Phillips 66 and the $1.2 Billion Mistake: A Cautionary Tale on Trade Secret Misappropriation and Due Diligence Failures

On July 30, 2025, a California Superior Court in Propel Fuels, Inc. v. Phillips 66 Company, awarded Propel Fuels $195 million in exemplary damages for “abusive behavior” after the jury had awarded $605 million in damages for trade secret misappropriation. Beyond the staggering financial consequences, the case offers critical lessons for companies navigating the delicate process of corporate acquisitions, particularly those involving the exchange of confidential information. It exposes how failures in due diligence, transparency, and internal safeguards can escalate a failed business deal into a high-stakes litigation with lasting reputational and financial fallout. This article examines the court’s reasoning, the implications under both the California Uniform Trade Secrets Act (CUTSA) and the federal Defend Trade Secrets Act (DTSA), and the broader message this case sends about commercial ethics and the legal protection of trade secrets.

Both the CUTSA and the DTSA provide 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. (Cal. Civ. Code § 3426.3; 18 U.S.C. § 1836(b)(3)(C)) The phrase “willfully and maliciously” is not defined in the DTSA or the CUTSA, and courts often rely on resources such as state law, out-of-state case law, legal treatises, and legal dictionaries to aid in defining the phrase.

Jury Verdict

The litigation arose from Phillips’ conducting due diligence on whether to acquire Propel Fuels, which produces and sells renewable, low-emission, high-performance fuel, specifically renewable diesel fuel and ethanol-based diesel fuel. As part of the negotiations, and pursuant to an NDA, Propel disclosed its trade secrets to Phillips. The negotiations were unsuccessful. Propel then sued Phillips under the CUTSA. After a lengthy trial in the fall of 2024, the jury found Phillips liable for trade secret misappropriation and awarded Propel $604.9 million for unjust enrichment. The jury also found by clear and convincing evidence that the defendant’s actions were willful and malicious, leaving the court to determine the amount of the exemplary damages.

Although both the DTSA and CUTSA provide that a court may award exemplary damages in the event of willful and malicious misappropriation, a jury is often given deference in determining whether “willful and malicious” misappropriation exists, as well as the amount of exemplary damages that should be awarded. In Phillips, the court “reached its own conclusions, independent of the jury as the statute appears to require, based on the entire body of the evidence admitted at trial.”

Exemplary Damages Determination

In awarding exemplary damages, the Phillips court focused on “(1) the nature of Phillips’ misconduct, as found by the jury, (2) Phillips’ financial condition (and specifically the ability to pay the ward), and (3) the ratio of the potential exemplary damages award to the compensatory damages.” The court also found that California law foreclosed Phillips’ assertion that an NDA between the parties prohibited the award of exemplary damages.

The court highlighted Phillips’ misconduct: First, the court noted that Phillips had misled Propel about the real status of the negotiations. Phillips was initially very excited about the potential deal, finding that it “could put Phillips in the position of being able to move large volumes of renewable diesel at the gas pump.” After signing a letter of intent, Phillips and Propel signed a letter of intent for Phillips to purchase Propel for $40 million. As part of the due diligence, Phillips downloaded nearly 3,000 records containing trade secrets from Propel. Thereafter, Phillips began to lose interest in the deal, which at trial they attributed to several factors, none of which the court found convincing. Despite the internal record that Phillips had soured on the deal, Phillips continued to tell Propel that the deal was on track and the transaction completion was “simply awaiting approval by Phillips’ chairman of the board.” It then took Phillips more than one month to inform Propel that the deal was dead. The court concluded that Phillips “should have been candid with Propel about any alleged misgivings” at the time they arose.

Second, and perhaps most importantly, the court took issue with Phillips’ decision not to use a clean room. Indeed, Phillips used the same team to implement a “go it alone” strategy that had been involved in the negotiations and had access to Propel’s trade secrets. The “go it alone” team, as the name implies, was intended to develop technology similar to Propel’s independently. The court completely rejected Phillips’ excuse that a new team was too expensive and “clean teams” are an exception and not the rule in the oil and gas industry. “Without a clean team in place, it is understandable why evidence of Propel trade secrets pops up through much of the evidence of Phillips 66’s ‘go it alone’ activities . . .” According to the court, Phillips’ “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 time because it had done all the work already alongside Propel during due diligence” Thus, the court agreed with the jury’s conclusion that the failure to use a “clean team” “helped support its finding of willful and malicious conduct by clear and convincing evidence.”

The court also rejected Phillips’ arguments “that its conduct did not really cause [actual] harm to Propel,” noting that while the harm to Propel “is difficult to model” and Propel sought and was awarded damages on an unjust enrichment theory, “Phillips’ had a very impact on Propel.” At a minimum, the court found that Propel “lost out on its acquisition price of $40 million, with $25 million lost by executives that they could have earned by hitting various post-acquisition milestones.”

Given its net worth of $31.7 billion, the court also found that there is no question that Phillips can pay the jury verdict, interest, and the court’s exemplary damages award, but also pointed out that a $1.2 billion award “is not routine.” The exemplary damages award, while three times the value of Phillips’ bid for Propel, “falls well within the court’s discretion under the CUTSA and is well within the bounds of due process set by the U.S. and California Supreme Court.”

Propel sought for the court to double the damages award of $604.9 million. However, the court viewed this request as excessive and stated that “the value of the Propel acquisition to the parties provides a better starting point for assessing exemplary damages.” The court linked the exemplary damage award to the harm that Propel had suffered, “including milestone payments that would have been made to Propel executives after meeting various volume and station opening targets.” Thus, by trebling the amount of what Phillips had agreed to pay to acquire Propel, “the court enhances the value of the benefit of the bargain to effectuate the purposes of an enhanced damages/punitive damages award . . . .”

Cautionary Tale

Phillips provides a cautionary tale of how not to conduct negotiations due diligence concerning the acquisition of a smaller company. On the flip side, it also provides important guidance, more broadly, on how to conduct due diligence, seeking confidential information and trade secrets about another company. Trade secret law has long been justified on two distinct grounds; property rights and unfair competition in tort. The latter has been described as a duty-based theory or “the maintenance of commercial morality.” Where a party, such as Phillips, has entered into a contractual relationship with another party and has breached the duty of confidence by misleading the other party on several matters, it constitutes a breach of trust, which courts have increasingly shown that they will not tolerate. The failure to negotiate in good faith may lead a court to find that it engaged in “reprehensible” conduct and to award of exemplary damages.

By conducting a development process through a clean team, companies can take steps to ensure their creations are not the result of copying preexisting works and that similarities between the created material and any preexisting material are coincidental. Clean Rooms can help avoid or defend against claims for breach of a confidentiality agreement or trade secret misappropriation. A Clean Room may also be used as a tool to support (or refute) a defendant’s independent development or reverse engineering claim in trade secret litigation by demonstrating that the product or information was (or was not) independently developed. In short, Phillips makes clear that a clean team is essential, and the failure to do so is, “at best, a terrible error of judgment.”

Phillips serves as a stark reminder that the costs of cutting corners during due diligence—whether by misleading negotiation partners or failing to implement proper safeguards like clean teams—can be astronomical. More than a legal lesson, this case underscores the ethical and operational imperatives of conducting mergers, acquisitions, and strategic partnerships with integrity. Courts are not only willing but increasingly likely to hold companies accountable when they exploit confidential information under the guise of negotiation.