Explore a legal case where a buyer filed a lawsuit against a former employee who left with business cards belonging to the seller’s clients after an M&A deal. Learn about the legal implications and challenges in protecting trade secrets in this post.
October 16, 2019
Introduction:
In service-oriented businesses, key employees often have strong connections with clients. When a company purchases such a business, there’s a risk that these key employees might take clients with them. This blog discusses a legal case involving a buyer and a former employee who left with business cards belonging to the seller’s clients.
The Deal:
In this case, a buyer acquired the assets of an investment research firm in December 2015. A crucial employee worked for the buyer for about five weeks post-acquisition, during which negotiations took place regarding the employee’s continued employment. This employee managed a team responsible for a significant portion of the seller’s annual revenue.
Unfortunately, the buyer and the key employee couldn’t agree on the terms of employment, including a non-competition agreement. As a result, the employee left, taking with him two other members of the health policy research team and business cards from the seller’s clients. He used these cards to kickstart his competing business immediately after leaving.
The Lawsuit:
The buyer filed a lawsuit against the former employee in a federal D.C. district court. The buyer claimed that the employee breached his fiduciary duty by using the business cards as sources for his competing business, considering them trade secrets. The former employee countered with a motion for summary judgment, arguing that he did nothing wrong. The court declined to dismiss the claim, stating that a jury should decide whether the former employee’s actions amounted to misappropriation of trade secrets.
The court emphasized that the former employee owed the buyer loyalty during his employment, but without an agreement to the contrary, he had the right to compete after leaving. However, he couldn’t engage in wrongful acts like misusing the buyer’s confidential information. In this case, the buyer accused him of misappropriating business cards acquired during his time with the seller to create his client list.
The court decided that there was a factual dispute about whether these business cards were equivalent to a confidential customer list, a question to be resolved at trial. During the trial, the fact finder would assess whether the business cards constituted trade secrets based on various factors, including how well-known the information was outside the business, the measures taken to safeguard it, its value, and the ease with which it could be acquired by others.
The court also noted that evidence not presented during the summary judgment motion, such as whether the business cards contained confidential and hard-to-find information, would be considered.
Comment:
In hindsight, it might have been wise for the buyer to offer a more enticing employment package to retain this employee. This could have included an attractive compensation plan tied to the employee’s successful performance over an extended post-acquisition period.
Case Reference:
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
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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