TRADE SECRET GUIDE: Taking Clients with You
There is good news if you are thinking about leaving your employer and taking clients with you. In many instances, client contact information is not protected and can be used by a departing employee to compete with his former employer. Furthermore, recent case law, which we helped create, limits the applicability of non-solicitation provisions in employment agreements.
Trade secret protection is a product of a pro-business socio-economic policy. California wants to encourage entrepreneurs and, in 1984, adopted the Uniform Trade Secrets Act to help protect entrepreneurs’ ideas and work from being stolen by their trusted employees and competitors. California is somewhat special, however, in that it has an equally important socio-economic policy in favor of an employee’s right to make a living. Trade secret protection in California is, thus, a balancing act between California’s desire to help entrepreneurs who have ideas and the employees who bring those ideas to life, so to speak.
The California Uniform Trade Secret Act
Under the Uniform Trade Secrets Act (“UTSA”), an owner of secret information may protect that information that has actual or potential economic value because it is secret. The secrecy required to prove that something is a trade secret does not have to be absolute in the sense that no one else in the world possesses the information. It may be disclosed to employees and outside agents as long as the employees and outside agents are instructed to keep the information secret. However, it must not have been generally known to the public or competitors.
The good news for employers is that, generally, California courts have said a customer list acquired by lengthy and expensive efforts deserves protection as a trade secret. One court opined:
Trade and business secrets and confidential information are the property of the employer and cannot be used by the employee for his own benefit. A list of subscribers of a service, built up by ingenuity, time, labor and expense of the owner over a period of many years is property of the employer, a part of the good will of his business and, in some instances, his entire business. Knowledge of such a list, acquired by an employee by reason of his employment, may not be used by the employee as his own property or to his employer’s prejudice.
The good news for employees is that this general rule has exceptions that are so often applicable, the application of the general rule is increasingly hard to find.
Three Ways You Can Take Clients With You
1. When The Competitor Knows Who They Are
One basic long-standing exception to the general rule of protection is when the information is already known to the competition. This sounds obvious, but the exception should not be overlooked. In many instances, the departing employee’s client relationships are well known to the competitor and, in fact, the very reason for the new job offer.
If you are a wine salesman for Distributor A, and you sell to Safeway, and Distributor B knows you sell to Safeway and hires you for that relationship, you may be able to call on Safeway. Your former employer does not own the clients, only information that falls within the very specific definition of a trade secret. Information already known to the other side is not a secret.
The key is, the competitor must already know the information from a source other than you. Distributor B, in the above scenario, cannot learn from you that you have a great relationship with Safeway. He must learn it from someone else, like Safeway.
2. When The Competitor Can Easily Ascertain Who They Are
While the first exception discussed above focuses on the identity of known clients, the next major exception concerns the identity of ascertainable clients. One Court of Appeal opinion reads:
A client list can be a “trade secret,” but not every client list qualifies. As one court put it in a very famous opinion, “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. [Citation.] 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. [Citations.] … [¶]”
In the above-quoted case, Valentine Capital Retirement Planning Group, Inc. v. Wixon, investment advisors marketing to Chevron employees left their employer and were sued for continuing to contact the same Chevron employees. The Court of Appeal found that “the names, addresses and places of employment of Chevron employees are readily ascertainable from public sources.” The court continued, “the same is true of information about Valentine Capital’s services and fees.” The Court concluded, “none of this information, therefore, is a trade secret.”
If you have a list of prospective customers that you want to take with you, get the list another way. Buy it commercially or put it together from commercial sources. So long as you can show that you didn’t bring it from your old employer, you should have a defense to a misappropriation claim.
Be careful not to target just the best clients on a commercially available list. This defeats the purpose. Canvas everyone.
3. When The Information Has Already Been Given Away
Last but not least of the exceptions, you can take information with you that has already been given away. Like the exceptions above, it sounds simple but you will be amazed when you see how broadly it applies.
In the case we worked on, Retirement Group v. Galante, the defendants-investment advisors would trot out to do seminars on retirement and investing. Interested seminar attendees would provide their information to the advisor’s firm, called TRG. The investment advisor would then pass the information on to a broker-dealer, which is an actual financial institution that holds money, makes trades, etc. The broker-dealer had a policy that the investment advisor could see and use the broker-dealer’s client information.
Thus, in that case, the client information went from the client to the investment advisor’s firm to the broker-dealer, then back to the investment advisor, as follows:
Client > Investment Advisor Firm TRG > Broker Dealer > Investment Advisor Firm TRG
The investment advisors left the advisors’ firm, TRG. TRG sued and argued that the client information was a trade secret of the TRG. We successfully argued that the client information in this scenario was not a secret of TRG because TRG freely gave the information away to the broker-dealer. There was no agreement between the firm and the broker dealer governing the use of the information. In fact, the broker dealer had separate agreements with the investment advisors and a policy that the information was not secret as to the advisors. Thus, the investment advisors were free to change firms and continue to access the broker-dealer’s information, even if to solicit the clients to their new firm.
If you are thinking of taking clients with you, think about whether the client information is given away as part of the operation of the business. Do not assume that it is given away under a tight confidentiality agreement. In most cases, such an agreement may not exist or may have significant holes. In some cases, federal and/or state regulations may even require information be made available (for the benefit of consumers). If you can show that a third party has the information, and that you can obtain the information from that source, it may not matter if it was confidential at an early stage in the process.
A Word of Caution to Departing Employees
Customer lists should not be confused with customer information. A customer list, as that phrase is used in this article, means the name and contact information of the individual or business. Customer information, more broadly stated, can also include unique information not generally available. If we are talking about an insurance company, for example, the client’s different policies, endorsements and limits is customer information beyond a name and phone number. A bank will have information on the client’s finances. An investment advisor will have information on the client’s investment goals and strategies. While a name or address is readily ascertainable customer information, the same cannot be said for this other goal-oriented or strategic information. Thus, you may be able to contact the client from your new firm, but you may have to get some specifics from them a second time to avoid exposure.
The Death of the Non-Solicitation Clause
Everyone seems to know that, under California law, non-compete agreements are unenforceable with limited exceptions, i.e., when an owner of a business is selling his interest in the business. This rule is a direct result of the socio-economic policy mentioned at the outset, the policy in favor of an employee’s right to make a living, and is embodied in California’s Business and Professions Code § 16600.
Where people are confused is with respect to the enforceability of the non-compete’s agreement’s sister agreement, the non-solicitation provision. Businesspersons and even the majority of the State Bar, if you polled them, would say these provisions are enforceable in California.
They are not.
The central issue in Retirement Group v. Galante was whether the injunction issued in the case was too broad. Immediately after our clients formed a new company, they were sued and the trial court issued a preliminary injunction prohibiting certain conduct. Included in the list of prohibited activities was 1) using trade secrets and 2) contacting clients.
We appealed the injunction to the extent it prohibited contacting clients even when doing so would not involve the use of trade secrets. Under Bus. & Prof. Code § 16600, as interpreted by the California Supreme Court in Edwards v. Arthur Andersen LLP, we argued that such a prohibition was unlawful. The court of appeal agreed:
Thus, in general, the old rule about sending a professional announcement and stopping there is dead. While trade secrets may be protected, a non-solicitation provision, by itself, is an anti-competitive agreement that is unlikely to be enforced beyond what is already protected by the Uniform Trade Secret Act.
Many employees believe that the customer relationships they forge and maintain over the years, and the information in their cell phone pertaining to those customers for example, are their own. That is not true. But, that also does not mean that you are out of options. There may be facts and/or circumstances that permit you to take your clients with you. If you are an employee thinking of leaving, whether you can use information and for what purpose depends entirely on the facts of your individual case. You are strongly encouraged to speak with an attorney that specializes in this area of law.