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Can a company sue a shareholder for disclosing trade secrets?

On Behalf of | Apr 23, 2024 | Intellectual Property

Trade secrets are the lifeblood of many businesses, granting them a competitive edge. Kentucky recognizes the importance of protecting this confidential information.

But what happens when a shareholder, someone with a financial stake in a company, breaches that trust and discloses trade secrets?

Understanding Kentucky’s Trade Secrets Act

The Kentucky Trade Secrets Act protects confidential information that has commercial value because it’s not readily known or easily obtainable by others. This information can encompass formulas, processes, techniques, customer lists and other business plans that give a company an advantage.

For information to qualify as a trade secret under state law, it must meet three criteria. First, the company must take reasonable measures to keep the information confidential. This may involve restricted access, non-disclosure agreements and employee training. Secondly, the information must have economic value because it’s not generally known and cannot be readily obtained by others. Lastly, the company must demonstrate it has taken steps to protect the confidentiality of the information.

Shareholder obligations and potential liability

Shareholders are granted access to certain company information by virtue of their ownership stake. Shareholders have a duty to uphold the confidentiality of this information, just like employees.

If a shareholder breaches this duty and discloses a trade secret, the company may have grounds to sue. The lawsuit would likely allege misappropriation of trade secrets, which is a civil claim seeking legal remedies. If a company believes a shareholder has misappropriated trade secrets, it can pursue an injunction. This court order prohibits the shareholder from further disclosing or using the trade secrets. This is often the first step to help prevent further damage.

Shareholders have a duty to protect a company’s trade secrets. While legal action is possible if a shareholder misappropriates this confidential information, the success of such a lawsuit hinges on the specific circumstances at issue. As such, companies facing a potential trade secret breach by a shareholder can benefit from seeking legal counsel to understand their options and help protect their valuable business assets.