The sad story of Protégé Biomedical, LLC losing valuable trade secrets to a competitor provides a cautionary tale about the need for meticulous review of NDAs even after they are signed, to confirm that the parties at the table are the ones who are bound.

Protégé specializes in researching, inventing, and developing hemostatic, or blood-clotting, products for veterinary and human use. They engaged the financial advisement firm, Duff & Phelps, to help find a buyer for their technology. Eventually, Z-Medica was identified as a potential buyer, and a D&P employee (Smith) contacted a representative of one of the owners of Z-Medica (Doug Schillinger, a director of minority owner DW Healthcare Partners (“DWHP”)) and had Schillinger sign an NDA with Protégé.

The NDA was drafted to refer to disclosures to “the Buyer,” which everyone involved understood to be Z-Medica. In reliance on that advice from D&P that the NDA was binding on Z-Medica, Protégé joined in a conference call which included Schillinger, representatives from D&P, and two directors from Z-Medica. Protégé opened by saying they were relying on the NDA and then proceeded to share confidential and trade secret information. Afterward, Z-Medica made use of what it learned from Protégé to make a competing product, asserting that Z-Medica was not bound by the NDA.

Protégé initially sued Z-Medica for breach of the NDA contract as well as misappropriation of trade secrets. The contract claim against Z-Medica was dismissed because, in fact, the NDA did not explicitly name Z-Medica as a party, and Z-Medica did nothing to suggest that Schillinger was acting on behalf of Z-Medica.

Protégé settled with Z-Medica on the trade secret claim and then proceeded against D&P, but the Federal district court in Minnesota dismissed the case and the Eighth Circuit affirmed.

Protégé then proceeded against D&P on a breach of contract theory, but that claim was dismissed as well. A key factor in the Eighth Circuit’s decision was the fact that it was Protégé, not D&P, that disclosed the crucial information to Z-Medica. Protégé also advanced the argument that D&P should be liable for misleading Protégé into thinking that Z-Medica was bound by the NDA, i.e., that D&P was negligent in carrying out its contractual duties with Protégé; that argument failed under the applicable law as well.

As a result, Protégé’s failure to confirm that everyone on the call was bound by the NDA made the NDA worthless to them, even though there was a known relationship between the signatory and the unbound party. The take-away from this story is that even though NDAs are among the most common business contracts, it is important that they be carefully reviewed even after they are signed to confirm that everyone in the conversation is bound.

 

   Frederick Spaeth

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