Trade Secret and Customer Lists
“About the author: Scott Lesowitz is a cum laude graduated of Harvard Law School and a former Assistant U.S. Attorney. His practice is located in Beverly Hills, California.His e-mail address is scott@syversonlaw.com.”
For many businesses, their most important confidential and proprietary information are their customer lists and customer information such as sales and purchasing data. Importantly, customer lists may be eligible to receive trade secret protection. Courtesy Temporary Service, Inc. v. Camacho, 222 Cal.App.3d 1278, 1287-88 (1990) (finding that a “customer list and related information was the product of a substantial amount of time, expense and effort” were protectable trade secrets).
However, employers must be wary that in California a court will never prohibit a former employee from generally pursuing a trade, profession, or type of employment. This is true even if the former employee had signed a non-compete agreement.
The Benefits of Trade Secret Status
If the identity of a business’s customers qualifies as a trade secret, the business may be able to obtain broad prohibitions on the use of a customer list. For example, where misappropriation has occurred, a court may issue an injunction prohibiting a former employee or his or her new employer from even doing business with the customers of the former employer whose identity the former employee learned of during his or her employment. E.g., Morlife, Inc. v. Perry, 56 Cal.App.4th 1514 (1997) (where a former employee took his collection of business cards of up to 80 customers prior to leaving his employment, and then used the identity of the customers to solicit customers, the court prohibited the former employee from soliciting or doing business with customers of the former employer).
Injunctive relief may be able to be obtained quickly before a trial occurs. Violating an injunction has serious consequences.
Even if the former employee used trade secrets that he or she merely remembered, that may be sufficient for a finding of trade secret misappropriation. Id. at 1522. Similarly, if a third-party vendor was given access to trade secrets and then misused or disclosed the trade secrets, he or she may be liable for trade secret misappropriation, and a court may prohibit use and disclosure of the trade secrets.
In contrast, if a customer list or information do not satisfy the elements to qualify as trade secrets, even someone who wrongfully obtains the customer list or customer information may be free to use the information. Not all theft of confidential and proprietary information constitutes trade secret misappropriation under the law.
When Customer Lists May Be Protected
There are many court cases that have found that a customer list and customer information constitute trade secrets. However, not all customer lists and customer information constitute trade secrets, even if the holder of the information believes that they are confidential and proprietary. To constitute a trade secret, information must not be generally known to the public or in a given field, must be the subject of reasonable efforts to maintain its secrecy, and also must have economic value from being secret.
Business’s customer lists and information often do not satisfy the required elements to receive trade secret protection. Customer lists and information may be generally known or readily ascertainable, lack sufficient value, or the business may not have used reasonable efforts to keep the lists and information secret. See Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1455-56 (2002) (cataloguing cases). Compare Whitted v. Williams, 226 Cal.App.2d 52 (1964) (in prohibiting ice deliverer from soliciting customers of former employer found that there was trade secret protection in regards to the combination of the names and addresses of customers, the location of their ice storage facilities, the price charged to customers, how the customers paid, the credit stability of customers, the particular needs of each customer, the variance in the individual customer’s needs, and gross sales information), and Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198 (in bank, 1952) (customer list not a trade secret as the plaintiff’s customers could be determined through business directories or observation, the plaintiff sold to the general market, did not have preferred customers, and personal relationships with customers lacked sufficient importance).
Customer lists and information are more likely to be protectable trade secrets if it would be difficult for a competitor to identify the relevant market for the goods or services. They are also more likely to be protected if the business has expended significant resources identifying the customers or compiling the information regarding the customers. For example, a customer list is more likely to be a protectable trade if there is only a niche or limited market, and it is difficult to identify who is in that market. Further, trade secret status is more likely to occur if knowing the identity of the customers or information makes it significantly easier to solicit the customers. Abba Rubber Co. v. Seaquist, 235 Cal.App.3d 1 (1991).
Regarding secrecy, the business may not do enough to put employees (or vendors or other recipients of the information as the case may be) on notice that the list of customers or customer information are confidential and proprietary and may not be utilized other than for the benefit of the employer. Also, it may be too easy to obtain the customer identities or customer information. This may include technological methods and internet search algorithms that are not unduly time consuming or expensive to employ. See MedSpring Group, Inc. v. Feng, 368 F.Supp.2d 1270, 1278-79 (D. UT. 2005) (identity of customer was readily ascertainable where the identity could be determined by simple series of internet searches); DVD Copy Control Assn., Inc. v. Bunner, 116 Cal.App.4th 241 (2004).
Additionally, a business may need to disclose its customer lists and information to third parties in the regular course of business. Companies or people outside of the business may have even helped to identify, solicit, or compile information on the customers at issue. The use of confidentiality agreements with third parties who receive, use, or develop customer lists and information make it more likely that a court will find that secrecy has been maintained. Generally, a business needs to treat its customer list and information like an important secret to receive trade secret protection.
It should be noted that if the customer goes to the former employee and seeks to do business with the former employee, it is permissible for the former employee to do business with the customer even if the customer list of the former employer constitutes a trade secret. Golden State Linen Service, Inc. v. Vidalin, 69 Cal.App.3d 1 (1977). Generally, a former employee may do business with a customer whose identity he or she learned during employment if knowledge obtained during the employment is not the significant means of obtaining the customer. Southern California Disinfecting Co. v. Lomkin, 183 Cal.App.2d 431 (1960) (acquisition of customers learned of in course of employment permissible where quality and price drove the customer’s switch in business).
It should be remembered that whether to protect customer lists or business information presents a delicate balance of the values of free competition and the protection of intellectual property. There are severe consequences when a court prevents someone from pursuing work or the practice of his or her trade.