violation of the NDA and interfered with its exclusive distribution agreement with the manufacturer.

In response to the declaratory judgment action, the defendant filed a counterclaim alleging a breach of the NDA, misappropriation of trade secrets, tortious interference with contract, civil conspiracy and misrepresentation. The parties thereafter cross moved for summary judgment. Based upon the materials submitted by the parties and the unambiguous language of the NDA, the court granted summary judgment in favor of the plaintiff finding no violation of the NDA and insufficient facts to establish any of the tort claims asserted by the defendant.

The court applied New York law pursuant to a choice of law clause with respect to the NDA. Ultimately, the court found that the parties intended the NDA only to apply to the negotiation of the potential purchase of the business, not to the sale of the underlying product. Although the NDA made general references to confidential information, the court held those references insufficient to expand the scope of the NDA beyond the contemplated transaction. The court also rejected the argument that plaintiff somehow had used information provided by the defendant to compete with the defendant. In considering the arguments with respect to confidentiality, the court specifically noted that it was “telling” that none of the information relating to the product had been marked confidential. The court held that buying a product directly from the manufacturer rather than a middleman distributor could not be considered using confidential information to compete with the distributor.

Having found no breach of the NDA, the related tort claims failed for similar reasons under the law of Virginia, the place of the alleged wrongful conduct. Because the product was not covered by the NDA, the court found no misappropriation of a trade secret because it was not provided under circumstances imposing a duty on a receiving party to refrain from using the information. Notably, the court again found nothing to suggest that the information had been marked confidential (which is technically not a requirement under the trade secret act). The misrepresentation claim, which was based in fraud, also failed because the product information was not included within the scope of the NDA and, therefore, could not support a claim that it had been provided in reliance on the NDA.

The tortious interference and civil conspiracy claims depended on a related theory concerning a distribution agreement entered into between the defendant and the original manufacturer. After reviewing the agreement, however, the court found that the distribution agreement had expired under its own terms prior to the execution of the NDA, the parties had not manifested a clear intent to continue the distribution agreement despite continued interactions, and that the parties to that agreement had not done the things necessary to trigger the exclusivity provisions in the agreement. Accordingly, the court found no existing contract or business expectancy sufficient to sustain a tortious interference claim. Having found no violation of the NDA or interference with the distribution agreement, the court dismissed the civil conspiracy claim, which was based on defendant’s allegation that the plaintiff had disregarded both in dealing directly with the manufacturer.

This case follows a familiar pattern of plaintiffs attempting to assert business torts arising out of primarily contractual duties. Although the court did not address that issue as part of its decision, it is not surprising to see claims for tortious interference, conspiracy, and trade secrets being included in a case that depends on a breach of contract. As all of the related claims fell based upon the inability to prove the violation of the contract, whether those claims could have stood independently seems doubtful.

The case also provides a useful reminder of the need to pay attention to the terms of an NDA and to protect materials that you believe are confidential. Had the scope of the NDA been drafted more broadly, perhaps the court would have reached a different outcome. Whether the court would have reached the same outcome had the material been marked confidential is also unknown. In either case, the lesson is the same - if you want your material to be treated confidentially, then you need to act accordingly.

 

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