How do two companies end up liable for nearly $50 million in damages relating to confidential, trade secret materials? Like many romances gone awry, this tale arose from actions taken under cover of secrecy that did not look as good in the clear light of day.
The sordid affair involved the greeting card company Hallmark, the consulting company Monitor Company Group, L.P. ("Monitor"), and a related private equity firm called Monitor Clipper Equity Partners ("Clipper"). Monitor performed consulting work for Hallmark, with the parties' relationship governed by non-disclosure agreements. Monitor and Clipper had close ties, sharing founders, an office building, and consultants. Clipper publicly touted its close relationship with Monitor as a selling point with its investors. Clipper claimed that it had a "substantial number of potential investments through Monitor's business relationships and through initiatives and target industries where Monitor has significant knowledge and expertise."
The real trouble began when Clipper was presented with the opportunity to purchase greeting card maker, and Hallmark competitor, Recycled Paper Greetings, Inc. To differentiate itself from competitors in bidding on Recycled, Clipper told potential investors that it would "derive growth and produce high cash flows from [Recycled Paper Greetings] that others cannot" because of "[Monitor's] unparalleled experience in the greeting card industry including the work they have done with Hallmark . . . ." What Clipper failed to tell investors was that Monitor had provided Clipper with confidential information that Monitor had acquired and developed in connection with its consulting relationship with Hallmark and was specifically covered by non-disclosure agreements.
Clipper ultimately won the bidding for Recycled, raising Hallmark's suspicions. Hallmark demanded that Monitor and Clipper preserve documents relating to the Recycled acquisition. Despite receiving this demand, Monitor and Clipper began to systematically destroy documents showing that Monitor had shared Hallmark's information with Clipper. At the same time, they told Hallmark that no Hallmark information had been misused.
Hallmark ultimately filed an arbitration case against Monitor, alleging breach of the parties' NDAs as well as trade secrets theft under the Minnesota Uniform Trade Secrets Act ("MUTSA"). Based on the scant evidence that Hallmark was able to muster, the arbitrator ruled against Hallmark on the MUTSA claim, but ruled in favor of Hallmark on the contract claim. The arbitrator found that Monitor had widely disseminated Hallmark's information internally, including to people who were not on the Hallmark consulting team. The arbitrator awarded Hallmark $4.1 million in contract damages and ordered that a forensic accountant be hired to search for any confidential Hallmark information remaining on Monitor's system.
The forensic accountant then uncovered emails showing that Monitor had shared Hallmark presentations with Clipper, which led to the arbitration award being reopened. Monitor subsequently settled with Hallmark for a total of $16.6 million, with the settlement specifically providing that it was only "attributable to damages related to the breach of contract claims . . . as well as interest, expenses and attorney's fees," but not the MUTSA claim.
Hallmark then sued Clipper in federal court, asserting trade secret misappropriation in connection with the Recycled acquisition. A jury ultimately ruled in Hallmark's favor, awarding Hallmark $31.3 million in damages, including $10 million in punitive damages, a verdict that was affirmed by the trial court following post-trial motions.
Clipper appealed the verdict to the Eighth Circuit, raising two arguments: (1) there was insufficient evidence to support a finding that the Hallmark presentations were trade secrets; and (2) Hallmark was being allowed a double recovery under MUTSA, in light of its settlement with Monitor.
As to first argument, Clipper argued that the Hallmark presentations had no value since they were over four years old. The Eighth Circuit rejected that argument, acknowledging that the passage of time could erode the value of trade secrets, but noting that the greeting card industry had little publicly available market information and therefore, "the presentations still provided a valuable source of knowledge about the greetings cards market." The Eighth Circuit also rejected Clipper's argument that the trade secrets had been publicly disclosed, finding that the public statements by Hallmark that Clipper pointed to only disclosed generalized conclusions and not the in-depth information contained in the confidential presentations, which could still have value to competitors.
With respect to the second argument, Clipper pointed to the $16.6 million settlement between Hallmark and Monitor as providing at least partial compensation for any trade secrets theft. Clipper relied on prior Eighth Circuit precedent that held that transmission of trade secrets between two parties was a single injury and precluded double recovery. The Eighth Circuit rejected this argument, holding that Hallmark suffered two separate injuries: (1) Monitor's transmission of Hallmark's trade secrets to Clipper; and (2) Clipper's use of Hallmark's trade secrets to acquire Recycled. The Court reached this conclusion after studying the Monitor-Hallmark NDA, which was the basis of the Monitor-Hallmark settlement and expressly prohibited the recovery of consequential damages. The Eighth Circuit reasoned that Clipper's subsequent misuse of Hallmark's trade secrets were the type of "consequential damages" precluded by the NDA and thus not part of the Monitor settlement. Second, the Eighth Circuit looked to the jury instructions in the Clipper-Hallmark trial. The instructions explicitly described a theory of trade secrets misappropriation through improper use, not just improper acquisition, a different theory of misappropriation under MUTSA. In addition, the Hallmark damages calculations depended on Clipper's actual use of Hallmark's information.
There are two important takeaways from these cases:
- The setup and discovery plan in a trade secrets case are often more than half of the battle. Here, Hallmark's pre-emptive retention demands followed by a request for appointment of an independent forensic investigator unearthed the spoliated, smoking-gun evidence that eventually turned this case in Hallmark's favor.
- The Eighth Circuit's holding regarding double recovery may have significant long-term implications. The Monitor/Clipper activities at issue in these cases were reasonably separable, and the Monitor settlement was careful to state it only related to Hallmark's claim under its NDA. One wonders, however, how the Eighth Circuit's double recovery holding will play out in situations where the activities at issue represent more of a continuum of activity or where the claims between multiple parties are more closely overlapping.
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