Recently, a potential investor was ordered to pay $80 million for breaching a confidentiality agreement, alerting investors that they need to consider carefully before entering into what may seem like a routine, benign confidentiality agreement.
In Hawaiian Airlines, Inc. v. Mesa Air Group, Inc.,1 Hawaiian Airlines, Inc ("Hawaiian") sued Mesa Air Group, Inc. ("Mesa") for misusing confidential information that Mesa obtained when it considered investing in Hawaiian. During a sale process, Hawaiian made information available to prospective investors by providing them with access to a secure website containing electronic documents that the prospects could view or download. Because Hawaiian believed that much of the information available for review was sensitive and confidential, Hawaiian required each prospective investor to enter into a confidentiality agreement, requiring the potential investors to (i) maintain confidentiality of certain information confidential, (ii) return or destroy it at an agreed upon time, and (iii) refrain from using the sensitive material for any purpose other than evaluating the potential transaction. Mesa, one of the prospects interested in the sale process, signed a confidentiality agreement and obtained the information from Hawaiian.
Mesa ultimately decided not to invest in Hawaiian Airlines. Shortly after making that decision, however, Mesa publicly announced that it would begin operating inter-island flights among the Hawaiian Islands, in direct competition with Hawaiian. Hawaiian sued Mesa, alleging that Mesa misused confidential and proprietary information it obtained during the due diligence process to compete with Hawaiian and therefore had violated the terms of the confidentiality agreement. The court ordered Mesa to pay $80 million in damages covering the amount of lost revenues and costs suffered by Hawaiian.
Information Commonly Covered by Confidentiality Agreements
The Hawaiian decision is of particular importance in private equity deals because of the type of information covered by the confidentiality agreement between Hawaiian and Mesa. As is common in many similar transactions where a potential buyer or investor explores and considers a sale or investment, the confidential information provided by Hawaiian included the following information:
- Projections of future operational and financial performance of the business
- A list of contracts with third parties, identifying the other party to the contract and listing the starting and ending dates of each contract
- Certain details about Hawaiian's passenger profile
- Details about expansion plans
- Details about marketing strategy
- Details about pricing policies and credit card relationships
This decision is noteworthy because it signals to investors the need to be cautious and mindful of agreements they may have previously signed, which may still be both effective and controlling. While confidentiality agreements often seem boilerplate and of low importance, and oftentimes accompany a deal that ultimately does not come to fruition, investors nevertheless must ensure that their business transactions and strategies do not run afoul of the provisions to which they have previously agreed.
An unrelated Texas case also highlights the importance of carefully evaluating confidentiality agreements. A dispute involving Oshkosh Truck Corporation ("Oshkosh") and Stewart & Stevenson Services Inc. ("Stewart")2 demonstrates that confidentiality agreements, which may also include restraints and provisions going beyond the typical promise not to improperly use sensitive information, can create liability. The Oshkosh dispute revolves around a confidentiality agreement that included a standstill agreement, which provision was designed to maximize shareholder value by motivating bidders to put forth their best offer by precluding them from making additional offers for a specified time period.
Oshkosh's confidentiality agreement with Stewart barred Oshkosh from offering a bid for two years after its initial offer. Oshkosh sued Stewart, claiming Stewart breached its fiduciary duties to its shareholders by allegedly failing to conduct a full and fair auction. Oshkosh argued it was treated unfairly during the auction process, partially because its standstill agreement was longer than it was for other bidders, which they alleged had the effect of rendering the standstill agreement unenforceable. Although Oshkosh submitted a bid higher than that submitted by Armor Holdings Inc. ("Armor"), the company who ultimately emerged as the winning bidder, Stewart determined that it would run into antitrust problems if Oshkosh were selected.
The court rejected Oshkosh's request to enjoin the acquisition of Stewart by Armor and allowed the deal to close. While differing lengths of time in standstill agreements for bidders in auctions are not unusual, the message of the Oshkosh dispute goes beyond the issue of the standstill agreement and provides another reason to carefully examine the terms of what may seem like a commonplace confidentiality agreement.
The Hawaiian and Oshkosh decisions highlight the need for close scrutiny when entering into confidentiality agreements and demonstrate the potential for confidentiality agreements to be the subject of litigation. Although the execution of such agreements is often a necessary first step in evaluating potential transactions, they should not be signed haphazardly and must be carefully reviewed.
1 No. 03-00817, (Bankr. D. Haw.Oct. 30, 2007)
2 Complaint, Oshkosh Truck Corporation v. Stewart & Stevenson Services, Inc., No. 06-1644 (S.D. Tex. May 12, 2006).
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