Recent Georgia Court of Appeals Case Finds that Investor Lists of Limited Partners Do Not Constitute Trade Secrets and Reverses Summary Judgment for Plaintiff

Posted by Neal F. Weinrich on

The Georgia Court of Appeals’ recent decision in Sutter Capital Management, LLC v. Wells Capital, Inc., — S.E.2d –, 2011 WL 2697058, (Ga. App. July 13, 2011), offers an interesting analysis of the Georgia Trade Secrets Act’s requirement that a trade secret derive economic value as a result of its trade secret status.

At the heart of the case is Ira Gaines.  Mr. Gaines was a limited partner in approximately 800 different limited partnerships, including Wells Real Estate Funds I through XII, the limited partnerships at issue in the case.  The general partner of these partnerships maintained a list of information regarding each of the investors in the Wells partnerships, including their addresses.  When Mr. Gaines became a Wells limited partner, he executed partnership agreements which provided that the list of Wells’ limited partners would be available for inspection by any limited partner.  However, Mr. Gaines also executed an addendum in which he agreed to only request a copy of the list for purposes reasonably related to his interest as a partner in the limited partnership and not to request the names and addresses of the limited partners for the purpose of making a tender offer to the limited partners.

Separately, Mr. Gaines was an investor in Sutter Opportunity Fund 3, LLC.  The president of a related Sutter entity told Mr. Gaines that Sutter wanted to obtain the list of Wells’ investors so that Sutter could mail mini-tender offers to purchase Wells’ partnership units to Wells’ limited partners.  Mr. Gaines sought and obtained this information from the IRS.  Sutter than provided this information to an entity which mailed mini-tender offers on Sutter’s behalf to Wells’ limited partners.  In response to these mailings, multiple Wells investors sold their partnership units to Sutter.

Wells sued Sutter alleging Sutter misappropriated its lists of Wells’ investors and that these lists constituted Wells’ trade secrets.  The trial court granted summary judgment in favor of Wells and awarded damages in the amount of $667,304.51.  This amount represented the cost incurred by Wells in fulfilling its requirement under the Securities and Exchange Act to provide each of its approximately 30,000 limited partners with a statement disclosing the partnership’s position and recommendation regarding any tender offer.

On appeal, Sutter argued that this ruling should be reversed because the Wells’ lists do not constitute trade secrets.  The Court of Appeals agreed, finding that Wells failed to demonstrate that the list “derived economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.”  The Court of Appeals noted that Wells’ position statement that it sent to its limited partners, while recommending that the partners reject Sutter’s tender offer, specifically stated that the decision to transfer units would not have any direct financial impact on the general partners or their affiliates.  Wells’ witnesses also admitted that the transfers to Sutter did not have any direct financial impact on the general partners or their affiliates.

Accordingly, the Court of Appeals found that Wells did not derive economic value from maintaining the secrecy of the lists.  Because the lists do not derive economic value as a result of their secrecy, they do not constitute trade secrets.  As such, Wells’ claim failed as a matter of law, and the Court of Appeals found that the trial court erred in granting Wells’ motion for summary judgment and in denying Sutter’s motion for summary judgment.