What if an LLC’s Books and Records Contain Trade Secrets?
One of the most important rights owned by LLC members is the right to inspect the LLC’s books and records. For an overview of LLC books and records requests, see the prior LLC Jungle post: Why LLC Managers Should Take Member “Books and Records” Requests Seriously. In general, as long as the member’s request is for a purpose “reasonably related” to the member’s membership interest, the LLC should comply with the request.
But what if the books and records contain the LLC’s trade secret information? A case recently published by California’s Sixth Appellate District — Perry v. Stuart — addresses that issue.
Facts: LLC member requests books and records; LLC contends the member list is a trade secret
Dahlex LP, a limited partnership owned by husband and wife Ogen and Dorit Perry, was a member in Milestone Financial LLC, a finance lender and broker. Milestone was managed by William Stuart.
A dispute erupted after Dahlex requested a return of its invested capital pursuant to the terms of Milestone’s operating agreement. Milestone initially returned only a portion of Dahlex’s invested funds.
Dahlex sent Milestone a statutory demand for books and records under California Corporations Code section 17704.10. Among other items, Dahlex requested a list of Milestone’s current members’ names, addresses, contributions, and share in profits and losses. Such member lists are among the records required to be maintained by LLCs under Corporations Code section 17701.13, and are generally part of the records to which a member is entitled under section 17704.10.
Milestone did not comply with the request. Dahlex sued.
Trial court: member list is a trade secret; names and addresses should be redacted
In the trial court, Milestone argued that its member list was a trade secret. Milestone’s manager William Stuart asserted he “had to invest time, money and effort to find the people willing to” invest in Milestone, that “Milestone makes an effort to maintain the confidentiality of its investor member list,” and that disclosure would enable Milestone’s competitors to “market, advertise and solicit people to obtain the investors.”
During the trial court proceedings, Milestone made additional payments to Dahlex, contending that its entire investment had now been returned. Based on those payments, Milestone contended that Dahlex’s membership interest was fully redeemed, and therefore Dahlex’s books and records request was moot.
The trial court partially granted the books and records request, but held that the member list constituted a trade secret under Civil Code section 3426.1 and that names and addresses of the members should be redacted from the list.
The trial court further held that even if Dahlex’s membership interest had been fully redeemed, its request for books and records was not moot.
Both sides appealed.
Court of Appeal: affirmed
The Court of Appeal affirmed the trial court’s rulings described above.
The court held that Milestone’s member list was a trade secret and redaction of the member’s names and addresses from the list was appropriate. The court cited evidence showing that Stuart (Milestone’s manager) invested time, money and effort to find investors for the LLC, including “thousands of hours” devoted to marketing, advertising, and soliciting potential members to make “this unique investment.” The court also found that the member list was not publicly available, and access to the list was restricted to those on a “need to know” basis.
The court rejected the argument that redaction would defeat Dahlex’s statutory rights under section 17704.10, holding that the Uniform Trade Secrets Act was “the more specific statute” compared with the Revised Uniform LLC Act, and therefore took precedence.
The court also confirmed that Dahlex had standing to pursue its books and records request despite its membership interest being redeemed. The court noted that Dahlex was a member of Milestone at the time of its original books and records request and at the time Dahlex filed its lawsuit seeking to enforce its rights. The court held that the Revised Uniform LLC Act does not state that a LLC member loses its right to request documents under section 17704.10 if it ceases being a member after making such a request. The court held: “If we were to agree with Milestone’s argument, a limited liability company could avoid its obligations under the Act by simply refusing to fulfill a member’s section 17704.10 request until it has redeemed the entirety of the member’s investment and distributions, and then declare the request moot.”
Lesson
Under the Perry opinion, an LLC’s member list might qualify as a trade secret. If so, then the list might be partially redacted when inspected by a member under section 17704.10. Also, the redemption of a member’s interest does not necessarily defeat the member’s standing to inspect books and records.