Le Tote, a subscription-based clothing rental service for women, filed a lawsuit last week against Urban Outfitters, claiming the company launched a competing subscription service by stealing proprietary information. In a complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, Le Tote alleges that, during merger discussions with Urban Outfitters in March 2018, the two companies signed a mutual non-disclosure agreement (NDA). The complaint alleges the NDA specified that Urban Outfitters would not use Le Tote’s proprietary information for any purpose other than evaluating a possible transaction with Le Tote.

After signing the agreement, Le Tote shared in-depth, proprietary information with Urban Outfitters about how it runs its business, including product information, technology, logistics and how to scale its subscription service. The knowledge and information had been collected since Le Tote’s founding in 2012 and was based on lessons the company learned over time. During the merger talks, Urban Outfitters disclosed to Le Tote that it did not have the knowledge or expertise to start its own clothing rental service, so it was looking to acquire a company like Le Tote.

Two months later, in an unexpected move, Urban Outfitters backed out of the merger talks because, they said, they could not get the approval of their board of directors. Le Tote was surprised by the news, because Urban Outfitters had not identified any potential reservations or stumbling blocks to the transaction. In the complaint, Le Tote said that, by June 2018, at least two members of the Urban Outfitters’ acquisition team were already working on Nuuly, according to their public professional networking profiles.

Last summer, Urban Outfitters launched a competing service, Nuuly, a subscription-based service for women’s fashion, using Urban Outfitters’ brands and other labels. Le Tote alleges that Urban Outfitters used information learned during the merger talks to develop Nuuly, claiming a breach of contract, unfair competition and unjust enrichment as well as violation of the Federal Defend Trade Secrets Act and the Pennsylvania Uniform Trade Secrets Act. Le Tote is seeking injunctive relief, compensatory, punitive and statutory damages along with attorney’s fees.

“This lawsuit arises out of the acquisition and misuse by Urban of highly valuable confidential information and trade secrets (the “Proprietary Information”) belonging to Le Tote for the purpose of developing a fashion rental subscription business that competes directly with Le Tote,” said the company in the complaint.

“Based on the facts and circumstances surrounding Urban’s discussions with Le Tote and its subsequent launch of Nuuly…it is obvious that Urban has misappropriated and misused Le Tote’s Proprietary Information in launching and operating Nuuly. Having learned from Le Tote how to build and operate an efficient infrastructure and how to successfully incorporate customer feedback to maximize customer satisfaction and profitability, Urban’s executives did not ‘forget’ this Proprietary Information, nor could they have disregarded Le Tote’s Proprietary Information in launching Nuuly,” the company said.

Since its launch in 2012, Le Tote has created a women’s fashion subscription service that allows customers to rent clothing and accessories for a flat monthly membership fee. Subscribers can wear the clothing, return it and exchange it for other items. If a subscriber loves a particular piece, they can pay up to 50% off the retail price to keep it. The company offers two monthly membership plans – the Classic plan at $59 a month or the Maternity plan at $79 a month. Le Tote said that it has served more than 330,000 customers in 48 states.

Insider Take:

It is not our place to judge, legally or otherwise, but this is certainly not a good look for Urban Outfitters or Nuuly. It must be terribly disappointing for Le Tote who took years to build their clothing as a service (CaaS) business from the ground up to have someone allegedly take the knowledge they acquired the hard way and to use it for their own benefit. This case will have to play out in the courts, but while it does, it might serve as a cautionary tale for any subscription business considering acquisition talks. Be very protective of any proprietary information.