United States: Inevitable Disclosure Doctrine Held Inapplicable To Failed Business Transaction

Last Updated: September 10 2015
Article by Paul E. Freehling

An Illinois appellate court recently rejected applying the inevitable disclosure doctrine in a trade secret misappropriation spat arising out of a failed business transaction.

After first securing an executed confidentiality agreement, Destiny, the developer of a proprietary healthcare wellness program called "Vitality," shared details of it with Cigna, a healthcare insurer. The insurer decided instead to create a wellness product of its own called "Empower." Destiny sued Cigna for trade secret misappropriation and breach of contract, alleging circumstantial evidence and "inevitable disclosure." Cigna's summary judgment motion was granted, and the appeals court affirmed. Destiny Health, Inc. v. Connecticut Gen. Life Ins. Co., No 1-14-2530 (Ill. App. Court, 1st Dist., Aug. 21, 2015).

Status of the case. Because of a possible interest in "Vitality," Cigna was considering entering into a joint venture or partnership with Destiny, or making an offer to acquire the company. Destiny obtained a signed non-disclosure agreement, prohibiting use or misappropriation of Destiny's confidential information, and then allowed Cigna to take a "deep dive" into data relating to "Vitality." The insurer ultimately decided that "Vitality" was too expensive and lacked flexibility. Thereafter, with the assistance of others, Cigna created and began using "Empower." Claiming that Cigna inevitably misappropriated Destiny's intellectual property and breached the confidentiality agreement, the developer sued the insurer but to no avail.

Background facts. "Vitality" was used to motivate employees to engage in specific healthy activities and to be rewarded for doing so. After deciding not to use "Vitality," Cigna designed and developed "Empower" with some assistance from a different vendor. Both "Vitality" and "Empower" incentivize healthy activities by providing rewards. "Vitality" does not permit employers to change the activities or the points to be awarded for each whereas employers using "Empower" can customize both the activities and the awards. Soon after "Empower" was launched, Destiny sued in the Circuit Court of Cook County. Following several years of discovery, Cigna moved for summary judgment.

Arguments for granting Cigna's motion. The insurer maintained that Destiny provided it with no trade secrets and that, in creating "Empower," it used nothing learned from the developer. Cigna also asserted that Destiny cannot prove damages.

Several Illinois court rulings recognize the "inevitable disclosure" doctrine. Cigna purported to distinguish those decisions on the grounds that they all came early in the litigation, in connection with motions to dismiss or for a preliminary injunction, and all involved employer-employee disputes. According to Cigna, since the instant lawsuit had passed those preliminary points and had reached the summary judgment stage, and because the case concerned a failed business transaction, the doctrine was inapplicable. Cigna cited Omnitech Int'l v. Clorox Co., 11 F.3d 1316, 1325 (5th Cir. 1994), which held that, in a failed business transaction case, absent evidence of actual disclosure, an inference of misuse or misappropriation of trade secrets cannot be based on unsupported speculation. Cigna also referred the court to Connecticut and New York court decisions holding that the "inevitable disclosure" doctrine cannot be used to create a triable issue of fact in opposition to a summary judgment motion.

Arguments against granting summary judgment. Destiny admitted relying on circumstantial evidence but emphasized that it often is used to prove misappropriation. The developer stressed that the Cigna team members who had evaluated "Vitality" had no prior experience with incentive-points platforms, and yet they designed "Empower" quickly after concluding that evaluation. According to the developer, what the insurer learned from Destiny inevitably provided "a footprint for Cigna to work from in creating its own wellness" product. Destiny insisted that the insurer should have constructed a "firewall" or "white room" to insulate the "Vitality" evaluation team from participating in the creation of "Empower."

Further, Destiny contended that the question of whether the insurer inevitably used the developer's intellectual property involved disputed issues of material fact which precluded entry of summary judgment for Cigna. Destiny also argued that the same policy reasons underlying application of "inevitable disclosure" in a dispute between a former employer and its ex-employee apply when a business suitor is given access to confidential information and then uses it to create a competitive product.

The ruling. The Illinois Appellate Court affirmed judgment for Cigna:

"The fact that the information provided by Destiny might have made Cigna more informed in evaluating whether to partner with Destiny or another vendor in the development of an incentive-points program does not support an inference that Cigna misappropriated Destiny's trade secrets absent some showing that Cigna would not have been able to develop its incentive-points program without the use of Destiny's trade secrets."

Takeaways. As Cigna argued and both courts agreed, Omnitech Int'l is the leading decision regarding the inapplicability of the "inevitable disclosure" doctrine to a failed business transaction. The court there stated that a potential acquiring company must be free to examine the books of all potential targets and should not be presumed to have revealed confidences.

Unless precluded, a potential acquirer often uses the same team to evaluate all targets. A target concerned about an "inevitable disclosure" would be well advised to obtain an express commitment from the potential acquirer to create a "firewall." Without such a commitment, the target may be unable to win a failed business transaction lawsuit claiming misuse of proprietary data unless (a) the target can show instances of actual misappropriation of its confidential information, or (b) the target can demonstrate that the potential acquirer could not have succeeded in entering into competition with the target without using the target's secrets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Paul E. Freehling
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