How binding/defensible are confidentiality agreements?
May 16, 2023
by a searcher in Los Angeles, CA, USA
If someone identifies a niche that they're interested in, later signs a confidentiality agreement to review an acquisition target in that niche, makes an offer that's rejected, realizes that this niche might not actually be that difficult to build in, and attempts to start their own business in the space, is that indisputably impropriety and in violation of the confidentiality agreement?
How binding/defensible are confidentiality agreements in the US, especially (1) given individuals are often looking at many deals in the same space, and (2) in cases where there is no real IP/moat?
from The Johns Hopkins University in Basking Ridge, NJ 07920, USA
Beyond legal considerations/arguments, there are also practical ones. If you truly exploit the niche based on discussions with the target, they may sue you regardless of the likelihood of legal success. Further, if truly a "niche," people talk so your efforts may ultimate be counterproductive. Generally, its not good faith to enter into an agreement that you don't intend to comply with - particularly given that NDAs and confidentiality agreements are often negotiated.
I have litigated these issues on a number of occasions, so I am happy to discuss offline if of value.
from University of Minnesota in Minneapolis, MN, USA
Now if you learned something proprietary in your due diligence, and you leveraged that to compete against the Seller, that might be a different story.
Generally, most small businesses view litigation as a last resort, and they aren't going to go looking to sue you under an NDA unless you pose an existential threat AND their likelihood of success is relatively high. At least that's my two cents.