A key employee in a service business may have valuable personal relationships with the company’s clients. A buyer of the service business risks the key employee walking out the door with company clients after the closing.
Here, the seller was an investment research firm. The buyer, which provides financial and economic research and analysis to institutional investors and newsletter products to mass market customers, purchased the assets of the seller in December 2015.
A key seller employee worked for the buyer for approximately five weeks following the sale, during which time the parties engaged in negotiations regarding the terms of the employee’s continued employment. At the time, the employee managed a team that oversaw the firm’s health policy research. That team allegedly generated over 70% of the seller’s annual revenue.
The buyer and key employee could not come to terms on an employment agreement, including a noncompetition covenant. The key employee left, taking with him the other two members of the buyer’s health policy research team, and business cards of the seller clients that he had picked up over the years when working for the seller. The former key employee used the business cards as his source for clients in his competing business which he started immediately after leaving his employment with the buyer.
The buyer sued the employee in a federal D.C. district court to stop him from contacting the buyer’s clients, claiming that the employee had breached his fiduciary duty to the buyer, as a former employee of the buyer, by misappropriating buyer’s business cards, which the buyer claimed were trade secrets, which the former employee used to compete against the buyer.
The former employee filed a motion for summary judgment asking the court to dismiss the buyer’s claim against him, arguing that he did nothing wrong by using the business cards to compete against the buyer. The court refused to dismiss the claim saying that the jury has a right to determine whether the former employee’s actions amounted to misappropriating the buyer’s trade secrets.
The court noted that the former employee owed the buyer an undivided and unselfish loyalty during the term of his employment. But in the absence of an agreement to the contrary, he was free to compete with the buyer after termination of his employment.
Nevertheless, in his post-employment competition, the former employee could not commit wrongful acts, such as misusing buyer’s confidential information. In this case the buyer accused its former employee of misappropriating his collection of business cards, which he acquired during his time with the seller which the former employee used to create his competing firm’s client list.
The court concluded that there is a factual dispute as to whether these business cards were the equivalent of a confidential customer list; a question not for the court in a motion for summary judgment but for the fact finder at trial.
At trial the court said that the fact finder must answer the question whether the business cards were trade secrets. And that involves (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the buyer to guard the secrecy of the information; (4) the value of the information to the buyer and to its competitors; (5) the amount of effort or money expended by the buyer/seller in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
The court noted that the fact finder will want to see other evidence not on record for the summary judgement motion such as whether the business cards contain information that is confidential and difficult to find, such as information about the identity of key decisionmakers at a client firm or those persons’ private email addresses.
This case is referred to as Hedgeye Risk Management, LLC v. Heldman, Civil Action No. 16-935 (RDM), United States District Court, District of Columbia (September 29, 2019) https://scholar.google.com/scholar_case?case=7765851825007819022&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
With 20/20 hindsight, the buyer would want to consider offering a more lucrative employment relationship for this employee; perhaps offering an attractive compensation package that would be conditioned upon the employee’s successful performance over significant post-closing term of employment.
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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