Customer Lists: Trade Secret or Not So Much?

I am frequently confronted with a common, reoccurring problem – what to do about former employees’ solicitation of a client’s customers.

To my clients, a former employee’s solicitation of the client’s customers is nothing but fundamentally wrong. After all, customers are the lifeblood of a business, often times earned only after years of attention, diligence and significant expense. So, it's understandable that customer lists come to be viewed as proprietary. 

Clearly customer lists can be protected secrets, but more often than not they are actually found not to be secret at all. Unfortunately for many, efforts to safeguard customer lists begin in earnest only after the proverbial walls have been breached, and by then it can be much too late.

Let’s disabuse ourselves from a few misconceptions. Customer lists are not viewed by the courts as inherently secret. Michigan law protects legitimate trade secrets under MCL 445.1901 et seqUnder MCL 445.1902(d), a “trade secret” is defined as:

• ...information, including a formula, pattern, compilation, program, device, method, technique, or process, that is both of the following:

(i) Derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from its disclosure or use.

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

Under this definition, a customer list can be a legitimate trade secret if the list fits the §1902(d) definition. The court will simply ask, is the list actually treated within the company as a secret?

The plaintiff in the case of Hayes-Albion v Kuberski, 421 Mich 170; 364 NW2d 609 (1984), sought to protect the identity of its customers as a trade secret. In that case, there was no evidence to show that the defendant actually stole a customer list that the plaintiff had kept as a business secret.  

Rather, the defendant had kept the names and addresses of the plaintiff’s customers in a personal memo book. The Michigan Supreme Court held that “there is nothing improper in an employee establishing his own business and communicating with customers for whom he had formerly done work in his previous employment.”

Similarly, other courts have found that former employees who simply work from memory are no different than the defendant in Hayes-Albion. The moral here is that all customer lists are important, but that does not make them secret if the customer identities are commonly known and used in day-to-day business operations.

Second, mere customer solicitation by a former employee may not be wrongful.  Borrowing from the notion that customer lists are actually proprietary, some clients have insisted that the act of solicitation amounts to stealing. The courts may, however, disagree.

“Conversion, both at common law and under MCL 600.2919a(a), is defined as ‘any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.’” The act of dominion is wrongful when it is inconsistent with the ownership rights of someone else. The act of soliciting, however, is not the same as exercising “dominion.”  

Soliciting involves simply asking potential clients if they are interested in doing business. It is this permissive aspect of soliciting that is inconsistent with the concept of ownership and inconsistent with the claim of conversion.

Third, clients also often claim that the attack on its customer base must be some type of actionable interference. Sometimes it is, but not always. The elements of tortious interference with a business relationship or expectancy are:

(1) the existence of a valid business relationship or expectancy that is not necessarily predicated on an enforceable contract,

(2) knowledge of the relationship or expectancy on the part of the defendant,

(3) an intentional interference by the defendant inducing or causing a breach or termination of the relationship or expectancy, and

(4) resulting damage.

Additionally, a plaintiff must prove that the “intentional interference” was accomplished through a per se wrongful act or the doing of a lawful act with malice and unjustified in the law for purposes of invading the plaintiff’s business relationship with another. A “per se wrongful act” is an act that is inherently wrongful or cannot be justified under any circumstances.

As you can begin to see, the mere act of soliciting someone else’s customers may not be deemed wrongful and certainly may not be considered per se wrongful under any circumstance. In addition, even if the act of soliciting a customer could be viewed per se as wrongful, unless a customer could actually be shown to have crossed over to the other side, such that a damage claim could be made because of the per se wrongful solicitation, a cause of action may simply not exist.

Finally, clients will often insist that lacking all else, the unchecked solicitation of its hard earned customer base must violate some rules a fair competition. Indeed, Michigan does follow the general law of unfair competition.

Originally, the law of unfair competition dealt with the palming off of one’s goods as those of another. Later, unfair competition was extended to outlawing “parasitism” because one cannot misappropriate a competitor’s skill, expenditures and labor. Today, the law governing “unfair competition” is broad and flexible, the essence of which is ensuring “fair play” in the business world.

That said, you will typically need more than mere solicitation to show unfair competition. General allegations concerning the wrongful solicitation of one’s clients and prospective clients may simply not be enough.

Indeed, in the eyes of the courts there is generally nothing wrong about soliciting another’s customers, because customers are not commodities. Subject to qualifications against fraud, misappropriation of trade secrets and covenants not to compete, a former employee may solicit the business of the former employer’s customers.

So what to do? The answer is plan ahead. If customer identities are truly secret, treat them as such. If you are not sure what that entails, ask a lawyer. 

If you have employees with common access to customer names, as well as other important information about the customer’s business needs, protect those legitimate business interests with a reasonable confidentiality and non-solicitation agreement with your employees. If you are not sure what that entails, ask a lawyer. 

Businesses are not helpless when it comes to potentially damaging customer solicitations by former employees, but the law helps those who first help themselves!

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