M&A Confidentiality Term Permitted Seller’s Post Closing Use of Customer Info

Introduction

A buyer of a business often pays a significant part of the purchase price for the company’s confidential information; such as customer contact information, pricing, cost structure and terms. As a result, the seller usually agrees in the purchase agreement not to use the confidential information or to compete against the business after the closing.

The deal

In this case, the company provided commercial and residential waste management services in 10 states. Many of its customers were city and county governments.

The seller sold the company to the buyer in May 2016 for $64 million. As part of the deal, the seller agreed not to use or disclose the company’s confidential information, including customer information.

The buyer and seller had a falling out after the closing. The buyer felt it had overpaid for the company due to seller’s misrepresentations.

Furthermore, the buyer learned that after the closing, the seller bid on a project with a Florida county; and used some of the company’s customer information in its bid—e.g. pricing, names, addresses, and contract terms and conditions.

The buyer contacted the Florida county and informed it that the seller had used customer information of the company in violation of its purchase agreement confidentiality obligations. The seller did not get the contract.

The lawsuit

The soured relations boiled over into a lawsuit in a Delaware court. There were claims and counterclaims. The buyer sued the seller for, among other claims, unlawfully using the company’s customer information in violation of its purchase agreement confidentiality covenant; and the seller sued the buyer for costing it a contract with the Florida county.

The seller admitted using and disclosing the customer information; but claimed that it was permissible under the seller’s confidentiality covenant; because the covenant did not apply to information known by the public. Specifically, the information used and disclosed related to government customers; and that information was public.

The court agreed with the seller that the confidentiality provision clearly did not apply to public information and dismissed buyer’s claim.

This case is referred to Bobcat North America, LLC v. Inland Waste Holdings, LLC, C.A. No. N17C-06-170 PRW CCLD, Superior Court of Delaware, (Decided: April 26, 2019)

Comment

Buyer lost a technical argument about why the public information was not disclosable. An argument that the buyer probably thought was a loser.

So why fight? Because the buyer understandably felt that it had paid the seller for this information; and that other competitors would have to spend time and expense in compiling this customer information from various government records.

Ok so what if the nondisclosure provision extended seller’s nondisclosure obligation to the public information; given the fact that the company derived a lot of its revenue from government customers?

Probably because the court would hold that a provision prohibiting the seller from disclosing public information was unenforceable as contrary to public policy. And more importantly, the court at the same time could declare the confidentiality provision unenforceable in its entirety; unenforceable as to both public and nonpublic information.

In other words, the court could throw the baby (the protectible nonpublic information) out with the bathwater (the public information) if the buyer had tried to extend seller’s nondisclosure obligation to public information.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

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

Telephone:      714 273-6291

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