In California, a trade secret is economically valuable information not generally known to the public and that the owner makes reasonable efforts to keep secret. Trade secret disputes often arise when an employee leaves and begins soliciting business from the company’s customers. In these situations, there is a fine – but important — line between a valuable customer list and contact list. The former is entitled to trade secret protection while the latter is not.
To qualify as a trade secret, a customer list must possess economic value. This means that the company incurred time or expense compiling the information or, alternatively, that a competitor would have to expend time and money to develop the information comprising the list. Generally, the more time, effort and money spent developing the customer list; the more likely it is entitled to protection.
Additionally, a customer list cannot simply contain information that a reasonably diligent competitor or sales person could independently gather. For example, a product or service that is sought by a specific category of customers (such as restaurants or hospitals) is often considered readily known to the public and is therefore not trade secret information.
However, a customer list that includes other valuable information, such as a record of each customer’s sales activity, key personnel, particular sales requirements, pricing information, etc., is much more likely to receive protection as a trade secret. Therefore, a valuable customer list entitled to trade secret protection should include much more information than a simple list of business contacts.
To prevent a former employee from using its customer list, the company must also show it took reasonable steps to keep its list secret. At a minimum, reasonable steps to protect a customer list should include restricting access to those employees who need such access, providing password protection, marking the lists “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.
There is no guarantee that a court will consider your customer list a trade secret. However, to help protect your customer list, you should take the foregoing measures.