Adcor Industries v. Beretta U.S.A.

Adcor Industries, Inc. v. Beretta USA Corp., No. 118, September Term, 2019, Argued: September 2, 2020 CONTRACTS – NONDISCLOSURE AGREEMENTS Contracts are voluntary undertakings that obligate the parties to duties and responsibilities that they otherwise wouldn’t have assumed. The risks of signing a contract are many and often unforeseen. Before signing a contract, the parties must assess whether the expected benefits of the transaction outweigh the risks, including the possibility that they underestimated or failed to protect against all of the risks. If they decide to proceed, it means that they accepted all risks and mutually agreed to the rules governing their relationship moving forward.

Parties enter into contracts with the reasonable expectation that the courts will enforce those rules. CONTRACTS – NONDISCLOSURE AGREEMENTS - DAMAGES Damages for the breach of a nondisclosure agreement are treated in the same manner as other contracts. The allocation of risk reflected in nondisclosure agreements is just as important and central to the expectations of the parties as it is with respect to other types of contracts. CONTRACTS – NONDISCLOSURE AGREEMENTS - DAMAGES The settled measure of contract damages under Maryland law serves its function for nondisclosure agreements as much as it does for other contracts.

Circuit Court for Baltimore County Case No.: 03-C-15-006837 REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 0118 September Term, 2019 ______________________________________ ADCOR INDUSTRIES, INC., ET AL. v. BERETTA U.S.A. CORP. ______________________________________ Wells, Gould, Eyler, James R. (Senior Judge, Specially Assigned), JJ. ______________________________________ Opinion by Gould, J. ______________________________________ Filed: April 1, 2021 Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. 2021-04-01 15:45-04:00 Suzanne C. Johnson, Clerk The ability of businesses to exchange information, particularly confidential and proprietary information, is a critical component of a functioning, free-market based economy. Such information often includes financial data and records, business plans, marketing plans, budgets, technical data, formulas, and the like. To facilitate the sharing of information, it is common for parties to enter into an agreement known as a non- disclosure agreement or an NDA.

Among other things, NDAs generally limit the disclosure of the sensitive information to a defined circle of people and specify its permitted uses. This case involves the fallout when the recipient of the information—the receiving party under the NDA—decided not to proceed with the contemplated transaction with the disclosing party, and then breached the NDA by failing to return all of the information it had received. The jury found the receiving party liable to the disclosing party in the amount of $20 million in compensatory damages. The trial judge, however, found that the evidence did not support the jury’s finding of damages, and reduced the judgment from $20 million to $1.

The disclosing party appealed, and presents us with a single question: Did the trial court err by improperly granting Appellee’s Motion for Judgment Notwithstanding the Verdict, vacating the jury’s damages award in favor of Appellants and entering judgment in the amount of one dollar? We answer that question in the negative and affirm the judgment of the circuit court. BACKGROUND Appellants Adcor Industries, Inc. and Adcor Defense, Inc. (together, “Adcor”) are Baltimore-based Maryland corporations in the business of designing and manufacturing bottling components, aerospace parts, and firearms. Adcor was founded in 1989 by Demetrios (“Jimmy”) Stavrakis when he was 23 years old.

Adcor’s foray into the firearms manufacturing business began when it was hired by Colt Manufacturing to produce a component to the M-16 rifle. From that experience, Adcor concluded that it had the know-how and experience to build a better firearm that could be used by police and the military. Adcor spent the next several years, and incurred $12 million in research and development costs, building an AR- 15 platform rifle known as the “Adcor B.E.A.R.” 1 The Adcor B.E.A.R. went to market in or about 2012. Appellee Beretta U.S.A. Corporation (“Beretta”) is a Maryland company that designs, manufactures, and sells firearms, shooting gear, accessories, bags, luggage, holsters, optics, and apparel.

In 2012, Beretta was looking to enter the market for the AR- 15, the most popular semi-automatic rifle in the United States. Beretta could have invested the time and money necessary to reverse engineer and design its own AR-15-style product, but it was looking for a shortcut into the market. That’s where Adcor came into the picture. 1 Although the sale of AR-15 style rifles has been prohibited in the State of Maryland since October 1, 2013, CR §4-303; PS §5-101(r)(2)(xv); Kolbe v. Hogan, 849 F.3d 114 (4th Cir. 2017), manufacture in the State of Maryland for sale elsewhere is expressly permitted. CR §4-302(3)(ii). 2 Beretta’s idea was to combine Adcor’s technical and manufacturing know-how with Beretta’s marketing expertise to roll out a Beretta-branded but jointly-developed product that would be called the BRX-15.

To explore the potential for such a venture and to protect its proprietary information, Adcor required Berretta to sign a nondisclosure agreement (the “NDA”). Section 2 of the NDA prohibited Beretta from disclosing Adcor’s confidential information, and required Beretta to return the information upon Adcor’s written request. Section 3 of the NDA stated: The Covenantor [Beretta] acknowledges that a breach of Section 2 will irreparably and continually damage Adcor or other appropriate Adcor Affiliate and that money damages in the event of such a breach may not be adequate to remedy such a breach and that such damages may be difficult to ascertain. Consequently, the Covenantor agrees that, in the event the Covenantor breaches or threatens to breach any of the provisions of Section 2, the appropriate Adcor Entity shall be entitled to (i) injunctive relief to enforce such provisions and specific performance of such provisions and (ii) money damages.

Nothing in this Agreement, however, shall be construed to prohibit the appropriate Adcor [Entity] or its Affiliates from also pursuing any other remedy (whether, at its option, in conjunction with or in lieu of any one or more of the aforementioned remedies), the parties having agreed that all remedies shall be cumulative and supplementary. As part of its money damages for the period of time during which the Covenantor breaches [Section] 2 the appropriate Adcor Entity shall be entitled to recover the amount of fees, compensation, or other remuneration earned by the Covenantor as the result of any breach of [Section] 2. During the two-year period in which the parties explored a possible joint venture, Adcor disclosed to Beretta substantial confidential or proprietary information, including Adcor’s entire Technical Data Package (“TDP”). Adcor considered its TDP and the other disclosed information to be valuable—indeed, Adcor likened its TDP to a “secret sauce” 3 that made its product unique.2 Adcor protected its confidential and proprietary information by, among other things, requiring its employees to sign confidentiality agreements and storing its proprietary information on secure computer servers.

In addition to sharing its confidential and proprietary information, Adcor manufactured prototypes for the BRX-15 in 2014. Beretta filed three marketing applications with the Bureau of Alcohol, Tobacco, Firearms and Explosives (the “ATF”) for the BRX-15.3 During this time, Adcor believed that it was moving forward with Beretta to co-develop and manufacture the BRX-15. Adcor’s belief turned out to be wishful thinking. In October 2014, Beretta sent a letter to Adcor stating: It is with regret that I must inform you that Beretta USA will be removing the equipment we recently purchased from your facility.

We have enjoyed working with you over the course of the last several years and regret that we were unable to form a mutually acceptable partnership on the AR platform. Now, due to changing dynamics in the market place, the desire to keep our workforce gainfully employed in the Accokeek facility, and our upcoming move to Tennessee, we intend to machine Pico and A300 Outlander parts in house. 2 The extent to which the information provided by Adcor met the definition of “Confidential Information,” as defined in the NDA, was vehemently disputed by Beretta at trial. The resolution of this appeal, however, does not require us to decide which categories or pieces of information did or did not qualify as “Confidential Information.” Thus, we will assume that such information was Confidential Information. 3 Firearms manufactured in the United States must, under federal law, be marked with certain identifying information. In lieu of those requirements, a manufacturer may apply for a marketing variance from the ATF, which would permit another method for identifying the firearm. 18 U.S.C. § 923 (i); 26 U.S.C. § 5842 ; 27 CFR § 478.92 and § 479.102. 4 In addition, we wanted to provide you with formal feedback on your quotes for the BRX-15 upper and lower receivers.

We were able to obtain superior pricing on comparable products in the magnitude of 50% less. Our attempts to negotiate with you have been unsuccessful and therefore we must source these parts elsewhere to remain competitive in the marketplace. In the next several days we will be sending a technical crew to your facility to disconnect the machines and pack up the items that we purchased under our recent agreement, as well as the A300 fixtures and tooling that were delivered to you from MPC. Minimal support will be required by your staff.

Thank you again for all of your hard work and support of our company, and best wishes for your continued success. Adcor was blindsided by this letter. With the relationship now at its end, Adcor demanded that Beretta return its confidential and proprietary information as required by the NDA. In a subsequent telephone conversation between Mr. Stavrakis and Beretta’s chief operating officer, Jeff Cooper, Mr. Stavrakis indicated that Adcor might sue Beretta.

Beretta made efforts to comply with Adcor’s demands by gathering, segregating, and returning information, but Beretta admitted that it retained at least one copy of Adcor’s proprietary information.4 Several Beretta witnesses testified that they weren’t told to delete, destroy, or return any of Adcor’s confidential materials. Beretta admits that “not all Beretta employees followed the collection protocol fully or recalled being instructed to destroy Adcor information.” After concluding that the market for AR-15 “platform” was saturated, Beretta eventually decided not to continue with the BRX-15 project. Beretta never received any revenue from the BRX-15. 4 Beretta contends that it lawfully retained a copy set in case Adcor made good on its threat to sue. 5 In 2015, Adcor filed a 17-count complaint against Beretta, alleging breach of contract, misappropriation of trade secrets, unjust enrichment, violation of the NDA, and other related counts. The complaint underwent numerous amendments.

Ultimately, the operative complaint became the Sixth Amended Complaint. The Sixth Amended Complaint contained 16 counts, generally described as follows: • Count I – Breach of Contract – Beretta breached a contract to develop, manufacture, market, and/or sell an AR-15 rifle together with Adcor; • Count II – Detrimental Reliance – Adcor detrimentally relied upon Beretta’s clear and definite promise to co-develop, manufacture, market, and/or sell an AR-15 rifle with Adcor; • Count III – Quantum Meruit – In connection with its expectation that it would co- develop, manufacture, market, and/or sell an AR-15 rifle with Beretta, Adcor provided valuable services, technical data, model drawings, vendor lists, prices, troubleshooting, and expertise to Beretta and received nothing from Beretta in return; • Count IV – Breach of Partnership Agreement – Beretta breached a partnership agreement to design, manufacture, assemble, market and sell an AR-15 rifle with Adcor; • Count V – Violation of Duty of Partnership – Beretta breached its duty as a partner of Adcor to design, manufacture, assemble, market and sell an AR-15 rifle with Adcor; • Count VI – Wrongful Dissociation of Partnership – Beretta wrongfully disassociated itself from partnership with Adcor to design, manufacture, assemble, market and sell an AR-15 rifle with Adcor; • Count VII – Unfair Competition – Misappropriation of Trade Secrets – Beretta wrongfully acquired Adcor’s trade secrets so that it could develop the AR-15 rifle without Adcor; • Count VIII – Unfair Competition – Misappropriation of Products – Beretta disclosed Adcor’s trade secrets and products so that it could develop the AR-15 rifle without Adcor; 6 • Count IX – Fraud/Intentional Misrepresentation – Beretta fraudulently represented that it would develop, manufacture, assemble, market, and sell an AR-15 rifle with Adcor; • Count X – Fraudulent Concealment – Beretta failed to disclose to Adcor that it did not intend to develop, manufacture, assemble, market, and sell an AR-15 rifle with Adcor; • Count XI – Violation of Non-Disclosure Agreement – Beretta signed an NDA that represented that it would not disclose confidential information and breached that agreement; • Count XII – Negligent Misrepresentation – Beretta breached its duty of care to provide accurate information about the proposed venture with Adcor to design, assemble, market and sell an AR-15 rifle; • Count XIII – Unjust Enrichment – Adcor conferred a benefit to Beretta by providing technical information, technical data, model drawings, tolerances, manufacturing techniques, materials, expertise, price lists, and vendor lists, to manufacture an AR- 15 rifle, without giving anything in return; • Count XIV – Usurpation of Corporate Opportunity – Beretta usurped the opportunity belonging to the partnership between Adcor and Beretta to develop and market an AR-15 rifle; • Count XV – Breach of Contract – Pico Slide – Beretta breached agreements to purchase equipment to manufacture the Pico pistol slide at Adcor and to manufacture the Pico pistol slide at Adcor’s facility; and • Count XVI – Detrimental Reliance – Pico Slide – Adcor detrimentally relied upon Beretta’s promise regarding the manufacture of the Pico pistol slide at Adcor. Adcor requested various forms of equitable relief, including an injunction prohibiting Beretta from using or disclosing any of the protected information, and compensatory and punitive damages. After discovery closed, Beretta moved for summary judgment on each of the counts.

The court granted summary judgment as to the following eight counts: Breach of Contract 7 (Count I); Breach of Partnership Agreement (Count IV); Violation of Duty of Partnership (Count V); Wrongful Dissociation of Partnership (Count VI); Unfair Competition – Misappropriation of Trade Secrets (Count VII); Unfair Competition – Misappropriation of Products (Count VIII); Usurpation of Corporate Opportunity (Count XIV); and Breach of Contract – Pico Slide (Count XV). The court denied Beretta’s summary judgment motion as to Adcor’s counts for Detrimental Reliance (Count II); Quantum Meruit (Count III); Fraudulent/Intentional Misrepresentation (Count IX); Fraudulent Concealment (Count X); Violation of Non- Disclosure Agreement (Count XI); Negligent Misrepresentation (Count XII); Unjust Enrichment (Count XIII); and Detrimental Reliance – Pico Slide (Count XVI). The case proceeded to trial on these remaining counts. At the close of Adcor’s case-in-chief, and upon Beretta’s motion for judgment, the circuit court granted judgment against Adcor on all counts but one: Count XI for breach of the NDA.

Though expressing concern about a lack of evidence of damages caused by any breach of the NDA, the circuit court allowed the claim to proceed to the jury. Beretta presented eleven witnesses in its defense case-in-chief. Adcor did not put on a rebuttal case. At the conclusion of the evidence, Beretta renewed its motion for judgment, which the court denied.

The trial judge gave the following jury instruction on damages: If you find for the Plaintiff on the issue of liability, then you must consider the question of damages. It will be your duty to determine what, if any[,] award will fairly compensate the Plaintiff[s]. The Plaintiff[s] have the burden to prove by a preponderance of the evidence each item of damage claim to be caused by the Defendant. In considering the items of damage 8 you must keep in mind that your award must adequately and fairly compensate the Plaintiff.

However, an award should not be based on guesswork. A party to a contract which has been broken may recover nominal damages of $1.00, even though he or she fails to prove . . . he or she suffered actual damages. During closing argument, Adcor argued that the jury could award the amount of money Adcor spent developing the Adcor B.E.A.R.—$12 million. Adcor also argued that the jury could award damages equal to the profits that Beretta projected on the sale of the BRX-15—$36 million.

Adcor did not explain to the jury the causal connection between the specific breach of the NDA and the damages it was seeking. Instead, Adcor suggested that Beretta would resume its efforts to bring the BRX-15 to market after the case was over. Adcor’s counsel stated: The retention provision of the NDA acknowledges the reality of the business world. That you could have somebody who deals with you in bad faith, takes that information.

And when you sue them they can say, well, I’m not doing anything with it. The problem is, once the cat’s out of the bag it’s . . . kind of hard to put it back in. The problem is that there’s nothing other than you to stop them from doing it the moment this case is over. That’s why retention alone is punishable, regardless of usage and regardless of dissemination.

The jury returned a verdict in favor of Adcor on its claim for breach of the NDA, and awarded Adcor $20 million in compensatory damages. In a consolidated filing, Beretta moved for judgment notwithstanding the verdict pursuant to Maryland Rule 2-532, for a new trial or a remittitur pursuant to Rule 2-533, and to revise the judgment pursuant to Rule 2-535. Among other things, Beretta argued that: (1) the evidence did not support the jury’s finding that it breached the NDA; and (2) the evidence did not support the jury’s award of compensatory damages. The court resolved the motions without reaching the first issue, finding that even if Adcor had proven 9 a breach, Adcor nevertheless failed to adduce evidence of actual damages resulting from the breach.

The court vacated the jury’s award of damages and ordered entry of a new judgment in favor of Adcor for nominal damages in the amount of one dollar. Adcor filed a timely notice of appeal. DISCUSSION I. STANDARD OF REVIEW “We review a grant or denial of a motion for JNOV for legal correctness, by viewing the evidence and the reasonable inferences to be drawn from it in the light most favorable to the non-moving party, and determining whether the facts and circumstances only permit one inference with regard to the issue presented.” Stracke v. Estate of Butler, 465 Md. 407, 420 (2019) (cleaned up). “If there is no rational ground under the law governing the case for upholding the jury’s verdict, JNOV must be granted.” Id. (cleaned up).

In this context, if the non-moving party has offered evidence supporting the initial damages award, such that reasonable minds may differ on the matter, the motion for JNOV should be denied. See Aronson & Co. v. Fetridge, 181 Md. App. 650, 665 (2008).

II

ANALYSIS Adcor advances two principal arguments on appeal. First, Adcor contends that the circuit court erroneously interpreted and applied the NDA. Adcor insists that the circuit court considered and accepted Berretta’s argument—made for the first time in its renewed motion for judgment—that the NDA was ambiguous, and then improperly construed it 10 against Adcor, as the author of the NDA. As a result, Adcor argues, the court erroneously interpreted paragraph 3 of the NDA to limit the recoverable damages to “the amount of fees, compensation, or other remuneration earned by [Beretta] as a result of any breach[,]” to the exclusion of damages allowed under Maryland law.

Second, Adcor contends that the circuit court erroneously found that the jury’s damages award was not supported by the evidence. Adcor insists that it adduced sufficient evidence that it was, in fact, damaged by Beretta’s breach of the NDA, and that the jury had an ample evidentiary basis on which to quantify the damages. We will address each of these arguments in turn. A. THE TRIAL COURT’S INTERPRETATION OF THE NDA Adcor devotes about eight pages of its brief to arguing that the court took Beretta’s bait by finding that the NDA was ambiguous and that it should be construed against Adcor as the drafter.

Referring to the court’s purported ambiguity finding, Adcor argues that Beretta waived that issue by waiting until its renewed motion for judgment to raise it for the first time, and concludes that “[i]t was therefore improper for the trial court to grant JNOV on this ground.” Adcor goes on to assert that the NDA’s language on the available remedies was not ambiguous and the trial court’s decision to construe it against Adcor was “legally incorrect.” As a result of this error, Adcor contends that the court improperly determined that under paragraph 3 of the NDA, Adcor’s recovery was limited to “three types of money damages: (1) fees, (2) compensation and (3) other remuneration earned by Beretta as a result of its breach.” 11 We are not persuaded. The court expressly acknowledged that paragraph 3 of the NDA: (1) permitted Adcor to seek injunctive relief and damages for a breach of the NDA; (2) allowed Adcor to obtain, as damages, the “amount of fees, compensation or other remuneration earned by [Beretta] as the result of any breach of Section 2”; and (3) required Beretta to indemnify Adcor for any costs or expenses, including legal fees, incurred or resulting from an actual or threatened breach. The trial court also acknowledged that Maryland law allows for recovery of reasonably foreseeable damages proximately caused by the breach that are proven with reasonable certainty. Here’s what the trial court said in its entirety: The