Explore the intricate world of M&A legal battles with our latest blog post, “Court Upholds Business Asset Buyer’s Lawsuit Against Seller’s Employee for Trade Secret Misuse.” Delve into compelling M&A stories, unraveling the aftermath of acquisitions, and the legal complexities surrounding trade secrets in the corporate landscape. Stay informed on the latest legal developments and strategic insights within the M&A industry.
M&A Stories
July 5, 2018
In a recent legal development, a court ruled in favor of a security system company that purchased assets from another business, allowing it to sue an ex-employee of the seller. The lawsuit alleges the misuse of trade secrets, which were acquired by the buyer during the asset purchase.
Background:
The buyer, specializing in security system installation, servicing, and monitoring, acquired the assets of a company in 2016. The seller was engaged in providing central station monitoring equipment to residential and commercial customers, with the purchase including customer accounts and contracts.
Post-acquisition, several customers, all contractually tied to the buyer, terminated their agreements and shifted to a competitor. Investigations revealed the involvement of a former employee of the seller in diverting these customers.
Trade Secret Misappropriation:
The buyer discovered that the ex-employee was utilizing confidential customer records purchased from the seller. These records contained sensitive information such as contact details, sales history, and pricing data, not publicly available.
Legal Action:
Promptly responding to the situation, the buyer initiated legal proceedings against the former employee and the competitor under federal trademark law, citing misappropriation of trade secrets. The former employee and competitor sought dismissal, arguing that a confidentiality agreement with the seller was a prerequisite for legal action.
Court Ruling:
The court dismissed this argument, emphasizing that the former employee had an inherent duty not to exploit the seller’s trade secrets while employed at a competing company, regardless of any confidentiality agreement. The defendants further contended that customer lists were not trade secrets, especially when the ex-employee had pre-existing relationships with those clients.
Contrary to this assertion, the court highlighted specific instances where the former employee actively solicited and contacted individual customers, none of whom had sought his services independently. Consequently, the court rejected the motion to dismiss the buyer’s claim.
Key Takeaway:
This case underscores the potential risks when acquiring a business, as former owners or employees might become competitors post-acquisition. While a non-compete covenant may offer protection, enforceability varies, especially against employees in certain jurisdictions like California. Sellers and their employees must exercise caution to avoid using trade secrets acquired by the buyer.
Case Reference:
This case is referred to as General Security, Inc. v. Commercial Fire & Security, Inc., No. 17-CV-1194 (DRH) (AYS), United States District Court, E.D. New York (June 25, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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