A California appeals court recently reversed a trial verdict that had found trade secrets in an auction house’s customer information. The case is notable because it demonstrates when customer information falls short of warranting trade-secret protection.
The case McCormack Auction Company, Inc. v. Hanks involved a now-defunct auction house known as the McCormack Auction Company. Operating in southern California, McCormack handled large-scale auctions, both online and in person. It had acquired several repeat customers during its 30-plus years of operation, including bankruptcy trustees, community colleges, and public utilities. McCormack maintained its customer information in electronic databases on its computers. As an advertising tactic, McCormack identified on its website some satisfied customers that it had served in the past, but it did not display the customers’ contact information.
In 2007, McCormack hired Jason Hanks (the defendant) as an IT employee. During his employment, Hanks had access to the auction house’s computers and customer information, including client contacts, cell numbers, and email addresses. In 2009 McCormack had Hanks sign an employment agreement containing a confidentiality provision. The provision prohibited Hanks from disclosing “confidential information,” which included customer lists as part of its definition.
Seemingly on amicable terms, Hanks left McCormack in October 2011. In departing the auction house, he did not take any customer lists with him, nor did he take the computer that McCormack had issued him during his employment. But then, a month later, Hanks started his own auction house as a competitor to McCormack.
Evidence at trial revealed that Hanks solicited customers for his new business by advertising in the local newspaper and several social media outlets. But he also reached out directly to customers he knew from his days working at McCormack. Though he recalled the identity of some customers from his McCormack days, he searched for and located their contact information by using mediums like Google and LinkedIn.
McCormack sued Hanks claiming that the customer information Hanks used to solicit his customers was McCormack’s trade secret, and that Hanks had misappropriated that secret for his own gain. After a bench trial, the trial court sided with McCormack. It concluded that although the identities of McCormack’s customers were not a trade secret, the “the identity of McComack’s client contact persons and information” were. Hanks appealed, and last week the California appeals court reversed.
The Appeals Court’s Reversal
The issue on appeal was whether McCormack’s customer information—that is, the identities of its customer contacts and their contact information—were protected trade secrets under the Uniform Trade Secrets Act. Despite applying a deferential review standard to the trial court’s decision, the appeals court held that there was insufficient evidence to conclude that McCormack’s customer information was a trade secret.
The appeals court began its analysis by defining what a trade secret is. A trade secret, under California law which applies the Uniform Trade Secrets Act, is information that “(1) [d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” If through legal means, a business competitor can easily discover the information on its own, then it is not a trade secret.
Here, the appeals court determined that there was “no substantial evidence” to support the trial court’s finding that McCormack’s customer information was a trade secret. Did the customer information derive economic value from not being generally known? No, the appeals court said, for the information was, in fact, generally known. Evidence showed that the identities and contact information of many McCormack customers were available on the internet and could be found through simple Google searches. “[T]hese contacts could not be trade secrets as a matter of law,” the court explained, “because they are generally known and McCormack could not take reasonable steps to keep the information secret.”
McCormack further failed to exert reasonable efforts to protect the information’s secrecy. Although McCormack had Hanks agree to a confidentiality provision—a provision which included customer lists as “confidential”—it posted the identity of its customers in website advertisements. A confidentiality agreement does not transform otherwise public information into a trade secret, the court said. With many clients posted on its website and their contact information discoverable through publicly-available means, the customer information derived no economic value from being secret; it was no secret at all.
The court also explained that McCormack’s customer information gave it little, if any, competitive edge because a competitor could easily obtain similar customer information. In the open market, the barriers to the customer information were low. There was no evidence showing that McCormack expended “considerable time and money to discover the identity of [its] client contacts or their information.” Thus a competitor could build a similar customer base with limited investment. In sum, the court concluded that the customer information lacked economic value because any competitor could easily obtain it.
McCormack is a cautionary tale. To be sure, under appropriate circumstances customer information may constitute a trade secret. The information in McCormack, however, was neither secret, reasonably protected by its owner, nor the product of significant financial investment. For those companies hoping that their customer information enjoys the protection of trade secret law, McCormack provides demonstrable guidance: invest in your customer information and invest in keeping specific customer information having economic value a secret.