Whether customer lists are trade secrets is one of the thorniest issues in the trade-secret world. In Caliss v. Unified Financial Services, LLC, 2013 WL 1490465 (Ariz. Ct. App. April 11, 2013), the court did a good job listing the factors considered when making this determination under Arizona’s Uniform Trade Secret Act.

The plaintiff previously worked for the defendants, who provide financial planning and tax services. After a falling out, the plaintiff left the defendants to work at a mortgage company that had a mutual referral agreement with the defendants. Soon thereafter, the mortgage company sent a mass email to all of its 2,000+ clients letting them know that the plaintiff had joined the firm. Because of the mutual referral arrangement, some recipients of this email were also clients of the defendants.

The plaintiff originally filed suit to recover unpaid compensation, and the defendants counterclaimed for misappropriation of trade secrets. After a bench trial, the court found that the plaintiff had misappropriated the defendants’ “customer lists and personal information.”

The Court of Appeals reversed. After first acknowledging that customer lists can be trade secrets, it described the factors to be considered when making this determination:

  • Whether the list “represents a selective accumulation of detailed, valuable information about customers—such as their particular needs, preferences, or characteristics—that naturally would not occur to persons in the trade or business.”
  • Was the list compiled through expending “substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information”?
  • “Whether the information contained in the customer list derives independent economic value from its secrecy, and gives the holder of the list a demonstrable competitive advantage over others in the industry.”
  • The extent to which the list was disclosed externally and internally.

Here, all of the factors weighed against granting trade-secret protection to the defendants’ customer list. In particular, the defendants did not offer evidence that they had specialized information about their clients and could not show they made significant efforts to develop the list.

Also, the defendants couldn’t show that they kept the list secret. For example, the mortgage company where the plaintiff worked knew the identity of a number of the defendants’ clients. The court reached this conclusion even though the defendants required that their employees sign confidentiality agreements and used electronic means to protect data.

Companies that want to keep their customer lists secret should maintain as much information about their clients as they can. By compiling as detailed a list as possible—with information that is not publicly known—a company can increase the likelihood that a court would later protect the list as a trade secret.

The list also needs to be kept secret. Only share the list with those employees who need it to do their jobs. Whenever possible, all such employees should be required to sign a noncompete and nonsolicitation agreement. That way, the company isn’t relying on the murky law regarding customer lists; it only needs to enforce the noncompete.

1 Comment

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