Learn how including a covenant in your acquisition agreement can prevent sellers from disclosing or utilizing customer data, even if it’s not classified as a trade secret. Explore a real case involving a seafood wholesaler and importer.
March 31, 2020
Introduction:
When acquiring a business, it’s crucial for the buyer to prevent the seller or its owner from becoming competitors, post-deal. One effective way to address this concern is by including a covenant in the acquisition agreement. This covenant ensures that the seller (including its owner) refrains from revealing or utilizing the business’s confidential information, which includes customer data.
The Case:
In a specific case, a global seafood wholesaler and importer purchased a business that supplied sustainable artisan seafood to establishments in San Francisco. The co-founder of the seller remained with the business for about a year after the acquisition, but eventually left and started competing with the acquired company. This led to a lawsuit initiated by the buyer in a California federal district court.
Legal Challenge:
The buyer’s revenue took a hit, prompting them to sue the co-founder of the seller. The claims included misappropriation of trade secrets, specifically customer information, and a violation of the covenant in the acquisition agreement that prohibited the use or disclosure of customer lists. The co-founder of the seller argued that the customer information wasn’t proven to be a trade secret, and in fact, was among public knowledge among the buyer’s competitors. The court initially agreed.
Outcome:
However, the court allowed the buyer to amend their complaint to demonstrate how the customer information qualified as a trade secret. Meanwhile, the court maintained that the buyer had grounds to pursue the claim against the seller’s co-founder for breaking the confidentiality covenant. This decision emphasized that the written commitment made by the seller’s co-founder not to utilize or expose customer information was legally binding, even if the information didn’t qualify as a trade secret.
Comment:
Buyers can utilize various strategies to prevent sellers and their owners from becoming competitors, post-acquisition. One effective approach is to establish a reasonable non-compete covenant. Additionally, it’s essential for buyers to safeguard acquired customer data and other confidential information. Depending solely on federal and state trade secret laws might not be sufficient, as proving customer information as a trade secret can be challenging, as demonstrated in this case. To ensure protection, buyers should include a confidentiality covenant in the acquisition agreement, requiring sellers and their owners to refrain from disclosing or utilizing customer information.
Case Reference:
This case is referred to as CleanFish, LLC v. Sims, LLC,, Case No. 19-cv-03663-HSG, United States District Court, N.D. California (March 17, 2020).
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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