In the course of marketing and selling a business, companies routinely permit trusted bidders to gain access to extensive confidential business information about a target’s business operations through a deal data room. For most targets, a portion of the data and documentation that they allow to be posted to auction data rooms qualifies as trade secrets, protected by US state and federal law and increasingly harmonized laws worldwide. With the US passage of the federal Defend Trade Secrets Act (DTSA) in 2016 (the first federal trade secret law), there was a notable shift in the increasing importance of trade secrets in a company's overall intellectual property strategy. Three years after the implementation of the DTSA, a body of case law is developing in the US that provides the framework for assessing what reasonable steps are required for protecting a company's trade secrets throughout its operations -- and in particular, in purchasing or selling off business segments or entire companies. For sellers, this means re-assessing the measures they use to protect high-value information in a deal context in order to benefit from the DTSA protections.
A recent case filed in the Southern District of New York serves as a reminder to sellers of the importance of proactively maintaining adequate security and secrecy measures over their trade secrets throughout the sale process, particularly in an auction context. The allegations in this case also highlight the application of the DTSA to a potential buyer or other party that acquires trade secrets knowing or having reason to know they are subject to a duty to maintain secrecy.
The seller in this case was subject to a court-ordered sale due to a shareholder dispute. After the transaction, the company accused certain unsuccessful bidders of using information accessed during the bidding process to later revamp the bidders' sales strategies, product offerings and pricing to mirror that of the target, to poach the target’s clients, and of refusing to comply with requests to return certain information. Many of the allegations, if true, would constitute an extreme example of bad faith manipulation of the auction process. However, in light of the DTSA framework, there are important lessons and reminders in sharing documents, data, and information in any deal context, especially during fast-paced, high-value deals, in which speed and difficulties in dealing with massive quantities of information can overshadow the crucial trade secrets that have otherwise been closely guarded by the seller in its operations.
Bidders should also expect this type of claim to become more common, particularly following an unsuccessful auction, and should be cautioned that information made available in the auction context is often limited to that specific purpose. The use by a bidder or its affiliates of such restricted information outside of the intended purpose can increasingly give rise to liability.
The key issues and action items that a seller should consider before making information available to potential bidders include:
- Identify the information that qualifies as protectable trade secrets that will be provided to potential bidders, including any lists of customers and suppliers, pricing information, commission schedules, employee files, manufacturing techniques, and sales, marketing and other key business strategies.
- Establish a proactive plan for managing and overseeing disclosure of trade secrets directly rather than solely through intermediaries.
- Utilize NDAs tailored to the business/assets being sold and the industry involved, and ensure coverage of any trade secrets that will be included in the data room.
- Differentiate documents containing sensitive and business information in the audit trail and track access to those documents, including when they are "viewed" or "downloaded."
- Prohibit direct competitors from viewing or accessing particularly sensitive business information until the final stage of negotiations, and ensure that such parties are bound by written NDAs confirming this understanding.
- Ensure that trade secret and other highly sensitive information are separately catalogued and reviewed in a "Clean Room," where additional access/viewing restrictions apply, downloading is prohibited, and enhanced monitoring of views is routine. Documents and information in the Clean Room should not be otherwise available in the data room, and the seller should consider with the deal team whether a separate NDA is appropriate for these disclosures.
- Include restrictions from viewing in the file names, such as "TRADE SECRET - LIMITED ACCESS," to avoid all doubt about the information contained within the files.
- Limit interviews of senior managers that involve trade secrets to the final phase of the bidding or auction process, with no exceptions, and confirm in writing that all participants have executed the governing NDAs prior to any such interviews.
- Require bidders that are, in the judgement of the deal team, no longer a possible purchaser to comply with the return and destroy obligations of the written NDAs.
- Include workable provisions in NDAs that require the return or destruction and certification of non-use and non-disclosure, of any information received in the transaction. Seller's remedies for breach should be clearly spelled out in any such NDAs.
- Establish deal protocols that allow for the immediate review of any anomalies in terms of accessing information, violations of the auction/transaction rules, or industry intelligence that suggests data breaches.