Court rules that former seller employees stole seller trade secrets and are using them to compete against the buyer.
March 16, 2023
A buyer of a business runs the risk that the seller’s employees will compete against the buyer of the business, with stolen seller trade secrets. Here the risk was managed with the use of seller confidentiality agreements with its employees.
The seller made “state-of-the-art shipping pallet and matching business applications for using the innovative pallet.” It sold its assets out of bankruptcy to the buyer for $5 million. The assets included valuable trade secrets.
The pallet was a multi-component shipping pallet made of an engineered wood core structure coated with a proprietary polymer to give it strength and rigidity. The seller’s trade secrets included the identification and sourcing of the engineered wood used in the pallet, the development and sourcing of the proprietary polymer used in the pallet, the methods for assembling and manufacturing the pallet, the development, incorporation and use of a proprietary tracking device in the pallet, and the business methods to track the movement of the pallet.
After the closing, a company formed by former seller employees started to compete with the purchased business. The buyer sued the former seller-employee company for theft of trade secrets and asked the court for a preliminary injunction, to order the competing company to stop using the trade secrets.
The court noted that the former employees had signed confidentiality agreements, where they promised the seller to not to disclose or use the seller’s trade secrets. It was also clear that the competing company could not have begun competing operations so quickly without the seller’s trade secrets.
The court issued the preliminary injunction, finding that the former seller-employee company likely is using the seller’s trade secrets.
See Palltronics, Inc. v. Paliot Solutions, Inc., Case No. 22-12854, United States District Court, E.D. Michigan, Southern Division, (February 27, 2023).
A buyer of a company with valuable trade secrets will want to make sure that the seller’s employees won’t use the seller’s trade secrets to compete with the buyer. Confidentiality agreements did the trick in this case.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Telephone: 714 273-6291
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.