For many business owners, the idea of a trusted employee running off with the company customer list and using it for her own purpose is the stuff of nightmares. Such an act feels so inherently wrong, you might assume you’ve got a slam-dunk grounds for a misappropriation lawsuit. But the reality is not quite so simple.
We have represented many local and regional businesses after they learn a former key employee is competing or plans to compete with them using their employer’s customer list. The first thing we have to do in these cases is explain that California law only protects a customer list if it constitutes a trade secret. The California Uniform Trade Secrets Act (CUTSA) defines a “trade secret” as information that: (i) has independent economic value because it’s not generally known to the public or others who might derive economic value from it, and (ii) the company has made a reasonable effort to keep secret.
To determine whether a specific customer list is a trade secret, California courts carefully examine whether the list meets both elements of the definition.
Independent Economic Value
California courts generally assess the independent economic value of a customer list by appraising the list’s specificity and the degree of effort the company put into developing it. Customer lists are most likely to have independent economic value under either of two circumstances:
1. The list includes detailed, personalized information about the clients.
Courts are more likely to protect lists that contain specific details about customers that aren’t “readily ascertainable” through public sources. These details may include a customers’ unique preferences and requirements, billing rates, discounts offered, and other precise information.
2. The list identifies buyers that require or are predisposed to purchase the product. Courts look favorably upon narrowly tailored customer lists. A business increases the economic value of a customer list when it has taken the time and effort to prune a larger list down to those customers most likely to buy the product.
Reasonable Efforts to Keep the List Secret
A customer list tends to meet the second prong of the trade secret definition if the company can demonstrate that it has made reasonable efforts under the circumstances to keep the list private. Reasonable efforts may include:
- Restricting access to the list with a password
- Stamping list “Confidential,”
- Limiting access to the list to employees who require the information
- Having the employee sign a non-disclosure agreement that explicitly includes customer lists.
If an employer discloses a customer list to someone who has no obligation to maintain its secrecy, however, the list could lose its protected status, even if the above precautions are otherwise in place.
Misappropriation of a Customer List
So, under what circumstances do courts consider a person to have misappropriated a protectable customer list? CUTSA defines misappropriation as “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.” The law further states that misappropriation also occurs when someone “discloses or uses” a trade secret knowing or having reason to know that the secret was acquired by improper means.
Accordingly, an employee who takes, discloses or uses a company’s protected customer list can be liable for misappropriation if he knew–or should have known–that he was acquiring it through improper means. By law, “improper means” constitutes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage.
But the broad wording of the misappropriation definition puts almost anyone who acquires or uses an improperly obtained trade secret within the scope of liability. Thus, companies or persons who know or should have known that they possess or are using an improperly acquired customer list also may be liable for misappropriation.
Penalties and Recourse for Misappropriation
Courts have multiple remedies for misappropriation of a protected customer list. It may issue an injunction to prevent the misappropriating party from using the list. Alternatively, it may allow the use of the list, but award damages to the trade secret owner by requiring the misappropriating party to pay royalties to the owner based on sales arising from the list. If the defendant misappropriated the trade secret “willfully and maliciously,” the court may award exemplary damages up to twice the amount of the underlying damages, as well as attorney’s fees.
This brief summary of the law discloses that those dealing with customer lists should consult with counsel regarding creation, use, protection, and/or enforcement of customer lists, a well as any other material believed to constitute a trade secret.