Properly Analyzing Breach of a NDA - Loftness Specialized Farm Equip., Inc. v. Twiestmeyer

by McDermott Will & Emery

The U.S. Court of Appeals for the Eighth Circuit has explained that under Minnesota law it is inappropriate to apply the test for the tort of misappropriation of trade secrets and confidential information when the issue is the alleged violation of a non-compete clause in a non-disclosure agreement (NDA).  The Court vacated and remanded the lower court’s grant of summary judgment. Loftness Specialized Farm Equip., Inc. v. Twiestmeyer, Case No. 12-4049 (8th Cir., Feb. 11, 2014) (Gruender, J.).

In June 2011, Loftness Specialized Farm Equipment (Loftness) brought a declaratory judgment action against Terry Twiestmeyer, Steven Hood and Twiestmeyer & Associates (T&A), who asserted counterclaims against Loftness for unjust enrichment and two breach of contract claims.

In 2007, Loftness and T&A entered into an NDA that included a 20-year non-compete clause.  Twiestmeyer and Hood then related their idea for selling grain bagging equipment in the United States, including their improvements on Argentinian-made equipment. Loftness developed and manufactured grain bagging equipment that incorporated Twiestmeyer’s and Hood’s ideas. During this period, Loftness agreed to pay Twiestmeyer and Hood a 2 percent override on all grain bagging equipment and related products (under the terms of the May 2008 Agreement).

Shortly before the expiration of the May 2008 Agreement, Loftness informed Twiestmeyer and Hood that it would be manufacturing grain bagging equipment for Brandt.  Although Loftness initially continued to pay Twiestmeyer and Hood the 2 percent override payments after the expiration of the May 2008 Agreement, Loftness eventually informed Twiestmeyer and Hood that the payments would be terminated.

The district court entered summary judgment for Loftness for breach of the NDA and breach of the May 2008 Agreement, in addition, it dismissed Twiestmeyer, Hood and T&A’s unjust enrichment counterclaim.  Regarding the breach of the NDA, the district court applied a three-part test for the tort of misappropriation of trade secrets and confidential information that it derived from Cherne Industrial v. Grounds & Associates (Minn. 1979).  However, in Electro-Craft v. Controlled Motion (Minn. 1983), the Minnesota Supreme Court distinguished between information protected by Cherne’s common law standard and Minnesota Uniform Trade Secrets Act, and information protected by a non-compete clause in a contract.  A non-compete clause can be violated with a single act and the single act could be entering a contract.  The tort of misappropriation of trade secrets and confidential information requires a continuing course of conduct by the party seeking to protect the information.  The U.S. Court of Appeals for the Eighth Circuit remanded this counterclaim because the parties did not comprehensively brief or argue whether Loftness’s actions in connection with the Brandt deal constituted a breach of the non-compete provision of the NDA.

The court also affirmed the district court’s rulings on the breach of the May 2008 Agreement and unjust enrichment.  The court agreed that the May 2008 Agreement was not extended by the NDA or orally since in either case it would be unenforceable under the statute of frauds.  The court agreed with the dismissal of the unjust enrichment counterclaim because adequate legal remedy existed under the counterclaims for breach of the NDA and breach of the 2008 Agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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