ARE CLIENT LISTS CONSIDERED
TRADE SECRETS IN CALIFORNIA?
Feb. 11, 2021
Unlike trademarks, copyrights, and patents, trade secrets are not registered with any governmental agency. By their very nature, they are intended to be both a secret and simultaneously guarded against theft, discovery, and use by competing individuals or business enterprises.
Trade secrets can include customer databases, marketing information, software, manufacturing processes, formulas, algorithms, even recipes — and the list goes on.
If you find yourself in a trade secret legal dispute in or around the San Francisco Bay area, contact the Law Offices of David H. Schwartz INC. With 45 years of experience, business litigation attorney David Schwartz will represent you if you’re the victim of trade secret theft or defend you if you are accused of the act.
Trade Secret Law in California
California, like many states, adopted the Uniform Trade Secrets Act (UTSA) and incorporated it into the California Civil Code in 1984. The code defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process” that:
Derives independent economic value from not being generally known by others and is not reasonably and independently ascertainable on one’s own
Is the subject of “reasonable efforts” to maintain its secrecy
Note that a trade secret is described as “information,” and information by its very nature can often be readily obtained by individuals — generally employees or outside contractors — and either used by themselves or shared with others to gain similar economic value on their own.
That brings up the issue of “reasonable efforts.” What does that mean? Basically, the owner’s mere desire to keep the information confidential is not enough. A California court has ruled that reasonable efforts include advising employees of the trade secret’s existence, requiring employees to sign a confidentiality agreement, limiting access to a need-to-know basis, and keeping the trade secret under literal lock and key (whenever possible).
Misappropriation vs. Theft of Trade Secrets
California law describes the act of obtaining and/or using another party’s trade secret illicitly more broadly as misappropriation, not just as mere theft. Misappropriation has two defined legal components: the acquisition by improper means, and the disclosure (or use) of trade secrets.
Under Civil Code Section 3426.1(a), improper means include "theft, bribery, misrepresentation, breach, or inducement of a breach of duty to maintain secrecy or espionage through electronic or other means." The second definition prohibits other individuals or entities from acquiring or using such misappropriated trade secrets.
Thus, misappropriation of a trade secret is broken down into three prohibited acts: wrongful acquisition, wrongful use, and wrongful disclosure.
Note also that misappropriation doesn’t necessarily just mean the physical taking of paper documents or digital files. Whether misappropriation includes what an employee has in her memory when she leaves is unclear in California. California provides very strong protections to employees for practicing their chosen profession. These protections clash with the right of employers and others to enforce trade secret restrictions where the enforcement is not limited to the misuse of clearly identifiable documents, files, code, lists, formulas, etc., but rather the trade secret holder seeks to extend its rights to what the employee retained in memory when she left.
This has sometimes been referred to as the "inevitable disclosure" rule, i.e., that because of the knowledge that the employee gained in working for the former employee, the employee will "inevitably disclose" such information in their new job. California has not adopted the "inevitable disclosure" rule, but other state jurisdictions have done so.
Client and Customer Lists as Trade Secrets
Customer lists have historically been considered trade secrets. On the federal level, the 2016 enactment of the Defend Trade Secrets Act (DTSA) seemed to codify the protection of such lists. The DTSA defines a trade secret as all forms and types of “financial, business, scientific, technical, economic, or engineering information.”
Historically, California courts have protected customer lists. The 9th U.S. Circuit Court of Appeals, which covers California along with other western states, once ruled that a customer list, if not protected by trade secret law, “allows a competitor...to direct its sales efforts to reach those potential customers who are already doing business with” the trade secret holder. It is important to note that the law generally provides protection only to "compilations," not a random set of customers.
An employee is generally free to solicit his former employer's customers where it would be reasonable for the employee to know the customers and contact information from memory. On the other hand, an employee who takes a compilation of hundreds or thousands of customers and contact and transaction information for those customers will likely be found to have misappropriated the former employer's trade secrets.
Companies seeking to maintain customer information as a trade secret must take certain precautions to prevail in court. First, the list must be maintained in written or digital form. Otherwise, a departing employee can claim the customer information was compiled for personal use. In other words, there must be something in a list format that can be misappropriated and can be proven to exist in court proceedings.
In addition, the list should be distributed only on an as-needed basis. If every employee has access to the list, courts have been reluctant to afford its trade secret status. Also, the list must go beyond mere customer information and include contact information, data such as each customer’s sales history, their needs and preferences, and even pricing guidelines used for that customer.
To protect your customer information and lists as trade secrets, you need to contact a knowledgeable and experienced attorney to take the proper documentation and storage steps rather than just relying on agreements with employees, which the courts now view skeptically.
Penalties for Trade Secret Violations
In California, one entity using another entity’s trade secret is punishable if it “has reason to know” of the existence of the trade secret being misappropriated. It need not be proven that the misappropriating entity had actual knowledge of the trade secret, but just what is called constructive knowledge. In other words, a company can be prosecuted under California trade secret laws so long as it should have known of the misappropriation.
A common result of a trade secret violation is an injunction barring further use of the trade secret. Sometimes the injunction will include payment of royalties from profits gained from the use of the trade secret. A victim of a trade secret misappropriation can also seek financial compensation for losses attributed to the theft. In the more severe cases, a court can order punitive damages of twice the amount of monetary losses.
Rely on an Experienced Business Litigation Attorney
Whether you’re the victim or the accused in a misappropriation case, you’re going to need the experience and knowledge of a trade secrets attorney to counsel and guide you through all of the legal steps. Attorney David H. Schwartz will investigate the facts, formulate a strategy, negotiate, and if need be, represent you in court.
To be proactive and protect your client and customer information as trade secrets, you’ll need to learn the procedures necessary to prevail in a court challenge.
If you’re in Oakland, Alameda County, San Mateo, Santa Clara, San Jose, or anywhere throughout the San Francisco Bay Area, call the Law Offices of David H. Schwartz INC. today for an initial consultation.