Court Bars Trade Secret Claim Arising From Impermissible Uses of Information Shared Under NDA

To gain a competitive advantage, businesses typically invest significant time and money to develop and secure their trade secrets, such as information about manufacturing techniques, sales methods, advertising efforts, and client and supplier information.

To deter and punish theft of trade secrets, courts often require companies found to have stolen trade secrets to pay a wide variety of damages. But a federal court recently let a swimwear company that had disclosed its trade secrets to a potential competitor under a non-disclosure agreement (NDA) pursue a claim that the potential competitor had breached the NDA by using the trade secrets to compete with it, but dismissed the company’s claim that its rival had stolen its trade secrets.

Swimwear Solutions operates a swimwear store in Kansas. Everything But Water (EBW) operates approximately 100 swimwear outlets, but has none in Kansas. Swimwear Solutions asserted that EBW falsely stated that it was interested in buying Swimwear Solutions, but EBW actually had no interest in doing so and instead feigned interest so that it could obtain EBW’s trade secrets and use them to open its own rival store. Because EBW expressed interest in buying Swimwear Solutions, the two companies entered into an NDA. Under the NDA, EBW was barred from using any of Swimwear Solutions’ trade secrets unless it did so to “evaluate and engage in discussions concerning [the parties’] potential business relationship.” Pursuant to the NDA, Swimwear Solutions disclosed several trade secrets to EBW, including information about the local market for swimwear, its vendor contracts, employee compensation, sales records, and most popular products. It alleged that after it sent EBW its trade secrets, EBW terminated discussions to acquire Swimwear Solutions and then used its trade secrets as a blueprint to begin the process of opening a competing store nearby.

Swimwear Solutions sued EBW and raised claims that EBW had, among other things, breached the NDA by using its trade secrets for an impermissible purpose, tortiously interfered with its business relationships and contracts, and stolen its trade secrets. Swimwear Solutions’ trade secret claim sought damages beyond the damages arising from the breach of the NDA by demanding a sum to reflect EBW’s unjust enrichment from the alleged misappropriation, a royalty for EBW’s unauthorized use of the trade secrets, exemplary damages, and attorneys’ fees.

However, the court dismissed Swimwear Solutions’ claims for trade secret misappropriation. It reasoned that the NDA provided that the parties did not have duties related to trade secrets outside of the NDA’s terms. It also rejected Swimwear Solutions’ contentions that that provision was unenforceable. Consequently, while the court is permitting Swimwear Solutions to pursue its claim for breach of the NDA by asserting that EBW used trade secrets in impermissible ways (namely, to start its own competing business, rather than to merely assess whether to acquire Swimwear Solutions), the court barred Swimwear Solutions’s claim for misappropriating trade secrets.

Parties often use NDAs to disclose trade secrets, and they typically restrict the way that those trade secrets can be used. A party receiving trade secrets under an NDA must honor its promises not to use another company’s trade secrets in a prohibited way. If a party that receives them uses them in a way forbidden by the NDA, then it may be subject to a claim for breach of the NDA. But its impermissible use typically does not subject it to a claim that it misappropriated trade secrets. This is particularly so when the NDA restricts the rights and remedies of the party that disclosed the trade secrets under the NDA.

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