In the last few years, we’ve heard a lot about non-disclosure agreements or “NDAs.” They are commonly used to protect against disclosure of confidential business information or financial data and similar types of highly sensitive information. Sometimes the question arises, what happens if someone breaches an NDA?
In a recent Maryland case, the answer had a whipsaw-like quality, as a jury returned a $20 million verdict only to see the trial judge reduce the award to $1. In an opinion written by Judge Steven Gould, and joined by fellow panelists Judge Gregory Wells and Senior Judge James Eyler, the Court of Special Appeals affirmed that drastic reduction. Adcor Indus, Inc. v. Beretta U.S.A. Corp., No. 0118, Sept. Term, 2019 (Md. Ct. Spec. App. April 1, 2021).
Adcor’s business includes designing and manufacturing firearms, and one of its products is an AR-15 platform rifle known. Beretta also designs, manufactures, and sells firearms and was interested in entering the market for AR-15 rifles. Looking to combine its marketing expertise with Adcor’s technical and manufacturing proficiency, it wanted to explore a possible joint venture that would result in a product called the BRX-15.
To move forward with those discussions, Adcor asked Beretta to sign an NDA, and then shared with Beretta substantial confidential or proprietary information. Adcor also manufactured prototypes for the BRX-15 and filed required applications with the ATF. While Adcor thought its endeavor with Beretta would bear fruit, those hopes were dashed when Beretta ended the relationship.
Adcor then asked Beretta to return the information that had been provided pursuant to the NDA, and while Beretta returned materials, it acknowledged keeping one copy of proprietary information. It claimed it kept that information because it feared Adcor would follow through on an earlier threat to sue Beretta. Moreover, it appeared that some Beretta employees might have kept some of Adcor’s information.
Although Beretta had indicated an interest in proceeding with the BRX-15 project on its own, it dropped the project and never received any revenue from it. But that did not prevent the almost inevitable litigation.
Adcor filed a 17-count complaint against Beretta in the Circuit Court for Baltimore County, advancing a plethora of allegations and claims. The case eventually proceeded on the sixteen-count Sixth Amended Complaint. After the court ruled on Beretta’s motion for summary judgment, eight counts remained. The case went to trial on those counts, but after the circuit court granted most of Beretta’s motion for judgment, only one count remained.
That count alleged breach of the NDA. While the trial judge thought there was a lack of evidence showing any damages caused by the breach of the NDA, the court allowed the claim to go to the jury, which found that Beretta breached the NDA and returned a verdict of $20,000,000. Beretta filed the predictable batch of post-trial motions, which resulted in the circuit court vacating the jury award and replacing it with a judgment in Adcor’s favor for nominal damages of $1. The litigation then moved to the Court of Special Appeals.
On appeal, Adcor launched a two-prong attack. First, Adcor argued that the circuit court misconstrued a provision in the NDA that dealt with remedies, including potential categories of damages. Adcor claimed that the court erroneously limited the recoverable damages to the specific categories listed in that provision of the NDA. The Court of Special Appeals rejected that argument, explaining that the circuit court acknowledged the availability of those specific remedies, but also “acknowledged that Maryland law allows for recovery of reasonably foreseeable damages proximately caused by the breach that are proven with reasonable certainty.” The appellate court quoted at length the trial court’s ruling reducing the damages to the nominal $1 amount, saying that at “no time during its lengthy explanation did the court find that the NDA was ambiguous or limit Adcor to the remedies provided under the NDA’s remedies clauses.”
The second prong of Adcor’s attack challenged the trial court’s determination that Adcor had failed to prove damages. To the contrary, Adcor urged two theories to support the jury’s $20 million award. The first was the “benefit conferred” theory, which looked at the benefit Berretta received by keeping and using Adcor’s confidential information. Adcor pointed to the $12 million it had spent in developing the confidential information it shared with Beretta.
The second theory was an “agreement in principle” approach,” which supposedly compensated Adcor for Berretta’s alleged dissemination and use of Adcor’s confidential information. Adcor argued that it and Berretta agreed in principle to co-develop, manufacture, and sell the BRX-15, and had they done so, $8 million in sales royalty would have resulted. According to Adcor, $12 million in conferred benefit plus $8 million in imputed royalties led to the $20 million verdict. We’ll look at each theory in turn.
The Court of Special Appeals rejected the “benefit conferred” approach, explaining that in a breach of contract action, the non-breaching party may recover damages proximately caused by the breach. In other words, the focus has to be on the loss sustained by the non-breaching party. The “benefit conferred” approach, on the other hand, looks at the benefit unjustly conferred on the other party. The Court explained, “Maryland law is well-settled that the benefit conferred approach applies to claims for quasi-contract and unjust enrichment, in which the aim is not to compensate the plaintiff for damages sustained but rather to require an underserving defendant to disgorge benefits that would be unjust to keep.” As a claim for unjust enrichment is not available when the subject matter of the claim is covered by an express contract between the parties, Adcor could not have prevailed on a quasi-contract or unjust enrichment claim. And according to the Court, an award for breach of contract damages cannot involve a disgorgement component, or consider what the defendant has been given or retained, and it saw “no reason to make an exception for NDAs.”
Adcor’s “agreement in principle” theory fared no better, as the Court gave it the shortest of shrift. The trial court had dismissed Adcor’s claim based on an alleged agreement to co-develop the BRX-15. Plus, thirteen of Adcor’s sixteen counts “sought damages based on an alleged agreement or promise to co-develop and sell the BRX-15,” but each count fell victim to either summary or judgment of the motion for judgment at trial. Adcor’s attempt to analogize to a misappropriation of a trade secret was equally unsuccessful, because it had pled a count for misappropriation of trade secrets, and that count was dismissed. In short, the Court of Special Appeals refused to permit Adcor to bootstrap failed claims “onto its claim for breach of the NDA, particularly a remedy that rests on speculation of an agreement that never was.”
A couple observations come to mind. One is the lack of any nexus between the breach of the NDA and the types of damages Adcor was seeking. As the Court of Special Appeals said: “Adcor did not explain to the jury the causal connection between the specific breach of the NDA and the damages it was seeking.” How did retaining confidential information cause Adcor to spend $12 million in product development, and how did the retention of that information cause a loss of $8 million in imputed royalties? The second observation deals with the way Adcor characterized the $12 million in development costs. Instead of saying those costs represented a benefit conferred on Berretta, would Adcor have been better off labelling them as expenses incurred in preparation for performance of the contract or made in reliance on the contract? See Dialist Co. v. Pulford, 42 Md. App. 173 (1979).
Yet the lack of causal nexus between breach of the NDA and the damages sought would remain a problem, for as the appellate court noted, the damages were tied to the failure to proceed with the project, not the failure to return the information. And the dismissal or entry of summary judgment on the counts related to the failure to consummate the project were not challenged on appeal.