Protecting Customer Lists as Trade Secrets?

What is a Trade Secret?

The basic textbook definition for a trade secret is any intellectual property such as know how items including formulas, recipes, processes and confidential information that gives the owner a specific competitive advantage.  A very important detail of this definition is that this information is not generally known to the public and cannot be easily accessed by the public.  Businesses who have trade secrets can enforce them against competitors if such competitors have misappropriated those secrets.

What Law Governs?

The laws that govern trade secrets vary from state to state.  All but two states have adopted some version of the Uniform Trade Secret Act (UTSA), one being New York.  Instead of relying on the definition of a trade secret provided in UTSA, New York continues to follow common law rules regarding trade secrets.  According to §757 of the Restatement of Torts, “[a] trade secret consists of a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”

How to Protect Your Trade Secrets:

Protecting your trade secrets can amount to using electronic and physical protections to ensure that your information is safe from competitors.  Things such as confidentiality agreements for all employees and certain computer safeguards will ensure that your trade secrets stay within your business.  A recent furtherance of trade secret law has surrounds the protection of a business’s client lists.

Are Your Client Lists Protected as Trade Secrets?

A recent case in California points to yes.  The case was brought before a federal district court over a dispute regarding an ex-employee’s use of their former employer’s client lists.  Not only did the client list contain readily available information, such as the contact information for each client, but also included valuable information regarding previous financial commitments from the clients and very specific details of previous orders from the employer.  In their motion to stop the ex-employee from using any information found in their client lists at his new job at a competing company, the former employer argued that the client lists should be considered a “trade secret.”

In California a “trade secret” can be defined as one of many things, including information that had certain valuable characteristics such as a formula, pattern, compilation, program, device, method, technique or process.  The information must have some independent economic value that was not known by the public and is the subject of reasonable efforts under the circumstances to maintain its secrecy.  Here, the ex-employee argued that everything found in the client lists were known to the pubic, i.e. that the information could have been found by anyone searching the company and its many clients.  However, the court disagreed and held that the other information found in the client lists, including the previous financial commitments from the clients and specific detailing of previous contracts, could be found to have some independent economic value not readily available to the public. In addition, the court found that the employer’s reasonable efforts to maintain security of their client lists, such as the mandatory confidentiality agreements that were signed by all employees as well as the security measures on the computers themselves was enough to satisfy the second element under California’s definition of a “trade secret.”

Effect of this Decision in New York

Client lists are crucial to maintaining and running a business.  In order to keep them protected businesses need to make sure that they can be classified as a trade secret.  Based on the definition from the Restatement, which is very similar to that found in California, there are two critical steps in ensuring the protection of those lists.  The first is that you need to show that the information found in your client lists are not something that can be found by the public.  As seen in the California case, the client list not only had regular contact information but specific information from past contracts and deals with the company.  Second, you should make sure that you have the appropriate safeguards in place to show that the lists are reasonably protected.  Confidentiality agreements for employees in addition to electronic protections in accessing the lists are key.

If you have questions regarding this article, including how to protect your trade secrets before and after they have been compromised, please feel free to contact The Wagoner Firm, PLLC for a free consultation.

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