Freight rail operating company MidRail has sued private equity firm Partners Group (USA), alleging in a lawsuit filed Friday in New York State Supreme Court that the firm violated non-disclosure agreements it signed related to a two-year period of talks with the rail company.
Non-disclosure agreements, known as NDAs, are ubiquitous in the financial industry, legally preventing companies from using information gathered during talks or due diligence before any kind of deal-making. MidRail is accusing Partners Group of soliciting its business secrets so it could then compete against the rail company.
“MidRail originally agreed to provide its confidential business information” to Partners Group because the private equity firm said it was considering investing in or with MidRail, according to the complaint. “That turned out to be a ruse.”
Instead, Partners Group “solicited MidRail’s most sensitive information and then used it to compete directly with MidRail,” the company alleged in the complaint. MidRail claimed in the lawsuit that Partners Group’s use of this information “has already cost MidRail tens of millions of dollars, and will certainly cause MidRail further damage in the future.”
The company also alleged that Partners Group had been “unjustly enriched” through its use of MidRail’s confidential information. MidRail is suing for damages and to stop Partners Group from continuing to use the company’s information.
"Partners Group considers the lawsuit filed today to be wholly without merit, and will vigorously defend against the asserted claims,” a spokesperson for the firm said in a statement to Institutional Investor. “We will not comment further on this pending litigation.”
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In May 2017, MidRail and Partners Group started discussions about potential deals where the private equity firm would put up capital and MidRail would provide the know-how on rail deals, according to the complaint. MidRail said it has spent years developing expertise, proprietary insights, financial and operational models, and strategies specific for the rail industry.
“As one of MidRail’s key strategic advantages lies in its proprietary information, MidRail required [Partners Group] to enter into a non-disclosure agreement that would protect this information,” according to the complaint. MidRail and Partners signed an NDA in June 2017 and renewed it in January 2019.
The complaint alleges that the NDA outlined the relationship between the two organizations and that Partners Group didn’t have any previous expertise in the rail industry. Meanwhile, MidRail had sought to protect its intellectual property and deal pipeline, saying it did not want to “give away its trade secrets for free” so that Partners Group could use them for its own benefit, according to the complaint.
“The ability to confidentially share sensitive business and financial information is essential for an effective, well-functioning private equity market, said Matthew Schwartz, a partner at Boies Schiller Flexner, the law firm representing MidRail, in an interview. “Companies would never divulge proprietary information to potential investors, partners, or buyers if they could not be sure that information would not later be used against them. Partners Group’s violation of that trust is so egregious that MidRail had no other choice than to take legal action to protect its business.”
MidRail provided the private equity firm with its business model as well as its pipeline of potential M&A deals, operational plans, financial models, and other proprietary insights, all of which MidRail claimed differentiate it from competitors in the industry, according to the complaint. The rail company alleged that Partners ultimately used all this information to bid for Patriot Rail, a U.S. railroad operator, in the summer of 2019. According to the documents, Partners learned about Patriot through MidRail in 2018, before the company went up for sale.
Around May 2019, Partners told MidRail that it wanted to put a first-round bid in for Patriot. If it made it past the first round, it would then team up with MidRail in subsequent rounds, according to the documents. As a result, MidRail said it provided the firm with confidential information on its strategy for Patriot.
But after getting into the second round of bidding in mid-June 2019, Partners Group refused to work with MidRail, but “continued to rely on the confidential information it had received from MidRail pursuant to the NDA,” according to the complaint, which alleged that Partners Group never intended to team up with MidRail on the deal.
Once MidRail learned it had been cut out of the deal, it decided to go after Patriot separately. But it soon realized it would be bidding against a third party that knew everything that it did. As a result, MidRail and a new financing partner paid $100 million more for Patriot than it had originally planned, according to the lawsuit.
MidRail wants restitution caused by the increase in the price it paid for Patriot as well as damages caused by the destruction in the value of MidRail’s business strategies, proprietary and confidential information, and trade secrets. It also wants the private equity firm to be stopped from unfairly competing with it in the future.