March 31, 2020
A buyer of a business does not want the seller or its owner to compete against it after the closing. One tool to manage this risk is the have the seller (and owner) provide a covenant in the acquisition documents to not disclose or use the business proprietary information, including customer information.
The buyer in this deal was a global seafood wholesaler and importer. Seller supplied sustainable artisan seafood to restaurants and markets out of San Francisco. The seller’s cofounder stayed on with the business after the closing as a key employee. This lasted for about a year when the seller cofounder left and started competing with his old business.
The buyer’s revenue significantly dropped, and the buyer sued the seller cofounder in a California federal district court for misappropriating trade secrets, specifically customer information, and breaching a covenant in the acquisition documents not to use or disclose the customer lists.
The seller cofounder asked the court to dismiss the buyer’s claim for misappropriation of trade secrets, arguing that the buyer in its complaint had not said how the customer information was a trade secret, as opposed to being known to the buyer’s seafood distribution industry competitors. The court agreed with the seller cofounder but gave the buyer permission to amend the complaint to allege how the customer information was a trade secret.
Nevertheless, the court did say that the buyer could pursue its claim against the seller founder for breach of his confidentiality covenant to not use or disclose the customer information; saying that the seller cofounder’s written promise in the acquisition documents to not use or disclose the customer information is enforceable even if the customer information is not a trade secret.
This case is referred to as CleanFish, LLC v. Sims, LLC,, Case No. 19-cv-03663-HSG, United States District Court, N.D. California (March 17, 2020).
A buyer can use several tools to keep the seller and seller owners from competing against the buyer after the closing. One is to have the seller and its owners execute a reasonable covenant not to compete.
Also, the buyer should protect the purchased customer information and other proprietary information. However, the buyer should not rely solely upon federal and state trade secret laws to protect the customer information, because a buyer (like the buyer in this case) could be hard pressed to prove to a court that its customer information is a trade secret. The buyer should also make the seller and seller owners promise to not disclose or use the customer information in a confidentiality covenant as part of the acquisition documents.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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