The issue of whether information about a company’s clients can qualify as a trade secret is a tricky one, since much of this information can be obtained from the clients themselves. In Central Trust and Investment Co. v. Kennedy, 2013 WL 268687 (Mo. Ct. App. Feb. 19, 2013), the Missouri Court of Appeals concluded that the customer information at issue is not a trade secret and strongly suggested that this information could never be a trade secret.
Here, the plaintiff, a financial-services firm, sued a former employee who left the company following its sale. The defendant employee started his own financial-services firm and immediately targeted his former firm’s clients. He was successful; 85 of his firm’s 90 clients were previously the plaintiff’s clients.
Although the defendant employee signed a noncompete, by its terms it became void upon the company’s sale. (As an aside, this is a bad idea.) Thus, the plaintiff brought claims under Missouri’s Uniform Trade Secrets Act (UTSA), alleging that its customer information was a trade secret.
The court concluded that this information was not a trade secret. Under the UTSA, the plaintiff must take reasonable efforts to protect the alleged trade secret. The court here gave a list of reasons why the plaintiff’s efforts were not reasonable, including:
- The employment contract did not specify that client information needed to remain confidential;
- The plaintiff shared its client information with affiliates and all of its employees, many of whom did not sign confidentiality agreements;
- Other former employees actively solicited the plaintiff’s clients but the plaintiff did not pursue legal action against them; and
- There was no evidence in the record that this information “had any recognizable extrinsic or intrinsic value.”
The court then strongly suggested that customer information can never be a trade secret when it said that “a non-compete agreement is the proper means of preventing an employee who leaves employment from disseminating information relating to customer or client lists once the employee leaves employment.” Because there was no longer an enforceable noncompete here, “this Court fails to see how [the plaintiff] could, as a matter of law, regulate [the defendant’s] use of” the client information.
I disagree. Companies often spend tremendous amounts of time and money developing databases or other repositories of information about their clients; this information would be incredibly damaging in a competitor’s hands. Assuming this information is reasonably protected, it should qualify as a trade secret. Courts in other states have found client information to be a trade secret when the company seeking enforcement meets all requirements of the Uniform Trade Secrets Act. That is the proper result.
Regardless, this case highlights some of the common ways companies fall short when trying to protect their proprietary information. Perhaps the most important takeaway from this case is that companies must make sure that employees with access to customer information that would be damaging in a competitor’s hands sign noncompete agreements.
This case also shows that companies must implement protections for all proprietary information, including client lists. And a company should diligently pursue its legal remedies against any trade-secret violations, or else a court may later find that it waived the right to do so.