December 26, 2005
Commentary: Keeping secrets | How to prevent vital customer information from landing in competitors' hands
By Lin Fan
Attorney, Bernstein Shur, Portland
Customer information is a major component of a company's goodwill, and is often a business' most valuable asset. Such information includes contact names and addresses, customers' technical requirements, preferences, tolerance for price increases and the like, and a wise businessperson will carefully guard those details against expropriation by employees for the benefit of competitors. For that reason, it is important to understand what customer information can be protected, and how to do it.
Generally speaking, the law recognizes a company's proprietary interest in its trade secrets and protects them against expropriation. But cases usually turn on whether a particular piece of information falls within the definition of a "trade secret." To help judge what constitutes trade secret, consider the following definition that has been widely adopted by courts: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business and which provides an advantage over competitors who do not know it or use it.
Courts have applied this definition to customer information with varying results. To determine whether customer information is indeed worthy of trade secret status, courts typically have considered the following circumstances:
How widely is the information known outside of the business, and by employees and others involved in the business?
If customer lists and information are ascertainable from directories or other publicly available information, they are not trade secrets.
Has the company taken reasonable measures to guard the information?
While absolute secrecy is not required, the information must be protected to the degree that it is difficult for third parties to obtain by legitimate means. Courts are generally unwilling to protect customer information when the company's own practices reflect indifference to such protection.
What is the value of the information to a company and to its competitors?
If, for example, the information has a very limited useful life (e.g., prices in industries where they tend to fluctuate), the courts are likely to refuse to protect it as a trade secret.
How much effort or money did the company expend in developing the information?
If a company can show that it has spent considerable time, effort and expense in assembling information about its customers ˆ such as their specific needs, contracts, pricing arrangements or decision-making processes ˆ that information may be protected even if it is possible to piece it together from other sources.
How easily could the information be acquired or duplicated by others?
Generally, the less "known" and more "expensive" to obtain the information is, the more likely it is a trade secret.
Plugging potential leaks
Is a confidentiality agreement a prerequisite to preventing a former employee from using confidential information to solicit your customers? No. Even in the absence of a signed confidentiality agreement, a former employee can be prevented from soliciting a company's customers based on the "duty of loyalty" that each employee owes to his employer. (Duty of loyalty is a legal term describing an obligation that prohibits members of a company from using their positions for personal gain.)
Courts have split over whether mere recollection of customer information as a result of casual memory will support an action against a former employee for theft of trade secrets. However, this defense is not available to former employees who have deliberately memorized the company's files with the intent of making subsequent use of them.
Still, it's better to protect customer information from employee misuse in the first place, using techniques such as the following to establish a company's entitlement to trade secret protection.
ˆ Tell your employees that you regard certain customer information as confidential and intend to protect it as a trade secret; emphasize the importance of confidentiality in your employee handbook.
ˆ Take reasonable precautions such as protecting electronic files with passwords, limiting access to certain files or documents to those persons who have a "need to know," or prohibiting employees from downloading confidential information onto their personal computers.
ˆ Document in your business records the amount of time, money and effort spent cultivating and maintaining your relationships with important customers.
ˆ Require that your key employees with access to highly sensitive information sign a confidentiality agreement; be as specific as possible as to what you consider to be your trade secrets.
ˆ If you are terminating an employee involuntarily, make sure the employee does not leave the premises with confidential information. In extreme situations, observe the employee while they gather their personal items and then escort them out.
Even by doing all of the above, there is no guarantee that your valuable and confidential customer information will be completely protected. However, by adhering to these guidelines you will significantly reduce the risk of misuse or misappropriation of such information by your employees for the benefit of your competitors.
Customer information is a major component of a company's goodwill, and is often a business' most valuable asset. Such information includes contact names and addresses, customers' technical requirements, preferences, tolerance for price increases and the like, and a wise businessperson will carefully guard those details against expropriation by employees for the benefit of competitors. For that reason, it is important to understand what customer information can be protected, and how to do it.
Generally speaking, the law recognizes a company's proprietary interest in its trade secrets and protects them against expropriation. But cases usually turn on whether a particular piece of information falls within the definition of a "trade secret." To help judge what constitutes trade secret, consider the following definition that has been widely adopted by courts: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business and which provides an advantage over competitors who do not know it or use it.
Courts have applied this definition to customer information with varying results. To determine whether customer information is indeed worthy of trade secret status, courts typically have considered the following circumstances:
How widely is the information known outside of the business, and by employees and others involved in the business?
If customer lists and information are ascertainable from directories or other publicly available information, they are not trade secrets.
Has the company taken reasonable measures to guard the information?
While absolute secrecy is not required, the information must be protected to the degree that it is difficult for third parties to obtain by legitimate means. Courts are generally unwilling to protect customer information when the company's own practices reflect indifference to such protection.
What is the value of the information to a company and to its competitors?
If, for example, the information has a very limited useful life (e.g., prices in industries where they tend to fluctuate), the courts are likely to refuse to protect it as a trade secret.
How much effort or money did the company expend in developing the information?
If a company can show that it has spent considerable time, effort and expense in assembling information about its customers ˆ such as their specific needs, contracts, pricing arrangements or decision-making processes ˆ that information may be protected even if it is possible to piece it together from other sources.
How easily could the information be acquired or duplicated by others?
Generally, the less "known" and more "expensive" to obtain the information is, the more likely it is a trade secret.
Plugging potential leaks
Is a confidentiality agreement a prerequisite to preventing a former employee from using confidential information to solicit your customers? No. Even in the absence of a signed confidentiality agreement, a former employee can be prevented from soliciting a company's customers based on the "duty of loyalty" that each employee owes to his employer. (Duty of loyalty is a legal term describing an obligation that prohibits members of a company from using their positions for personal gain.)
Courts have split over whether mere recollection of customer information as a result of casual memory will support an action against a former employee for theft of trade secrets. However, this defense is not available to former employees who have deliberately memorized the company's files with the intent of making subsequent use of them.
Still, it's better to protect customer information from employee misuse in the first place, using techniques such as the following to establish a company's entitlement to trade secret protection.
ˆ Tell your employees that you regard certain customer information as confidential and intend to protect it as a trade secret; emphasize the importance of confidentiality in your employee handbook.
ˆ Take reasonable precautions such as protecting electronic files with passwords, limiting access to certain files or documents to those persons who have a "need to know," or prohibiting employees from downloading confidential information onto their personal computers.
ˆ Document in your business records the amount of time, money and effort spent cultivating and maintaining your relationships with important customers.
ˆ Require that your key employees with access to highly sensitive information sign a confidentiality agreement; be as specific as possible as to what you consider to be your trade secrets.
ˆ If you are terminating an employee involuntarily, make sure the employee does not leave the premises with confidential information. In extreme situations, observe the employee while they gather their personal items and then escort them out.
Even by doing all of the above, there is no guarantee that your valuable and confidential customer information will be completely protected. However, by adhering to these guidelines you will significantly reduce the risk of misuse or misappropriation of such information by your employees for the benefit of your competitors.
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