Companies and clients often talk about their customer lists, suggesting that these lists are sacrosanct, secret and, therefore, protectable business information. I have defended many cases involving an allegation that a trade secret—specifically a customer list—has been misappropriated.
It is rare that a court has deemed a list of customers to be a legally protectable trade secret under the Uniform Trade Secrets Act. The reason is pretty simple: A client list, bereft of no other information than a customer’s name, address and telephone number, is little more than an abbreviated phone book.
A trade secret is a body of information that has value and provides a competitive advantage by virtue of remaining secret, and is also the subject of reasonable efforts to maintain its secrecy. During the past few years, courts have been reluctant to confer upon mere lists of customers the status of a legally protectable body of information.
Take the 2011 case of Columbus Bookkeeping & Business Services v. Ohio State Bookkeeping, in which CBB sued a direct competitor and several former long-time employees for, among other things, trade secret theft. After reviewing the evidence of CBB’s efforts to keep the information under lock and key, with access allowed only under need-to-know circumstances, the court concluded that, “Client lists may be trade secrets. A client list is entitled to trade secret status only if the information is not generally known or readily ascertainable to the public.”
“As a result, a client list entitled to trade secret status typically includes not only the name of the business but information not available to the public, such as the name of the contact person, a non-public telephone or cell phone number, an email address, and other pertinent business data known only because of the client relationship. Indeed, such information is the value in a client list.”
The court noted that CBB’s client list only contained names of business clients and billing addresses.
“Nothing in the evidence suggests that any sensitive information, otherwise unavailable to the public, is included in the list,” the court stated in its decision.
The Arizona appellate court reached a similar decision in a 2013 case, Calisi v. Unified Financial Services. In that case, the appeals court evaluated the client list, and noted that a “customer list may be entitled to trade secret protection when it represents a selective accumulation of detailed, valuable information about customers—such as their particular needs, preferences, or characteristics—that naturally would not occur to persons in the trade or business.”
In other words, to be protected, a customer list must have additional information that is valuable because it is not readily known to competitors, not generally available to others who can use it, and is kept secret.
When a List is a Trade Secret
It was for those reasons a California federal court issued an order in May granting a preliminary injunction against several former employees of Farmers Insurance Exchange and their new employer.
And predictably, the court focused on the question of how a bare list of customers could be imbued with sufficient value to constitute a trade secret under the Uniform Act.
“Here, plaintiff’s customer lists do not consist solely of the customers’ names, birthdates and drivers’ license numbers, which information would be ‘readily available’ to the public,” the court papers report. “Rather, the customer lists contain information including names, addresses and telephone numbers, as well as the amounts and types of insurance purchased from the company, premium amounts, the character, location and description of the insured property, personal history data of insurance policyholders, and renewal and termination dates of policies in force.”
The list had value from being painstakingly updated over time, and filled with information that would be difficult (though not impossible) to obtain, providing Farmers with a significant business advantage over competitors. This customer list qualified as a trade secret.
Protecting a Powerful Tool
A customer list is a powerful but dangerous tool. Powerful because, if maintained and developed with care, it can provide crucial sales and marketing data for a business to continuously speak with customers about their products, preferences and needs on an informed, insider basis. Dangerous because, absent reasonable precautions to maintain the secrecy of such a value-laden list, that customer list is your former employee’s and competitors’ perfect head-start to taking your customers away. So what should you do to protect that list?
Build the information on the list to create and establish a comprehensive understanding of the client, its buying characteristics, timing, preferences, cost sensitivity and the like.
Protect the list and the information in it by doing at least the following:
• Require your employees to at least sign non-disclosure and non-solicitation agreements, which prohibit the use of information designated confidential by the company and prohibit solicitation of customers with whom the employee had contact while employed by the company.
• Maintain a comprehensive regime of computer and digital security, which protects customer information by, among other things, requiring passwords; limiting access to databases on a need-to-know basis; and control the use, access and downloading of customer information onto personal devices, such as laptops and smartphones.
• Repeat throughout the company and to all of your employees that the information in customer files and databases is confidential by virtue of the non-competition, non-disclosure or non-solicitation agreements that the employees signed, including in any exit interview or departure protocol for departing employees.
Cole is a partner of Sheehan Phinney Bass + Green in Manchester. His practice is devoted in large part to counseling companies on employee mobility issues and challenges, the use and enforcement of non-competition, non-disclosure and non-solicitation agreements, and on trade secret and other intellectual property matters. He can be reached at ccole@sheehan.com and 603-627-8223.
Current Issue - May 2024