Customer list held to be trade secret

In an industry where none of your competitors knows who your customers are, if you treat a customer list like a trade secret it will be upheld as such. So ruled the California Court of Appeals in a recent case.

The employer limited access to the customer list to a few key employees. Unfortunately, two of them left to set up a competing business, and took their card files with them. The employees had signed an agreement specifically providing that customer lists were trade secrets.

The Court held that given these facts, the former employees could be enjoined from contacting customers and must pay about $40,000 for profits made on those customers.

In concluding Morlife's customer list fell within the definition of a trade secret under the UTSA, the court found that "Morlife provides a relatively unusual roofing service, namely, commercial roof repair and maintenance, as distinguished from replacement roofing." Its customer list was "a compilation, developed over a period of years, of names, addresses, and contact persons, containing pricing information and knowledge about particular roofs and roofing needs of customers using its services: as such, it has independent economic value. The identity of those particular commercial buildings using such services is not generally known to the roofing industry." The court further emphasized "Morlife made reasonable efforts to maintain the secrecy of its customers' identity by limiting circulation of its customer lists and by advising its employees, including [appellants] Lloyd Perry and Carl Bowersmith, through an employment agreement and an employee handbook, that Morlife considered the information valuable and confidential." This court must accept the trial court's finding that Morlife's customer list was a trade secret unless the record reveals no substantial evidence to support it. (Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 50.)

With respect to the general availability of customer information, courts are reluctant to protect customer lists to the extent they embody information which is "readily ascertainable" through public sources, such as business directories. (American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1326.) On the other hand, where the employer has expended time and effort identifying customers with particular needs or characteristics, courts will prohibit former employees from using this information to capture a share of the market. Such lists are to be distinguished from mere identities and locations of customers where anyone could easily identify the entities as potential customers. (See Klamath-Orleans Lumber, Inc. v. Miller, supra, 87 Cal.App.3d at p. 461; ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 19-20.) As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret. (Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal.App.3d 1278, 1287.)

The requirement that a customer list must have economic value to qualify as a trade secret has been interpreted to mean that the secrecy of this information provides a business with a "substantial business advantage." (See Klamath-Orleans Lumber, Inc. v. Miller, supra, 87 Cal.App.3d at p. 465.) In this respect, a customer list can be found to have economic value because its disclosure would allow a competitor to direct its sales efforts to those customers who have already shown a willingness to use a unique type of service or product as opposed to a list of people who only might be interested. (Courtesy Temporary Service, Inc. v. Camacho, supra, 222 Cal.App.3d at pp. 1287-1288.) Its use enables the former employee "to solicit both more selectively and more effectively." (Klamath-Orleans Lumber, Inc. v. Miller, supra, 87 Cal.App.3d at p. 466.)

In the case at bar, the court heard testimony that Morlife's customers were not readily ascertainable, but only discoverable with great effort, and the patronage of such customers was secured through the expenditure of considerable time and money. Morlife's president testified about the difficulty encountered by sales personnel in getting past the "gatekeepers" and identifying and gaining access to the actual decisionmakers with the authority to purchase roofing services. Morlife developed its customer base by investment in telemarketing, sales visits, mailings, advertising, membership in trade associations, referrals and research. Out of 100 persons contacted by the telemarketing department, only about 10 result in contacts. He estimated an initial visit by a Morlife salesperson costs the company $238.

While labeling information "trade secret" or "confidential information" does not conclusively establish that the information fits this description (American Paper & Packaging Products, Inc. v. Kirgan, supra, 183 Cal.App.3d at p. 1325; Moss, Adams & Co. v. Shilling (1986) 179 Cal.App.3d 124, 126, 130), it is nonetheless an important factor in establishing the value which was placed on the information and that it could not be readily derived from publicly-available sources. Furthermore, "to afford protection to the employer, the information need not be in writing but may be in the employee's memory. [Citation.]" (Greenly v. Cooper (1978) 77 Cal.App.3d 382, 392.). The evidence referenced above is more than sufficient to merit the court's finding that the information used by appellants had independent economic value to Morlife and appellants, and was not generally known to the public in satisfaction of the first prong of the statutory definition of a "trade secret."

MORLIFE, INC., v. LLOYD PERRY et al.,
___Cal.App.4th___, 97 CDOS 6508 (CA 1, August 14, 1997)

Information here is correct at the time it is posted. Case decisions cited here may be reversed. Please do not rely on this information without consulting an attorney first.