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August 2011

Customer Information. What do Courts Require Before Information About Customers is Given Trade Secret Status Under California’s Uniform Trade Secret Act?

By | Trade Secrets - News & Publications

by Andrew Holland

With employee mobility on the rise due to a poor economy and entrepreneur-driven technology industries, employers increasingly have to deal with problems associated with former employees exploiting the knowledge and contacts they developed during their employment to set up competing enterprises. In many situations, there is little that an employer can legally do to prohibit their former employees from using information the former employee was paid to develop to compete against them. California courts have long found that public policy favors employee mobility, innovation and robust competition over employers’ desire to prevent their former employees from gaining a competitive advantage at their former employers’ expense.
In many states, non-competition provisions may be enforceable if they are “reasonable” in terms of length of time and geographic area of restriction. In California, however, non-competition agreements are invalid under California Business and Professions Code Section 16600, even if narrowly drawn, unless they fall within an express statutory exception. (See Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.)
Trade secret litigation, especially in the Silicon Valley, can be very complex depending on the information, technology, formula or process at issue. In many cases the alleged trade secrets consist of non-technical business information, which can still have significant commercial value, such as unique information about customers. Although not scientifically complex, trade secret cases involving customer lists have been frequently litigated. However, the identities of customers alone is often not considered a trade secret because it takes little time and effort to independently cultivate this information. The former employee will typically argue that the identities of customers claimed to be a trade secret can be located in public records such as telephone directories and industry publications, so these are not a protectable trade secret.
In American Paper & Packaging Prods., Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1326, for example, the court refused to recognize customer names as a trade secret because “customer names were generally known to the public, and the compilation process used by plaintiff was “neither sophisticated nor difficult, nor particularly time consuming.” Similarly, in Scott v. Snelling & Snelling, 732 F. Supp. 1034, 1044 (N.D. Cal. 1990), the court found that a customer list was not protectable as a trade secret because “[T]he typical customers of a [temporary personnel service] are large and small companies of all sorts, easily discoverable through public sources.”
While the identity of customers is generally not protectable, information about them may be as long as the information has an “independent economic value” by not being known to the general public and “reasonable steps” have been taken to protect its secrecy.
In San Jose Construction, Inc. v. S.B.C.C., (2007) 155 Cal.App.4th 1528, the Court of Appeal rejected the former employee’s argument that a collection of project documents was not a trade secret within the meaning of California trade secrets law. San Jose Construction involved an employer’s suit against a former employee and his new employer for misappropriation of trade secrets. The employers were local competitors in commercial construction, and the former employee had taken project documents from his former employer shortly before he left to join the competitor and immediately compete for the same projects.
The documents in question consisted of “subcontractor proposals, correspondence to and from subcontractors, correspondence to and from project owners and various proposals and draft budgets to owners. The diskettes were, according to defendants, “miscellaneous forms (change order logs, RFI logs, meeting minutes, etc.)” that the former employee had created while employed by plaintiff. ( Id. at 1537.) Defendants unsuccessfully argued that such information could not be trade secrets because it was created by, or had been disclosed to, third parties. In the court’s words, “South Bay misses the forest for the trees.” It was not merely the contact information for subcontractors or their prices that defendants were alleged to have wrongfully acquired. What plaintiff sought to protect was the overall compilation of the correspondence involving architects, SJC, and project owners; descriptions of the proposed scope of each project, measurements for each project building, and detailed cost estimates. (Id. at 1539) “We can readily infer, therefore, that the information contained in SJC’s project binders, viewed as a whole, derived economic value from being kept secret from competitors such as South Bay. As SJC describes it, “only SJC had the completed puzzle for each project, contained in the Project Binders. … No third party had it. The subcontractors each had a piece, and the owners had a piece, but no one except SJC had it all.” (Id. at 1539.)
Similarly, in Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal. App.3d 1278, the court issued an order prohibiting former employees from using customer information in starting their own temporary employee placement business where the customer information included key customer contacts, profit margins, specialized requirements, and was of irrefutable commercial value and not readily ascertainable to other competitors. In reaching its decision, the court relied on the employer’s well-documented and substantial efforts made to compile the confidential customer information.
While courts analyze customer list trade secret allegations on a case-by-case basis using CUTSA’s requirements of value and secrecy, the reality is that without more, the mere identities of customers will not constitute a trade secret in most cases. Recent decisions make it clear, however, that a compilation of information about customers that requires significant time and effort to cultivate, as long as reasonable steps are taken to protect its secrecy, may be trade secrets.