Navigating the Acquisition of Talent-Rich Companies: Uncover Potential Legal Pitfalls
In the fast-paced world of business, acquiring companies for their talent, a practice known as "acqui-hiring," can offer significant opportunities. However, this approach comes with potential risks, particularly when it comes to trade secret disputes and legal challenges.
Recent events, such as the high-profile lawsuit between Google subsidiary Waymo and Uber, have underscored the importance of taking precautions to avoid such issues. The lawsuit, which centred around allegations of stolen lidar technology files, highlighted the legal concept of "misappropriation by acquisition."
To mitigate risks, businesses engaging in acqui-hiring should follow a series of best practices.
1. Conduct thorough due diligence on trade secrets and intellectual property: Understanding what confidential information and trade secrets the acquired team brings is crucial. This helps identify what needs protection and prevents inadvertent misappropriation.
2. Use carefully drafted and clearly defined Non-Disclosure Agreements (NDAs): NDAs should specify exactly what information is confidential, the obligations of the receiving party, the duration of confidentiality, permitted disclosures, and remedies for breach.
3. Implement enforceable non-compete agreements where legally viable: Non-compete clauses should be narrowly tailored in scope, duration, and geography to be enforceable, considering jurisdictional variations.
4. Institute strong internal policies and training on trade secret protection: Written policies should define confidential information categories, mark information as confidential, and restrict access to authorized personnel. Employee training and awareness ensure that confidentiality obligations are understood and followed consistently.
5. Secure physical and electronic access to trade secrets: Limit access to sensitive information through technological and procedural controls, ensuring trade secrets are kept in secure environments and only accessed by authorized individuals.
6. Clarify the handling of confidential information during onboarding and offboarding: When new employees join or leave, explicitly address confidentiality obligations, return of company materials, and reinforce non-disclosure commitments.
7. Avoid encouraging or knowingly accepting use of former employer’s trade secrets: Acqui-hiring companies must ensure they do not solicit or permit employees to bring proprietary information from prior employers.
8. Regularly review and update trade secret classifications and protection measures: As business activities and technologies evolve, companies should reassess what constitutes a trade secret and adjust protections accordingly to maintain effectiveness.
By adhering to these practices, businesses can significantly reduce the risk of trade secret disputes and related legal issues, protecting both their new talent and proprietary information in a compliant and ethical manner.
The Uber-Waymo case serves as a reminder that the risk for acquiring companies might be higher than they think, especially in the age of acqui-hiring. Forensic due diligence, a process that ensures all electronic files and cybersecurity protocols are merged appropriately when one company acquires another, is crucial. Companies should also manage internal communications with an eye towards respecting trade-secret law, assuming that such documents might be used in court to determine the underlying motivation for the acquisition.
In the end, being attuned to trade-secret issues at all times during M&As is considered smart compliance to avoid any surprises. The settlement of $245 million in the Uber-Waymo case underscores the potential financial and reputational costs of failing to do so.
To mitigate potential trade secret disputes and legal challenges when engaging in acqui-hiring, it's imperative that businesses conduct thorough checks on trade secrets and intellectual property, and use carefully drafted non-disclosure agreements (NDAs) to clarify confidentiality obligations. By following best practices such as due diligence, NDAs, non-compete agreements, internal policies, and secure access controls, companies can ensure a compliant and ethical approach to acquiring talent while protecting their own proprietary information. The Uber-Waymo case exemplifies the high consequences, both financially and reputationally, of failing to prioritize trade secret protection in M&A activities.
