NDAs: 6th Cir. Says No Breach in Parent’s Use of Confidential Information
Non-disclosure agreements often distinguish between the parties with whom information may be shared and those parties who are bound by the agreement. A recent Weil blog highlights a 6th Circuit case that addresses the consequences of that distinction and the perils of entering into an NDA with an intermediary.
Knight Capital Partners v. Henkel AG, (6th Cir.; 7/19) involved an expired NDA entered into between Henkel, a subsidiary of Henkel AG, and Knight Capital Partners, or KCP, an intermediary who hoped to establish a distribution arrangement for a novel cleaning product. After the NDA lapsed without a deal, KCP filed a lawsuit allegations that Henkel AG breached the NDA by using confidential information acquired under it to develop a new product. The trial court rejected those contentions, and the 6th Circuit affirmed. This excerpt from the blog summarizes the Court’s reasoning:
The Sixth Circuit affirmed the trial court’s judgement. While Henkel Parent Co. was clearly an “affiliate” of a “Party” to the NDA (i.e., “any individual, corporation or other business entity, which directly or indirectly, controls a Party, is controlled by a Party, or is under common control with a Party”), and therefore entitled to receive the confidential information as a defined “Receiving Party” under the NDA, Henkel Parent Co. was not actually bound by and liable for breaches of the NDA as a contracting Party, only Henkel US was. In other words, only Henkel US was responsible for alleged breaches of the NDA, whether they were the result its own actions or those of Henkel Parent Co., its parent
The blog notes that this distinction between parties with whom information may be shared and those who are bound by the NDA is a very common approach in private equity settings. It’s also a widely used approach outside of the private equity context. Perhaps more importantly, the case highlights the perils of entering into an NDA with an intermediary:
Although summary judgment was ultimately obtained, this dispute was litigated for over three years because a middleperson with whom a potential counterparty had entered into an NDA apparently felt cut out of a deal that in fact was never consummated. That’s the potential nightmare that needs to be considered anytime these intermediary arrangements are contemplated. Getting the language right in the NDA is paramount, of course, but avoiding these situations unless absolutely necessary is even better.
–John Jenkins, DealLawyers.com August 2, 2019
Want to keep reading?
Great. Enter your email address and gain instant access to this article