Industry News 5/2/2008

Legal Update: Memorized Customer Lists are Trade Secrets

Legal Update: Memorized Customer Lists are Trade Secrets
By Michael Orlando, attorney at Sheppard Mullin Richter & Hampton LLP

A recent case decided by the Ohio Supreme Court has held that an employee that leaves a company and uses memorized trade secret information (including customer lists) will be held liable for trade secret misappropriation.  The case of Al Minor & Associates, Inc. v. Martin concerned the former employee (Martin) of a consulting firm (Al Minor).  Martin left Al Minor to start his own company and although he took no physical confidential client information with him when he left, he was able to successfully solicit several of Al Minor’s client from information he had memorized.  Al Minor prevailed in its suit against Martin for misappropriation of trade secrets.

Martin argued that (i) a client list memorized by a former employee cannot be the basis for a trade secret violation, (ii) enforcing the judgment against him would restrict his right to compete in business against Al Minor, (iii) Al Minor should not have the right to control the use of this memory, and (iv) if Al Minor wanted to protect its client list it should have executed a confidentiality agreement with Martin. However, in its ruling the Court gave no weight to Martin’s arguments.  The Court first found that the client list fit was confidential and fit within the definition of a trade secret under the Uniform Trade Secret Act (UTSA), and then stated that “whether a client list constitutes a trade secret…does not depend on whether it has been memorized by a former employee.”  The Court further concluded that “[i]t is the information that is protected by the UTSA, regardless of the manner, mode or form in which it is stored.”

Although Ohio law is not controlling in other states, it may be persuasive.  This is especially true since Ohio’s Uniform Trade Secret Act is based on a model law, which to date has been adopted in some form by 46 states, including California.  California courts have already held that memorized information can constitute trade secrets.  The 1997 case of Morlife, Inc. v. Perry held that confidential information does not need to be in writing, but can be stored in an employee’s memory.  The main difference between California and other states on the issue of memorized information is that California courts have to battle with the strong public policy in California disfavoring non-competition that is embodied in California Business and Professions Code Section 16600.  Some jurisdictions follow the line of reasoning embraced in the 1995 case of PepsiCo, Inc. v. Redmond, that allows employers to block former employees from working for competitors because it is argued that confidential information in their memory will inevitably be disclosed.  California courts have rejected the “inevitable disclosure” doctrine of the PepsiCo case, requiring that the trade secret information be used or disclosed before action can be taken.

While the issue of whether a customer list or any other confidential information actually is a “trade secret” is a topic for another article, this Ohio case serves as a good reminder to companies about taking precautions regarding their confidential information.  Many different types of trade secret information can linger in an employee’s memory, such as customer lists, business and strategic plans, financial projections, and research results.  Companies should make sure they are using proper procedures and controls to ensure that trade secrets are not being used by former employees and that new hires are not using trade secret information from a competitor that will subject them to a lawsuit.