Topic: Trade Secrets

Chancery Court Rules that Investing in Competing Businesses Does Not Constitute Misappropriation of Trade Secrets When Permitted by Governing Documents

By: Jessica Pearlman and Corinne Smith

In Alarm.com Holdings, Inc. v. ABS Capital Partners, Inc., et al. (C.A. No. 2017-0583-JTL (Del. Ch. June 15, 2018), plaintiff Alarm.com, Inc. (“Alarm”) brought suit against defendants ABS Capital Partners, Inc., ABS Partners V, LLC, and ABS Partners VII, LLC (collectively “ABS”) asserting: (1) the misappropriation of trade secrets under the Delaware Uniform Trade Secrets Act (“DUTSA”), and (2) common law misappropriation of confidential information. Both claims related to ABS’s investments and board appointments in both Alarm and one of its direct competitors. The Delaware Court of Chancery dismissed both claims for failure to state a claim pursuant to Court of Chancery Rule 12(b)(6), ruling that (1) it was not reasonably conceivable that ABS engaged in misappropriation under DUTSA, and (2) DUTSA preempts Alarm’s common law claim because it is based on the same wrongful conduct as its trade secret claim. Read More

Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)),  one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee. 

Taylor controlled the Partnership through his control of the Partnership’s general partner.  As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners.  In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions.  In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership.  Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee.  The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.”  Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

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