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Litigation Traps in Purchasing a Business
When prospective purchasers of businesses don't perform a thorough due diligence on the sellers, the result can be unneeded and protracted litigation. Due diligence should include investigation into trade secrets, other potential purchasers, covenants not to compete, seller's liabilities and insurance coverage. The purchaser should consider all 'what ifs' including claims and remedies during the due diligence period. What if the seller defaults? What if the seller breaches the representations and warranties? What if the seller violates the covenant not to compete? What if the seller discloses or has already disclosed to others acquired trade secret information? Paying too much too early to a seller without substantial assets or sufficient holdbacks are red flags. In the event of a seller's breach and purchaser's lawsuit, any resulting judgment may be uncollectible.
Purchasing Trade Secrets That Were Not Adequately Protected
The Uniform Trade Secret Act (UTSA) defines 'trade secret' as information that derives independent economic value, actual or potential, from not being generally known to the public or other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The purchaser's due diligence should include an analysis of the seller's trade secrets. If those trade secrets are generally known to the public or, more likely, known to other persons who can obtain economic value from disclosure or use, or not the subject of efforts that are reasonable under the circumstances to maintain secrecy, trade secret protection will not be afforded in the event of misappropriation.
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