When are Client Lists Trade Secrets?

By February 17, 2020Business Law, News

Many companies face situations in which an employee leaves the company and takes client information with them.  This is particularly a problem for companies that primarily provide services, and for whom a client list can be an important asset.  When litigation ensues, companies often bring claims against the former employee for trade secret misappropriation.  Therefore, one of the key issues that frequently comes up in such litigation is whether or not the client list constitutes a trade secret.

There are numerous laws in California protecting trade secrets, including the California Uniform Trade Secrets Act, California Civil Code § 3426, et seq.  California Civil Code § 3426.1(d) defines a trade secret as: “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives 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) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The recent ruling in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal. App. 5th 923 (2018) has dealt a blow to employers by making it harder to classify a client list as a trade secret.

The individual defendants in this case were travel nurse recruiters who were former employees of AMN, a staffing agency, who had gone to work for Aya, a competing staffing agency.  They had signed agreements with AMN which included confidentiality clauses and also clauses to the effect that they would not solicit any employee of AMN to leave AMN for a period of one year after their employment ended.  After working for AMN for a period of time, the individual defendants left AMN and went to work for Aya, where they recruited some of the travel nurses they had worked with at AMN.  AMN brought suit on contract and tort based claims.  The trial court found in favor of the defendants and the court of appeals confirmed.

One of the issues that the Court considered was whether the list of travel nurses that AMN was working with constituted a protectable trade secret.   The Court determined that the names and contact information of the travel nurses did not constitute a protectable trade secret.  This decision was based on the following facts, amongst others: (1) travel nurses often work with multiple placement agencies, sometimes simultaneously, (2) travel nurses sometimes disclose the terms of their pay packages to competing recruitment agencies, (3) some travel nurses had their information in the databases of AMN, Aya, and other recruitment agencies simultaneously, (4) some recruiters got to know some of the nurses and were personal friends, (5) travel nurses sometimes contact recruiters directly, and (6) many travel nurses belong to a public social media group.

The Court distinguished ReadyLink Healthcare v. Jerome Cotton, 126 Cal. App. 4th 1006 (2015) on the basis that in ReadyLink, the defendant had used ‘“ReadyLink’s databases containing lists of ReadyLink nurses, employees, and healthcare facility customers, compilations of compensation, employment preferences, contact information, nurse applications and tests, and ReadyLink’s unique per diem program’ to solicit illicitly the plaintiff’s employees.”  Thus, the database that the defendant in ReadyLink used contained significantly more information than client names and contact information.  Therefore, the Court indicated that a client list that contained information developed by the employer and not generally known to the public could still constitute a trade secret.

The AMN decision also highlighted the fact that in order for an employer to bring claims relating to the taking of client information, they must demonstrate that a defendant used the information to the detriment of the employer.  A claim for damages cannot be sustained in a situation where a former employee has possession of client information, but does not use it.  One of the individual defendants, prior to leaving AMN, e-mailed to her personal e-mail address information about several travel nurses she had placed while at ANM.  However, she testified that she did not use any of the information to recruit or place any nurses.  Moreover, AMN did not present any evidence to contradict this.  Therefore, the Court stated that even assuming this list was a protectable trade secret, AMN had not suffered any harm and thus, could not pursue a claim based on the individual defendant’s actions.

Cases decided after AMN have also stood for the proposition that an employer must prove that its client list contains information which it independently developed in order to be protected as a trade secret.  In Calsoft Labs, Inc. v. Panchumarthi, 2019 U.S. Dist. LEXIS 194939, *15 (N.D. Cal. 2019), the Court found that “Plaintiffs’ naked allegation that its customer list constitutes a trade secret does not provide enough factual detail to suggest that it ‘[d]erives independent economic value . . . from not being generally known to the public.’ Cal. Civ. Code § 3426.1(d).  It is not clear whether Plaintiffs’ lists simply contain public information or information already known to Defendants.”

However, subsequent cases also indicate that client lists that contain information beyond names and contact information may be protected as a trade secret.  In Chartwell Staffing Servs. v. Atl. Solutions Grp. Inc., 2019 U.S. Dist. LEXIS 84723 (C.D. Cal. 2019), the Court found that the plaintiff’s “customer list and the information that accompanies the list, such as the key contacts, mark up rates, and pay rates of each customer” was properly classified as a trade secret.

Accordingly, a list containing just the names and contact information of clients will likely not be protectable as a trade secret going forward in California.  However, if a client list also contains additional information, such as pay rates, preferred methods of doing business, methods of operation, key contact personnel, and mark up rates, which the employer has devoted significant resources to developing or determining, a client list will likely still be protectable as a trade secret under California law.  As always, it is still important to properly label client lists as confidential and to treat them as trade secrets in order to increase the likelihood that they will be treated as trade secrets by the courts.

 

Kate Vescera practices business and employment law at The Amin Law Group, Ltd.  She can be reached at kvescera@talglaw.com.