[Writing Sample: Question presented and factual background redacted]
Our client Fine Travel, Inc. (“FTI”) probably will be able to establish that it made reasonable efforts, under the circumstances, to protect the secrecy of its customer list and that its former employee, Ms. Sarah Tung, misappropriated its customer list. For negotiation purposes, Ms. Tung’s counsel has conceded that FTI’s customer list is “information” with “independent economic value,” but maintains that FTI did not make reasonable efforts to protect the secrecy of its customer list thereby failing to satisfy the final element of the trade secret definition. A company makes reasonable efforts when it informs its employees that its customer list is a trade secret or limits access to the list. See Morlife, Inc. v. Perry, 66 Cal. Rptr.2d 731 (Ct. App. 1997); Courtesy Temp. Serv., Inc. v. Camacho, 272 Cal. Rptr. 352 (Ct. App. 1990). FTI employed reasonable efforts by informing its employees that the list is a trade secret verbally and/or with written documents, and restricting access to the list. In addition to proving that it employed reasonable efforts, FTI also will need to establish that Ms. Tung misappropriated its customer list. A former employee misappropriates a customer list if s/he contacts a former employer’s customers in a manner that goes beyond a professional business announcement and crosses into solicitation. Aetna Bldg. Maint. Co., Inc. v. West, 39 Cal. 2d 198, 198 (1952). See also Hilb, Rogal and Hamilton Ins. Serv. Of Orange Cnty., Inc. v. Robb, 39 Cal. Rptr.2d 877 (Ct. App. 1995); Am. Credit Indem. Co. v. Sacks, 262 Cal. Rptr. 92 (Ct. App. 1989). Ms. Tung misappropriated the customer list when she wrote a letter to FTI’s customers that went beyond a professional announcement and solicited.
A. Reasonable Efforts
To determine if FTI can protect its customer list as a trade secret a court will look to the California Uniform Trade Secrets Act section 3426.1(d)(2) which requires that information “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d)(2) (Deering’s 2010). A company takes reasonable steps, under the circumstances, to maintain the secrecy of a trade secret customer list when it informs its employees that the list is trade secret, or access to the list is restricted. See Morlife, 66 Cal. Rptr.2d 731; Courtesy, 272 Cal. Rptr. 352. Courts will examine reasonable efforts on a case-by-case basis and the facts in each situation are subjected to section 3426.1(d)(2) in an interpretive manner as opposed to a list of absolute requirements. FTI has evidence in its favor that reasonable steps were taken to inform employees the customer list was a trade secret and that it restricted access to the list which probably will satisfy the reasonable efforts prong under section 3426.1(d)(2).
Courts have consistently held that informing employees of a trade secret is one way to meet the definition of reasonable efforts required by section 3426.1(d)(2). Eg., Morlife 66 Cal. Rptr.2d at 736; Courtesy, 272 Cal. Rptr. at 355. In Morlife, Inc. v. Perry, 66 Cal. Rptr.2d 731 (Ct. App. 1997), the plaintiff company provided professional roofing services specializing in the installation and repair of roofs on commercial properties. The court there held “that the plaintiff had made reasonable efforts to maintain the secrecy of its customers’ identities” by requiring employees to sign an agreement not to “use, duplicate or disclose information about…customers,” as well as distributing an employee handbook that also emphasized the confidential nature of its customer information. Id. at 733. In addition to written notification, the president of the plaintiff company verbally referred to its customer list as the “main asset” and asserted that “without it, there’s no business.” Id. at 736. In American Credit Indemnity Co. v. Sacks, 262 Cal. Rptr. 92, 92 (Ct. App. 1989), the plaintiff company offered insurance policies on creditor’s accounts receivable, the court found that the plaintiff’s customer list did constitute a trade secret because its employees were notified of the confidentiality of the list. The plaintiff company “alleged it required its employees to sign confidentiality agreements with respect to their [customer] information.” Id. at 94. The defendant’s claim he did not sign the confidentiality agreement had no affect the court’s decision because the company always required employees to sign and this employee simply failed to. Id. at 92. As in Morlife, and American Credit, the court in Courtesy Temporary Service, Inc. v. Camacho, 272 Cal. Rptr. 352 (Ct. App. 1990), also held that “advising employees of the existence of a trade secret” was an important factor in maintaining reasonable efforts although the court opinion does not say how the employee’s were advised. The plaintiff in Courtesy provided temporary employees for businesses and the defendants in this case used the plaintiff’s trade secret to fraudulently steal their employees and solicit its clients. Courtesy, 272 Cal. Rptr. at 355. Employees of the plaintiff company in Courtesy were aware of the confidential nature of the information, although the court mentioned no specific methods of notification in its opinion. Id. Often times employers will need to procure signatures from current employees after hiring on confidentiality agreements and will have to pay bonuses to persuade its employees to sign, like the plaintiff in Hilb, Rogal and Hamilton Insurance Services of Orange County, Inc. v. Robb 39 Cal. Rptr.2d 877, 892 (Ct. App. 1995) did to get a non-compete agreement signed by the part-owner.
Informing employees of the existence of a trade secret is not the only method that the courts recognize to satisfy reasonable efforts as defined in section 3426.1(d)(2). The courts in Courtesy and Morlife found that limiting access to the information also contributes to satisfying the definition. Courtesy, 272 Cal. Rptr. at 358; Morlife, 66 Cal. Rptr.2d at 736. The plaintiff in Courtesy only divulged its customer list on an “as needed basis,” when needed for a specific job related duty. 272 Cal. Rptr. at 358. The plaintiff also limited circulation of the customer list between its own branch offices, which prevented any one employee from accessing the customer list in its entirety. Id. The plaintiff in Morlife restricted access in a slightly different way than Courtesy, although equally effective according to the court, by keeping its list on a password-protected computer. Morlife, 66 Cal. Rptr.2d at 736. Despite the fact that the defendant in Morlife simply took business cards and not the actual list, the information taken constituted seventy five to eighty percent (75-80%) of the list, which was enough to constitute a trade secret even though the complete list was not taken. Id. at 733. The plaintiff companies in Courtesy and Morlife both limited access and expressly informed employees, in advance, of the existence of a trade secret. Compare Morlife, 66 Cal. Rptr.2d at 731; with Courtesy, 272 Cal. Rptr. at 352.
FTI has evidence that Ms. Tung was informed the customer list is a trade secret in addition to evidence showing restricted access to the list. Ms. Tung was verbally informed in each staff meeting by the CEOs’ comments that the list was “the core of the business,” “our bread and butter,” “the secret ingredient to our success,” and it – along with FTI clients – must be “handled with care.” The comment made by FTI’s CEO that the list is the “core of the business” imparts the same idea that the president of the plaintiff in Morlife meant to convey when he referred to its list as the “main asset,” simply put each aims to imply that the list is of utmost importance to the company. The other comments made by the CEO at FTI referring to the list as “our bread and butter,” the “secret ingredient to our success,” to be “handled with care,” are somewhat vague because the CEO’s choice of words which never expressly refer to the customer list as a trade secret and only attempts this with euphemisms. However, in conjunction with the other statements the CEO’s comments help to further the notion that keeping the list a secret is imperative to the business.
In addition to verbally informing its employees FTI also made use of written proprietary information agreements and Ms. Tung was, more than likely, well aware of this fact. FTI’s efforts over the last three (3) years to ensure that new employees sign a proprietary information agreement is comparable to the plaintiffs in Morlife requiring a confidentiality agreement be signed by new employees. Although unlike the plaintiff company in Morlife, FTI did not require legacy employees to sign the agreement or issue an employee handbook restating the confidentiality. There is, however, a chance the proprietary information agreements were handled completely by the Human Resources Director in which case Ms. Tung would not have had knowledge of them. Like the defendant in American Credit, Ms. Tung did not sign a confidentiality agreement, however the defendant in American Credit was supposed to sign the agreement whereas Ms. Tung was not. FTI did have an opportunity to persuade Ms. Tung to sign a proprietary information agreement by paying her a bonus, which most likely will be a point of concern for the court because some similarities can be drawn to the bonus paid to the defendant in Hilb for the non-compete agreement. However, this fact is distinguishable because the defendant in Hilb had been a part owner of the plaintiff company as opposed to an employee like Ms. Tung. Even without signing the proprietary information agreement Ms. Tung was still aware that the customer information was “the core of the business” and she most likely had knowledge that lower level employees, for the last three (3) years, were all required to sign the agreements. Therefore, a court probably will find that Ms. Tung was well informed that FTI’s customer list is a trade secret.
In addition to informing Ms. Tung that a trade secret exists, FTI also limited access to the customer list because of its importance to the business. FTI grants forty percent (40%) of its employees access to the customer list, which is contained in a password-protected database on FTI’s computer network, comparable to the plaintiff in Morlife who also limited access to its customer list on a password-protected computer. FTI gave the list password to employees that needed it to perform their job just as the plaintiff in Courtesy gave customer list information to the employees who needed it to perform their jobs. While FTI gave out full access to the list, the plaintiff company in Courtesy is distinguished because it granted access to portions of the list on an “as needed basis.” The plaintiff company in Courtesy also prevented inter-office circulation, however, FTI is a smaller entity and such sophisticated access might not have been reasonable under the circumstances for a business of its size.
FTI will ultimately have a enough facts to convince the court that it did make reasonable efforts under the circumstances to protect the secrecy of its customer information, thereby satisfying section 3426.1(d)(2). The court’s holding probably will be based on the fact that FTI informed Ms. Tung verbally, required all new employees for the last three (3) years sign confidentiality agreements, and restricted access to the list.
In the event FTI is successful in proving that it made reasonable efforts to protect the secrecy of its customer list, it will next be required to prove that Ms. Tung misappropriated the list. Misappropriation under the California Uniform Trade Secrets Act section 3426.1(b)(2) occurs when a former employee makes “use of a trade secret of another without express or implied consent” and “at the time of…use, knew or had reason to know that his or her knowledge of the trade secret was: [a]cquired under circumstances giving rise to a duty to maintain its secrecy.” Cal. Civ. Code § 3426.1(b)(2) (Deering’s 2010). An employee misappropriates its former employer’s customer list when s/he uses it to solicit the business of the customers on the list. Am. Credit, 262 Cal. Rptr. at 92. California courts consistently impose a duty on employees to keep their employers’ trade secrets confidential. See e.g., Aetna Bldg. Main. Co., Inc. v. West, 39 Cal. 2d 198, 198 (1952); The Retirement Group. v. Galante, 98 Cal. Rptr. 3d. 585, 585 (Ct. App. 2009). Furthermore, higher-level employees, such as a Vice-President, have a duty that is at least as great as that of lower level employees. Roger M. Milgram, Milgram on Trade Secrets (2010). Ms. Tung’s letter went beyond a simple professional announcement entering in to solicitation; therefore, FTI probably will be successful in a claim of misappropriation against Ms. Tung.
Courts going at least as far back as 1952 have consistently recognized an employee’s right to engage in fair competition with his/her former employer, which includes informing the former employer’s customers of a change in business affiliation. See, e.g., Am. Credit, 262 Cal. Rptr. at 100; Aetna, 39 Cal. at 198. Courts therefore draw a line between making use of a trade secret to solicit a former employer’s customers, which is misappropriation, and merely informing them of a change in business affiliation which is not. E.g., Morlife, 66 Cal. Rptr.2d 731; Aetna Building Maintenance Co., Inc. v. West, 39 Cal. 2d 198, 198 (1952). The Aetna court, as well as its progeny, rely on Black’s Law Dictionary definition of solicitation which is “to ask with earnestness, to make petition, to endeavor to obtain, to awake or excite action, to appeal, or to invite.” Aetna, 39 Cal. 2d at 198. See also Am. Credit, 262 Cal. Rptr. at 99; Morlife, 66 Cal. Rptr.2d 738. This definition of solicitation is consistent with California’s long commitment to employee mobility expressly shown in the Business and Professions Code section 16600, which prohibits restraining a former employee “from engaging in a lawful profession, trade, or business of any kind.” Cal. Bus. & Prof. Code § 16600 (West 2010).
The court in American Credit applied the historically established definition of solicitation when it analyzed a former employee’s letter that offered business alternatives to the former employer’s customers. 262 Cal. Rptr. at 94. There the defendant’s letter offered “a very interesting alternative” to the plaintiff companies’ credit insurance products and expressed an eagerness to “discuss it in detail with you when you are ready to review your ongoing credit insurance needs.” Id. Similarly, the defendant in Morlife sent a letter assuring his former employer’s customers of his “commitment to provide you with timely, dependable, professional solutions to alleviate your roofing problems” and expressed willingness to “talk soon about how we can prevent or minimize your headaches and costs.” 56 Cal. Rptr.2d at 737. The defendant’s letters in American Credit and Morlife invite and solicit business. Eg., Am. Credit, 262 Cal.Rptr.2d at 98; Morlife, 66 Cal. Rptr.2d at 731. The courts willingness to protect employee mobility when leaving an employer is shown by the decision in The Retirement Group v. Galante 98 Cal. Rptr.3d. at 589 (Ct. App. 2009), the plaintiff there provided asset investment and financial advisement services and the defendants were actively soliciting business from the plaintiff’s clients. However, because the customer information used was not a trade secret, the solicitation was found lawful. Id. at 588.
In contrast to the solicitous letters sent by the defendants in Morlife and American Credit, the defendant’s letter in Hilb did not solicit business and merely informed the plaintiff company’s customers of his change in business affiliation. Hilb, 39 Cal. Rptr.2d 892. In Hilb, the defendant was formerly affiliated with the plaintiff’s insurance brokerage firm as a part owner and in return for signing a non-compete agreement was paid $52,500. Id. at 889. The defendant, upon taking up employment with a competitor, sent a letter merely informing the plaintiff company’s customers of his change in affiliation. Id. at 892. The court did not include the text of the letter in its decision, but it found that “all declarations [from the plaintiff companies' clients] indicate[d] that [the defendant] merely announced a change in employment and then responded to the clients’ lawful business requests.” Id. Although in the Hilb case the plaintiff’s customer list was not found to be a secret the court found it necessary to assert in dictum, that “even assuming that [the plaintiff's] customer list…constitute[d] trade secrets…the evidence before the trial court does not support the conclusion that [the defendant] misused” the list by simply informing the plaintiff’s customers that he had changed employment. Id. The Hilb court, like the courts in Aetna, and American Credit, recognized the right an employee has to inform the customers of his former employer that he has changed business affiliations. Hilb, 39 Cal. Rptr.2d 887. See also Aetna, 39 Cal. 2d at 198; Am. Credit, 262 Cal. Rptr. at 92.
Assuming that a court agrees with FTI on its interpretation of the trade secret definition, the court will also find misappropriation because Ms. Tung’s letter intended to excite action from FTI’s clients. FTI disclosed the customer list to Ms. Tung under circumstances that gave rise to her duty to maintain its secrecy. Upon using the list to email FTI’s customers Ms. Tung made use of the list without “express or implied consent” which equates to misappropriation under section 3426.1(b)(2) because her use of the list was not authorized by FTI or its agents. Ms. Tung a high-ranking FTI employee, similar to the defendant in Hilb although not a part owner, was well aware of the duty to maintain the secrecy of the customer list.
Ms. Tung’s email made use of the list initially in an attempt to announce her change in employment; however, the latter portion of her letter more closely resembles the solicitous letters sent by the defendants in American Credit and Morlife. Like the defendant’s letter in American Credit, which offered “very interesting alternatives,” Ms. Tung also mentioned alternative products, like the culinary themed vacation which entailed a “tour of Tuscany with [a] chef,” not available through FTI but offered by her new employer. As an FTI employee, Ms. Tung had been asked to do market research regarding the possibility of offering very similar culinary themed vacations, which would make FTI and LLC direct competitors in this market.
Ms. Tung not only discussed the alternative culinary themed vacations but she also offered FTI’s client a ten percent (10%) discount on these products. A court likely will treat Tung’s mention of a ten percent (10%) discount as solicitation because objectively this discount is intended to “awake or excite” action as prohibited by the court in Aetna and its progeny. Ms. Tung also made an attempt to initiate contact with FTI’s client by offering to “treat [the client] to dinner” next time they are in San Diego, a fact somewhat similar to the letter written by the defendant in Morlife who also expressed an interest in “talk[ing] soon” about “professional solutions.” While the express invitation to talk soon by the defendant in Morlife is obvious, the open invitation to dinner by Ms. Tung is an implied attempt to initiate contact. An implied attempt to initiate with contact FTI’s customer probably is not sufficient to establish misappropriation; however in combination with the expressly offered ten percent (10%) discount it begins to stray closer to solicitation. Ms. Tung’s letter offering a discount, discussing potentially competing products, and offering to treat FTI’s client to dinner will most likely exceed the exception for professional announcements and cross the threshold into solicitation.
FTI will, in addition to establishing its customer information is a trade secret, have enough evidence to persuade the court that Ms. Tung misappropriated the trade secret. Her letter, while not overtly solicitous in nature, does go beyond simply informing FTI’s customers that she has made a change in employment by offering a discount on potentially competing products and offering to treat the clients to dinner. In light of Ms. Tung’s solicitous letter, FTI probably will succeed on a claim of misappropriation as well.