CUSTOMER LISTS/ TRADE SECRETS OR NOT?

PART I

A question which frequently comes up in today’s business climate is whether or not a certain business’s customer list is indeed a protectable trade secret.

As with any other questions in and around the business legal field the answer is not always so simple and in fact the analysis can be quite complicated.

This article will drive towards the more basic tenets of Trade Secrets under the California’s adoption of the Uniform Trade Secrets Law.
The starting point of course will be the actual subject customer list that one is discussing.

But before getting into the actual scrutinizing of the ‘customer list’ in question, let’s discuss how these issues tend to arise and some of the general rules.

These disputes over ‘trade secret’-customer lists, generally arise in connection with a former employee’s solicitation of the former employer’s customers after changing jobs.

The Courts have recognized that a person has a substantial interest in the unrestrained pursuit of his or her livelihood and is free to solicit business from a former employer’s customers so long as the competition is ‘fairly and legally conducted’.

Additionally, in the sales field in general, a singular sale to one customer does not make that customer and the information regarding that customer a ‘trade secret’.

Regardless, this area of protection of customer lists and information is one of the most hotly contested areas of trade secret law since California’s adoption of the Uniform Trade Secrets Act.

There is a large body of case law which swings both ways and the key facts involve a very heavy fact intensive inquiry which is usually interwoven in and around the subject industry. While cases in California under the UTSA have generally recognized the unrestrained pursuit of one’s livelihood, they have nonetheless found that in many instances, notwithstanding being able to pursue one’s livelihood, there are instances in which ‘customer lists’ may qualify as trade secrets.

Along the way there are some hybrid ideas that have come about as well. For instance, even though customer information is determined to be a trade secret, the former employee is permitted (often times) to inform the customers of a change in jobs or of his/her new affiliation (the professional announcement exception) but he or she is not permitted to affirmatively solicit those customers for new business.
(Admittedly this is a very fine line that one walks).

So evolving out of these myriad cases are some general rules that one needs to take into consideration in trying to determine whether or not a given ‘customer list’ is a trade secret, or not?

These several factors are as follows:

1) Is the customer information readily accessible to a reasonably diligent competitor or salesperson?

2) If the Court finds that the ‘protected information’ could have been readily accessed from a third party source, the likelihood is that the finding will be that there is no trade secret.

However, even where the information is available from third parties, there are instances, where the former employer will be able to show, ‘that the customer list was constructed through substantial time, effort, and expense, and thus is protectable as a trade secret.

3) Was the customer list developed by lengthy and expensive efforts, and does it identify those customers most likely to subscribe to plaintiff’s services?

4) Was the customer list composed of information containing ‘special and peculiar’ facts regarding specific customers (e.g. date existing service contract ends, price structure, or product needs)?

5) Was the alleged customer information considered to be the former employer’s property?

6) Certain businesses, such as employment agencies or telephone answering services, have had their customer lists given presumptive trade secret protection by statute – see Business and Professions Code 16606-16,607

7) Certain other businesses have carved out doctrines adopted in the industry which spell out what information they have access to falls within protectable trade secrets or not. See Financial Advisors and Brokers- and the Financial Industry Regulatory Authority (FINRA) which was formerly known as the NASD (National Association of Securities Dealers).

In sum, there are a number of items that the reasonable business person needs to keep apprised of as they go about protecting their own businesses trade secrets and too, when hiring making sure that they are not hiring into a hornet’s nest of trade secret issues that are coming into their business with the hire of a new employee from a competitor.

This completes Part I of our article on Trade Secrets. In part II there will be discussion on what needs to be done- reasonable efforts to maintain secrecy- how misappropriation can occur and who can be liable-and avoiding misappropriation when hiring a competitor’s employees.

Respectfully submitted,

Steven H. Wilhelm
Steven H. Wilhelm APC © 2014

By | 2014-10-11T16:30:45+00:00 October 11th, 2014|