Real Property Investment Vehicles Have Intellectual Property Too

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The terms “intellectual property” and “real estate” are rarely found in the same sentence.  Real estate industry veterans generally view “property” as an asset comprised at least partly of dirt.  But real estate investment vehicles – including REITs, private equity real estate firms, and private lending/investment entities – often have valuable intellectual property worth fighting over, most often in the form of trade secrets.

KBS v. ARC

Allegations of trade secret theft are at the center of ongoing litigation between two major sponsors of nontraded REITs (American Realty Capital Advisors and KBS Capital Advisors), a dispute that also includes the sponsors’ broker-dealers (Realty Capital Securities and KBS Capital Markets Group).  And this is no small skirmish.  The battle is being waged on two fronts – a Financial Industry Regulatory Authority (FINRA) arbitration, which was initiated in 2009, and an Orange County Superior Court action, filed in 2011, which is scheduled for a jury trial on March 9, 2015.

A “trade secret” is defined as information that derives independent economic value from not being generally known to the public or competitors, and which is the subject of reasonable efforts to maintain its secrecy.  Trade secret theft (or “misappropriation”) occurs when a person acquires another’s trade secret by improper means or uses or discloses another’s trade secret without consent.  If the information is generally known by the public or those within the industry, or if the information is readily ascertainable (i.e., via the internet), then it’s not a trade secret.

In the litigation between KBS and ARC, KBS claims that three of its former broker-dealer employees misappropriated trade secrets by downloading KBS information and using it to compete against KBS after they joined ARC.  Specifically, KBS claims that one former employee, on the day that he resigned, emailed to ARC a large spreadsheet containing a record of all KBS sales.  KBS also claims that two other former employees downloaded confidential information from KBS’ proprietary sales database, including contact information for registered dealers who sold the company’s REITs, and KBS’ former employees used that information after joining ARC.  That information could have value because nontraded REITS are sold almost exclusively through independent broker-dealers.

Who will win?

Who will win?  In trade secret cases, the ultimate outcome is so fact driven and there is so much “gray area” in the law that it is difficult to predict or handicap the final verdict.  For example, courts often hold that basic contact information of clients or key allies is not a trade secret, especially where that information is readily available on LinkedIn and other websites.  On the other hand, a trade secret finding is much more likely if contact information is mixed with more detailed (and less publicized) data such as pricing, ordering preferences, or other operational facts built up through research and experience.  If successful, trade secret claims can result in actual damages, recovery of unjust enrichment, imposition of a reasonable royalty on profits made through the trade secret theft, and (in cases of willful/malicious misappropriation) exemplary damages and attorney’s fees.

Just like other companies, real estate investment vehicles need to protect their valuable trade secrets, most typically by requiring employees to sign agreements acknowledging the company’s trade secrets, limiting and monitoring access to confidential information, with extra sensitivity during times of key employee departures.  Similarly, when hiring, great care should be taken to ensure that the new employees don’t bring their former firm’s stolen trade secrets with them.  Simple steps like these can avoid the courtroom and keep the focus on the “dirt-based” kind of property.

Topics:  Broker-Dealer, FINRA, Misappropriation, Private Equity, Real Estate Investments, REIT, Trade Secrets

Published In: Business Torts Updates, Finance & Banking Updates, Intellectual Property Updates, Residential Real Estate Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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