Are preliminary business negotiations putting your trade secrets at risk?
By Brian J. Hunt, J.D. |
Your team’s been working this deal for months, crunching all the numbers, diving deep into all aspects of the business, and planning every step of the strategic combination. You think you’re about to sign on the dotted line, and then the firm you’ve been wooing all this time finds a better suitor.
In a business climate that’s teeming with mergers and acquisitions, it’s not uncommon for some of these relationships to sour. But what happens to all of that important and sensitive business information you shared? What happens when that firm moves on without you, but with a wealth of confidential and competitive information about your business? What, then, can you do to protect yourself?
Destiny Health Inc. v. Connecticut General Life Insurance Co.
, 2015 IL App (1st) 142530, addresses this very question. Here, defendant Cigna Corporation (Cigna) was interested in expanding its employee wellness program by combining it with Destiny Health Inc.’s incentive-points program (Destiny was a pioneer of such points-based programs).
As expected, the parties executed a common-sense confidentiality agreement governing the exchange of business information during the negotiations, which prohibited them from using or misappropriating any confidential information. Notably, however, the agreement didn’t commit Cigna to a business relationship with Destiny, prohibit it from developing its own points-based program, or prevent it from contracting with another vendor.
During their negotiations, Destiny provided Cigna with secret actuarial data, marketing data and other trade secrets to enable Cigna to “deep dive” into Destiny’s program. Following this, however, Cigna informed Destiny that it couldn’t move forward with the business relationship, citing—among other reasons—the lack of customization available with Destiny’s program and Destiny’s refusal to consider a relationship other than a joint venture. After breaking things off, Cigna moved on with one of Destiny’s competitors to implement a points-based program.
This understandably didn’t sit well with Destiny, which ultimately filed suit against Cigna, alleging misappropriation of trade secrets pursuant to the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (Trade Secrets Act), and breach of the confidentiality agreement.
Ultimately, however, the Circuit Court sided with Cigna, finding that Destiny failed to present any evidence that the organization used confidential information when implementing its program. Destiny was dealt a further blow by the Illinois Appellate Court when, on appeal, it affirmed the Circuit Court’s decision, rejecting Destiny’s principal argument that Cigna used trade secrets in the development of its incentive-points program.
In making this decision, the Court reviewed the three elements required to establish the improper use of trade secrets, namely, a trade secret existed; the secret was misappropriated through improper acquisition, disclosure, or use; and the owner of the trade secret was damaged by the misappropriation.
With respect to whether a trade secret existed, the Court noted that Destiny failed to identify the alleged trade secrets or confidential information that Cigna used in the development of its points program with any degree of particularity.
The Court then turned to the second element, misappropriation of trade secrets, which can be proved under the Trade Secrets Act in one of three ways: Improper acquisition, unauthorized disclosure, or unauthorized use. To satisfy the unauthorized use prong, Destiny would have needed to show that Cigna couldn’t have created its points program without utilizing Destiny’s trade secrets. However, Destiny’s own expert witness explicitly stated that he couldn’t point to any evidence that Cigna actually used Destiny’s trade secrets in the development of its program.
Destiny further argued that the circumstantial evidence it presented required a reversal of summary judgment. In essence, Destiny asked the Court to infer that Cigna misappropriated trade secrets because Cigna had access to its information and later developed a program similar to Destiny’s. The Court rejected this argument, noting that circumstantial evidence can be used to support a cause of action, but must demonstrate that the misappropriating party had access to the secret and that the secret and the defendant’s competing product share similar features. The Court found that Destiny produced no direct or circumstantial evidence that the two programs were similar, and also noted key conceptual and operational differences between Cigna’s customizable program and Destiny’s fixed program.
Destiny’s final, alternative argument asserted that it sufficiently established Cigna’s use of its trade secrets under the “inevitable disclosure doctrine.” Cigna, on the other hand, argued that the inevitable disclosure doctrine shouldn’t apply in the context of failed commercial transactions. The Court again agreed with Cigna, noting that misappropriation means more than merely using information gained from an analysis of a possible target company or business partner. Notably, the Court held that the fact that information Destiny provided might have better informed Cigna’s evaluation of whether to partner with Destiny wasn’t enough to determine that Cigna misappropriated Destiny’s trade secrets. The Court reasoned that Destiny would need to show that Cigna could not have developed its program without the use of Destiny’s trade secrets. Without that, the Court could not find that the use of trade secrets was inevitable.
Finally, briefly turning to Destiny’s claim arising out of breach of the confidentiality agreement, the Court ruled in favor of Cigna here as well, noting that Destiny set forth the same rejected arguments in support of this claim as those in its trade secrets claim.
The case of Destiny Health shows us how rough a breakup can sometimes be. The lesson here is simple: Be careful about the relationships you forge and the partners you think about getting involved with.
Brian J. Hunt is the managing principal of The Hunt Law Group LLC in Chicago. He has been chosen as one of Chicago’s Top Lawyers and as one of Illinois’ Top Rated Lawyers. Brian’s practice focuses on business litigation and the defense of corporations and individuals in the areas of construction, premises, transportation, product and professional liability. He can be reached at [email protected] or 312.384.2301.