By: Kenney & Sams, P.C.
At some point, most commercial and intellectual property litigators have faced this situation. Your client comes to you, furious: A trusted employee has left the company and struck out on his own, and taken your client’s customer list with him. Can your client do anything to prevent this former employee from stealing its customers?
Without contractual protection, your client must rely on trade secret protection. As much as your client may value its customer list, however, your client may find it a very difficult proposition to establish its customer list as a protectable “trade secret.” Recent cases in Massachusetts demonstrate just how difficult staking out a claim to trade secrets can be.
To make a claim for misappropriation of trade secrets under Mass. Gen. Laws ch. 93, § 42 and the common law, a plaintiff must show: (1) the information is a trade secret; (2) the plaintiff took reasonable steps to preserve the secrecy of the information; and (3) the defendant used improper means, in breach of a confidential relationship, to acquire and use the trade secret.
When it comes to customer lists, this is easier said than done. The tallest hurdle is proving that the list is, in fact, a trade secret. Massachusetts courts evaluate six factors – the so-called “Jet Spray Cooler” factors — to determine whether confidential information qualifies as a trade secret:
- The extent to which the information is known outside the business;
- The extent to which the information is known by employees and others involved in the business;
- The extent of measures taken by the employer to guard the secrecy of the information;
- The value of the information to the employer and to his competitors;
- The amount of effort or money expended by the employer in developing the information; and
- The ease or difficulty with which the information could be properly acquired or duplicated by others.
Two recent cases mark off the two poles of this analysis.
The June 2015 case of Head Over Heels Gymnastics Inc. v. Ware concerns a former gymnastics academy employee who opened her own academy after her employer terminated her.
The former employer sued her, alleging that, among other things, she misappropriated its customer list, a trade secret. The customer list — which included names, addresses, telephone numbers and email addresses — was available to all employees and was distributed to all gymnastics trainees and their families so that they could directly communicate with each other. The employer never informed its employees that the list constituted confidential information or otherwise was a trade secret.
The Massachusetts Appeals Court, affirming summary judgment for the employee, found that the information was not a trade secret because the employer: (i) made its customer information available to all staff, employees and gymnasts and their families without restriction or limitation; and (ii) it never informed the defendant or any other person to whom this information was distributed that the information was confidential. In addition, the employer did not identify any steps it took to ensure that its information remained confidential or secret. The court found “simply unrealistic” the employer’s assertion that the parties understood the customer lists were not intended for purposes other than its business, and were neither publicly known nor available through other sources.
The employer’s own missteps cost it trade secret protection. It widely disseminated its list, it did not take steps to ensure that the list was kept secret, and its list contained information that was publicly available.
By contrast, the recent District of Massachusetts case of Bruno International Ltd. v. Vicor Corp. involved a company that did much more to protect the trade secret status of its customer list.
In September 2015, Judge Woodlock held that a company had stated a claim for misappropriation of trade secrets sufficient to withstand a motion to dismiss. The company accused its distributor of sharing its “sensitive and confidential customer and pricing information” with its competitor, despite the distributor’s promise to keep it confidential.
In concluding that the company had plausibly alleged that the customer list constituted a trade secret, the court found that the “Jet Spray Cooler” factors pointed to trade secret protection, given the company’s allegations that it took significant efforts to compile and prepare the information, that the information was central to its business operations and provided it with a competitive advantage, that it had not conveyed the extent of its customer portfolio to anyone other than the distributor, and that the customer information was not otherwise in the public domain.
So, is your client’s customer list a trade secret? As with any fact-intensive analysis, the answer is, “it depends.” But you can advise your client to take the following steps to make sure its customer list meets the standard for trade secret protection:
First, ensure that the customer list is comprised of information that your client put together through its own hard work and experience, and that it is not merely a compilation of publicly-available information. Second, keep it safe! Your client should never disseminate the customer list outside of its company, and should only make it available to employees on a “need to know” basis. Your client should keep the list somewhere secure, with password protection and layers of security. Finally, be sure that your client can demonstrate the value of this list to its business. Your client should keep track of its efforts to develop it. Did your client generate a number of leads by attending an expensive conference? It should keep track of that.
Did your client spend years cultivating a particular customer relationship? It should memorialize that information.
Now, what can your client do if its former employee did not take a physical copy of the list, but instead took the names of customers that were “in his head”? Unhappily for your client, absent a non-competition or non-solicitation agreement, the employee is “entitled to use his general knowledge, experience, memory and skill” in establishing his new business, including “remembered information.” In other words, your client would be hard pressed to prevent its former employee from relying on his own memory without some additional form of protection.
Thus, to help ensure the secrecy of this important proprietary information, even if it does not rise to the level of a trade secret, your client should consider implementing confidentiality, non-solicitation and non-competition policies.
Confidentiality agreements are fairly non-controversial and simple to enforce. They can be contained in the employee handbook or a separate agreement, so long as the employee signs a document saying that he or she has reviewed the policy and consents to be bound by its terms.
Non-solicitation and non-competition competition agreements can be more difficult to enforce. A narrow non-solicitation agreement would prevent an employee from diverting business opportunities away from his former employer, or from contacting that employer’s customers or employees, for some reasonable period of time. A broader non-competition agreement would prevent the employee from working in that field, whether the employee directly solicits the former employer’s business or not.
Non-solicitation and non-competition agreements are enforceable in Massachusetts so long as they are: (1) necessary to protect a legitimate business interest of the employer; (2) supported by consideration; (3) reasonably limited in time, space, and subject matter; and (4) consonant with the public interest. Your client’s employees will need to sign new non-solicitation and non-competition agreements with every material change in their employment for them to remain enforceable.
The inconvenience of preparing and updating such agreements may well prove worth it to your client in the end. Why leave it to trade secret law when your client can put in writing, within reasonable limits, the precise form of protection it desires and can expect? Such agreements are the surest protection against a former employee bent on competing againstyour client with pilfered information, whether or not Massachusetts law would recognize that information as a “trade secret.”
 Bruno Intl. Ltd. v. Vicor Corp., No. 14-10037-DPW, 2015 WL 5447652 (D. Mass. Sept. 16, 2015).
 Jet Spray Cooler Inc. v. Crampton, 282 N.E. 2d 912, 925 (Mass. 1972).
 Head Over Heels Gymnastics Inc. v. Ware, et al, 87 Mass.App.Ct. 1128 (June 9, 2015) (unpublished decision).
 Hamburger v. Hamburger, 4 Mass.L.Rptr.409 (Mass. Super. Ct. 1995).
 Bowne of Boston Inc. v. Levine, 7 Mass.L.Rptr 685 (Mass. Super. Ct. 1997); Analogic Corp. v. Data Translation Inc., 371 Mass. 643, 647 (1976).
 F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585 (1968).
Originally published in ComCom Quarterly by Massbar.org