Companies and clients often come to me and 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 – a customer list – has been misappropriated; to my recollection, no such list has ever been deemed by a Court to be a trade secret within the meaning of the common law or 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.
To review: a trade secret is some body of information that has value and provides a competitive advantage by virtue of remaining secret, and is the subject of reasonable efforts to maintain its secrecy. Over the past few years, Courts have shown a reluctance to confer upon mere lists of customers the status of a protectable and proprietary body of information. Take the relatively recent 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 company typically has spent many hours of labor and interaction to develop the information reflected in the list, and disclosure to a competitor grants the competitor a tremendous advantage in not having to spend the time and money to develop that same information.
Here, by contrast, the evidence does not indicate the [CBB] client list consists of any information but the names of the entities that do business with [CBB] and perhaps a billing address….Nothing in the evidence suggests that any sensitive information, otherwise unavailable to the public, is included in the list.”
A recent Arizona appellate decision is similar. In that case, Calisi v. Unified Financial Services, the Court reversed a trial court’s determination that a client list was a trade secret. The appeals Court evaluated the client list, and noted as follows:
“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.”
“A customer list may also be entitled to trade secret protection if the claimant demonstrates it compiled the list by expending substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information.”
In other words, the listing of customers may be infused with value – other 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.
Now, consider and contrast this decidedly low-tech case. A tailor – you know, the fellow who makes suits and shirts and brings up the pant legs and lets out the waist – employs an apprentice for five or six years, and during that time, carefully maintains and updates a list of all of his customers, protects it by, among other things making his apprentice sign a confidentiality agreement concerning sensitive business information. And the apprentice leaves, taking a copy of the list with her, and when sued for theft of a “trade secret,” the customer list, asserts that the list is not a trade secret. But the list contains more than client names and phone numbers. It contains arm length and neck size; the type of cotton preferred by the client; a preference for button-down collars versus French collars; the number of striped shirts and solid shirts; the size of the suit jacket and pant length; the type of material – poplin, wool, cotton – used in the suit; and the date on which the customer last made a purchase. This list has value; it is not a telephone book. It provides the tailor with the tools to market exactly what the client wants (“pinpoint cotton, 16″ neck, 34” arms, right?), and exactly when the client needs it (“those shirts I made for you in 2002 must be getting a little on in years, no?”). It contains information that took time and numerous client-specific measurements to learn. It is valuable by containing information not being generally known and not being readily ascertainable by proper means.
As I write this article, I see that a California federal court issued an order on May 16, 2013, 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. 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 augmented over time, and filled with hard (not impossible)-to-know and obtain information, providing Farmers with “a significant business advantage” over competitors. This customer list qualified as a trade secret.
A customer list that is a trade secret is a powerful but dangerous tool. Powerful because, if maintained and developed with care, it can provide crucial market-related 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 this bit of practical advice:
- Build the information on the list to create and establish a comprehensive understanding of the client, its buying history and characteristics, timing of the purchase and potential obsolescence of the product, customer business needs and preferences, cost sensitivity and the like;
- Protect the list and the information in it by doing at least the following:
- Require your employees to sign at least 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 (in particular to this topic) 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; and
- Repeat throughout the company and to all of your employees that the information in customer files and databases is Confidential, within the meaning of the protective provisions 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.
This article is intended to underscore – using this most common piece of information, the customer list – that trade secrets must be created by imparting value into information and compilations of information, and must then be protected with constant vigilance.