Many M&A transactions are motivated by a desire to acquire another company’s trade secrets. But the unique nature of trade secrets, as compared to other types of intellectual property, creates risks for the acquiring company.

For example, a company doesn’t know if its proprietary information is a trade secret until a judge says so, usually in the context of a misappropriation claim. If the acquired trade secrets are stolen after the M&A transaction, this determination will involve a judge’s analysis of how the target company protected the information at issue prior to the transaction.

I recently came across a case from the Northern District of Georgia, DS Waters of America, Inc. v. Fontis Water, Inc., that shows how this can play out. A copy of the opinion is linked below. DS Waters, the company behind Crystal Springs bottled water, acquired the assets of a bankrupt water company, including its customer list. In this case, DS Waters brought a claim under the Georgia Trade Secrets Act alleging misappropriation of the customer list.

The defendants argued that because the bankrupt company did not reasonably protect the customer list, the list is not a trade secret. The case ultimately settled. But if it hadn’t, a jury would have decided whether the bankrupt company took appropriate protections. If not, then DS Waters would have paid for a customer list that it cannot protect as a trade secret.

This highlights the need for in-depth due diligence into the target company’s trade secrets, with a focus on the protections used. These tasks are often farmed out to junior lawyers, who may not have sufficient familiarity with the way courts analyze reasonable protections in misappropriation cases. Resist the temptation to reduce costs by having inexperienced lawyers handle this aspect of the due diligence.

Instead, whenever you are involved in an M&A transaction in which there is value assigned to trade secrets, you should engage an attorney who is an expert in this area who can determine whether the target company’s protection efforts are likely to survive judicial scrutiny. Otherwise, you are taking a substantial risk that the assets you are purchasing cannot be protected as trade secrets.

DS Waters v. Fontis Water

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