Given the prevalence of trade secret misappropriation litigation among members of the fashion, beauty, and retail industry, those in that industry should (1) take care to protect their trade secrets from misuse by others and (2) consider steps to try to reduce the risk of misappropriation claims against them by others. Both situations – loss of a valuable trade secret and burdensome litigation – can be devastating to a business. We offer here some potential measures that businesses can take to attempt to avoid such undesirable situations.
A common scenario which gives rise to misappropriation claims is the termination of:
(a) exploration of a potential business relationship or
(b) an existing business relationship
during which purported confidential information has been exchanged by one or more of the parties.
A recent example is the pending litigation between Le Tote, Inc. and Urban Outfitters, case number 2:20-cv-03009, in the Eastern District of Pennsylvania. According to the Complaint’s allegations, after Le Tote, Inc. (“Le Tote”), a pioneer in the rental fashion space, provided Urban Outfitters, Inc. (“Urban Outfitters”) with confidential information about the workings of its business in anticipation of Urban Outfitters’ acquisition of Le Tote’s business, Urban Outfitters unexpectedly abandoned the negotiations and then launched a copycat rental service of its own.
Le Tote’s Complaint alleges that Urban Outfitters’ use of Le Tote’s confidential information in furtherance of Urban Outfitters’ rental service violated the parties’ non-disclosure agreement (NDA) by which “Urban agreed not to use Le Tote’s proprietary information for any purpose other than evaluating a transaction with Le Tote” for a period of two years. Le Tote alleges that pursuant to that NDA, it shared with Urban Outfitters “proprietary in-house tools” which enable Le Tote to run its business – information which was the result of Le Tote’s years of “trial-and-error and substantial resources” and included “technological infrastructure and logistical functions [that are] different from those used by traditional fashion retailers.”
According to Le Tote, Urban Outfitters set up its own competing fashion rental subscription business, Nuuly, by using “the unique infrastructure and algorithms that made [Le Tote] successful.” Le Tote claims that Urban Outfitters violated the Federal Defend Trade Secrets Act and the Pennsylvania Uniform Trade Secrets Act by misappropriating Le Tote’s “business, engineering and technical information, including plans, formulas, compilations, techniques, processes, procedures, and programs, [which] constitute trade secrets.” Le Tote also asserts claims for breach of contract, unfair competition, and unjust enrichment.
Takeaways: Regardless of whose claims and defenses in the above lawsuits are meritorious, the existence of the lawsuits suggest a few potential steps that members of the fashion, beauty, and retail industry (as well as other industries) may want to consider in order to reduce the risk that their trade secrets will be misappropriated and/or that they will be hit with a misappropriation claim in connection with a collaboration (potential or actual) with another party:
- Make sure an appropriate NDA is in place to protect your confidential information that will be disclosed to the other party in the course of the relationship or the discussions about a potential relationship.[1]
- If you are going to receive the other party’s confidential information, consider whether there are provisions that will cause undue burden or may otherwise bite you at the backend (g., provisions that may restrict your use of the other party's non-confidential information, information in the public domain, and/or information that you independently developed).[2]
- Be careful of provisions that allow the other side to assign the NDA to others or to disclose your confidential information to its affiliates, which may include your competitors (now or in the future). Also, consider the possibility that a competitor may acquire the other party in the future. If that is a concern, attempt to require the other party to obtain your consent before it can assign the NDA or disclose your information to any acquirer (potential or actual). On the other hand, if your business is going to be receiving the other party’s purported confidential information, consider whether the proposed NDA will interfere with your business interests if you are not permitted – unless the other party consents – to assign rights under the NDA or share protected information with a potential acquirer or other business considering entering into a transaction with you. [3]
This article is not an unequivocal statement of the law, but instead offers some potential issues to consider with counsel. This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard Mullin attorney contact for additional information.
FOOTNOTES
[1] See Do Not Give NDAs the Short Shrift, The Licensing Journal.
[2] See id.
[3] See id.