Trade Secrets and Due Diligence

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We all know that when companies are looking to purchase/merge with/make a significant investment in another company, they have their attorneys conduct due diligence regarding the transaction and the acquisition target. Generally, this due diligence includes identifying key employees, determining whether these employees have executed noncompete agreements, and reviewing the agreements.

But acquiring companies too often fail to go beyond a noncompete review to look at how effectively the acquisition target is protecting its proprietary information. Thus, acquiring companies are unwittingly subjecting themselves to significant risk. Intentional or inadvertant disclosure of this information could destroy the target’s business post-acquisition.

To minimize this risk, due diligence should always include a comprehensive look at how the target protects its proprietary information. This should start with conversations with management and key employees to identify the company’s critical proprietary information. Once identified, all measures in place to protect this information should be reviewed.

To determine whether adequate protections exist, a number of questions need to be answered. For example, are there any employees who have access to proprietary information who have not signed a noncompete, or at least a nondisclosure agreement? Are employees periodically educated about their obligations regarding proprietary information? Is the company proactively using IT solutions to safeguard proprietary information? Is a trade-secrets policy in place?

By conducting this review as part of the due-diligence process, the acquiring company can identify protection gaps and make sure these can be addressed as part of or after the acquisition.

Every company seeking to acquire or invest in another company should speak with an attorney who specializes in trade-secrets law to assist with the due-diligence process. This involves a relatively minor cost, especially compared to the risk minimized.

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  1. Pingback: Thursday Wrap-Up (April 11, 2013): Noteworthy Trade Secret, Non-Compete and Cybersecurity News from the Web | The Trade Secret Litigator

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