Protecting Customer & Client Lists

By Allyson K. Thompson

When preparing Employee Handbooks, we frequently are asked by clients, "What can I do to protect my client and customer lists from being taken by departing employees?" Client and customer lists are often a company's most important asset. Legally protecting that asset in California can be difficult.

We advise that the best way to protect your client information is to treat it the same way that you would your proprietary products, designs, and methods: as a trade secret. California courts historically have rarely upheld covenants not to compete and non-solicitation agreements as enforceable, even when negotiated in an employment contract. So, if you make reference to the confidentiality of your client lists in a covenant not to compete or non-solicitation agreement, you run the likelihood of that proprietary information not being protected. Trade secrets however, have been given much more enforcement protection by California courts. It therefore makes better sense to make reference to the confidentiality of your client lists in your trade secret or confidential information provisions.

In California, two conditions must be satisfied for information, including customer and client lists, to enjoy trade secret protection. First, the employer must routinely make efforts to maintain the secrecy of the client/customer information, and second, the information must derive independent economic value from not being generally known to the public. California Uniform Trade Secrets Act and Civil Code §§ 3426.1 through 3426.11.

What must a company do to make efforts to maintain the secrecy of client and customer lists? Make certain that your internal policies make it unequivocally clear that this information is secret and is not to be disseminated, and communicate that policy in writing regularly to your employees.

To satisfy the second requirement, showing that the information has independent economic value from not being publicly known, is inherently easy to demonstrate. Client and customer lists have a natural monetary value, especially if considerable efforts were made by the company to compile the information. Clearly if your client list with contact information was to be leaked to a direct competitor, that competitor now has a ready ability to poach your customers. These customers have a known willingness to purchase a competing product, and the poaching company is spared the time and expense of having to work to generate the list. Mark all of your client and customer lists as "Confidential and Privileged." During exit interviews with key staff that may have access to this information, make sure that they have returned all computers and technology devices that were given to them that may have this information. And immediately terminate access to computer drives that contain this information.

The takeaway: the more a company screams, "this information is confidential and privileged," the more inclined a court will be to agree that this information clearly was not meant to be disseminated, and to protect the information as a trade secret.

Allyson K. Thompson is an Associate with Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or athompson@kringandchung.com .