A Delaware court dismissed a claim that a private equity firm and its affiliated funds had misappropriated trade secrets acquired from a portfolio company via their directors on the board of the company and misused the information by investing in a competitor.

The court found that no reasonable inference of misappropriation could be drawn because multiple agreements between the company and the private equity firm (and the company’s code of conduct and charter) specifically contemplated the possibility that the private equity firm would invest in competitors.

The private equity firm acquired a controlling interest in an alarm company. Subsequently when they no longer had anyone on the board they acquired a stake in a direct competitor. The alarm company claimed that the private equity firm had acquired confidential information including trade secrets while serving on the board and misused the information by investing in a competitor. There was no direct evidence of such reliance and numerous agreements allowed the private equity company to invest in competitors.

The decision emphasises the importance of contractually addressing potential conflicts when the investor is a private equity firm with directors who might sit on boards of competing companies.

The case is Alarm Com Holdings, Inc. v ABS Capital Partners Inc.