Explore the legal intricacies of M&A trade secrets in this in-depth analysis of a recent case. Discover key findings, implications, and the importance of due diligence.
M&A Stories
November 5, 2023
Introduction:
In a recent legal case, an M&A buyer took on the seller, and an owner, in a lawsuit with implications for the protection of trade secrets. The case, filed in an Omaha federal district court, in 2023, involves allegations of misappropriation of trade secrets. In this blog post, we will dissect the case to understand the legal intricacies and implications for M&A transactions.
Background:
The buyer is a property management company operating in Nebraska. On November 28, 2022, the buyer and the seller executed an Asset Purchase Agreement, which involved the buyer’s purchase of the seller’s property management service, including lease agreements and property management contracts.
The Controversy:
The dispute arose after the completion of the purchase on January 2, 2023. The buyer alleged that after the closing, a seller client and former seller investor, Gary, asked a seller owner, Wendy, for access to electronic files related to the seller’s Rent Manager database, which the buyer claimed to have exclusive rights to after the purchase. These electronic files contained information related to owner contracts, lease agreements, its managed properties, contact information for the property owners, and fee structures. Gary used this data, enabling him to reach out to the buyer’s clients, causing harm to the buyer’s business. The seller had kept an electronic copy of this data, despite telling the buyer that the seller group would have no access to this data post-closing.
Legal Claims:
The buyer filed a lawsuit against the seller and Wendy, alleging misappropriation of trade secrets under Nebraska state law and the federal Defend Trade Secrets Act. The seller and Wendy asked the court to dismiss the trade secret ground arguing that the buyer’s factual allegations were insufficient to support its claim. The court denied the seller group’s motion to dismiss.
Key Findings:
The court’s decision included several key findings:
Plausible Trade-Secrets Misappropriation: The court found the buyer’s allegations of misappropriation of trade secrets plausible, as they alleged that the transfer of electronic files to Gary constituted misappropriation under Nebraska and federal law.
Adequate Precautions to Maintain Secrecy: the buyer’s allegations of reasonable precautions to maintain the secrecy of the electronic files were deemed sufficient. The buyer said that the seller group was required to transfer all its electronic files to the buyer at closing, and that Wendy confirmed to the buyer that the seller group would no longer have access to those files after the closing. Furthermore, the buyer kept this information confidential and stored it on a separate, internal server to which others— including Gary and the seller group—lacked access.
Wendy’s Involvement in Disclosure: the buyer’s complaint adequately alleged that Wendy disclosed the Rent Manager information to Gary despite being aware of its secrecy and its exclusive ownership by the buyer.
Implications:
This case serves as a reminder for buyers to review the seller’s trade secrets during due diligence to see whether the seller has taken reasonable steps to maintain their secrecy. And after the closing, the buyer must take reasonable measures to maintain the secrecy of this information.
Case Reference:
Aksarben Property Management, LLC v. Vertical Focus LLC No. 7:23CV5000 United States District Court, D. Nebraska (September 19, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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