Tag: customer list

Marital Privilege Argument Premature in Insurance Broker’s Trade Secrets Case Against Former Agent – IL ND

The district court in Cornerstone Assurance Group v. Harrison discusses the Federal court plausibility standard for pleadings and considers whether Illinois’s marital privilege statute defeats an insurance broker’s trade secrets suit against a former employee.

The defendant signed an employment contract that contained a confidentiality provision covering plaintiff’s financial information, marketing plans, client leads, prospects, and lists along with fee schedules, and computer software.  Plaintiff paid defendant $1,000 not to disclose plaintiff’s confidential information.

The plaintiff alleged the defendant disclosed the information – including a protected client list and private medical data – to her husband, who worked for a competing broker.  The plaintiff alleged the competitor used that information to recruit plaintiff’s employees.  The defendant moved to dismiss the plaintiff’s claims under Rule 12(b)(6).

Trade Secrets Claim

Denying the motion, the court first looked to the pleading requirements of a claim under the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq.To prevail on a claim for misappropriation of a trade secret under the [ITSA], the plaintiff must demonstrate (1) the information at issue was a trade secret, (2) that the information was misappropriated, and (3) that it was used in the defendant’s business.

ITSA defines a trade secret as information, data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that is (1) sufficiently secret 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; and (20 is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILCS 1065/2(d)

The law does not confer trade secret status for information “generally known or understood within an industry even if not to the public at large.”  A plaintiff also foregoes trade secret protection where it fails to take affirmative measures to keep others from using the proprietary information.  In addition to these statutory guideposts, Illinois case law considers several additional factors that inform the trade secrets analysis.  These include: (1) the extent to which the information is known outside of the plaintiff s business; (2) the extent to which the information is known by employees and others involved in the plaintiff s business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information; (4) the value of the information to the plaintiff s business and to its competitors; (5) the amount of time, effort and money expended by the plaintiff in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.  No one factor predominates but the more factors present increases plaintiff’s chances of establishing a trade secret.

The Court held the plaintiff alleged sufficient facts to show that some of the information allegedly misappropriated was a trade secret.  Under Illinois law, a list of actual or potential customers as well as insurance claims data can qualify as a trade secret under certain facts.  The plaintiff’s Complaint allegations that it spent several years developing the confidential data at issue and that it wasn’t accessible to others satisfied the pleading requirements for a valid trade secrets case.

Marital Communications Privilege

The Court held it was too soon to address Defendant’s argument that the marital privilege statute negated Plaintiff’s claims.  The marital privilege attaches to husband and wife communications.  But a spouse’s communication to a third party waives the privilege and a litigant is free to use that communication against its adversary.  The marital privilege also doesn’t extend to subsequent uses of protected communication.  See 735 ILCS 5/8-801 (husband and wife may not testify to communication or admission made by either of them to each other.)

While the court opted to table the privilege issue until after discovery, the Court noted the plaintiff alleged the defendant disclosed trade secrets not only to her husband but to a third party – the husband’s employer. Since the Complaint established it was possible the defendant shared information with someone other than her husband, the marital privilege didn’t bar plaintiff’s claims at the case’s pleading stage.

Afterwords

This case represents a court flexibly applying Rule 12’s plausibility standard in the trade secrets context.  Solidifying the proposition that a plaintiff doesn’t have to plead evidence or try its case at the pleading stage, the Court makes clear that disclosure of a trade secret to even a single competitor can satisfy the misappropriation prong of a trade secrets claim.  Harrison also shows the marital communications privilege won’t apply to information that escapes a husband-wife union.  A complaint’s plausible allegation that protected information went beyond the confines of the marital union nullifies the marital privilege.

‘Helpful’ Client List Not Secret Enough to Merit Trade Secret Injunction – IL Court

Customer lists are common topics of trade secrets litigation.  A typical fact pattern: Company A sues Ex-employee B who joined or started a competitor and is contacting company A’s clients.  Company A argues that its customer list is secret and only known by Ex-employee B through his prior association with Company A.

Whether such a claim has legal legs depends mainly on whether A’s customer list qualifies for trade secret protection and secondarily on whether the sued employee signed a noncompete or nondisclosure contract. (In my experience, that’s usually the case.)  If the court deems the list secret enough, the claim may win.  If the court says the opposite, the trade secrets claim loses.

Novamed v. Universal Quality Solutions, 2016 IL App (1st) 152673-U, is a recent Illinois case addressing the quality and quantity of proof a trade secrets plaintiff must offer at an injunction hearing to prevent a former employee from using his ex-employer’s customer data to compete with the employer.

The plaintiff pipette (a syringe used in medical labs) company sued to stop two former sales agents who joined one of plaintiff’s rivals.  Both salesmen signed restrictive covenants that prevented them from competing with plaintiff or contacting plaintiff’s customers for a 2.5 year period and that geographically spanned much of the Midwest.  The trial court denied plaintiff’s application for injunctive relief on the basis that the plaintiff failed to establish a protectable interest in its clients.

Result: Trial court’s judgment affirmed.  While plaintiff’s customer list is “helpful” in marketing plaintiff’s services, it does not rise to the level of a protectable trade secret.

Rules/Reasoning:

Despite offering testimony that its customer list was the culmination of over two-decades of arduous development, the court still decided in the ex-sales employees’ favor.  For a court to issue a preliminary injunction, Illinois requires the plaintiff to show: (1) it possesses a clear right or interest that needs protection; (2) no adequate remedy at law exists, (3) irreparable harm will result if the injunction is not granted, and (4) there is a likelihood of success on the merits of the case (plaintiff is likely to win, i.e.)

A restrictive covenant – be it a noncompete, nondisclosure or nonsolicitation clause – will be upheld if is a “reasonable restraint” and is supported by consideration.  To determine whether a restrictive covenant is enforceable, it must (1) be no greater than is required to protect a legitimate business interest of the employer, (2) not impose undue hardship on the employee, and (3) not be injurious to the public.  (¶ 35)

The legitimate business interest question (element (1) above) distills to a fact-based inquiry where the court looks at (a) whether the employee tried to use confidential information for his own benefit and (b) whether the employer has near-permanent relationships with its customers.

Here, there was no near-permanent relationship between the plaintiff and its clients.  Both defendants testified that many of plaintiff’s customers simultaneously use competing pipette vendors.  The court also noted that plaintiff did not have any contracts with its customers and had to continually solicit clients to do business with it.

The court then pointed out that a customer list generally is not considered confidential where it can be duplicated or pieced together by cross-referencing telephone directories, the Internet, where the customers use competitors at the same time and customer names are generally known in a given industry.  According to the Court, “[i]f the information can be [obtained] by calling the company and asking, it is not protectable confidential information.” (¶ 40)

Since the injunction hearing evidence showed that plaintiff’s pipettes were typically used by universities, hospitals and research labs, the universe of plaintiff’s existing and prospective customers was well-defined and known to competitors.

Next, the court rejected plaintiff’s argument that it had a protectable interest because of the training it invested into the defendants; making them highly skilled workers. The court credited evidence at the hearing that it only takes a few days to teach someone how to clean a pipette and all pipette businesses use the same servicing method.  These factors weighed against trade secret protection attaching to the plaintiff’s customers.

Lastly, the court found that regardless of whether defendants were highly skilled workers, preventing defendants from working would be an undue hardship in that they would have to move out of the Midwest to earn a livelihood in their chosen field.

Afterwords:

This case provides a useful summary of what a plaintiff must show to establish a protectable business interest in its clients.  If the plaintiff cannot show that the customer identities are near-permanent, that they invested time and money in highly skilled workers or that customer names are not discoverable through basic research efforts (phone directories, Google search, etc.), a trade secrets claim based on ex-employee’s use of plaintiff’s customer list will fail.