breach of contract
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No Breach of Contract Where Company Disclosed Its Own Non-Public Information

The US Court of Appeals for the Eighth Circuit affirmed a district court’s dismissal of a trade secret lawsuit against a consultant that allegedly failed to prevent its client from disclosing its own proprietary information during a call with a potential buyer. Protégé Biomedical, LLC v. Duff & Phelps Securities, LLC, and Philip I. Smith, Case No. 21-1368 (8th Cir. Apr. 4, 2022) (per curiam) (Erickson, J., dissenting).

Protégé entered into an agreement with Duff & Phelps to help Protégé find a buyer for its business. Under the agreement, Duff & Phelps received immunity from certain types of claims, its employees were shielded from individual liability and it owed no fiduciary duties to Protégé.

One of Protégé’s competitors, Z-Medica, was identified as a potential buyer. One of Duff & Phelps’s employees, Philip Smith, facilitated execution of the non-disclosure agreement (NDA) by a member of Z-Medica’s board of directors. Protégé assumed that the NDA would also bind Z-Medica and thus participated in conference calls with Z-Medica in which Protégé revealed non-public information. In Z-Medica’s view, however, the board member signed the NDA in his personal capacity and not as Z-Medica’s representative. As a result, Z-Medica used the information it received from Protégé to create its own competing product.

Protégé sued Z-Medica. After settling with Z-Medica, Protégé sued Duff & Phelps and Smith in state court for breach of contract, unlawful practice of law, negligence, breach of professional services and breach of fiduciary and principal-agent duties. Duff & Phelps removed the case to federal court on the ground that Smith, the only non-diverse defendant, had been fraudulently joined. The district court dismissed the case for failure to state a claim. Protégé appealed.

The Eighth Circuit first analyzed whether the case belonged in federal court. The Court upheld the district court’s determination that Smith was fraudulently joined. The Court stated that fraudulent joinder occurs when there is no reasonable basis in fact and law for the claims brought against the non-diverse defendant. Here, the Court found that there was no reasonable basis for Protégé to allege breach of contract against Smith since he was never a party to the contract between Protégé and Duff & Phelps. The Court found that Protégé’s unlawful practice of law claim against Smith also constituted fraudulent joinder because Smith never gave legal advice to Protégé. The Court noted that the contract immunized Smith from Protégé’s other claims and thus, without any viable claims against Smith, the case was properly in federal court under 28 U.S.C. § 1332.

Turning to the merits of the claims against Duff & Phelps, the Eighth Circuit affirmed the dismissal for failure to state a claim. The Court reasoned that Protégé’s breach of contract claim was predicated on an alleged failure by Duff & Phelps to prevent Protégé from disclosing its proprietary information. However, the agreement only made Duff & Phelps responsible for its own conduct, not for Protégé’s conduct. The Court explained that Protégé’s other claims failed for the same reason.

Judge Erickson [...]

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NDA Sunset Provision Means Trade Secret Use May Not Be Misappropriation

The US Court of Appeals for the Ninth Circuit reversed a district court ruling in a trade secret misappropriation case based on a non-disclosure agreement (NDA) that resulted in an award of more than $60 million, ruling that any disclosures that occurred after the termination date of the NDA were not subject to misappropriation claims. BladeRoom Group Ltd. v. Emerson Electric Co., Case No. 19-16583 (9th Cir. Aug. 30, 2021) (Murphy, J.) (Rawlinson, J., concurring).

BladeRoom and Emerson compete for contracts to design and build data centers. In August 2011, the companies explored a potential sale of BladeRoom to Emerson. BladeRoom drafted an NDA governed by English law, and the parties signed it. Critically, the 12th paragraph of the NDA provided that “this agreement shall terminate on the date 2 years from the date hereof.” The potential acquisition ultimately fell through.

Not long after, Facebook began plans to build a data center in northern Sweden. BladeRoom pitched a design in July 2012, and Emerson pitched a design several months later. In October 2012, Facebook verbally approved Emerson’s design although it was only 10% complete. Almost a year later, Facebook contacted BladeRoom asking about updates to its proposal. In November 2013, Facebook selected Emerson’s proposal. Facebook and Emerson signed a design-build contract in March 2014, at which point BladeRoom learned about the design Emerson had pitched. BladeRoom sued Facebook and Emerson, alleging that Emerson had breached the NDA and misappropriated BladeRoom’s trade secrets.

The case was tried to a jury. During trial, BladeRoom settled with Facebook but not Emerson. Before closing arguments, Emerson proposed a jury instruction excluding information disclosed or used after August 2013 (i.e., after the NDA allegedly expired). The district court denied the instruction. BladeRoom then moved in limine to prohibit Emerson from arguing that the NDA permitted it to use BladeRoom’s information after August 2013. The district court granted the motion. The jury found Emerson liable and awarded $10 million in lost profits and $20 million in unjust enrichment damages but did not distinguish between the breach and misappropriation claims in making its award. The district court awarded $30 million in punitive damages and further awarded pre-judgment interest beginning on October 30, 2012, and $18 million in attorney’s and expert witness’ fees. Emerson appealed.

The Ninth Circuit first considered whether the NDA expired after two years. Applying English law, the Court held that it did based on a primarily textual analysis. However, the Court could not determine from the record the date on which the alleged breach/misappropriation had occurred. Accordingly, it vacated the judgment and remanded for a new trial.

The Ninth Circuit also discussed several issues in the appeal that would be relevant if Emerson was found liable on remand. The Court stated that the punitive damages award was not supported by the record where the jury did not distinguish between the breach and misappropriation claims because punitive damages are not available for breach of contract under California law. The Court also discussed prejudgment interest, observing [...]

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Can’t Camouflage Express Trademark Contract Terms

Addressing a range of trademark licensing issues, including discretionary approval, exculpatory contract clauses and third party beneficiary standing, the US Court of Appeals for the Federal Circuit affirmed a lower court’s grant of summary judgment to the US Army, finding that the Army abided by the terms of a trademark licensing agreement with a brand management company that sold clothing bearing the Army logo. Authentic Apparel Grp., LLC v. United States, Case No. 20-1412 (Fed. Cir. Mar. 4, 2021) (Lourie, J.)

In a 2010 licensing agreement, the Army granted Authentic Apparel, a brand management company that licenses merchandise, a non-exclusive license to manufacture and sell clothing bearing the Army’s trademarks in exchange for royalties. The licensing agreement gave the Army sole and absolute discretion on whether to approve any products and marketing materials bearing the Army’s trademarks. The licensing agreement also included exculpatory clauses exempting the Army from liability for exercising this discretion. From 2011 to 2014, Authentic submitted 500 requests for product approval, and the Army disapproved of only 41. After a series of late or unpaid royalty payments, Authentic sent notice that it would not pay 2014 royalties. The Army then terminated the license to Authentic. In 2015, Authentic and its chairman, Ron Reuben, sued the US government for breach of contract of the licensing agreement. The alleged breaches included denial of the right to exploit the goodwill associated with the Army’s trademarks, refusal to permit Authentic to advertise its contribution to certain Army recreation programs, delay of approval for a financing agreement for a footwear line, and denial of approval for advertising featuring the actor Dwayne “The Rock” Johnson. The Court of Federal Claims granted summary judgment to the US government and dismissed Reuben as a co-plaintiff for lack of standing. Authentic appealed.

The two main issues on appeal were whether Authentic provided sufficient evidence to show there was a genuine dispute of material fact that the Army breached the terms of its contract or any implied duty of good faith, and whether Reuben was a third party beneficiary to have standing as a plaintiff to the suit.

As to the first issue, the Federal Circuit affirmed the lower court’s grant of summary judgment for the government because Authentic was unable to provide sufficient evidence that the Army breached the trademark licensing agreement. The Court found that:

The contracting parties contemplated the terms of the contract and voluntarily decided to include express language of broad discretionary approval and exculpatory clauses exempting liability for disapproval, and therefore they should be held to the express terms for which they bargained.

The Army did not act unreasonably or violate its duty of good faith and fair dealing in exercising its discretion because it did approve more than 90% of Authentic’s products.

Authentic’s argument that the Army’s discretion was too broad and restricted Authentic’s use of the trademarks to solely “decorative purposes” was without merit because (1) the Court was not evaluating the validity of the trademarks here, (2) Authentic still [...]

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Improper Use of Voluntarily Communicated Trade Secrets Sufficient to Maintain Action for Misappropriation in Texas

The US Court of Appeals for the Fifth Circuit held that, under Texas law, a plaintiff can sustain an action for trade secret misappropriation even if the plaintiff voluntarily communicated the alleged trade secrets to the defendant. Hoover Panel Systems, Inc. v. HAT Contract, Inc., Case No. 19-10650 (5th Cir. June 17, 2020) (per curiam). (more…)




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