Imagine if I said to every salesperson in Texas: I don’t care whether you signed a non-compete or not. If you quit your job and try to take your customers with you to a new company, your original employer can sue you in federal court and get an injunction to prevent you from contacting any of your customers.

That would amount to saying every salesperson has a de facto non-compete.

Surely this cannot be true, right? But here’s how you get there:

  1. Almost every salesperson has some kind of list of his own customers, even if it’s just contacts on a smartphone. The salesperson knows the identity of the customers, their contact information, what they buy, and the prices they pay.
  2. A customer list is a trade secret under both the Texas Uniform Trade Secrets Act (TUTSA) and the federal Defend Trade Secrets Act (DTSA).
  3. Under the DTSA, the employer can file a trade secrets claim in federal court.
  4. The court can enter a preliminary injunction barring the salesperson from contacting anyone on the customer list.
  5. If the salesperson can’t contact his customers, the effect is about the same as a reasonable non-compete.

Hey, you had a good run, sales people. But you’re stuck where you work now, unless your employer agrees you can leave.

Wait. Is it really that bad?

Not quite. Because I’ve overstated one step in the analysis above: Step no. 2. A sales person’s customer list can be a trade secret, but it’s not always a trade secret. It depends.

That gives judges an important role. It’s up to them to police the boundary between when a customer list is a trade secret and when it isn’t. If judges set the bar too low for giving trade secret protection to a customer list, the result will be what I said: de facto non-competes for all sales people.

The Austin Court of Appeals made this very point the Trilogy Software case: “[I]nformation that a firm compiles regarding its customers may enjoy trade secret status under Texas law. But this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition.”[1]

So, preservation of American free enterprise as we know it depends on courts holding companies to their burden of proof when they claim that customer lists are trade secrets.

To prove the customer list is a trade secret, the company has to show three things:

(1) the customer list has “independent economic value”

(2) it is not “readily ascertainable” by competitors

(3) the employer took “reasonable measures” to keep it secret

It’s usually not that hard to establish element no. 3, reasonable measures. Did the company avoid sharing the information publicly, require employees to sign confidentiality agreements, and maintain password protection on company computers? Those things are typically enough.

What about element no. 1, “independent economic value”? That’s a harder one. But it’s usually going to follow from element no. 2. If the customer list is not readily ascertainable by a competitor, that’s a good sign it has independent economic value. If it was readily ascertainable, it wouldn’t have much value.

One warning: there are still some Texas cases that say a readily ascertainable customer list can be a trade secret. This is a mistake, for reasons I explained in my longest-titled blog post ever, Customer List Confusion: The Pesky Persistence of the Brummerhop Rule in Texas Trade Secret Litigation.

No, a readily ascertainable customer list is not a trade secret. But how readily is “readily”? It is of course a matter of degree. If a competitor could compile the same list from spending a day running Google searches, that’s probably “readily” ascertainable. If it would be extremely difficult to compile the list from public sources, that’s not readily ascertainable. Most cases fall in the middle. It’s going to be a fact-intensive issue.

That means it will often be a fact question for either the jury (at trial) or the judge (at a temporary injunction hearing). In those cases, the jury verdict or judge’s ruling will hold up as long as there is at least a little evidence to support it.

For example, in Amway Corp. v. bHIP Global, Inc., there was testimony that the customer contacts and information the employee provided were his own contacts he had previously developed. This was sufficient evidence to support the jury’s conclusion that the information was not a trade secret.[2]

Conversely, in 360 Mortgage Group, LLC v. Homebridge Financial Services, Inc., No. A-14-CA-00847-SS, 2016 WL 900577, at *4 (W.D. Tex. Mar. 2, 2016), there was sufficient evidence that the customer list was a trade secret. The fact that the employee emailed herself a copy of the broker list was evidence the list was not readily available elsewhere. And the list provided more than simply names and addresses. It also included compensation rates that could be used to “undercut” the employer. (See also The Price Undercutting Theory in Trade Secrets Litigation.)

As these cases illustrate, whether a customer list is a trade secret often presents a fact issue. But in some cases, the undisputed facts will establish as a matter of law that the customer list is not a trade secret.

For example, in Alliantgroup, LP v. Feingold, the court granted summary judgment that a client list was not a trade secret. It was undisputed that the client list was very short (under 15 names), the information was limited, and the names were readily ascertainable.[3]

Parker Barber & Beauty Supply, Inc. v. Wella Corp. was a similar case involving, strangely enough, the barber and beauty supply industry. The court held that “basic customer contact and limited sales information” that the company provided about 39 of its customers was readily ascertainable and therefore not entitled to trade secret protection.[4]

In Numed, Inc. v. McNutt, Numed argued that its pricing structure, marketing research, customer lists, and renewal dates were trade secrets. But the court disagreed: “The evidence reflects much of the information Numed wishes to protect is not secret. Instead, it is contained in the contracts distributed to Numed’s customers, which in turn may be discovered by anyone.”[5] This was a pre-TUTSA case, but the principle should still apply.

Finally, Guy Carpenter & Co. v. Provenzale was a pre-TUTSA case where the federal district court denied the employer’s motion for a preliminary injunction, and the employer appealed. The Fifth Circuit, applying Texas law, noted that a “customer list of readily ascertainable names and addresses will not be protected as a trade secret,” citing numerous cases. The court then said:

. . . the district court implicitly found the customer lists were readily ascertainable. We agree. Evidence in the record indicates participants in the reinsurance market freely disclose the identity of their reinsurance broker and the nature of the reinsurance products they regularly consume. We also note that Provenzale’s list of customers was relatively short—it included only those companies he personally serviced while at Guy Carpenter. He could easily reconstitute this list even without the aid of a trade publication. Even though Guy Carpenter took steps to protect its customer list and Provenzale signed a contract stating the customer list was confidential, we conclude the customer list was not a trade secret because it was readily ascertainable.[6]

So, if the employee offers evidence like this, the court may reject trade-secret status of the customer list as a matter of law.

These cases suggest some good deposition questions to ask if you are the lawyer representing the employee:

  • How long is the employee’s customer list in comparison to the entire customer list for the company?
  • Does the company require all of its customers to keep their transactions with the company secret? If not, how is the identity of the customers a secret?
  • Do customers freely share the identity of companies they buy from?
  • Could the employee easily reconstruct her short customer list? If so, doesn’t that suggest the information is readily ascertainable?
  • Are you saying a competitor would pay real money for this customer list? If not, how can you say it has “independent economic value”?

These can be tough questions for the company. But the company’s lawyer always has the best comeback: if the customer list is readily ascertainable and doesn’t have any economic value, why did the employee take it?

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App.—Austin 2004, pet. denied) (emphasis added).

[2] Amway Corp. v. bHIP Global, Inc., No. 4:10-CV-549, 2013 WL 2355083, at *2 (E.D. Tex. May 29, 2013).

[3] Alliantgroup, LP v. Feingold, 803 F.Supp.2d 610, 626 (S.D. Tex. 2011).

[4] Parker Barber & Beauty Supply, Inc. v. Wella Corp., No. 03-04-00623-CV, 2006 WL 2918571, at *17 (Tex. App.—Austin Oct. 11, 2006) (mem. op.).

[5] Numed, Inc. v. McNutt, 724 S.W.2d 432 (Tex. App.—Fort Worth Feb. 5, 1987, no writ).

[6] Guy Carpenter & Co. v. Provenzale, 334 F.3d 459 (5th Cir. 2003).

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