Software Vendor's Worst Nightmare: Your Licensee Acquires Your Main Competitor.
You are a software licensor and you own a lot of valuable intellectual property tied up in the 
code and the trade secrets of your software. You license that software to an entity and then that entity buys your main competitor. You just know that all your valuable intellectual property is getting swapped around with your competitor. Pop quiz, hotshot. What do you do? What do you do? (Yep. Speed reference again.)
Well, if you are Edifecs, Inc. and your licensee Tibco Software, Inc. buys Foresight Corporation, you bring a suit and allege breach of contract and misappropriation of trade secrets. Unfortunately, for Edifecs, a California court dismissed a substantial portion of their complaint and held that, under California law, allegations that failure to segregate employees and relevant documents after the Foresight acquisition did not state a claim for misappropriation of trade secrets, breach of contract or a breach of the implied covenant of good faith and fair dealing. The Court also reiterated that California has rejected the inevitable disclosure doctrine. That doctrine, adopted in a few states, allows a claim to proceed without evidence of actual disclosure if the circumstances are such that the court thinks that a disclosure is inevitable. Edifecs Inc. v. Tibco Software Inc., Case No. C10-330-RSM, United States District Court, Western District of Washington. Order On Defendant's Motion to Dismiss Amended Complaint, March 23, 2011
Note that this is not a final ruling on the merits but it is does say that merely stating in California that wrongful disclosure is likely to occur will not substitute for pleading and proving that disclosure actually occurred. Also note that a well drafted confidentiality provision would prohibit disclosure to the competitor, even if that competitor is a subsidiary of the licensee.
Other ways to prevent this result are to include a provision in your license agreement that the license terminates if the licensee acquires or is acquired by a competitor or to include a "paint your people purple" provision. Alliteration aside, this is a provision that states that in addition to the normal confidentiality provisions, the license agreement prevents any person who worked on or had access to your confidential information from being assigned to any position that makes it likely that they would use absorbed information. These are not usual provisions in a license agreement but could make sense in an environment where an acquisition of this nature is contemplated.
