CUSTOMER CONFIDENTIALITY
KEEPING YOUR CUSTOMER LIST CONFIDENTIAL
Reproduced with the Permission of Miles L. Kavaller
Your company's most valued asset is its customer list. Like your bank account number, you want it to remain confidential. Unlike your bank account number, however, many employees have access to the company's customer list and use it on a daily basis. Keeping the information confidential while the personnel have access to it requires some exercise of control; keeping the information confidential when an employee quits or is terminated and goes to work for a competitor can be far more difficult. And, if the appropriate measures are not taken at the proper time, protection of that information may well be impossible.
A customer list, or customer identity and preferences, etc. if not contained on a discrete list, may not be eligible for legal protection unless it qualifies as a trade secret, or the employees have signed an agreement which state that this information is confidential. These agreements can be a separate document, properly drafted and signed by the employee, which is retained in the employee personnel file. Or, the company's customer confidentiality policy can be contained in the employee manual which the employee has acknowledged receiving. Indeed, the employee's initials next to the most important company policies serves to emphasize their importance and operates as an employee's understanding of the policy.
If a customer confidentiality policy is not in an employee handbook or in a separate document, its protection after the employee quits or is terminated may present serious problems. There has been a great deal of litigation on this issue and the law is not crystal clear. The problem arises when an employee quits or is terminated and obtains employment with a competitor or starts their own business which competes with that of the former employer. Fearing loss of customers, business and revenues, the former employee runs to court asking for a restraining order prohibiting the former employee from using the customer list or any other information the former employer deems confidential. In addition, the former employer will seek a preliminary injunction and damages equal to the revenues diverted by the former employee as a result of the misappropriation of the customer list. The stakes in this type of litigation are high for both the former employer and the former employee. And the expense of attorney's fees and court proceedings can run into the many thousands of dollars, not to mention the emotional cost.
The law recognizes the fundamental right of a person to work in a chosen occupation. It also seeks to protect an employer's trade secrets. In each case, the courts attempt to weigh these interests and balance the competing rights of the parties as well as the overall objectives of the public.
In 1984 the California legislature adopted the Uniform Trade Secrets Act ("UTSA"). It defines "trade secret" to mean "...information including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) [derives 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 (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." This statutory definition has been applied in a number of court cases. The identity of a company's customers is not a trade secret where they can be ascertained from widely available sources and are generally known in the business. This fits most customer lists or compilations in the transportation industry.
Whether a particular employer or employee will succeed in court in a case is almost impossible to predict. Before going to court, however, the former employer should consider the cost and whether that money is better spent in a marketing campaign to retain its customers in the face of new competition. To put this in context, shippers are free to use whatever carrier or broker they choose. And while a court might find a customer list to be a trade secret, a court cannot compel the customer to use the services of the former employer.
Customer profile information can be of great value to a company. It is worthwhile taking appropriate measures and obtaining professional assistance to protect it.
[1]California Civil Code Section 3426 et seq. It has also been adopted by 41 other states.
For more information, contact
Miles L Kavaller, A Professional Law Corporation, Encino Law Center, 15915 Ventura Blvd., Penthouse One, Encino, CA 91436-2741.
Tel: 818-728-4821.