Is Your Customer List a Trade Secret?

Businesses go to great lengths to attract and keep customers and clients. A good customer list will help a business understand who is buying and who is likely to buy again. This information is vital to growing a business through marketing and product development, among other things, and can make a business attractive to potential investors and buyers.

Small wonder, then, that businesses react strongly when a customer list falls into the wrong hands. If the list is valuable enough—and if it was misused or taken by an employee or someone else through improper means—a trade secret lawsuit will often follow.

But is a customer list a trade secret? That is almost always a hotly contested issue. The fact is, there is no clear answer that applies in every case. Sometimes a customer list is a trade secret; sometimes it isn’t. If your list simply consists of a bunch of names pulled from the Internet, it will be hard to protect the list as a trade secret. But if the list incorporates detailed, useful information that is not in the public domain, then it may well be eligible for protection. This article offers strategies for protecting a customer list as a trade secret.

Trade secret basics

Not just anything qualifies for trade secret protection. Certain requirements need to be met first. To qualify as a trade secret under Michigan and federal law, the information must:

• Not be known or readily ascertainable to others
• Have independent value because it is not known or readily ascertainable
• Be subject to reasonable efforts to keep it a secret

In a trade secret case, the plaintiff—i.e., the owner of the information that was stolen or misused—must prove all three elements. Where customer lists are concerned, all three elements will come into play, but the first is often a particular focus. Defendants frequently argue that the information contained in a customer list is readily ascertainable—that it is not really a secret at all. In that respect, they have some law on their side. The case law is clear that a simple list of names and phone numbers compiled from a telephone book or (more likely today) the Internet generally does not rise to the level of a trade secret.

Beefing up your customer list

Nevertheless, whether or not a customer list is a trade secret is what lawyers call a “question of fact.” That basically means that there is no simple legal rule that tells you whether or not a customer list is a trade secret. It depends on the facts of situation.

A customer list—or any document or information for which protection is sought—becomes more protectable when it contains information that others cannot readily obtain. For example, a customer list may contain mobile numbers, email addresses, and the identities of individuals with purchasing authority for a business that cannot be obtained from any public source. Every case is different, but this kind of information can strengthen your list.

Better yet, a customer list might go further and incorporate information specific to each customer or client on its list, such as preferences, needs, purchase histories, and custom pricing charged to the customer. Additionally, if your business has extensive customer information and uses proprietary methods for organizing or coding the information on its list, this may also enhance the prospects for protecting its customer list as a trade secret.

The point is this: The more your customer or client list includes specific information that is not generally known in your industry or to the wider public, the stronger it will be from a trade secret perspective. A good question to ask is: Could a competitor readily reconstruct the list using only public sources?

Further requirements for trade secrets

While trade secret defendants often focus on the issue of whether a customer list is known or readily ascertainable to others, additional requirements must also be met. First, the list must have “independent economic value” that comes from not being known or readily ascertainable by proper means to others who can benefit from the use or disclosure of the list. Put more simply, the list must gain value from not being known to your competitors.

Further, your customer list must be subject to reasonable efforts to maintain its secrecy. Does your business limit the people who have access to the list? Is the list kept on a secure server and password-protected? Does your business require employees with access to sign non-disclosure agreements? While different types and levels of protection will be appropriate for different businesses, steps must be taken to keep your list a secret.

Breach of confidentiality agreement

Trade secret law has a number of advantages for plaintiffs. Michigan and federal law provide for robust remedies, such as an injunction to prevent actual or threatened misappropriation and recovery of attorney’s fees for willful and malicious misappropriation. However, these statutes impose stringent requirements that must be met for a claim to succeed. Therefore, businesses should consider using a well-crafted confidentiality or nondisclosure agreement to protect their customer lists and other proprietary information. Not only can such an agreement support a trade secret claim, but it may also provide the basis for a breach of contract claim. This can be an important backstop in case the information does not technically rise to the level of a trade secret.

Maxwell Goss Law represents clients in trade secret, intellectual property, and business litigation cases in Michigan and nationwide.