ABUSIVE BEHAVIOR INVOLVING TRADE SECRETS THEFT LANDS PHILLIPS 66 IN HOT FINANCIAL WATER: TIPS FOR PROTECTING TRADE SECRETS DURING BUSINESS NEGOTIATIONS

Contract law recognizes that the concepts of good faith and fair dealing are an unspoken aspect of every contract.  Yet, I tell clients that the best drafted contract in the world will not prevent bad actors from breaching the contract.  Dishonest conduct by the receiving party of proprietary information under the terms of an NDA can have particularly devastating effects for the NDA’s disclosing party.  And when the receiving party is held accountable in a court of law, financial consequences for the receiving party can also be devastating.  It’s called karma.

These assertions are supported by the July 30, 2025 decision by the California Superior Court of Alameda County in Propel Fuels, Inc. v. Phillips 66 Company to award Propel Fuels $195 million in exemplary damages for “abusive behavior” even after Propel had already been awarded $605 million in damages by the jury for trade secret misappropriation.  This blog discusses the decision and provides tips for protecting trade secrets under an NDA.

Discussion

Propel Fuels is in the renewable fuel industry where it produces and sells renewable, low-emission, high-performance fuel, specifically renewable fuel and ethanol-based diesel fuel.   The case arose from Phillips 66’s conducting due diligence under an NDA and Letter of Intent on whether to acquire Propel Fuels.  As part of the negotiations, Propel disclosed its trade secrets which included financial models, business strategies, and location algorithms to Phillips.  The negotiations fell through when Phillips 66 withdrew in 2018 and launched competing renewable fuels in 2019. 

In 2022 Propel sued Phillips 66 under various causes of action, eventually being awarded $605 million by the jury.  The case was brought under both the California Uniform Trade Secrets Act (CUTSA) which provides that a court may award exemplary damages in the event of willful and malicious misappropriation in an amount not more than two times the damage award. Most states including Florida have also enacted trade secret statutes based on the Uniform Trade Secrets Act; these state statutes all provide for an award of exemplary damages.  So does the federal Defend Trade Secrets Act.

Following the jury award of $605 million, the court itself awarded Propel an additional $195 million for Phillips “willful and malicious” misappropriation on top of the jury award under the CUTSA.  The total award of $800 million is one of the biggest trade secret awards in U.S. trade secret litigation history.

In granting an award for exemplary damages, the court found that Phillips 66’s conduct was egregious in two respects.  First, Phillips had misled Propel on the real status of the negotiations after the signing of a Letter of Intent to purchase Propel for $40 million and an NDA.  As part of the due diligence process, Phillips 66 was granted access to nearly 3000 records containing Propel’s trade secrets.  Phillips began to lose interest in the deal but still continued to tell Propel that the deal was on track.  It took Phillips over a month to finally tell Propel that the deal was dead after leading Propel on that things were proceeding toward consummating the acquisition deal.

Second, the factor that most contributed to the finding of malicious conduct was Phillips 66 decision to “go it alone” strategy in expanding its business to include renewable fuels.  One of the downsides of trade secrets is that they are susceptible to reverse engineering.  As long as any reverse engineering is done independently by people having no access to another’s trade secrets, there should not be a problem with trade secret misappropriation.  In fact, reverse engineering by competitors is a known risk factor for intellectual property owners having trade secrets.  If a trade secret is independently reverse engineered, the original trade secret owner may have little legal recourse.  

Here, Phillips 66 never independently reverse-engineered Propel’s trade secrets to come up with renewal fuels for entering the renewal fuel energy industry.  Instead, the very people involved in the reverse engineering scheme were the same people who had been involved in negotiations with Propel and had had access to its trade secrets!  Phillips 66 had not used a “clean team” to reengineer Propel’s trade secrets.  That is, Phillips 66 did not use a development team comprised solely of members who had never ever had access to or never been made aware of anything having to do with Propel’s trade secrets.   Had it played by “good faith” rules, then arguably Phillips 66 would have had a case that they had engaged in honest reengineering to obtain their new products.  The court found that Phillips 66’s failure to rely on clean teams explained “why evidence of Propel’s trade secrets pops up though much of the evidence of Phillip 66’s ‘go it alone’ activities . . .”

Further, the court found that Phillip 66’s “knowledge of Propel’s trade secret information itself made the business case for entering the renewable diesel and E85 markets.  Phillips 66 saved months (if not years) of design and development work because it had done all the work already alongside Propel during due diligence.”  The court’s award of $195 million in exemplary damages “falls well within the court’s discretion under the CUTSA and well within the bounds of due process set by the U.S. and California Supreme Court.”

In sum, Phillips 66 lost big time because it mislead Propel and failed to implement an honest strategy for “going it alone.”  Instead, Phillips 66 relied on the trade secrets that Propel had provided to it under an NDA and Letter of Intent to save time and money in developing new products instead of developing renewable energy products in its own stead.  Phillips 66, a company which has been around for decades, behaved unethically and reprehensibly with the smaller company which had entered into good faith negotiations based on Phillips 66 representations that it was genuinely interested in consummating a deal.  

Phillips 66 is expected to appeal the award. 

Take Home Points/NDA Drafting Tips and Compliance Tips

Once the trade secret is out of the bag, the damage can be extremely difficult to undo.  NDAs which are intended to protect a disclosing party’s proprietary information can show up in a variety of business matters including the following: 1)  contract manufacturing agreements where the contract manufacture may need to receive certain trade secrets from the client; and 2) software/APP development contracts where the developer will be provided with the client’s algorithms for use in developing codes/digital systems. And, as the Propel decision demonstrates, NDAs are also executed when proprietary information will be exchanged during M&A negotiations, business asset purchase agreements, and the like.  Small businesses/new entrepreneurs can be at an NDA disadvantage when dealing with “big players” especially when the “big player” has drafted the NDA.    

No small business/entrepreneur should think that it must sign a presented NDA as is. Here are some tips for an NDA’s disclosing party to consider when trade secrets and other confidential information will be provided to the other party as a crucial step in achieving a specific business purpose.   Small businesses/entrepreneurs should not approach NDA negotiations from a position of lesser bargaining strength.  Ask smart questions and require unambiguous terms/obligations to provide a clear roadmap for the receipt of and handling of proprietary information by the receiving party.  

1. It is important to understand that confidential information does not necessarily rise to the level of a trade secret.  To qualify as a trade secret, confidential information must meet certain requirements as per state statutes and/or the DTSA.  That is, businesses should identify potential trade secrets and take steps to qualify and protect that confidential information as a trade secret internally.  Proprietary information may be defined in the NDA as comprising both trade secrets and confidential information. Both can be very valuable business assets, but trade secrets theft may have particularly severe economic consequences for the trade secret owner if stolen or somehow inadvertently disseminated by the trade secret owner.   
2. All NDAs are not created equally.  Make sure the NDA is tailored specifically to the business purpose behind the release of the disclosing party’s proprietary information. Chat GPT might provide a basic outline, but such an NDA should be finalized/reviewed by an IP attorney based on the surrounding circumstances.  If provided with an NDA for signature by the other potential party to the NDA, have it reviewed by an attorney who will explain it and point out any areas of concern.
3. If confidential information/trade secrets are to be disclosed under an accompanying Letter of Intent, ensure that any such information to be disclosed under the NDA’s disclosure requirements will not exceed the scope of any Letter of Intent.  For example, if the Letter of Intent is specific to the possible acquisition of one specific branch of a business, only proprietary information related to the business branch should be released.  This is why articulating the NDA’s business purpose is important; ensure it matches the scope of any Letter of Intent.  
4. Make sure that every piece of proprietary information provided under the NDA is tracked and documented by both the disclosing party and the receiving party and the method of dissemination (electronically, special encryption, hard copies, etc.).  
5. Consider “releasing” trade secrets in stages on a need-to-know basis depending on the negotiation phase laid out in any Letter of Intent. In other words, the disclosing party may not want to tip its hand too soon.  
6. The disclosing party should assign a person who will oversee the dissemination of information and require that the receiving party also designates a person who will be in charge in monitoring the handling of the trade secrets received by the receiving party to only those people who actually have a need to see such information.
7. Don’t flood the receiving party with proprietary information without understanding how the receiving party is going to control dissemination to others in the organization.  Verify that the NDA’s receiving party is responsible for the actions of any employee/manager/principal/partner who will have access to disclosed proprietary information.  Ensure that all disseminated information is stamped or otherwise designated as proprietary information being provided under the terms of an NDA executed by parties X and Y on (specify the day).  
8. The NDA should require that all disclosed trade secrets will be maintained in confidence indefinitely by the receiving party.  For confidential information, a specific protection period, e.g., three years, is generally specified.  The NDA should also specify the typical valid exceptions to the receiving party’s obligations to hold the confidential information/trade secret in confidence.  For example, the NDA may state that the Receiving Party can “release” proprietary information providing that the Receiving Party shall first have given notice to the Company and shall have made a reasonable effort to obtain a protective order requiring that the Proprietary Information so disclosed be used only for the purposes for which the order was issued.”
9. Require that disclosed proprietary information, whether electronically delivered or provided as hard copies from the disclosing party, is destroyed/deleted from the receiving party’s storage systems/servers/hard drives and that the receiving party certifies such action. This is why tracking of disclosed and received proprietary information is essential.
10. The NDA should address the handling of: 1) oral communications which could involve trade secret/confidential information disclosure; and 2) the creation of documents by the receiving party on behalf of the disclosing party.  For example, an NDA might state that for oral communications to constitute confidential information, the communications must be reduced to a confidential writing within a certain number of days.  Regarding #2, an example is where the software code developed by the receiving party on the basis of algorithms provided by the disclosing party is to constitute the disclosing party’s protectable confidential information/trade secrets. As an aside, in case #2, the software development company should be required to assign all rights in the code to the disclosing party either in the NDA or via a separate assignment of rights agreement.
11. The NDA should include a provision concerning the disclosing party’s right to seek injunctive relief in addition to or in lieu of damages.
12. The boiler plate provisions typically included in most contracts should be included but tailored accordingly.

The above tips, although largely directed to protecting and guiding the disclosing party, can also be beneficial for the receiving party.  Receiving parties should understand their obligations.  By complying with its obligations, the receiving party will be able to demonstrate that it has acted in good faith in the event of any dispute arising under the NDA down the road.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL, THE CONTENT IS FOR INFORMATION ONLY AND IS NOT LEGAL ADVICE.

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