As any business owner knows, his or her company’s customer list can be an extremely valuable business asset. In some cases, disclosure of the customer list and/or related customer information could threaten the very existence of the company. Thus the common question asked of business attorneys—to what extent is this type of information protectable as a trade secret?
In general, when a company employs reasonable measures to protect its information, and if the information is economically valuable and not generally known to the public, California courts will grant trade secret protection to it. In addition to customer lists and related data, many other forms of information may be protectable as trade secrets, such as business plans, research and development data, product manuals, personnel information, designs, blueprints, schematics, ingredients, formulas and manufacturing techniques.
Customer lists are among the most frequently contested trade secret matters. Courts take into consideration a number of factors when deciding whether a customer list qualifies as a trade secret, chief among them:
- To what degree did the company expend time and effort to compile the list, and then expand on it through research, marketing and other efforts? To one court, a company’s “time, labor and expense of the owner over a period of years” was sufficient to convince the court to deem the customer list worthy of sustaining a trade secret claim. Augmenting a customer list by maintaining a record of each customer’s sales activity, key personnel, sales requirements, pricing information and the like greatly increases the likelihood that the list will receive protection as a trade secret.
- Has the company taken necessary and reasonable precautions to safeguard the information against employee misappropriation or threats from outside the company? At a minimum, reasonable steps to protect a customer list should include restricting access to those employees who need access, providing password protection, marking the list “Confidential,” and requiring employees to sign confidentiality agreements. A confidentiality agreement should contain, among other things, a definition of trade secrets that specifically includes customer lists, limitations on how employees can utilize trade secrets, and the types of relief the company can recover if the employee breaches the agreement.
Courts have found trade secret protection merited in a wide range of customer list cases. Case law demonstrates that protection is more likely to be found where: (1) the customer list identifies buyers of products that are inherently difficult to sell (e.g., non-commoditized devices and technology); (2) the list contains specialized information on each customer such as discounts offered and purchase history; and (3) the customers’ purchase decisions are influenced primarily by its special needs or susceptibilities, as opposed to more generic factors such as price, quality, reliable delivery and efficient service.
If a court finds a violation of a trade secret, it has a number of remedies at its disposal, including issuing an injunction to prevent future use of the information, allowing use but awarding damages against the violator or awarding the trade secret owner a reasonable royalty on the violator’s sales based on use of the list. In cases of “willful and malicious misappropriation,” the court may double the amounts awarded for actual loss, unjust enrichment or reasonable royalty, and require the defendant to pay the plaintiff’s attorneys’ fees incurred in the litigation.
Trade secret protection of customer lists—like many other types of trade secrets—depends on a rigorous pre-litigation approach by the business wishing to protect its customer list and, when necessary, a thorough presentation to the court that demonstrates why the information is entitled to the protection sought.