Whether big or small, a customer base is vitally important to any business. Depending on the size and sophistication of a business, a customer list may be kept in one's head, on index cards, in a book or on a computer. Regardless of how that customer list is kept, a business wants to take steps to protect that customer list from being disclosed to people outside of the company, especially its competitors. And by taking those steps, a business may be able to qualify its customer list as a trade secret, which would allow it to take advantage of certain legal protections, such as those offered by the Uniform Trade Secret Act. This Act is an important tool in preventing third parties from obtaining and using a business's customer list.
Just because a company believes that its customer list is a trade secret, does not mean that it is. Whether a customer list is a trade secret reflects a balancing of conflicting social and economic interests. In determining whether a customer list is a trade secret, courts typically look to the following factors:
- Does your company gain a competitive advantage from its customer list because its customers are not generally known to others?
- Does your company take affirmative steps to keep others from gaining access to its customer list?
- To what extent is the information in the customer list known to others outside the company?
- To what extent is the information in the customer list known to people within the company?
- How valuable is the customer list to competitors?
- How much time, effort or money did it take to develop the customer list?
- How easily could a third party duplicate the customer list?
While no one of the above seven factors is determinative of whether a customer list qualifies as a trade secret, the primary focus is whether the customers are not generally known to competitors and whether the company has taken the necessary steps to maintain the confidentiality of the customer list.
Generally, customer lists that are developed over time with considerable effort and expense are given more protection provided that the company has taken the appropriate steps to maintain the confidentiality of the customer list. Courts use a sliding scale of confidentiality, holding larger companies to more rigorous standards of confidentiality than smaller companies. Regardless of the size of a company, at a minimum, all companies should take the following steps to protect their customer lists:
- Have employees sign confidentiality/non-disclosure agreements;
- Advise employees that the customer list is confidential;
- Label the customer list "Confidential" or "Trade Secret";
- Keep the customer list under lock and key and/or on a password protected computer. If you keep the customer list on a computer, make sure that each employee uses a different password to access the computer;
- Restrict access to the customer list to those that really need access;
- Maintain as few copies of the customer list as possible; and
- Shred or delete old customer lists before they are thrown away.
In addition, companies that have large sales forces should consider implementing the following additional procedures to maintain the confidentiality of customer lists:
- Instead of having just one combined customer list, have separate customer lists for each sales territory. This will prevent employees from having access to the entire customer list, which will help guard against misappropriation of the entire customer list.
- Only allow sales teams to access the customer list for that sales teams' territory.
- If the customer list is stored on a computer, give each member of the sales team his/her own password and identification number that will allow him/her to access the relevant customer list or the relevant portion of the customer list. This will allow a business to limit who can access the customer list.
- When a sales person accesses the customer list through the computer, have a confidentiality reminder statement pop-up on the computer screen before the customer list can be accessed.
- Make sure the Employee Handbook contains a confidentiality provision that explicitly states that the customer list is considered confidential information and have all employees acknowledge receipt of the Employee Handbook.
- When a member of a sales team leaves or changes territory, eliminate or change that person's access to the customer lists.
Despite implementing the steps above, a customer list may not qualify as a trade secret. If a customer list is generally known or understood within an industry, it will not qualify as a trade secret. If a customer list is derived from public sources and did not require a lot of time and effort to compile, cull or analyze, it may not qualify as a trade secret. However, even if a customer list does not qualify as a trade secret, implementing the steps above will still help a company protect its customer list and decrease the likelihood that its customer list will come into the hands of its competitors.