Protecting Customer Lists as Trade Secrets
California law recognizes some customer lists as trade secrets. But not all of them.
Customer lists are often one of a business’s most valuable assets. California law recognizes this value and protects some—but not all—customer lists as trade secrets.
What is a Trade Secret?
California adopted the Uniform Trade Secret Act in 1984 as Civil Code § 3426 (“the CUSTA”). That statute defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) [d]erives 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) [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d).
The CUTSA’s definition does not specifically mention customer lists. But in the years since California adopted the UTSA, state courts have consistently held that “customer lists can be protectable trade secrets[.]” American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal.App.3d 1318, 1324 (1986).
So what determines whether a specific list will be protected?
Independent Economic Value
Courts follow the language of the CUTSA and first ask whether the customer list “[d]erives independent economic value . . . from not being generally known[.]” Cal. Civ. Code § 3426.1(d).
Customer lists that contain specific, customized information about customers are more likely to be protected as trade secrets. For example, courts have found protectable customer lists where the company involved had:
- identified an “elite 6.5 percent” of customers predisposed to buy the company’s product, American Credit Indemnity Co. v. Sacks, 213 Cal.Appl3d 622, 631 (1989);
- winnowed down from a generalized list of customers to a shorter list of those that actually required the product, Abba Rubber Co. v. Seaquist, 235 Cal.App.3d 1, 20 (1991); or
- included “sophisticated information” like “billing rates, key contacts, specialized requirements and mark up rates[,]” Courtesy Temporary Service, Inc. v. Camacho, 222 Cal.App.3d 1278, 1289 (1990).
When a company does not invest time and effort to refine its customer list, that list will not qualify as trade secret. Courts are very reluctant to protect customer lists “to the extent they embody information which is ‘readily ascertainable’ through public sources, such as business directories.” Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1521 (1997).
This makes sense. Otherwise, every business would be able to turn a phonebook into a trade secret simply by marking it “CONFIDENTIAL” and referring to it as a “customer list.”
Reasonable Efforts to Maintain Privacy
Courts then ask whether the business took steps that were “reasonable under the circumstances” to maintain the secrecy of its customer list. Cal. Civ. Code § 3426.1(d). This is usually the easier of the two requirements for plaintiffs to meet. But like any objective standard of “reasonableness,” this requirement is somewhat vague. See the practical tips below for some specific steps all businesses should take to ensure that they end up on the right side of this standard. Businesses should also respect standard industry practices regarding how customer lists are maintained.
Impact of New Federal Law
The Defend Trade Secrets Act of 2016 (DTSA) created a new federal cause of action for trade secret misappropriation. This means that there is now a parallel body of federal case law developing regarding if and when customer lists are protected as trade secrets.
There is substantial overlap between the CUSTA and the DTSA. While the DTSA’s definition of “trade secret” is not identical to CUTSA’s, it nevertheless focuses on “independent economic value” and “reasonable measures[.]” See 18 U.S.C. § 1839(3). Because of this overlap, “several courts have addressed DTSA claims in conjunction with claims under the CUTSA[.]” Veronica Foods Co. v. Ecklin, 2017 WL 2806706, at *13 (N.D. Cal.).
This means that the California case law, discussed above, will likely prove relevant to certain DTSA claims as well.
Lawyers should advise businesses to take the following steps to help ensure that their customer lists qualify as protectable trade secrets:
- Draft confidentiality agreements that refer specifically to the business’s customer list and require employees to sign them.
- Mark documents with information about customers “CONFIDENTIAL” and implement a sensible internal policy limiting who has access to them.
- Do not publicly disclose the identities of customers unless it is necessary to do so.
- Be prepared to explain how the business developed its customer list and the steps it takes to continually refine and enhance that list.
- Identify, and be prepared to articulate, the “specific business advantage” that the customer list provides.
While these guidelines are helpful, the fact is these can be difficult and emotional issues particularly for a business that has expended great time and effort to build up its clientele.
Mark Punzalan is the founder of Punzalan Law, P.C., an intellectual property and commercial litigation boutique firm in Redwood City. Stephen Stanwood is a post-bar law clerk at the firm.