The Delaware Supreme Court has upheld a lower court’s decision to dismiss smart home company Alarm.com’s trade secrets case against a private equity firm stockholder that made investments in a rival company.

The state Supreme Court on Feb. 6 summarily affirmed the Chancery Court’s 2018 decision finding Alarm.com Holdings Inc.’s complaint against ABS Capital Partners Inc. did not support a “reasonably conceivable inference of misappropriations.”

The Chancery Court said various agreements between Alarm and ABS specifically considered the PE firm would invest in competitors and established an understanding that such an investment, by itself, would not give rise to a claim for misappropriation of trade secrets.

Background

Beginning in 2008, ABS explored an investment in Alarm and eventually acquired a controlling stake in the company through two funds that it managed. It appointed one of its partners to serve on Alarm’s board of directors. In September 2017, ABS acquired a significant stake in Alarm’s competitor, Resolution Products Inc. ABS appointed a different partner to Resolution’s board of directors.

Alarm filed a lawsuit against ABS and its two funds in the Chancery court, alleging the private equity firm acquired confidential information, including Alarm’s trade secrets, and misused that information by investing in Resolution. Alarm brought a claim for misappropriation of trade secrets under the Delaware Uniform Trade Secrets Act.

Chancery Court Ruling

Dismissing the complaint in a June 15, 2018 ruling, Vice Chancellor J. Travis Laster said ABS’ investment in Resolution was made more than a year after Terkowitz left Alarm and followed an auction in which ABS outbid other potential investors.

“In my view, these circumstances only support an inference that AMS invested in a company that competes with Alarm, just as Alarm always understood ABS could do,” the judge wrote.

Vice Chancellor Laster highlighted various evidence documenting this “shared understanding.”

This included a 2008 non-disclosure agreement in which Alarm acknowledged the private equity firm “deal[s] with many companies, some of which may...pursue similar or competitive paths” to Alarm. The document went on to say that “nothing in this letter agreement will prevent you from evaluating a possible investment in and/or collaboration with, or entering into any transaction with (including any investment in ), a company whose business is similar or competitive with the business of the company.”

Similar language appeared in a pair of stockholders agreements. Alarm’s charter also included a provision that ABS and its representatives on the Alarm board had no duty not to engage in similar lines of business as Alarm.

“The only reasonably conceivable inference is that the parties contemplated that ABS could do precisely what it did,” the judge wrote. “The complaint fails to state a claim under DUTSA.”

Conclusion

When seeking to attract investments, startups often utilize non-disclosure agreements to protect intellectual property and other confidential information. The ruling shows the need for companies to carefully consider how those agreements are drafted and, at a minimum, be aware of what they allow the PE investor to do. On the flip side, the ruling provides some comfort to PE and VC investors that properly crafted agreements and charter documents can provide protection to investors who invest in competitors within an industry.