TRADE SECRET GUIDE: The “Already Known” Exception to Customer List Protection
In my article Taking Clients With You, I put forward three distinct exceptions to the rule that customer lists are protectable: 1) the “already known” exception, 2) the “readily ascertainable” exception, and 3) the given-away exception. In this article, I explore the first “already known” exception in greater detail.
The Basic Premise
If you are thinking about taking a customer list from one employer to another, the first thing you should ask yourself is whether your potential new employer already knows to whom your current employer sells.
The Beginning of the Exception
The “already known” (or “generally known”) language comes from the statute itself, which says a trade secret is information that “[d]erives 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 “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (Civ. Code, § 3426.1, subd. (d)(1), (2).)
In American Paper & Packaging Products, a California court began to carve out the modern exception for information which is already known to competitors. The case involved competing shipping supply companies. In ruling that the employees, in that case, should not be enjoined from contacting manufacturers, the Court stated,
While the information sought to be protected here, that is lists of customers who operate manufacturing concerns and who need shipping supplies to ship their products to market, may not be generally known to the public, they certainly would be known or readily ascertainable to other persons in the shipping business.
American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1326 [228 Cal.Rptr. 713, 717]
The “already known” exception was referenced and discussed again five years later, in 1991, in the Abba Rubber Co. v. Seaquist case, in which the court said:
By itself, knowledge of the identities of the businesses which buy from a particular provider of goods or services is of no particular value to that provider’s competitors. However, that information is valuable to those competitors if it indicates to them a fact which they previously did not know: that those businesses use the goods or services which the competitors sell.
By way of illustration, consider a hypothetical market for widgets, supplied by five widget sellers. There are 100,000 businesses engaged in industries which have been known to use widgets in their operations; however, there is no way for the widget sellers toknow for sure which of those individual businesses use widgets and which do not. Seller A has a list of 500 businesses to which he has sold widgets in the recent past. That list proves a fact which is unknown to his competitors: that those 500 businesses are consumers of widgets, the product they are trying to sell. Therefore, it has independent value to those competitors, because it would allow them to distinguish those proven consumers, who are definitely part of the widget market, from the balance of the 100,000 potential consumers, who may or may not be part of the market. With that list, they would know to target their sales efforts on those 500 businesses, rather than on 500 other businesses who might never use widgets.
Now imagine the same facts, but assume that each of the other four sellers of widgets know that the businesses on Seller A’scustomer list are proven widget consumers (although they do not know that those businesses buy their widgets from Seller A). Under those circumstances, Seller A’s customer list has no independent economic value, because the identities of those consumers are already known to his competitors.
In both situations, the identities of the businesses which bought widgets from Seller A are unknown. The distinguishing factor is whether it is also unknown that those businesses bought widgets at all. Thus, the customer list in the first hypothetical would be a protectable trade secret, while the list in the second hypothetical would not be.
Abba Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 19 [286 Cal.Rptr. 518, 527]
In Abba Rubber Co., the question was whether it is generally known that the businesses on the plaintiff’s customer list are consumers of rubber rollers. “If that fact is known,” the Court said, “to competing suppliers of rubber rollers, then the fact that those businesses are customers of the plaintiff is not a trade secret. However, if it is not known that those businesses use rubber rollers, then their identity as plaintiff’s customers is a trade secret.” The Abba Rubber Co. court ultimately found the customer list was not generally known, opining:
Here, substantial evidence indicates that this information was not known. For instance, the plaintiff’s president testified “that one of the most difficult parts of [the plaintiff’s] job is to determine which companies, of all the businesses in the United States, need rubber rollers…. Customers are not readily recognizable or identifiable, and the process which brings to light the names of potential customers is … expensive and time consuming.” “[T]he customerlists represent a winnowing down from a generalized list of companies which may utilize rubber rollers or rubber molded products to a valuable and discretelisting of a more limited number of existing and potential customers. [Those lists] are an enormously valuable resource to [the plaintiff], as well as to any competitor. Indeed, any competitor … could not duplicate [those lists] without similar years of effort and expense.” Those lists are confidential, to keep their contents from the plaintiff’s competitors. The trial court could have inferred from that evidence that it was not generally known that those businesses used rubber rollers.
Abba Rubber Co. at 20-21 [286 Cal.Rptr. 518, 528].
An Objective Test, Not Subjective
Taking the American Packaging & Paper and Abba Rubber cases together, it is clear that the courts are not suggesting a subjective test (whether the competitor actually knew who the buyers were) but rather the courts are directing a more objective inquiry (could/should the competitor have known the buyers based on the nature of the market for the goods and services at issue?). Bike manufacturers may distribute their products to a limited number of distributors and the distributors may, in turn, sell to a limited number of shops. The universe of clients, in either case, may not be that special, especially if we are talking about simply who they are and how they can be reached. If you leave your old employer and, at the new one, target everyone including your old employer’s customers, it will be very tough for your old employer to say you were using its special list. (Obviously, you should consult with a lawyer before engaging in such a process.)
Modern Application of the “Already Known” Exception
In a 2010 case between companies selling custom-made promotional items, one party tried to argue that because the products were used in the public and bore the user’s name, the user was “known.” The court thought that was a stretch:
“A customer list is one of the types of information which can qualify as a trade secret. (American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1323-1324….)” (ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 18 [Fourth Dist., Div. Two].) But, “[i]f a so-called trade secret is fully disclosed by the products produced by use of the secret then the right to protection is lost. (Futurecraft Corp. v. Clary Corp. (1962) 205 Cal.App.2d 279, 289….)” (Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 50.) Any information that is either not held in a confidential manner or is generally known cannot be deemed a trade secret.
In the present case, the Nays assert that Majestic’s customer information is not a trade secret because the identity of individualcustomers can be discerned from the promotional products that publicly announce and promote the customer. In other words, a promotional bag bearing the logo for Widgets, Inc. publicly identifies the company as a proven purchaser of promotional products. Additionally, the Nays contend that Majestic’s customer information is available from its own catalogs, its sale of customer lists to third parties, and from the businesses themselves. Therefore, Majestic cannot claim confidentiality or trade secret status for the identity of any of its customers. (ABBA Rubber Co. v. Seaquist, supra, 235 Cal.App.3d at pp. 18-20.)
We disagree with the Nays’ assessment of the public nature of Majestic’s customer information. Instead, after reviewing the evidence submitted by the parties, we agree with the trial court’s findings that the information about Majestic’s customers is valuable because it is not generally known to its competitors to the extent it has been developed by Majestic in detail for many years. Furthermore, Majestic has undertaken significant efforts to keep the information secret. (Morlife, Inc. v. Perry, supra, 56 Cal.App.4th at p. 1521.)
Where an owner has expended time, effort, and expense creating a customer list “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.] 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….)” (Morlife, Inc. v. Perry, supra, 56 Cal.App.4th at pp. 1521-1522.)
In the case at bar, the evidence submitted by Majestic established that its 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, Inc. v. Perry, supra, 56 Cal.App.4th at p. 1522.) Majestic’s president explained that Majestic developed its customerbase “through years of Majestic’s trade show marketing, industry publication advertising, web advertising, telemarketing, and satisfiedcustomer referrals and cannot be replicated or compiled by any individual or organization in a matter of weeks, months or even a few years.” (Ibid.) Substantial evidence supports the trial court’s finding that Majestic’s customer list comprised a protectable trade secret. Therefore, it was not an abuse of discretion for the trial court to grant an injunction prohibiting the Nays from using customerinformation existing as of January 2, 2008. (The Retirement Group v. Galante, supra, 176 Cal.App.4th at pp. 1238-1241.)
Majestic Marketing, Inc. v. Nay (Cal. Ct. App., Jan. 29, 2010, E047085) 2010 WL 338966. In a 2009 case between competing limousine companies, the defendants tried to argue that the identity of local businesses who need limousine service was generally known. Again, this was seen as a stretch, with the court stating:
There is also no basis for defendants‘ assertion that the identity of Airport Commuter’s customers was public knowledge. Airport Commuter’s business relieson repeat customers who frequent the airport regularly. Princeton testified that some of Airport Commuter’s corporate customers pay $10,000 a month totransport their employees to and from the airport, and that the company’s top ten customers account for about a third to one–half of its revenue. While theidentity of local corporations is readily available, there was no evidence that the identity of the small subset of corporations that frequently utilize airportlimousine services is similarly available in the public domain.
Airport Commuter Limousine and Sedan Service, Inc. v. Albazian (Cal. Ct. App., June 8, 2009, A120752) 2009 WL 1588210. Now, the information would not have to be “public knowledge” if it was known within the industry but it is unlikely that the fact at issue-the names of the customers that pay monthly for service-was common knowledge even within the local transportation industry.
In another 2009 case, competing for environmental consulting firms fought over customer lists. The court there said:
Thus, matters of public knowledge or of general knowledge in an industry cannot constitute a trade secret. (Aetna Bldg. Maintenance Co. v. West (1952) 39 Cal.2d 198, 206, 246 P.2d 11.) For this reason, a list of customers or, by a parity of reasoning, a list of suppliers, cannot constitute a trade secret or confidential information where the products in question are sold in an open, competitive market. (Continental Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 148 P.2d 9.)
The undisputed facts here unquestionably show that Brown never possessed, or used any secret information belonging to Augeas. Not only is the evidence upon which Augeas attempts to rely to show Brown’s knowledge of secret information inadmissible, the evidence presented cannot even establish that any of the alleged information was even secret for purposes of trade secret law. The primary material that Augeas claims is secret is client information. However, by the nature of the work Augeas’s work, and the requirement that it file reports with public agencies that contain client information and a description of Augeas’s services, all client information was available to the public. Indeed, there is no evidence that Augeas attempted to maintain any secrecy of the client information, because it could not-all information was required to be filed, and available online, by anyone, at anytime, without password protection. Simply put, there is nothing secret about who Augeas’s clients were, or what work Augeas did for them. Because its clients were a matter of public knowledge, Augeas cannot claim that the client list is a trade secret. In addition, because there was nothing secret about the client information, that information was not subject to any misappropriation on Brown’s part.
Augeas Corp. v. Brown (Cal. Ct. App., May 21, 2009, H031275) 2009 WL 1425355
The case highlights how useful it is to think creatively in these situations. Does the work involved require public filings? If it does, departing employees have another arrow to put in their quiver.
In a 2008 case, competing clean-room monitoring device suppliers fought over customer lists. The below passage from the court’s opinion is long and, after citing the general principles discussed previously, is quite detailed about the evidence in the particular case. The discussion is illustrative, however, of how the battle is played out in court, with the former employer arguing the time, energy and intrinsic value of the list and the defendants’ obligation to show why, indeed, the list is nothing special at all.
Appellants contend that there was insufficient evidence to support the trial court’s finding that Lighthouse’s customer list was a tradesecret. We disagree.
A customer list may qualify as a trade secret. (Abba, supra, 235 Cal.App.3d 1, at pp. 18-21, 286 Cal.Rptr. 518.) When customerinformation is available through public sources, it will generally not qualify as a trade secret. (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1521, 66 Cal.Rptr.2d 731 (Morlife ).) However, such information will be protected when an employer has spent time and effort in identifying its customers‘ needs or characteristics. (Ibid.) “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 substantial business advantage. [Citation.] 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. [Citation.] Its use enables the former employee to solicit both more selectively and more effectively. [Citation.]” (Id. at p. 1522, 66 Cal.Rptr.2d 731, internal quotation marks omitted.)
In Morlife, supra, 56 Cal.App.4th 1514, 66 Cal.Rptr.2d 731, a roofing company sought, among other things, injunctive relief prohibiting its former employees from misappropriating its customer list. (Id. at p. 1517, 66 Cal.Rptr.2d 731.) The trial court found in favor of the roofing company. (Id. at p. 1518, 66 Cal.Rptr.2d 731.) On appeal, the former employees argued that the customer list did not meet the definition of a trade secret, because the identity of potential customers was generally known in the industry. (Id. at p. 1521, 66 Cal.Rptr.2d 731.) The roofing company produced evidence that it created the customer list, which included names, addresses, contact persons, pricing information, and information about the customers‘ needs, through “telemarketing, sales visits, mailings, advertising, membership in trade associations, referrals and research.” (Id. at p. 1522, 66 Cal.Rptr.2d 731.) The record also established that the roofing company limited employees’ access to the customer list and informed employees through an employment agreement and an employee handbook that it considered the information confidential. (Id. at p. 1523, 66 Cal.Rptr.2d 731.) Based on this evidence, the reviewing court held that there was substantial evidence to support the trial court’s finding that the customer list was a trade secret. (Ibid.)
Similarly, here Lighthouse’s customer list had “independent economic value … from not being generally known to the public.” (Civ.Code, § 3426.1, subd. (d)(1).) Lighthouse invested “a substantial amount of time, energy, and personal networking” to create itscustomer list. This information included not only the identity of the customer, but also the customer’s history with Lighthouse, a contact person, product and pricing schedules for each customer, quotations, payment terms, purchase orders, job costs, vendor invoices, and shipping costs. Such information would be economically valuable, because it would allow any competitor to undercut Lighthouse’s prices. Lighthouse also made reasonable efforts to maintain the secrecy of its customer list. (Civ.Code, § 3426.1, subd. (d)(2).) Portions of the customer list were maintained in separate databases. Moreover, information from the list was provided to an employee only when it was necessary for the performance of his or her job. Giandomenico was the only employee with access to all information on the customer list. Lighthouse also informed Giandomenico through the “Employee Confidentiality, Inventions, and Non-Competition Agreement” that it considered the customer list confidential. Thus, there was substantial evidence to support the trial court’s findings that Lighthouse’s customer list was a trade secret.
Appellants, however, rely on evidence that they produced in opposition to the application for preliminary injunction. They assert that “(1) it is common knowledge in the air monitoring industry that the primary customers for particle counters are manufacturers in the semiconductor, data storage, pharmaceutical, biotechnology, aerospace and defense industries; (2) Lighthouse is only one of many companies that manufacture and sell laser particle counters; (3) Lighthouse’s customers often purchase particle counters from numerous vendors and disclose those vendors’ names to obtain better prices and service terms; (4) Lighthouse’s competition is already in place and competing; and (5) Lighthouse has no exclusive customers….” They also direct our attention to Lighthouse’s own Web site and marketing materials in which Lighthouse lists some of its customers.
Appellants’ argument, however, ignores the contrary evidence produced by Lighthouse, and the trial court’s resolution of these disputed factual issues in favor of Lighthouse. (Huong, supra, 150 Cal.App.4th at p. 409, 58 Cal.Rptr.3d 527.) First, only Hach produced laser particle counters that were compatible with the Lighthouse System, and this competitor had an extremely small share of the market. Thus, there were not “many” companies that manufactured and sold laser particle counters that were comparable to the Remote 3010. Second, Lighthouse sought to protect not only the identities of its customers, but also other information contained on its customer list. Since there was substantial evidence to support the trial court’s findings, we reject appellants’ argument.
Lighthouse Worldwide Solutions, Inc. v. Giandomencio (Cal. Ct. App., Jan. 31, 2008, H030748) 2008 WL 256974.
The above passage highlights another reality as well-that the “already known” and “readily ascertainable” exceptions, and indeed the very prerequisites for establishing the existence of a trade secret, are not mutually exclusive concepts but indeed overlap.
Retirement Group v. Galante
In a case I worked on and which was successfully brought to a close, I represented investment advisors who were alleged to have taken customer lists from their former employer. The advisors, when working for their former employer and at their new firm, generally targeted employees of specific telecommunications companies (AT&T and Verizon), as well as some other Fortune 500 firms that had corporate offices in the area. Indeed, the former employer and our clients advertised that they catered to employees of these companies.
Though we ultimately won the preliminary injunction fight and the case on other grounds, some arguments that had considerable merit with respect to the trade secrets issue were that the names and contact information of the former employer’s clients were generally known as a result of the former employer catering to these companies and the companies’ employee lists being generally available to the public. In fact, my original article Taking Clients With You talks about a Contra Costa case in which the judge ruled in favor of investment advisors who targeted Chevron employees. That court 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.” Though the court spoke about the issue in terms of the ability to ascertain the information, I think it is equally a case in which the clients were already known.
If you are thinking about leaving your employer and taking your clients with you, consider what client information is basically known to everyone. If you have select relationships and your new employer is hiring you because he knows you have those relationships (from a source other than yourself), you may have a good argument. Or, if the list of potential buyers is advertised, or simply limited because of the nature of the industry (buyers of parts for 747s), you may have a good argument. Certainly, in an initial consultation with an attorney, do not leave these details out, as they could be critical to his or her analysis of your rights.