Quirky Question # 141, Customer Lists as Trade Secrets

Quirky Question # 141:

One of our sales employees recently left our company.  He now is starting to call on our customers.  It appears that he may have some of our customer lists in his possession.

We do not have any post-employment restrictive covenants, such as a non-compete or a non-solicitation agreement, that would govern his conduct.  But, aren’t customer lists trade secrets that he is precluded from using?

Dorsey’s Analysis:

You ask whether your company’s “customer lists” can be protected as trade secrets.  The evaluation of whether any information constitutes trade secret data depends on an analysis of many variables, none of which you have described in your query.  But we can offer you a few general observations, coupled with some specific comments that focus on the issues surrounding customer lists.  Armed with this information, you should be able to conduct the appropriate analysis applicable to the specific facts of your situation.

By way of general background information, in most, though not all states, the law of trade secrets is largely governed by the Uniform Trade Secrets Act (UTSA).  This uniform statute sets forth the fundamentals of trade secret law.  Note, however, that when the various state legislatures enacted this uniform statute, they tweaked it in different ways, the result of which is that the statutes in each state are similar but not identical.

Further, there is other relevant law that you will need to explore to understand your company’s and your former employee’s rights with respect to the trade secrets you believe he misappropriated and is using.  For example, you should examine your state’s common law on fiduciary duties and how that law might apply to someone in the position formerly occupied by your employee.  You also will need to understand whether your state’s version of the UTSA preempts pre-existing common law claims addressing the subject of confidential or proprietary information.  In some instances, these common law rights will be deemed to be preempted but this is not always true.

Other potential underlying legal issues will depend in part on what contractual obligations your company and your ex-employee may have toward each other.  As you stated in your question, however, your company did not utilize non-competition or non-solicitation agreements, at least for the particular former employee whose conduct concerns you.  As you undoubtedly have deduced, perhaps with some regret, had your company utilized post-employment restrictive covenants, including non-competition and non-solicitation agreements, your current legal arguments might be quite different now.

Having made those preliminary observations, it is important to understand the basics of trade secret law.  In Minnesota, where I live and work, for example, prior to the 1980 adoption of the UTSA, the Minnesota Supreme Court had relied upon the Restatement of Torts (1939) to define trade secrets.  Under the Restatement test, to constitute a trade secret, information had to: “(1) not be generally known or readily ascertainable; (2) provide a competitive advantage; (3) have been developed at plaintiff’s expense, and (4) be the subject of plaintiff’s intent to keep it confidential.”  Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 898 (Minn. 1983) (citations omitted).  Although the Minnesota Uniform Trade Secrets Act, which I’ll refer to as MUTSA, made some changes from the Restatement definition, the Minnesota Supreme Court noted in Electro-Craft that the Restatement test is now “more or less embodied in the [MUTSA].”

The MUTSA defines a trade secret at Minn. Stat. § 325C.01, subd. 5, as information that meets two basic elements: a) the information must derive “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use;” and b) the information must have been “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  As you can see, this MUTSA definition largely incorporates the Restatement position that to qualify as a trade secret the information must not be generally known or readily ascertainable.

With respect to this fundamental requirement regarding the definition of a trade secret, companies’ claims that their “customer lists” are trade secret information often break down.  Especially in the age of the Internet and instant communications, contending customer lists constitute “trade secrets” may be a tough sell to a court.

For example, we have a case where the plaintiff corporation has sued the client claiming that its customer lists, composed of national retailers, constitute protectible trade secret information.  Really?  We’d wager that in 15 minutes or less, a reasonably resourceful person with a computer connected to the Internet could come up with a fairly comprehensive list of national retailers operating in the U.S.  Given the easy availability of this type of data, it is very difficult to construct a compelling argument that this information is not “readily ascertainable by proper means.”

Moreover, companies asserting the identity of their customers is secret data worthy of statutory protection had better be sure that they communicate that message to their Web-page designers.  It is very common (and quite legitimate) for companies to list their customers on their firms’ websites.  This is one way of communicating to prospective customers that the company is capable and reliable.  Often times, the Web-page listing of customers will describe in some detail particular successes achieved with certain customers, or testimonials from those customers extolling the capabilities of the company in question.  Again, there is considerable value in publicizing this type of data.  But, it undermines completely the assertion that this information is not “readily ascertainable.”

Many courts have weighed in on the subject of whether customer lists may constitute trade secrets.  See, for example, Internet Incorporated v. Tensar Polytechnologies, Inc., 2005 WL 2453170 at 8 (D. Minn. 2005) (denying preliminary injunction and noting that “ultimately, Internet will have a high burden to overcome” to show that customer lists constitute trade secrets “as customer lists, even with specific information customers attached to them, are generally not considered to rise to the level of a trade secret under Minnesota law”); Nationwide Mutual Insurance Co. v. Stenger, 695 F. Supp. 688, 692 (D. Conn. 1988)(ex-employee of plaintiff solicited customers with whom he formerly worked, encouraging them to switch their business to his new employer; plaintiff sued for misappropriation of trade secrets, focusing particularly on the customer files; court denied injunctive relief, finding that the customer files did not warrant trade secret protection, and noting that it was not convinced the plaintiff had “expended substantial time, money and/or effort on developing the information contained in the [customer files].”

At times, companies make the argument that the identities of intermediaries between the company and the customer, or other industry contacts, are protectible trade secrets.  Here, too, courts have expressed skepticism.  For example, in Fox Sports Net North, LLC v. Minnesota Twins Partnership, 319 F.3d 329, 336 (8th Cir. 2003), the appellate court noted that “knowledge of industry contact people does not rise to the level of a trade secret because this type of unprotected information is readily ascertainable within a trade.”  The plaintiff employee benefits insurance company sued my client for misappropriation of trade secrets and numerous other claims.  The plaintiff company contended that the identities of the insurance brokers with whom it worked were confidential, proprietary information. But, if one merely Googled the words “stop loss insurance,” numerous insurance brokers were identified, including those the plaintiff contended were somehow confidential (though known to the employees who had resigned).  Both the trial court and the court of appeals found plaintiff’s argument unavailing, the former denying the plaintiff’s motion for a preliminary injunction and the latter affirming the judge’s decision. As the appellate court found, “Viewed in the light most favorable to respondents, the record reflects that, in the employee benefits insurance business, information about customers is not considered confidential or given special protection and is readily accessible from many sources. Brokers have access to information about customers and accounts and share it with sales representatives.  Broker relationships and contact lists are treated a sales representative’s asset that an insurance company expects its new lateral hires to use for the company’s benefit.” Reliastar Life Insurance Co. vs. KMG America Corporation, et al., No. A05-2079 (Minn. Ct. App. 2006).

As you can see from the decisions referenced above, absent some unusual facts, courts may not be too receptive to the notion customer lists constitute trade secrets.  In certain circumstances, it is hypothetically possible that this skepticism could be overcome, but this will depend on the development of additional facts that highlight why your customer lists warrant special protection.  Keep in mind too that even if your company is able to convince the court that your customer lists are not readily ascertainable, were developed at significant expense, and deserve to be treated as trade secret, there are other critical issues on which your company still bears the burden of proof.  As set forth in the UTSA, your company also will have to demonstrate that it took reasonable steps to maintain the secrecy of the information.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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