HR Management & Compliance

Trade Secrets: Workers Liable After Taking Former Employer’s Customer Business Cards; 4-Point Protection Checklist

When employees leave to join a competitor or start their own business, is your confidential data going with them? Sometimes the most valuable, but least-guarded information-like your customers’ names or even an employee’s rolodex-could seriously harm your business if it falls into the wrong hands. This problem continues to cause big headaches for many employers. Fortunately, as a new case points out, there are steps you can take to protect yourself.

Employees Compete With Former Employer

Lloyd Perry worked as a sales representative for Morlife, Inc., a commercial roofing company in San Leandro. At the time he was hired, he signed an agreement not to use, copy or disclose information about Morlife’s customers if his employment terminated.

Perry and another Morlife employee, Carl Bowersmith, eventually quit to open their own roofing business nearby. Perry took with him customer business cards he had accumulated while working for Morlife that represented about 80% of its customer base. He then contacted those customers, and at least 32 of them eventually switched their business to his new company. Morlife demanded that Perry and Bowersmith stop using the cards but they refused.

Morlife sued, claiming the business cards were trade secrets protected under California law and that Perry and Bowersmith illegally used them to solicit business for their new company. Perry and Bowersmith argued that the customer list wasn’t a secret because all commercial buildings eventually need roof work and the owners are all prospective customers whose names are generally known in the roofing industry.

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Customer Business Cards Are Trade Secrets

The court of appeal ruled the business cards were trade secrets and upheld a damage award of $39,000 to Morlife. The court explained that customer lists are protected if you have spent time and effort to identify consumers with particular needs and characteristics, generating information that has competitive value and isn’t readily obtainable. Also, you must take steps to keep the list confidential.

The court of appeal pointed out that Morlife developed its collection of customer business cards through substantial marketing and research. Plus, it made considerable efforts to keep the information secret by including statements in its employee handbook and employment contracts advising workers that the customer lists were confidential and could not be disclosed. Also, Morlife restricted access to the data on its computer.

The court concluded, therefore, that the business cards were trade secrets and the ex-employees broke the law when they used them to call on customers for their new competing business.

4-Point Protection Checklist

As this decision underscores, advance planning and proper procedures are critical to shielding your confidential information. Here are some simple steps you can take:

  1. Maintain confidentiality. Clearly mark sensitive documents and computer files “confidential” and use passwords to block access. Also, limit the information to employees on a need-to-know basis and periodically remind workers about trade-secret confidentiality.
  2. Use confidentiality agreements. Have new employees sign an agreement not to disclose your confidential information. This serves the dual purpose of putting them on notice of the rules and deterring them from violations. The agreement should define what a trade secret is and state that employees may not disclose or publish trade secrets or confidential information during their employment or anytime thereafter. You should also describe the criminal penalties for the theft of trade secrets. (See CEA May and September 1996 for sample language.)
  3. Conduct exit interviews. Ask departing employees to sign a statement that they have not taken confidential documents or computer files and haven’t disclosed your trade secrets to anyone. If the person signed a confidentiality agreement, remind them of their obligations under the contract.
  4. Respond quickly to theft. If you discover an employee has left with your trade secrets, take immediate action to deal with the situation-including a demand for the return of the information. If you wait too long, it may appear that the data wasn’t sensitive. But choose your legal battles carefully because in some cases the potential rewards may not justify the hefty attorneys’ fees required to pursue a former employee.

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