The asset purchase agreement excluded the healthcare intellectual property from the deal.
M&A Stories
March 6, 2023
Introduction
When selling a division or product line of a business, there is a risk of disputes after the sale regarding the assets acquired by the buyer. In this particular case, a worker’s compensation software division was sold to an employee who later utilized trade secrets from the seller’s healthcare software division.
The deal
The seller had two business units: one focused on consulting and actuarial services for the healthcare insurance market, and the other serving the workers’ compensation insurance market. The buyer, who had previously worked as the head of predictive analytics in the worker’s compensation division, sought to expand the use of their predictive analytics tool to the health insurance market.
To avoid internal competition between the worker’s compensation and healthcare software businesses, the seller offered to sell the worker’s compensation software division to the buyer outright. However, the asset purchase agreement explicitly excluded the healthcare intellectual property from the deal, safeguarding the rights, title, and interest of the seller’s health practice.
The lawsuit
Following the sale, the seller discovered that the buyer was using healthcare trade secrets in their business operations. These trade secrets encompassed confidential methods for importing and processing health insurer accounts, formulas related to assigning group risk scores, and pricing, sales, and marketing methodologies.
In response, the seller filed a lawsuit against the buyer, alleging misappropriation of their trade secrets. The buyer, in a summary judgment motion, requested the court to dismiss the trade secret claim by asserting that the trade secrets were jointly developed by both the healthcare and workers’ compensation units.
The court declined to dismiss the buyer’s trade secret claim, recognizing that there existed significant factual disputes that could not be resolved at the preliminary stage of the litigation.
See Milliman, Inc. v. Gradient AI Corp., Civil Action No. 21-10865-NMG, United States District Court, D. Massachusetts, (Filed January 19, 2023).
Conclusion
This case highlights the challenges associated with separating assets of one business unit from the rest of the organization during divestiture. It prompts the question of whether there could have been a better approach to describe and protect the trade secrets that the seller wanted to exclusively retain.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
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