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August 14, 2012

"N-D-A" Can Spell "T-R-O-U-B-L-E"

A recent decision by the U.S. District Court for the Southern District of New York shows why companies should use care when entering into non-disclosure and confidentiality agreements.

Goodrich Capital, LLC v. Vector Capital Corporation, involved claims by a financial advisory firm ("Goodrich") that a private equity firm ("Vector") had breached the confidentiality agreement ("NDA") into which the two firms had entered.

Goodrich had approached Vector as a potential financing source for acquisitions by one of Goodrich's clients ("Treasurer") in the cash handling industry. They executed the NDA which prohibited Vector from using any of Goodrich's "Confidential Information" for any purpose other than to explore business opportunities in the cash handling industry involving Treasurer and Goodrich. The NDA also contained a "non-circumvention" provision which provided that Vector would not, "in violation of any agreement between the parties entered into after the date hereof "¦ circumvent, avoid, bypass or obviate Goodrich "¦ to avoid payment of fees"¦"

Goodrich provided a presentation marked "Confidential" to Vector in which it identified potential targets for Treasurer/Vector in the cash handling industry. Treasurer and Vector attempted, but failed, to acquire one target identified by Goodrich. Thereafter, Vector, on its own, acquired another of the targets Goodrich had identified.

Goodrich sued for breach of the NDA. Vector moved to dismiss claiming that the NDA only covered transactions among Goodrich, Vector and Treasurer. The court rejected this argument stating that it "overlooks the broad language of the NDA, which prohibited Vector from using Goodrich's confidential information for any purpose other than the contemplated business arrangement with Goodrich and Treasurer." Vector argued that so broad an obligation would be unreasonably indefinite and thus unenforceable. The court disagreed, holding that the NDA imposed a "definite obligation, i.e., an obligation not to use Goodrich's confidential information other than for certain, specific purposes."

Goodrich also claimed that Vector had breached the anti-circumvention provision of the NDA. Vector countered that the anti-circumvention provision contained the phrase "in violation of any agreement between the parties entered into after the date [of the NDA]" and that Goodrich had not identified any subsequent agreement that would obligate Vector to pay Goodrich a fee. The court held, however, that under New York law, the covenant of good faith and fair dealing that is implicit in every contract is violated when a party promises to pay fees or commissions but then does not act in good faith to permit those fees or commissions to be earned. The court found that Vector benefitted from Goodrich's advice but then refused to pay.

The court also sustained Goodrich's claims for unfair competition, unjust enrichment and tortious interference with contract.

The decision in Goodrich Capital LLC v. Vector Capital Corporation is a cautionary tale for companies that enter into confidentiality agreements without understanding the range of activities that will be inhibited by of those agreements.

For more information. Please contact John P. Lowe, Jr. at (585) 295-4499 or by e-mail at jlowe@hblaw.com.

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