California Court Affirms That Customer Lists Can Qualify As Trade Secrets

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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Wanke, Industrial, Commercial, Residential, Inc. v. Superior Court, 2012 WL 4711888 (Cal. App. 4th, Oct. 4, 2012): In Wanke, the appellate court affirmed that under some circumstances, a company’s customer list can qualify as a trade secret. Two former employees of Wanke, Industrial, Commercial, Residential, Inc. who had signed confidentiality agreements with the company as a condition of their employment, left Wanke and formed their own competing company. Wanke sued the former employees, alleging that they had misused and misappropriated Wanke’s confidential information to improperly target and recruit Wanke’s customers. The parties resolved the action by entering into a settlement agreement that included a stipulated injunction prohibiting the former employees from contacting or soliciting any person on Wanke’s customer list for the purpose of gaining any of their business.

After two separate trials, which litigated the enforcement of the injunction, both sides appealed. The appellate court held that the injunction could apply only to jobs undertaken or proposed to be undertaken for the particular customer while the defendants were employed by Wanke. Only on those jobs could the defendants be said to be using information that they learned while employed at Wanke to identify customers with particular needs or characteristics that would qualify as trade secrets. To any extent beyond that, the injunction was overly broad and unenforceable.

According to Michael J. Nader, of counsel in the San Francisco office of Ogletree Deakins, when determining whether customer lists are trade secret, a court’s analysis will consider factors such as whether the list was compiled with substantial effort and expense, whether the customer identities are public or commonly known, and the sophistication of the customer information, including whether it includes key contacts, special customer requirements, ordering history, billing rates, and payment terms. Employers should make reasonable efforts to maintain the secrecy of such information by limiting its disclosure, restricting public and employee access to the information, labeling the information confidential, and requiring employees to sign confidentiality agreements that prohibit the use or disclosure of such information.

Note: This article was published in the November 14, 2012 issue of the California eAuthority.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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