IRENE BOURLATSKI—Le Tote Inc. v. Urban Outfitters, Inc. is a recent intellectual property lawsuit that has captivated the fashion industry. Le Tote is an innovative rental fashion service that allows customers to rent clothing and accessories for a flat monthly fee. The company filed a lawsuit against Urban Outfitters, alleging that the retailer stole its business model and intellectual property under the guise of a potential acquisition of the company when Urban Outfitters established a direct competitor of the company, called Nuuly. How did Urban Outfitters manage to “steal” trade secrets? According to Le Tote: due diligence and the breach of a non-disclosure agreement (“NDA”).
In early 2018, Urban Outfitters approached Le Tote with interest in learning more about its business and “candidly acknowledged [its] inability to enter the rental subscription market on its own, precisely because Urban lacked the experience, systems, infrastructure, and technical knowledge involved in operating a fashion rental subscription service.” Le Tote and Urban Outfitters began discussions of a potential investment, which was accompanied by a NDA. The NDA stated that (i) Urban Outfitters could only use Le Tote’s confidential information to evaluate the company for a possible investment; (ii) Urban Outfitters would preserve the confidentiality of the information; and (iii) Urban Outfitters would only disclose confidential information to the individuals in its company necessary to perform the Le Tote evaluation.
Le Tote shared information with Urban Outfitters through diligence requests and negotiations. The information included the design of Le Tote’s customer-facing website, fit engine, style recommendation tool, dynamic pricing engine, the warehouse management software, and control systems that enable Le Tote to manage its inventory and review customer feedback.
Urban Outfitters’ proposed acquisition of Le Tote was abandoned in May of 2018, due to Urban’s board of directors’ disapproval of the deal. A month later, Urban Outfitters began planning the launch of Nuuly and subsequently announced the fashion subscription service in May of 2019. Between the launch and Le Tote’s complaint, Nuuly gained 27,000 subscribers, a number that took Le Tote four years to reach.
Urban Outfitters filed a motion to dismiss the suit in June of 2020, which was denied on the grounds that Le Tote properly alleged conduct that, if true, would violate the Defend Trade Secrets Act and the Pennsylvania Uniform Trade Secrets Act and would constitute a misappropriation of trade secrets, breach of contract, and unfair competition.
Fast forward two and a half years, Urban Outfitters is urging a federal court in Pennsylvania to decide the trade secret misappropriation lawsuit without a trial, arguing that it is entitled to summary judgment since Le Tote has failed to advance its “accusations beyond speculation.”
So, does a NDA do a sufficient enough job in preventing a potential acquirer from using the proprietary information it learns from due diligence? In fact, how does a company prove that another misused “confidential information”? Should companies have additional safeguards in place when letting another company “look under the hood”? Or will a bad actor always find a way? On the other hand, is it fair for a potential acquirer to be bound by a NDA that masquerades as a non-compete? Is access to proprietary information simply an assumption of risk a target company must take in order to accomplish certain strategic aims? According to the ABA, in addition to having a robust NDA, the target company can protect its trade secrets by “focus[ing] on the process of disclosure to ensure that information is only transferred when and to the extent that it needs to be.” One suggestion for target companies is to use “progressive incremental disclosure,” which begins with an exchange of nonconfidential information, and works gradually through increasingly sensitive information as the parties gain confidence and trust. Thus, target companies must first balance the risk of the misuse of their trade secrets against the strategic incentives of allowing outsiders into their world. If such a decision is found to be advantageous, then target companies should carefully plan at what point and how to disclose sensitive information to potential acquirers.