IP Law Daily, TRADE SECRETS—6th Cir.: Dismissal of security provider’s trade secret misappropriation claim upheld, (May 13, 2024)

By Linda O’Brien, J.D., LL.M.

The prospective buyer of a private security company provided similar services and had business relationships with some of the same clients prior to entering into acquisition negotiations.

A small private security services provider failed to show that a prospective buyer misappropriated its trade secrets and breached a nondisclosure agreement following unsuccessful acquisition negotiations, the U.S. Court of Appeals in Cincinnati, Ohio has ruled. There was insufficient evidence that the prospective buyer used the company’s proprietary information without authorization and its hiring of two former employees alone did not indicate trade secret misappropriation. Thus, the district court’s grant of summary judgment was affirmed (Professional Investigating and Consulting Agency, Inc. v. SOS Security, LLC , No. 23-3344 (6th Cir. May 10, 2024)).

Professional Investigating and Consulting Agency, Inc. (PICA) is a small Ohio company that provides consulting, investigation, executive protection, and secure transportation services. SOS Security, LLC (SOS) is a large, full-service security company with clients across the globe that primarily provides uniformed security at embassies. SOS hired PICA to provide services to some of its clients in Latin America and began to explore the possibility of acquiring PICA. In December 2014, SOS and PICA signed a nondisclosure agreement and began negotiations for the acquisition. Throughout the due diligence process and during their joint business ventures, PICA shared financial and operational information, including customer and vendor lists, salary and pricing schedules, growth opportunities, and a catalog of PICA’s services.

In April 2015, SOS tendered two offers to PICA, both of which were rejected. A deal was never reached and, following billing disputes and personnel issues, the two companies cut ties in April 2016. After the negotiations failed, PICA’s Chief Operations Officer Rodolfo Diaz, resigned to work for another security organization. While SOS continued to grow, PICA’s company profits declined. Major clients Microsoft, Yves St. Laurent, and Bain dropped PICA as one of their security contractors, a former PICA regional director in Brazil went to work for SOS in 2016, and Diaz joined SOS in 2017 after his noncompete agreement with PICA expired.

In June 2019, PICA filed suit in state court against SOS, Diaz, and SOS CEO Edward Silverman, alleging ten state law causes of action. The case was removed to the federal district court in July 2019, based on diversity of citizenship. In January 2020, five of the ten counts in the complaint were dismissed as well as defendants Diaz and Silverman, leaving claims for misappropriation of trade secrets, breach of contract, and quantum meruit. In March 2023, the district court granted SOS’ motion for summary judgment on all the remaining claims and PICA appealed the court’s decision.

Trade secret misappropriation. The misappropriation of trade secrets claim failed as a matter of law because PICA did not demonstrate a connection between SOS’s services and PICA’s trade secrets necessary to support an inference of misappropriation. In Ohio, a state trade secret misappropriation claim has elements: the existence of a trade secret; the acquisition of the trade secret was the result of a confidential relationship or through improper means; and the unauthorized use of the trade secret, the appellate court explained.

It was uncontested that PICA’s business models, client lists, pricing structure, personnel and financial information qualified as trade secrets and the information was shared during acquisition negotiations. PICA admitted that there was no direct evidence that SOS used PICA’s trade secrets without authorization. PICA’s contention that SOS lacked the capacity to offer consulting, investigation, secure transport, and executive protection services without PICA’s proprietary information was rejected as conjecture. In contrast, SOS introduced ample evidence that PICA’s proprietary information was not needed to develop comparable services since the bulk of SOS’s services was security guard protection and SOS had broad operational capacity long before its business association with PICA. The fact that two former PICA employees went to work for SOS did not support a misappropriation claim as there was no evidence that SOS developed novel operating capabilities that those two former PICA employees could have provided. PICA’s argument that it lost clients and business opportunities after cutting ties with SOS was also rejected. It was undisputed that SOS had preexisting relationships with every client that dropped PICA from its lists of security providers and PICA’s post-SOS revenue decline was not indicative of misappropriation, the court stated.

Breach of contract. PICA failed to produce sufficient evidence that SOS breached the contract. PICA contended that SOS violated the confidentiality and nondisclosure agreement. On appeal, PICA relied on the same arguments made in support of its trade secrets misappropriation claim – SOS used PICA’s confidential information without authorization. Those arguments were rejected as unavailing, the court noted.

Quantum meruit. To prevail on its quantum meruit claim, PICA must show that SOS used and benefited from PICA’s services and SOS should have known that PICA expected to be compensated for those services. PICA based its argument on plans it drafted in anticipation of providing services to SOS clients during the 2016 Olympics. SOS and PICA cut ties many months before the Olympics and SOS used different subcontractors for the job. PICA produced no evidence that SOS should have known PICA expected to be paid for draft plans alone, that SOS paid for similar plans in the paid, or companies in the industry typically pay subcontractors for draft plans, the court concluded. Thus, the dismissal of the claim was affirmed.

The Case is No. 23-3344.

Judge: Thapar, A.

Attorneys: Timothy Raymond Bricker (Carpenter Lipps LLP) for Professional Investigating and Consulting Agency, Inc. Eric S. Bravo (Gordon, Rees, Scully & Mansukhani LLP) for SOS Security, LLC.

Companies: Professional Investigating and Consulting Agency, Inc.; SOS Security, LLC

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