All businesses have customers. Many maintain an electronic database of their customers that includes such things as contact information, pricing and purchasing information, and other data that has been collected through time and expense. This database can be an important asset to the business and provide it with a competitive advantage in the marketplace. As such, a majority view this information as “confidential” and believe it constitutes a “trade secret” and thus is protected from unauthorized disclosure under the law.
Not all customer information, however, may qualify as a trade secret under Delaware law. In addition, many businesses fail to take steps to protect confidential information such as requiring employees to enter into non-disclosure agreements. Unfortunately, businesses frequently learn this when it is too late to do anything about it. The time to address these issues is before such information is removed by a departing employee or other third party.
All employers should require employees who have access to confidential information and trade secrets to sign confidentiality or non-disclosure agreements. In Delaware, a company may legally require employees who have access to such information to sign such an agreement in order to keep their job. If drafted properly, the agreement can provide the business with contractual remedies against the former employee, including emergency injunctive relief from a court and a potential award of damages. Importantly, in appropriate circumstances, Delaware courts will enforce a provision in a confidentiality agreement providing that an individual who violates its terms is subject to paying the company’s attorneys’ fees and costs in bringing enforcement action.
In the absence of a binding confidentiality agreement, a company usually must look to applicable state law to try to protect its customer information. Delaware, like most states, has enacted the Uniform Trade Secrets Act which provides businesses with legal protection for trade secret information even in the absence of contractual agreements with employees. The statutory definition for a trade secret is “information” that “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.” 6 Del. C. § 2001(4).
Customer lists and compilations may qualify as protected secrets trade secrets if they derived independent economic value by virtue of not being generally known to and not being readily ascertainable by proper means by others. For instance, if a business were to collect and store information about its customers’ purchasing trends and habits which gives it an advantage in the marketplace, then this information could qualify as a trade secret.
The Court of Chancery in Delaware has granted trade secret status to customer lists in various situations. Nucar Consulting, Inc. v. Doyle, (Del. Ch. Apr. 5, 2005) (observing that “[c]ustomer lists are ‘precisely the type of business information which is regularly accorded trade secret status.’”); Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, (Del. Ch. Jan. 29, 2010) (finding certain customer lists “held independent economic value” and constituted protected trade secrets, observing that the “customer lists . . . contain[ed] important, nonpublic information, including the names, addresses, and phone numbers of contacts at each organization as well as the types and volume of product purchased by each customer. In the fundraising industry, such information could take months or years–and significant expense–to accumulate.”).
It is important to remember that in order to be considered a trade secret the information must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Although this does not necessarily require signed confidentiality agreements, a company must show that it took “reasonable efforts” to maintain the secrecy of this information, such as adopting specific policies to prevent disclosure of information to outsiders. Wayman Fire Prot. v. Premium Fire & Sec., (Del. Ch. Mar. 5, 2014). Other reasonable methods to maintain the secrecy of such information include:
· Periodic communications to employees explaining the company’s confidentiality policies
· Labeling the information as “confidential” and keeping it in a secured location
· Limiting employee access to confidential information on a need to know basis
· Restricting access to electronic data by requiring a user name and password
· Shredding or destroying outdated confidential information
· Requiring a confidentiality agreement before disclosing information to a third party
· Reminding departing employees (in writing) of their ongoing confidentiality obligations
Taking the above steps does not guaranty that a customer list will be classified as a trade secret under Delaware law. These steps will, however, show that the company has taken reasonable efforts to maintain the secrecy of the information, thereby increasing the protections available under the law. It goes without saying that these measures must be implemented before – not after – a dispute arises.