Many businesses have customer lists that they consider their own private property. It is common, however, for sales representatives and other employees to regard customer lists as theirs too, something they can take to a new employer.
Employment agreements, confidentiality agreements, and non-solicitation agreements can all be used to eliminate confusion over whether a customer list is transferable or not. The legal effect of these agreements are in flux and are hotly litigated at present. It is important to have these agreements drafted by competent counsel and reviewed periodically to make sure they remain consistent with the law.
In the absence of clear contractual protections, however, case law and state “trade secret” statutes may decide whether a list is the exclusive property of a business. If the list is a “trade secret,” a business owner may have an easier time protecting it and obtaining damages for its use by ex-employees and competitors. 47 states, including California, have adopted some version of the Uniform Trade Secrets Act, which provides for penalties and remedies for the misappropriation of trade secrets.
When is a list a trade secret?
Generally, a list receives “trade secret” protection if, first, it contains information not readily ascertainable from public sources, that is, it is a “secret”. Merely listing customers and general contact information is usually not enough to elevate the information to trade secret status. Customer information that has been obtained through time and expense may be considered “trade secrets”. Also, these “trade secrets” should have independent economic value. That is, a competitor would pay money for the information. Second, owners must usually take some measures to keep the information confidential.
What steps can a company take to ensure that a list is viewed as a trade secret?
The following are elements which, when present, can lead to a customer list being deemed a trade secret.
- The list contains unique, non-public information about each customer, such as ordering history, needs and preferences, and private phone numbers and e-mail addresses. The more a customer list contains valuable details painstakingly compiled about each customer, the less likely a court is to say that the list could have been readily assembled from public sources.
- The list is marked “private” or “confidential,” and employees are informed that it the property of the company.
- Electronic versions of the list are password-protected, and access is limited to certain users.
- Printed copies are kept under lock and key.
- When the list is shared with third parties, there is a confidentiality agreement.
- The owner can show that time and effort was invested in building and maintaining the list.
A recent case involving former employees of an insurance company shows how these factors can influence a court. In that case, the customer list contained more than just customer names, birthdates and drivers’ license numbers. It also contained laboriously compiled information about the amounts and types of insurance each customer had bought, the location of insured property, the personal history of policyholders, policy termination and renewal dates, and other potentially valuable details. The list conferred a powerful, competitive advantage and the court deemed it a “trade secret.”
Meeting the criteria spelled out in that case and in the suggestions above does not guarantee that a customer list will be deemed a protected trade secret. It could, nonetheless, increase the odds. California favors free and open completion and even invalidates covenants not to compete between an employer and employee. Use of the procedures above, which merely attempt to prevent an employee from competing will be rejected by the courts. Careful attention must be made to how best to protect your confidential, proprietary and trade secret information. If you own a business or are an employer with information you wish to protect from employees and third parties, please make an appointment with a knowledgeable business law attorney at Schneiders & Associates, L.L.P. to review your situation.