When stakeholders and advisors think about intellectual property risk in an M&A transaction, they tend to reach first for “traditional” types of intellectual property that are registered with the government. That instinct is reinforced by a diligence process often built around public records and government filings, with questions such as whether a target’s patents, trademarks and copyrights are properly recorded with clean chain of title.

In contrast, trade secrets often receive less, if any, attention; there is no registry to search or file history to pull. However, the failure to consider the potential for trade secret risk in a transaction is a potentially dangerous and expensive omission. Trade secret litigation is becoming more common, and large trade secret verdicts and settlements arising out of M&A processes (whether failed or completed) demonstrate that trade secrets may, in appropriate circumstances, warrant the same rigor in diligence that is applied to other types of intellectual property.

This article begins by identifying recurring fact patterns that can signal trade secret risk. It then examines how a sponsor can evaluate whether a target or its officers face a credible risk of trade secret litigation, and whether the sponsor itself could inherit that exposure as a buyer. Finally, it discusses how a sponsor can structure a transaction’s confidentiality agreements so that if a deal falls apart, a disappointed counterparty cannot credibly claim that the sponsor walked away with its secrets instead of its business.

Recognizing Trade Secret Risk In M&A

Trade secret litigation has grown steadily not just in the number of cases filed but also in the size of the verdicts. Federal Defend Trade Secrets Act filings rose from 609 in fiscal year 2021 to 708 in 2024 and reached a record high of 1,552 cases in 2025. Furthermore, trade secret damages in the last five years have often reached hundreds of millions of dollars.

M&A activity is a recurring trigger for these disputes, and the fact pattern repeats often enough to be recognizable. A target shares sensitive technical or commercial information with a prospective acquirer under a nondisclosure agreement (NDA) during diligence. The deal falls apart. The prospective acquirer later launches, or accelerates, a competing product or business line. The target concludes that the acquirer never intended to close and used the diligence process to obtain, free of charge, exactly the information it would have paid to acquire.

That pattern produced one of the largest trade secret verdicts in recent years. Propel Fuels, Inc. sued Phillips 66 Company after Phillips signed an NDA in September 2017 to explore acquiring Propel’s renewable fuels business. After Phillips terminated negotiations in August 2018, it launched an effort to enter the renewable fuels market using the same team that had conducted due diligence on Propel. A California jury found in October 2024 that Phillips had misappropriated Propel’s trade secrets, awarding $604.9 million in damages, and the court separately awarded $195 million in exemplary damages after finding the misappropriation willful and malicious. The court later denied Phillips’s post-trial motions to overturn the verdict in October 2025.

The same pattern appears in strategic investments and partnerships. Zunum Aero, an electric aircraft startup that took venture capital from Boeing, sued Boeing in 2020, alleging that Boeing used Zunum’s trade secrets learned during diligence to develop a competing hybrid commuter aircraft. A jury initially awarded Zunum roughly $81 million in trade secret damages. A federal judge later invalidated the verdict for insufficient identification of the trade secrets, but the Ninth Circuit reinstated the award in August 2025, finding that Zunum’s evidence was specific enough to support the jury’s findings.

A second pattern involves alleged trade secret misappropriation by a target, which later exposes the acquirer to liability. In Arcturus Therapeutics, Inc. v. AbbVie Inc., Arcturus Therapeutics sued AbbVie Inc. and its subsidiary Capstan Therapeutics in September 2025, alleging that two individuals who had worked for Arcturus brought trade secrets relating to Arcturus’s lipid nanoparticle delivery technology to Capstan before Capstan was acquired by AbbVie for $2.1 billion. Arcturus’s complaint alleges that a material part of Capstan’s value “consisted primarily of trade secrets its personnel had misappropriated from Arcturus.” The court largely denied the defendants’ motion to dismiss in March 2026, allowing the case to proceed.

The Arcturus case is instructive for sponsors for a reason that goes beyond its facts: it demonstrates that trade secret exposure most often does not stay with the seller in an acquisition. AbbVie, the buyer, now defends a lawsuit arising out of conduct that occurred before it owned Capstan, over technology that may sit at the core of the deal’s value.

Diligencing Trade Secret Risk

Because trade secrets are not recorded on public registers, it is essential for buyers to ask the right questions during diligence. A few areas warrant particular attention:

Provenance of key trade secrets. Where trade secrets drive the value in a transaction, diligence should trace the origins of those trade secrets. The target should be able to explain who, when and how such trade secrets were developed and whether such development drew on technology or confidential information belonging to a former employer, collaborator, licensor or other third party. A gap in that history—particularly where a key technical advance closely followed the arrival of personnel from a competitor—may warrant further investigation.

Personnel movement into and out of the target. The Arcturus dispute began with two individuals with longstanding ties to Arcturus—a former employee and a former consultant—moving to a competitor. Where conducting trade secret due diligence, diligence teams should ask where a target’s key technical personnel came from, whether any joined from close competitors, and whether the target has documentation showing that those hires went through a clean onboarding process. If recent hires have filed patent applications, those applications should be reviewed to determine if inventions are being claimed shortly after the new hire joined.

Consultants and advisors working across competitors. Consultants who work for multiple companies in the same technical space can create overlooked risk because they may fall outside standard onboarding and confidentiality protocols. Arcturus illustrates the issue: Arcturus alleges that its longtime consultant began working for Capstan while still consulting for Arcturus.

None of this diligence eliminates the risk that a seller’s technology was not developed cleanly, but it builds the factual record a sponsor will want if a claim surfaces after closing: evidence that the sponsor asked the right questions and that the answers, at the time, gave no reason for concern.

Drafting for the Deal that Does Not Close

The harder problem for a sponsor is often prospective: how to structure the confidentiality and diligence protocols for a deal it is pursuing, so that if the deal fails, the sponsor is not exposed to the kind of claim Phillips 66 and Boeing faced.

The Propel Fuels decision is a useful roadmap of what not to do. The court found that Phillips took “no efforts to shield the team implementing its [renewable fuels] project from Propel’s trade secrets,” despite recognizing that it could have used a “clean team” to avoid misusing Propel’s information. The court similarly emphasized Phillips’s efforts to “strip[] out and delet[e] Propel information” from financial models that Phillips wanted to reuse internally. As the court put it, Phillips “should have collected and sequestered, returned, or destroyed all Propel confidential information shared during due diligence, without exception,” rather than trying to parse after the fact which piece of information was a trade secret.

Sponsors evaluating a strategic acquisition, minority investment or joint venture where the counterparty will share potentially competitive information should consider building the following into the transaction documents and internal process from the outset.

Negotiate the NDA with a failed deal in mind. The TAOS v. Intersil Corporation litigation provides another data point about NDAs during negotiations: Texas Advanced Optoelectronic Solutions, Inc. (TAOS) disclosed confidential ambient-light-sensor technology to Intersil Corporation during unsuccessful 2004 merger discussions, and later alleged that Intersil used the information to develop competing products. In 2025, after years of litigation, the Federal Circuit affirmed awards, including $8.5 million in disgorgement for trade secret misappropriation, $17.1 million in exemplary damages, approximately $7.25 million in reasonable-royalty damages for breach of contract, and attorneys’ fees.

Use a clean team for technical diligence. Where practicable, sponsor personnel who review a target’s confidential technical information during diligence should be walled off from others in the sponsor’s organization who could put that information to competitive use. This is particularly important in cases where the sponsor already holds, or is evaluating, a competing portfolio investment. The absence of a “clean team” was central to the willfulness finding in Propel Fuels, and its use can help rebut an inference of bad faith.

Require specificity about what is confidential. Generic NDAs that sweep in “all information disclosed” as confidential, without asking the disclosing party to identify what it considers a trade secret, create ambiguity that favors the plaintiff in later litigation. Where commercially practicable, sponsors should consider NDA provisions that require counterparties to identify trade secret material as such when it is produced.

Include an independent development clause. An acquirer’s confidentiality and diligence agreements should state that the recipient remains free to develop, acquire or use similar information independently, provided it does so without reference to the counterparty’s confidential disclosures.

Consider a residuals clause. A residuals clause can permit personnel who were exposed to a counterparty’s confidential information to use, after the fact, general knowledge, skills and experience retained in unaided memory. These clauses are valuable to acquirers precisely because trade secret disputes over failed deals often turn on what diligence personnel remember and later apply. But a residuals clause can be drafted to exclude specific technical data, source code, formulas or documents, as courts and disclosing parties may scrutinize any residuals language that reads as an improper license to retain the substance of what was disclosed.

Conclusion 

Trade secret exposure in M&A is not a theoretical risk confined to a narrow set of technology deals. It arises across industries whenever competitively sensitive information changes hands during a process that might not close, and it can attach to an acquirer years after the fact or follow an acquired business into its buyer’s hands. In appropriate cases, trade secret risk should therefore be a distinct diligence item addressed by asking the right questions about people, prior negotiations and information handling, and managed prospectively through carefully drafted confidentiality agreements.

Private Equity Report Fall 2026, Vol 26, No 3