Court Says That Buyer of Business Not Likely to Win Trade Secret Suit

Introduction

A buyer of a business sued the seller’s owner to stop him from competing against the owner’s old business.

The deal

This case involved the sale of a seafood distribution business. The seller was a San Francisco based organic seafood supplier to restaurants across the U.S. via foodservice distributors. The co-founder and president of the seller had been working in the seafood industry for approximately thirty-nine years. He knew all his company’s suppliers and customers and he had a pre-existing relationship with many of them.

The buyer is a Boston based wholesale seafood supplier to high-end restaurants. Buyer purchased the assets of the seller in April 2018 pursuant to an asset purchase agreement. The seller’s owner worked for the buyer after the sale for a year. He then left and formed his own company and started to compete against his old business.

The lawsuit

The buyer sued the seller’s owner accusing him of stealing the sold company’s trade secrets before he left the buyer and using it to fulfill orders to buyer’s customers with his new company. The buyer claimed that this diversion of business away from the buyer caused the buyer’s “revenue to drop precipitously.”

That same day, the buyer also applied for an immediate entry of a temporary restraining order, and an order to show cause why a preliminary injunction should not issue against owner. Specifically, the buyer asked the San Francisco federal district court to issue a temporary restraining order to stop the seller’s owner from using the buyer’s trade secrets and stop soliciting and contacting the buyer’s customers.

The court said that a temporary restraining order is intended to preserve the status quo and prevent irreparable harm to the buyer until a hearing can be held on a preliminary injunction application.  Also, a temporary restraining order is an “extraordinary remedy” that the court should award only upon a clear showing that the buyer is entitled to such relief. And a temporary restraining order would not be issued if the buyer was unlikely to succeed on the merits.

In this case the court held that the buyer will probably not succeed on the merits because the buyer information involved (customer and supplier lists and pricing) probably was not a secret in buyer’s market.

Why? As to the customer list, the buyer had not claimed that the customer list was not “readily ascertainable through public sources.”  Supplier list? The names of buyer’s suppliers were on the buyer’s website. Pricing? The “key players in the seafood industry are well-known, and pricing in the industry is standard and not unique.”

This case is referred to CleanFISH, LLC v. Sims, Case No. 19-cv-03663-HSG, United States District Court, N.D. California, (June 28, 2019)  https://scholar.google.com/scholar_case?case=10000178774886670925&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017#[1]

Comment

The buyer could have stopped the owner’s competition with a covenant not to compete. A covenant not to compete would be enforceable against the seller’s owner in California because it would have been given in connection with sale of the owner’s business.

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).

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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Posted in asset purchase agreement, trade secret misappropriation by former seller employee Tagged with: , ,

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