LBDS is a Texas developer of cardiac MRI technology. ISOL Technology Inc. is a manufacturer of MRI systems based in South Korea. According to a federal court complaint (LBDS Holding Company, LLC v. ISOL Technology Inc. et al., 6:11-cv-00428, (E.D. Tex. Aug. 16, 2011)), LBDS contracted with ISOL in 2008 to purchase MRI systems with ISOL agreeing to integrate LBDS’s proprietary technology into those systems. The agreement contained a non-disclosure provision and LBDS disclosed its technology to ISOL to assist with the integration project.

The relationship turned south in 2010 at a convention for the Radiological Society of North America. LBDS’s CEO attended the convention and saw a competitor’s booth displaying LBDS’s proprietary cardiac technology. To make matters worse, he saw ISOL management and engineers manning the competitor’s booth.

LBDS sued for breach of the non-disclosure provision, unfair competition, and misappropriation of trade secrets. LBDS alleged that ISOL took the cardiac technology and integrated it into the competitor’s system, even helping to market the new product in South Korea and, brazenly, at the trade convention. A Texas jury agreed with LBDS and awarded the company $25 million in damages.

While trade secret theft may conjure up images of rogue employees or shady outside actors, the LBDS case reminds us that trade secret theft can also occur when a company invites a contractor through the door.

When contracting with third parties it is important to:

  • Review contracts to ensure information is protected by appropriate non-disclosure provisions;
  • Perform due diligence on contractors, particularly those operating overseas;
  • Carefully monitor projects that require the disclosure of trade secrets to third parties.

Although LBDS obtained a sizeable jury verdict, it couldn’t unring the bell – the competitor still received highly confidential information. The lesson is clear: be careful who you let in the door.

What steps does your company take to protect trade secrets when contracting with third parties?