Customer Lists: What Reps Need to Know About Using Them When They Leave Their Firms

all Street pundits are predicting more layoffs for 2003. As a result, reps need to know their rights regarding the use of their customer lists if they leave their firms. Although laws vary from state to state, let's examine some general principles.

First, did you sign a contract providing that the customer list is a trade secret that belongs to the firm? If not, you have cleared a major hurdle. If so, you should have a lawyer review the contract language. Note that such a contract is strong evidence of the firm's intent and action to protect its customer list as a trade secret. But such a contract is not dispositive, as the firm still must demonstrate that it has attempted to restrict access to its customer list.

Second, can the firm show that the customer list is sufficiently non-public so as to derive economic value (actual or potential) from not being generally known to other persons who can obtain economic value from its disclosure or use? Three court decisions illustrate this point. In the first, the customer list generally was known to others and could be obtained from the yellow pages of a telephone directory. The court held that this customer list was not so secret as to be protectable. Likewise, a second court decision involved a trade secret that purportedly cost $60,000 to create. Nonetheless, the customer list was derived from a public list purchased at a state office, albeit distilled by geographic region and updated for current contacts and telephone numbers. The court held that the customer list was not protectable. Finally, the third court decision found that the customer list was a protectable trade secret. In that case the business showed that there was no public source for the customer list; the cost of obtaining new customers was $50,000 per month; and the company's salespersons spent about 60 hours per month prospecting to find about 100 new customers.

Third, assuming a protectable trade secret, what has the firm done to protect the secrecy of the trade information? This is a critical requirement. Courts have afforded no trade secret protection to customer lists when they have determined that the company failed to designate material "confidential" or failed to restrict access to the material. Consider also whether the company has policies in place to trace and retrieve copies of documents, and whether employees had to return documents during exit interviews.

Fourth, what kind of "misappropriation" has occurred? Clearly, stealing the customer list is prohibited. But, as one judge noted, departing employees need not undergo a frontal lobotomy to remove their memories. Hence, and as a practical matter, absent intentional, wholesale memorizing and later, detailed recording, reps are allowed to recall customer identities.

Fifth, did the rep sign a contract with the former firm which contains a "non-competition" provision or which contains a "non-solicitation" provision? Non-competition agreements restrict competition with the former firm. Non-solicitation agreements restrict or prohibit contact with customers of the former firm. When enforced by a court of law, both hinder the ability of a rep effectively to utilize the customer lists, even if not protected as a trade secret. However, generally courts disfavor non-competition agreements. Even when courts enforce them, they ensure that their geographic and temporal restrictions are narrowly drawn. On the other hand, courts generally enforce non-solicitation agreements.

Sixth and finally, did the rep know or do business with any of the customers at a previous firm? If so, then the complaining firm does not have a proprietary interest in those customers. Accordingly, no employment agreement or action to protect the secrecy of those customer names will prevent a rep from continuing to do business with those customers.

Reps may be able to utilize their customer lists. But consult an attorney before attempting to do so.