Explore a recent M&A legal case where a buyer sued a seller’s owner for competing with the acquired business. Learn about trade secrets, competition, and the court’s ruling.
July 21, 2019
M&A Stories
Introduction:
In a recent legal development, a buyer of a business took legal action against the seller’s owner to prevent him from competing with the business he used to own. This case revolves around the sale of a seafood distribution business, shedding light on critical aspects of trade secrets and competition.
The Background:
The seller, a San Francisco-based organic seafood supplier, had deep-rooted connections in the industry, spanning nearly four decades. They supplied restaurants nationwide through foodservice distributors, enjoying strong relationships with suppliers and customers.
The buyer, headquartered in Boston, specializes in wholesale seafood for high-end restaurants. In April 2018, they acquired the seller’s assets via an asset purchase agreement. Post-acquisition, the seller’s owner worked for the buyer for a year before venturing out to launch his own seafood business, directly competing with his former enterprise.
The Lawsuit:
The buyer filed a lawsuit against the seller’s owner, alleging that he pilfered trade secrets from the acquired company before leaving and used them to serve the buyer’s customers through his new venture. The buyer argued that this diversion of business caused a significant drop in their revenue.
On the same day, the buyer sought a temporary restraining order from the San Francisco federal district court. This order aimed to prevent the seller’s owner from utilizing the buyer’s trade secrets and contacting the buyer’s customers. However, the court’s decision hinged on whether the buyer could demonstrate a clear entitlement to such relief.
The Court’s Ruling:
The court refused to grant the temporary restraining order, citing that it is an extraordinary remedy designed to maintain the status quo and prevent irreparable harm. To warrant such an order, the buyer needed to show a strong likelihood of success in the lawsuit.
In this instance, the court determined that the buyer was unlikely to succeed on the merits of their case. The critical trade information in question, including customer and supplier lists and pricing, did not appear to qualify as trade secrets in the buyer’s market.
Why? Regarding the customer list, the buyer had not proven that it was not easily obtainable from public sources. As for the supplier list, the names were readily available on the buyer’s website. Lastly, pricing in the seafood industry was considered standard and not unique, with well-known players.
Closing Thoughts:
It’s worth noting that the buyer could have potentially prevented the owner’s competition by implementing a covenant not to compete. Such an agreement would have been enforceable in California, given that it would have been associated with the sale of the business.
Case Reference:
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]
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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