In a significant recent decision, the Federal Circuit reversed a $66 million judgment against L’Oreal USA, Inc. for patent infringement and trade secret misappropriation asserted by Olaplex, Inc. The case arose as a result of L’Oreal and Olaplex entering into negotiations regarding a potential acquisition, pursuant to which Olaplex shared with L’Oreal its confidential information, including asserted trade secrets. L’Oreal subsequently walked away from the deal and launched competing products of its own. Though the parties’ negotiations were governed by a non-disclosure agreement, the Federal Circuit found Olaplex failed to prove that either its asserted trade secrets were actually trade secrets, or that L’Oreal had misappropriated them.

Olaplex claimed L’Oreal misappropriated four different categories of trade secrets: (i) information in an unpublished patent application regarding the use of maleic acid during hair bleaching; (ii) business information; (iii) testing and know-how; and (iv) dead ends and trials and errors. The Federal Circuit first found that using maleic acid during bleaching was not a trade secret because Olaplex failed to prove that such use was not readily ascertainable through proper means. Olaplex’s asserted “testing and know-how” and “dead ends and trials and errors” trade secrets likewise failed because the alleged trade secrets were described at such a high level of generality that it was impossible to say that L’Oreal had improperly used the trade secrets in the group, or what those trade secrets were. Lastly, the Court dismissed Olaplex’s claim that L’Oreal had misappropriated its “business information” by using it in a “Build v. Buy” analysis. The Court also found that, had any of Olaplex’s alleged trade secrets met the appropriate standard, the language in the NDA, under which L’Oreal agreed not to use Olaplex’s confidential information “for any purpose other than to evaluate negotiate and, if applicable, consummate a possible Transaction,” explicitly contemplated L’Oreal’s use of such information. Though this was clearly not Olaplex’s understanding or intent regarding the parties’ agreement, ambiguity in the NDA left it bound by the Court’s ruling.

Olaplex’s reversal of fortunes provides insight into how misappropriation of trade secret claims arising from unsuccessful intellectual property transactions can be anticipated and potentially mitigated by carefully drafting the NDA governing the exchange of information between the parties.  First, NDAs that clearly and unambiguously define what constitutes a “trade secret” may avoid subsequent litigation on that point. This is an especially important consideration for the disclosing party, as the putative plaintiff in a misappropriation of trade secret action bears the burden of proving the existence of a trade secret. Moreover, any asserted “trade secret” that is described in overly broad terms may be found to be unenforceable by a court (as the Federal Circuit found in Olaplex). These considerations pose problems for misappropriation of trade secret plaintiffs however, as trade secrets, by definition, lose trade secret status if they become generally known (or are readily ascertainable by proper means).  Thus, a plaintiff who shares information about its trade secrets in briefing to the court as necessary to support its misappropriation of trade secret claims may inadvertently lose trade secret protection by doing so. Separately defining what information counts as a “trade secret” within an NDA mitigates this problem by creating a detailed record that proves to the court both the existence of the trade secret and the receiving party’s agreement of its trade secret status, without requiring public disclosure.

Another consideration when drafting an NDA is how to define the obligations of the party receiving the confidential information, particularly with respect to how the receiving party may use the information. In the context of a potential acquisition, the parties typically contemplate that the receiving party will use the confidential information to conduct an economic analysis to determine whether to acquire the receiving party. However, without careful drafting, the terms of an NDA may allow the receiving party to subsequently use this information in developing its own competing product.

While this case presents only a small fraction of the issues that may emerge in trade secret litigation arising from unsuccessful IP transactions, it is a timely reminder that at least some potential problems may be anticipated through the careful use of NDAs.