Protecting Business Secrets and Customer Lists

• An Law Office With Experience in Business Litigation

It reminded me of the book Helter Skelter. Two trucks approached the padlocked gates of a small business late at night. A chain, one end wrapped around a truck's bumper, the other end hooked over the locks. The strike force leader looked at one accomplice "When he rips this open, you cut the phone lines.” With one massive tug, the gates to the business were torn apart. The telephone lines went dead. Three men stormed the tow yard, backing away tow trucks while their leader approached the business owner’s mobile home. The sale of a business had gone bad. As a young prosecutor, it had landed on my desk because the night ended in gunfire.

While almost no former employee gets even by breaking and entering, some steal while they're still on the job. Feeling that they need a leg-up in starting a competing business, they steal trade secrets, customer lists, and confidential and proprietary information. They use these stolen trade secrets in their new business. Actionable misappropriation of confidential business information occurs where information is “derived” from someone who “owed a duty” to the business owner to either “maintain its secrecy or limit its use.”

The California Uniform Trade Secrets Act (California Civil Code section 3426) prohibits “misappropriation of trade secrets” including “use” of information “without consent” by a person who “acquired” the information “under circumstances giving rise to a duty” to either maintain the information secret “or limit its use.”

Customer lists are “trade secrets.” The definition of a “trade secret” includes both “information” and “compilation” which derives independent economic value (even potential economic value, from not being generally known and which is subject to reasonable efforts to maintain its secrecy. Numerous California state court and federal court decisions have held that customer lists are protected trade secrets. American Paper & Packaging Prods. v. Kirgan (1986) 183 CA3d 1318; Greenly v. Cooper (1978) 77 CA3d 382; Hollingsworth Solderless Terminal Co. v. Turley 622 F2d 1324 (9th Cir. 1980); Surgidev Corp. v. Eye Technol., Inc. 828 F2d 452 (8th Cir. 1987).

The California approach to customer lists was summarized by one of our Courts of Appeal as follows:

“...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...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 ... Its use enables the former employee ‘to solicit both more selectively and more effectively.’"

Wrongful theft of customer information and business secrets gives rise to many potential claims by the business victim, including civil causes of action for theft, misappropriation of trade secrets, breach of contract, intentional interference with prospective economic advantage, negligent interference with contractual relationships/prospective advantages, and violation of California’s Unfair Competition Act.

The Pasquali law office is here to help.