from our firm's library return to news, articles, updates & presentations →
Protecting Your Customer List
By Michael B. Abramson, Esq. | Published: December 2006
My general manager has worked for me for over 10 years. He knows all my customers and employees and has a very good reputation in our industry. I'm worried he may be hired away by a competitor or start his own business and compete with mine. What's to keep him from taking my customers with him?
Our state has a strong policy interest in favor of keeping Californians employed. The general rule in California is that an employer cannot prevent a former employee from starting his own business or going to work for a competitor. This policy is expressed in Business and Professions Code §16600 et seq.
However, California law also recognizes that you, as a business owner, are entitled to protect your company's confidential information and prevent it from being improperly exploited. This protection is set forth in California Civil Code §3426, known as the "Uniform Trade Secret Act" or "UTSA." Under the UTSA, if a former employee misappropriates your "trade secret"you are entitled to recover damages equal to the actual loss you suffered, the benefit received by the employee or other third party, or a reasonable royalty for the use of the information. If the employee acted willfully and maliciously in disclosing your trade secret, you may be entitled to damages of twice this amount. You may also seek an injunction to prevent a former employee from making trade secret disclosures.
Is the information you want to protect a "trade secret"?
To enjoy the benefits of the UTSA the information you want to protect (in this case, your customer list) must be a trade secret. Determining whether certain information is a "trade secret"requires an analysis of the particular facts in each case. Under the right circumstances, your customer list, strategic business information (such as costs, sources, and marketing plans), product specifications, and "tnow-how"(i.e. methods, processes, and expertise) can be trade secrets.
The UTSA defines "trade secret"as information, including a formula, pattern, compilation, program, device, method, technique, or process, that (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
The first element of the definition requires examination of the information at issue. If the information is confidential and gives you a competitive edge over your competitor, it is likely to be eligible for trade secret protection. A customer list including the names, contact information, pricing data, and particular needs of your customers can qualify for trade secret protection.
The second element of the definition requires examination of the steps you took to protect the information from disclosure. Meeting this element of the definition is entirely within your control. The issue is whether you took reasonable efforts to protect the information's secrecy. What security measures and safeguards did you implement to protect the information? For example, you'll have a difficult time establishing your customer list or new product packaging as a trade secret if you've published it on your website.
Trade Secret Policies
Wise business owners implement and follow a trade secret policy. Keep in mind this policy does not need to be unduly burdensome; it only needs to be reasonable under the circumstances. Examples of common internal procedures include restricting access to confidential information and requiring employees, independent contractors and other third parties to sign confidentiality agreements before providing them access to it. Many companies include their trade secret protection policies in their employee handbooks. A simple confidentiality agreement can be a very valuable tool.
If an employee with knowledge of your trade secrets does leave your company to pursue a competitive opportunity, it may be appropriate to send a short letter to that employee and his new employer reminding them that the employee possesses certain trade secrets and you expect the employee to honor his obligations and the employer not to induce the employee to breach his obligations or violate applicable law. This letter should be carefully worded — the point is to remind and serve notice, not to interfere with the employee's new position.
Hiring Practices —The Other Side of the Coin
You should also be mindful of these rules when hiring new employees. While it makes sense to hire employees with experience in your industry, you don't want to find yourself in the position of having to defend a lawsuit by your employee's former employer. Your trade secret policy should prohibit your employees from disclosing their former employer's trade secrets to you or utilizing them for your company's benefit.
Conclusion
In summary, you can't keep your general manager from starting a competitive business or being recruited by a competitor, but there are steps you can take to prevent him from soliciting business from your customers and raiding your proprietary information. Your policy should both prohibit your former employees from disclosing your company's trade secrets, and prohibit your current employees from disclosing their former employers' trade secrets.
The information contained in this article is general in nature and does not constitute legal advice. Please contact the author for more information on this topic or how it may apply to your circumstances. Feel free to forward this article to others who might find it interesting.
