Is Your Company’s Client List Really A Trade Secret? The Answer May Be No.

Posted by Cyberbear on April 29, 2015 in Internet, Trade Secrets |

Posted by: Stepehn Mostrom

April 18, 2015

Blog Post 2 - ImageThe trade secret may be the most valuable, and most misunderstood, form of intellectual property available to a company today. Customer lists and other similar compilations of information are considered proprietary by many organizations, but are they afforded the protection of law? Some courts say no.

To complicate matters, a trade secret “is one of the most elusive and difficult concepts in the law to define.” Unlike patents and trademarks, which are grounded in filings with the USPTO and made public, trade secrets derive their value from secrecy and the maintaining of secrecy.

“[T]he subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business.”

Kewanee Oil Co. v. Bicron Corp. (1974)

Yet, as the Internet continues to expand the amount and availability of information—taking information that was once difficult to come by and putting it in the hands of millions of users—courts must grapple with what constitutes a viable secret, and whether there are some secrets that no longer deserve protection.

To begin any trade secret inquiry, it is helpful to look at one of the earliest descriptions of a trade secret, found in the Restatement (First) of Torts § 757 (1939).

“[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”

The Restatement goes further to describe secrets that “relate to the sale of goods or to other operations in the business,” including a specific note for “a list of specialized customers.”

Based on a reading of the Restatement, client lists would likely fall under the protections of a trade secret. They meet the Restatement definition, are kept secret, and are actively used in the business. However, the final requirement—that the secret provides “an advantage over competitors”—has courts split over the amount of advantage that must be afforded.

“[C]ourts are reluctant to protect customer lists to the extent they embody information which is ‘readily available’ through public sources, such as business directories. On the other hand, where the employer has expended time and effort identifying customers with particular needs or characteristics, courts will prohibit former employees from using this information to capture a share of the market.”

Morlife, Inc. v. Perry (1997)

Contrast, for instance, a pair of recent trade secret cases: Columbus Bookkeeping & Business Services v. Ohio State Bookkeeping (2011) and Farmers Insurance Exchange v. Steele Insurance Agency (2013).

Both cases involved alleged misappropriation of client lists by former employees, but what really separated them was the extent of the information. The Columbus case involved only “the names of the entities that do business with plaintiff and perhaps a billing address,” which the court determined was not sufficient to constitute a protectable trade secret.

In contrast, the Farmers case involved customers lists with “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 insured property, personal history data of insurance policyholders, and renewal and expiration dates of policies in force.’” The Farmers court noted the extent of information in assigning trade secret protection to the misappropriated customer lists.

Thus, in a case of misappropriation, the court will look to the time, effort, method, and type of information involved in the list. Where the list is determined to afford “an advantage over competitors,” like in the Farmers case, it will be protected. But where the information is limited to name and contact information, like the Columbus case, the court is much less likely to grant protection.

While this determination seems straightforward, it has been complicated further by the proliferation of the Internet and the information it has made widely available.

Take, for instance, the case of Sasqua Group, Inc. v. Courtney (2010). Courtney, a former employee of Sasqua Group, was charged with misappropriation of the company’s method for recruiting employees and its database.

In her defense, Courtney alleged that Sasqua used no “proprietary methodology” for recruiting, and instead gathered their information from free, online sources such as Bloomberg, LinkedIn, and Facebook. The court dismissed the claims, noting the impact the Internet has had on trade secrets.

“the information in Sasqua’s database . . . may well have been a protectable trade secret in the early years of Sasqua’s existence when greater time, energy and resources may have been necessary to acquire the level of detailed information . . . However, for good or bad, the exponential proliferation of information made available through full-blown use of the Internet and the powerful tools it provides to access such information in 2010 is a very different story.”

In short, the ruling in Sasqua stands for the proposition that trade secret protection—specifically the gathering of information for client lists and the like—is subject to updating based on the information available to the public. Thus, information that had once been considered secret, or required “time, energy and resources” to obtain, may now be considered “readily available.”

Given the ruling in Sasqua, the savvy business owner should be mindful of several notions. First, trade secret protection is grounded in secrecy. Business owners must take steps to maintain secrecy, even from their own employees. The business should have a process for requesting and delineating information.

Second, customer lists will only be protected to the extent that they require “time and effort” and provide information that is not “readily available” from public sources. Business owners should take steps to develop their client lists beyond simply collecting names and contact information. Taking the additional step to add needs and characteristics will push the list into the range of protectable property.

Lastly, the Internet has altered what information is considered “readily available.” As seen in the Sasqua case, client lists gathered from online databases, without the additional step of adding needs and characteristics, will likely not be protected. Further, as the Internet continues to fuel the “proliferation of information,” the bar for secret information may continue to rise.

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