Aside from the goods or services that it provides, a company’s most valuable asset is arguably its customer or client information. Client lists and information, however, are invariably vulnerable to “poaching” by current employees who are considering a move to a competitor or striking out on their own. Therefore, companies should treat their client information just as they treat their product designs and proprietary methods – as a trade secret. Unlike with other tools of enforcement, such as non compete and non solicitation covenants (whose enforcement is generally state specific and often unlawful), virtually every state will enable a company to protect trade secrets and confidential information, if the company has undertaken the necessary prerequisites to enforcement.
History shows that it can be very difficult to prevent employees — particularly senior level employees – from using their employer’s customer lists to compete. This is particularly true in states such as California, where the law is notoriously resistant to restrictions on competition. But, even in California, an effective and comprehensive trade secret and confidential information protection program can be developed. This program can then form the basis for a company’s protection program in other states.
In California, as in virtually every other state, two conditions must be satisfied for information — including customer information — to enjoy trade secret protection. First, the information must derive independent economic value from not being generally known to the public. Second, the employer must use efforts that are reasonable under the circumstances to maintain the secrecy of the information.
Depending on the nature of a company’s business, the first part of the test – that the list has independent economic value from not being publicly known – is relatively easy to meet. Customer information, such as contact information, product usage and pricing, seasonal differences, and virtually every other unique bit of information developed by your company as to your clients and prospective clients combine to drive the economic value calculation. Such information has obvious value. After all, if a competing company were to obtain your company’s client list, it may be spared the expensive, arduous and time consuming task of identifying customers who are ready, willing and able to buy what you are selling. As one California case has noted, “a customer list can be found to have economic value because its disclosure would allow a competitor to direct its sales efforts to those customers who have already shown a willingness to use a unique type of service or product as opposed to a list of people who only might be interested.”
Therefore, at a minimum, in order to demonstrate why the customer list has value, companies should document the processes they go through to compile their lists along with the costs and expenses associated with doing so. This can be as simple as “brainstorming” the various steps the company takes, and expenses that it incurs, in developing its client base. Memorialize it in writing. The more detail, the better.
To satisfy the second condition, companies must make reasonable efforts to maintain the secrecy of their client list. There is no one way to go about this, but as one court noted, “reasonable efforts to maintain secrecy have been held to include advising employees of the existence of a trade secret, limiting accessing to a trade secret on need to know basis, and controlling plant access.” In other words, to protect a customer list and information as a trade secret, one of the first steps is to tell all employees — in writing — that the list of customers is the property of the company and a company trade secret, and to obtain the employees’ acknowledgements. It is also a good idea to have in place a formal confidentiality and computer use agreement, which will contractually augment the applicable state trade secret law. Having a confidentiality agreement in place can help establish that the company’s employees were aware that the company considers the list to be confidential. The agreement should also specify obligations of the employee with respect to confidential information upon termination of employment.
Companies should also develop a means of restricting access to the customer list and information. This would include preventing employees from accessing files and computer systems that contain customer contact information without an appropriate authorization or a password, and affirmatively instructing employees that they are not to use or divulge any client information to anyone outside the company, except for company purposes. Employers should also limit access to client information on a “need to know” basis.
Under most state laws, former employees may send professional announcements about the employee’s new business affiliation. However, if the customer list and information meets the trade secret test, using the customer list for the purpose of sending such a solicitation would constitute trade secret misappropriation, and courts may issue an injunction to prevent further misappropriation of customer lists.