The use of confidential information for any purpose other than that agreed upon when advising on the sale and purchase of companies is a violation of trade secrecy

Victoria Vilar & Candela Villa

On 20th May 2022 the Provincial Court of Barcelona upheld an appeal stating that business information that had been shared under the protection of a confidentiality agreement for the purchase and operation of a hotel complex can be considered as a trade secret. The use of such information for a purpose other than that agreed upon (i.e. the submission of bids for the operation of the hotel complex) constitutes unfair behaviour for violating trade secrets.

The claimant sought to acquire the assets comprising of a hotel complex and the shares of the company operating the complex. In order to make this acquisition, the claimant commissioned a consulting firm to carry out due diligence on the assets and the hotel business and to find an operator to manage them.

In the course of this assignment, the consultant entered into a confidentiality agreement with the chosen operator (and defendant) obliging them to treat the information provided by the consultant in strict confidence and to use it for the sole purpose of evaluating the claimant’s submission of a commercial offer for the operation of the hotel complex. The information shared included, among others, valuation reports, the business plan prepared by the consulting firm and professional and salary data of the employees.

The claimant’s projected deal was foiled when an entity related to the defendant acquired the entire capital stock of the company operating the hotel complex. Given the circumstances, the claimant filed a lawsuit against the defendant for exploitation of trade secrets and breach of the confidentiality agreement. It alleged that the defendant had made unlawful use of the information provided under the confidentiality agreement, having used it for its own benefit, and claimed damages. The claim was dismissed and the claimant decided to appeal the judgment.

When deciding upon the appeal, the Provincial Court relied upon the concept of a trade secret as outlined in the Trade Secrets Act ( hereinafter "LSE" by its Spanish acronym), although it was not in force when the facts occurred and despite the fact that, as a general rule, laws cannot be applied retroactively if this would prejudice the rights of parties involved. However, the Court understood it to be logical to apply the LSE in this case, because doing so filled a legal gap as up until this point Spanish law had no definition for trade secrets. Trade secrets had been interpreted as such when discussing non-disclosed information.

The Provincial Court found that the information shared with the defendant met the requirements to be considered a trade secret in accordance with the LSE, as in, the information is secret, it has business value precisely because it is secret and therefore reasonable measures should have been taken by the holder to keep it secret.

In this regard, the court ruled that the information shared was of a private or secret nature, given that it was only available to the defendant after signing the confidentiality agreement, and therefore was not available to any hotel operator.

On the other hand, the Court confirmed that the information had business value, was complete and valuable, as it allowed the defendant to prepare its own business plan and two bids to operate the hotel.

Likewise, the Court understood that the signing of the confidentiality agreement between the defendant and the consultant - who had assigned its contractual position to the claimant- was a reasonable measure to protect and preserve the secrecy of the information.

Having confirmed that information obtained by the defendant could be considered a trade secret, the Court turned to article 3.2 of the LSE (which can be conceived as falling under the concept of exploitation of trade secrets in article 13 of the Unfair Competition Law), which considers unlawful the use of trade secrets by whoever breaches a confidentiality agreement limiting the use of a trade secret without the consent of the owner.

Thus, the Provincial Court concluded that the defendant engaged in unfair behaviour by exploiting trade secrets (business information received) obtained with a duty of privacy established by means of a confidentiality agreement and, in violation of such agreement, by making an offer to purchase the entire share capital of the company that operated the hotel complex which the claimant intended to acquire. Consequently, it ordered the defendant to pay the claimant compensation for damages caused by the loss of the hotel's operating business, including loss of profits and consulting fees incurred by the claimant.

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