“Reprehensible” is a strong word, but that’s how a state court described the conduct of Phillips 66 in a trade secret case brought by the much smaller Propel Fuels. Propel Fuels, Inc. v. Phillips 66 Company was a case in the Superior Court of California that arose after a long courtship between the two companies was called off, resulting only in accusations of stolen trade secrets.
California’s environmental regulatory scheme encouraged the establishment of a renewable diesel fuel market. Propel had experience in California and had developed a special blend of diesel and ethanol and a means to market it. Phillips expressed interest in acquiring Propel in order to gain a foothold in the California market.
As part of the due diligence in deciding whether to buy Propel, a team of Phillips employees gained access to trade secrets in the form of databases and general know-how. Phillips gained an enormous amount of information concerning renewable diesel markets from the due diligence. Some Phillips personnel characterized the information they found as a 10-year head start because Propel had accumulated 10 years’ worth of real-world data.
Phillips ultimately decided to walk away from the deal after essentially stringing Propel along. The court noted that this was vividly demonstrated in an email in which the Phillips CEO reassured the owner of Propel that the deal had been presented to decision-makers and approval was a mere formality. A month after the reassuring email, Phillips declined to purchase Propel. This backtracking had a negative effect on Propel’s ability to find another buyer, and the court described Propel as “imploding” after the move.
A jury awarded a $604.9 million verdict to Propel for unjust enrichment and found that Phillips’ actions were willful and malicious. The court took such exception to Phillips’ behavior that it imposed exemplary damages under a California statute.
In this case, the judge was free to award exemplary damages up to twice the unjust enrichment award, which would have totaled $1.2 billion. The judge expressed doubt that such an award would survive on appeal, so instead chose to triple the amount of Phillips’ original $65 million offer for Propel, which came out to $195 million of additional, exemplary damages. The combined total of nearly $800 million was enough to get anyone’s attention, the court said.
The court noted that the CEO of Phillips should have been candid with Propel about any alleged misgivings in the email a month before the deal was called off. The court also held that Phillips should have sequestered or destroyed all the confidential information instead of populating spreadsheets with it. In fact, the court pointed to the existence of “clean teams” that can be hired for that purpose. Rather than taking the standard means to avoid misuse of confidential information, Phillips set up the sme team to start a new line of business based on the knowledge they had gained from courting, and then dropping, the smaller company.
The judge seemed to be particularly motivated by Phillips’ extending the courtship another month after it had already decided that it did not want to go ahead. It’s interesting to find out that hurt feelings do count for something. In this case, jilting a smaller corporation cost the disenchanted suitor an additional $195 million.
