As general counsel to a local company, I regularly review documents for potential acquisitions of real estate, and my employer typically shares that information for properties in its portfolio with potential buyers.
Part of that process involves nondisclosure agreements. Yet the recent high-profile case involving Phillips 66 Company, Propel Fuels, Inc. v. Phillips 66 Co., Case No. 22CV007197 (Cal. Oct. 16, 2024), is especially troubling, as it shows just how much a breach of trust, or at least a perceived breach, can be a costly mistake.
Here, Phillips 66 was found liable for misappropriating trade secrets during due diligence and was ordered to pay more than $600 million in compensatory damages, with an additional $195 million in exemplary damages. For practitioners advising on transactional matters, the case is a reminder that due diligence is not merely a routine check-the-box exercise, but a process laden with legal risk when not managed carefully.
In late 2017, Phillips 66 announced it was exploring the acquisition of Propel Fuels Inc., a low-carbon fuels company. During due diligence, Propel shared confidential information, including business models, financial data and proprietary strategies, under a nondisclosure agreement.
In 2018, negotiations terminated. Shortly thereafter, Phillips 66 entered the same market that Propel served—renewable diesel and high-blend fuels in California—and commenced operations, allegedly using the trade-secret information acquired during due diligence.
In October 2024, a California jury awarded substantial compensatory damages to Propel. Then, in July 2025, the exemplary damages were awarded. In total, Phillips 66 was hit with more than $800 million in damages.
The trial court described Phillips 66’s conduct as “reprehensible” and found that it had abused its bargaining power during the due diligence process. A recent motion for a new trial was denied, with the judge finding the jury’s findings well-supported.
For practitioners, the bottom line is that due diligence processes that involve access to confidential information, particularly in a contemplated transaction that does not close, can carry serious trade-secret and unfair-competition risk.
For lawyers advising on commercial transactions, whether M&A, real estate sales, joint ventures or strategic investments, the Phillips 66 case underscores several core takeaways:
• The sharing of confidential information in the context of due diligence triggers heightened risk.
When sensitive documents are shared under a confidentiality agreement, the receiving party must treat the information with utmost care. If the transaction is abandoned but the acquirer uses the information to compete or launch a similar business, misappropriation claims may arise.
• The potential buyer’s conduct during and after due diligence can create liabilities.
Key risk factors include insinuating the deal is proceeding when the buyer already intends to walk away; failing to put in place a “clean team” or firewall between diligence and business development; and not returning or destroying confidential information following negotiation termination. As a result, lawyers must advise clients not only on what to look at, but how the process is managed and what happens if things stop.
Legal due diligence must encompass strategic and behavioral dimensions, not just document review.
While typically diligence focuses on document review, the Phillips 66 case shows that the information gathering process, and how the parties behave during that process, may itself be scrutinized. Counsel should ask: What access is being provided, under what terms, and what will happen if the transaction does not close?
• Drafting and structuring the NDA and confidentiality terms is critical.
A clear NDA should define permitted uses of the information, what happens at deal termination (e.g., return/destruction obligations), and limits on the buyer’s post-diligence business activities (to the extent possible). In the absence of meaningful controls, a buyer may face liability even if it never signed a purchase agreement.
• Post-diligence conduct, integration planning and surveillance of competing activities matter.
Practical steps for acquirers include: monitoring access to confidential information (audit trails); implementing user restrictions; considering a clean team that manages sensitive data separately; and documenting decision-making about whether to proceed or walk away. If the acquirer uses the information to develop a competing business, as here, courts (and juries) may view the conduct as willful misappropriation.
As such, a practical checklist for lawyers engaged in commercial due diligence may include:
• Define the scope and purpose of diligence up-front: Clarify what information will be reviewed, under what confidentiality terms, and what the buyer can and cannot do with the information.
• Structure the NDA: Ensure it specifies use limitations, defines what constitutes confidential information, sets return/destruction obligations and includes indemnities or penalties for misuse.
• Implement process controls: Suggest virtual data rooms with audit logs; restrict access to “need-to-know”; employ clean-team structures where appropriate.
• Monitor the buyer’s post-diligence activity: Document internal decision-making about whether to proceed or not; if the buyer initiates similar business lines, consider how the earlier diligence materials were used.
• Segment responsibilities: Legal counsel should coordinate with commercial teams to ensure the diligence process is not purely mechanical but tied to strategic analysis and risk allocation (e.g., indemnities, escrow).
• Report clearly and timely: Summarize risks in a “red-flag” form as well as detailed schedules where needed; ensure findings feed negotiation of the purchase agreement.
• Consider potential trade-secret liability: If trade secrets are disclosed, the buyer’s post-diligence conduct may be scrutinized under state-specific laws. Florida has enacted the Uniform Trade Secrets Act, Fla. Stat. Chapter 688, but the Phillips 66 case was decided pursuant to California law.
The Phillips 66 case serves as a cautionary tale, one where the due diligence phase became the focus of litigation, rather than just the deal documentation.
Beyond the usual contract reviews and financial checks, effective due diligence demands attention to process, information flows, confidentiality safeguards, and how shared information may be used if the deal does not consummate. In short: The diligence process is as much about controlling the process of information as it is about reviewing it.
Adina Pollan is general counsel for Hakimian Holdings Inc. Her practice includes commercial litigation, real estate, bankruptcy and corporate governance.