In the middle market of the Aerospace and Defense industry, most business owners think they are protecting their intellectual property if their engineers have signed “IP assignments.” That’s a good start. It’s also, by itself, an incomplete answer to the question a buyer’s counsel will ask during due diligence.
Formal IP, such as patents, registered designs, and copy righted drawings, is easy to identify and easy to protect. Most employment documentation transfers these to the company as a matter of course. But most of what makes a middle- market A&D supplier valuable was never patentable in the first place. Your process tolerances. Your repair procedures. The way you sequence a fixture build. The tribal knowledge behind how you process jobs. Those are all trade secrets, and trade secrets need to be protected differently from patents.
Here’s why buyers care. Trade secret protection under both federal and state laws requires the owner to have taken “reasonable measures” to keep the information secret. Employment paperwork that doesn’t formally address trade secrets and only addresses “inventions” or “IP assignments” gives a buyer’s diligence team an easy argument that you did not take “reasonable measures” to protect your trade secrets. If a key machinist or salesperson leaves for a competitor next year, your company’s ability to protect your trade secrets depends on paperwork you signed with that employee years before you ever thought about a sale.
We see this problem often in buyer due diligence. Buyers notice the problem and flag it as a “finding” (i.e., a problem), and these kinds of findings often make their way into indemnity terms in the purchase agreement.
Fixing this potential problem is easy and low-cost if you do it well in advance of selling your business. Simply ask your legal counsel to review your new-hire paperwork and explicitly add a trade secret provision, including the employee’s obligation to protect it, both during and after employment. And, to the greatest extent possible, ask your existing employees to acknowledge their acceptance of this (new) provision. We suggest you check with your legal counsel about how best to do this in the state(s) where you operate.
If you have any comments or questions on this Deal Note, or have a topic you would like us to write about, please don’t hesitate to let me know: wa@aldermanco.com
Have a great day, everyone.
William Alderman
Founding Partner
