In Protégé Biomedical, LLC v. Duff & Phelps Securities, LLC, et al., the business seller disclosed confidential information on a telephone call with a prospective buyer corporation. Instead of purchasing the seller’s business, the prospective buyer corporation used the seller’s confidential information to create its own competing product.
The seller sued, but the buyer corporation prevailed because the court concluded that the NDA was not binding on the buyer because the NDA was signed by a member of the buyer’s Board of Directors (BOD), not as an officer of the buyer corporation (such as President or Vice President). Generally, a member of a corporation’s BOD does not have the right to enter into contracts on behalf of a corporation.
This case highlights the importance of carefully reviewing the terms and conditions of an NDA–in particular–who (on behalf of the counterparty corporation) signs the NDA and in what capacity (whether as a member of the BOD or as an officer of the counterparty corporation).
The seller entered into a contract with a nationally-recognized business intermediary to market the seller’s business for sale. Subsequently, the business intermediary prepared and sent a nondisclosure agreement (NDA) for the buyer to sign before commencing any formal discussions regarding the potential sale of the seller’s business. As it turned out, a member of the buyer’s board of directors signed the NDA rather than an officer (e.g., President, Vice President) of the buyer corporation. Generally, a member of a corporation’s board of director does not have the right to enter into contracts on behalf of a corporation–only officers of a corporation have the right to enter into contracts on behalf of the corporation (and, in such case, only if they authorized to do so (whether authorized by the board of directors or because of the subject matter of the contract is within the the officer’s ordinary job duties/responsibilities).
The seller believed that the NDA was properly signed. However, the business intermediary did not understand the important distinction of the rights and authority of a corporation’s officer versus a corporation’s director. Therefore, the business intermediary presumed that the NDA was effective and binding on the buyer and coordinated a telephone conference between the seller and the buyer. During that telephone conference, the seller disclosed its confidential and proprietary information to the buyer. Shortly thereafter, the buyer terminated discussions with the seller and used the confidential information disclosed by the seller to create its own competing product.
Accordingly, the seller sued the buyer corporation, but the buyer prevailed.