Signing a non-disclosure agreement (NDA) is often viewed as a tedious obligation and a mere formality. A recent ruling from Spain demonstrates that no party involved should underestimate the significance of such an agreement; in that case, the defendant was ordered to pay damages of over 4.2 million euros for breaching a non-disclosure agreement (Audiencia Provincial de Barcelona, judgment of May 20, 2022, Case No. 853/22; the original Spanish judgment can be found here).
Background: Exploitation of a business opportunity by a sister company
The case is briefly summarized as follows: The plaintiff is an investment company. In April 2017, it learned that the owners of a large hotel complex in Nerja (province of Málaga) were considering selling the property. The property comprised a large plot of land with 200 apartments located directly on the beach. The owners had leased the hotel operations to an operating company. The revenue from the lease agreement amounted to more than 680,000 euros per year. The subject of the planned transaction was the property with the apartments as well as all shares in the operating company.
The plaintiff recognized an attractive investment opportunity but lacked sufficient experience in hotel operations. For this reason, she commissioned an external service provider (CBRE) to conduct a comprehensive due diligence review and to search for a new lessee in the event of an acquisition. As part of this search mandate, the service provider CBRE approached First Ona Cap S.L. (the subsequent defendant) as a potential tenant. The defendant is a company belonging to the “Grupo Ona,” which operates numerous hotels through several subsidiaries. Before disclosing information that CBRE had obtained as part of the due diligence process, CBRE entered into a confidentiality agreement with the defendant. The agreement stipulated that the defendant was permitted to use the information provided by CBRE – including business plans, valuations, and information about employees – exclusively for the purpose of preparing an offer to lease the hotel business. In the summer of 2017, the defendant submitted two offers to the plaintiff to take over the hotel operations as a lessee. No contract was concluded. Ultimately, the plaintiff did not acquire the property either. Instead, in early July 2018, another company within the Grupo Ona group acquired all shares in the operating company.
It is hardly surprising that the plaintiff is not pleased with this turn of events and is seeking damages from the defendant. What is interesting here is that the plaintiff is bringing the action based on rights assigned by CBRE, which had entered into the NDA with the defendant (para. 32). As far as can be seen, the defendant’s defense is based primarily on formal objections and focuses on the question of which of the group companies the managing director represented when signing the NDA. The defendant argues that the managing director lacked the authority to represent the company, meaning that the NDA was not validly concluded.
The court is not at all amused by the defendant’s “deeply abusive” and “childish” arguments (para. 16). It examines whether the business plans and other information constitute a trade secret within the meaning of the Spanish Law on Trade Secrets (Ley de Secretos Empresariales, LSE) and finds:
- The information was neither generally known nor accessible within the circles of hotel operators who typically handle such information. Rather, the information was not known at all, as it was first prepared by CBRE and disclosed only after the execution of an NDA. In this regard, it is also irrelevant that the defendant might have been able to obtain individual pieces of information, such as lists of employees. This was particularly not the case with the especially important business plans.
- The information enabled the defendant to submit a tailored offer of its own for the acquisition of the shares and therefore had economic value.
- The information was also subject to appropriate confidentiality measures, as it was disclosed to the defendant only after the signing of an explicit and unambiguous NDA.
- Finally, the fact that CBRE compiled and prepared the information constituting the trade secret is irrelevant. The work was carried out on behalf of the plaintiff, who is therefore also the owner of the trade secret.
The acquisition of the company shares by the defendant’s sister company using the trade secret constitutes an unfair act of exploitation because this acquisition was made in violation of the confidentiality agreement. The defendant must therefore compensate the plaintiff for the profit it lost, namely the lost lease income (para. 39). In addition, the defendant must reimburse the futile expenses incurred for due diligence and other consulting services. In total, the defendant is ordered to pay damages in the amount of just under 4,275,000 euros.
What conclusions can we draw?
Even if the decision is not transferable to German law in every respect, it contains some valuable insights:
1.
The most important lesson is that entering into an NDA is not merely a formality. An NDA is a simple and cost-effective way to protect trade secrets. Precisely for this reason, entering into confidentiality agreements is an absolute minimum standard when it comes to assessing appropriate protective measures. It is worthwhile in every respect.
2.
It goes without saying that, as a bona fide business partner, one should use the information received after signing an NDA only within the scope of that agreement. In any case, in egregious cases such as the one at hand, even a German judge might react harshly if the defendant defends itself by citing a managing director’s lack of authority to represent the company at the time the agreement was signed.
3.
To avoid unpleasant and risky disputes regarding the scope of the NDA, it must be made clear exactly what obligations the recipient of the information has. This applies also – and especially – to the disclosure of information within a corporate group and to the question of which specific individuals receive what information, when, and under what conditions.
4.
Most confidentiality agreements exclude the assignment of claims, which would have posed problems for the plaintiff in this case. Therefore, the agreement should either be entered into directly by the beneficiary or include an explicit provision regarding the consequences of breaches (such as an explicit waiver of claims for damages in favor of the principal).
5.
In the case at hand, the plaintiff had the significant advantage that the damage could be demonstrated with a reasonable degree of plausibility. For calculating damages in comparable situations – such as confidentiality agreements entered into in the run-up to M&A transactions – there are likely to be ways to quantify the damages as well, especially since Section 287 of the German Code of Civil Procedure (ZPO) assists the injured party in such cases. In other cases, such as the protection of technical or scientific information, only a contractual penalty clause provides a solution.