Is Your Customer List a Trade Secret? Don’t Be So Sure . . .

Customer lists can be an important asset for competitive advantage in many businesses – insurance, real estate, stock brokerage and financial advice – the list goes on. When a person decides to leave his firm and moves on to another opportunity, the customer list often becomes a bone of contention. The departing employee believes that he invested his time, effort and energy developing the customer list and the relationships that followed. The company feels confident that because the customer list was developed while the employee was on its payroll, the customer list is proprietary to the employer.

However, the customer list was developed, the pivotal question really is whether the customer list is a trade secret. And not all customer lists are trade secrets.

Nevada’s Uniform Trade Secrets Act protects information that (1) derives economic value from not being known to the public; (2) is the subject of reasonable efforts to maintain its secrecy and (3) cannot be “reverse engineered” – recreated by legitimate public means. Element 1 is self-explanatory; it is only valuable if it is a secret. Element 2 may be less clear. Did the owner of the trade secret guard the secrecy of the information by labeling any documents “Confidential”, “Private” or “Trade Secret”? If the customer list was on a computer system, did the owner password protect access to the information? Did the owner limit access to the information within the company on a “need-to-know” basis? How widespread was the knowledge of the contents of the customer list within the company?

In this age of the Internet, perhaps the most interesting question is that posed by Element 3: the ease or difficulty with which the information can be properly acquired and duplicated by others. With the plethora of Internet resources that exist today, developing a “leads” or customer list that may mirror very closely the customer list of the former employer may be surprisingly easy to do – in which event, the customer list isn’t much of a secret.

The point of this discussion is that if you want to protect your customer list, you really can’t just rely upon the law of trade secrets. Best practices for a company who seeks to protect its customer list, or any other business process it believes and expects to keep proprietary, is to require anyone who will come into contact with what you expect and believe to be your trade secrets to sign a non-disclosure/confidentiality agreement. A proper drafted non-disclosure/confidentiality agreement requires your employee, vendor, supplier, etc. to contractually agree to what constitutes your trade secrets and thus, does not leave you exposed to the dangers of the analysis I described above.

Better safe than sorry. If you have information you considered to be essential to your business’ competitive, then have a comprehensive, properly drafted non-disclosure/confidentiality agreement.