In a recent opinion, the Arizona Court of Appeals reaffirms that "only those
secrets 'affording a demonstrable competitive advantage' will qualify" as a
protected trade secret
It is most business owners' nightmare: An employee with
access to customer lists leaves the company to join a competitor, or to go into
business for himself, and begins soliciting his ex-employer's customers. With
its future possibly at stake, what trade secret protection is available to the
As the recent Arizona Court of Appeals ruling in
Calisi v. United Financial
Services confirms, the law affords little protection if the former
employer has not taken appropriate steps to ensure that its customer list
qualifies as a "trade secret."
For three years, Michael Calisi, CPA, was an employee in a Phoenix-area office
of United Financial Services (UFS), a multi-state firm that provides tax return
preparation, financial planning and other professional services.
On January 28, 2009, Calisi left UFS (whether he resigned or was fired was a
matter of dispute) and became the in-house CPA at an Arizona mortgage company
owned by Daryle Messina. For much of the time of Calisi's employment, UFS
maintained a mutual referral arrangement with Messina's company. Five days after
leaving UFS, Messina's company sent out a mass email to more than 2,000 clients
to announce Calisi's arrival and to offer discounted tax preparation services.
Among the recipients of the email were some clients of UFS.
Later, Calisi left Messina and started a tax services firm. Calisi also sued UFS
for unpaid commissions and other compensation. UFS countersued, alleging various
claims against Calisi, including misappropriation of trade secrets related to
his alleged use of UFS's customer list.
Before trial, the court ordered Calisi to produce a list of former UFS clients
who had moved their business from UFS to Calisi's firm. The list consisted of 48
clients who had paid Calisi approximately $50,000 after he left UFS. At trial,
Calisi testified that he had directly worked with several of them while he was
After a three-day bench trial, the court ordered UFS to pay to Calisi the
improperly withheld compensation totaling almost $44,000. At the same time, the
court found that Calisi had misappropriated UFS's customer list and ordered him
to pay UFS $51,600 on UFS's trade secret claim.
Calisi appealed the trial court's order on the trade secret claim, arguing that
UFS failed to present any evidence that he had misappropriated a legally
enforceable trade secret, i.e., UFS's customer list.
The Court of Appeals agreed with Calisi. In reversing the trial court's ruling
on the trade secret issue, and noting that making such a determination "is a
mixed question of law and fact," the Court provided a useful set of criteria for
determining when and whether the third-party use of a customer list constitutes
misappropriation of trade secrets. Here are some of the highlights:
Under the Uniform Trade Secrets Act (UTSA), which Arizona has adopted, a "trade
secret" is information that:
"derives economic value … from not being generally known to, and not being
readily ascertainable by … other persons who can obtain economic value from its
disclosure or use;" and
"is the subject of [reasonable] efforts … to
maintain its secrecy."
Stated more simply, the subject matter must be a secret, and the owner must have
tried to keep it a secret.
Specific to customer lists, the Court cited several factors to determine whether
a customer list qualifies as a trade secret.
A customer list may be entitled to trade
secret protection when it represents a "selective accumulation of detailed,
valuable information about customers – such as their particular needs,
preferences, or characteristics – that naturally 'would not occur to persons
in the trade or business.'"
In other words, a qualifying customer list must be something more than a list of
names, addresses and phone numbers. It must contain information that a company
compiles by virtue of its relationship with the customer, not simply by
gathering required contact information or purchasing a commercial list of
prospects that meet the profile of the company's customers.
A customer list may also be entitled to
trade secret protection if the company that owns the list shows that it
compiled the list by "expending substantial efforts to identify and
cultivate its customer base, such that it would be difficult for a
competitor to acquire or duplicate the same information."
A related factor is whether the information
contained in the customer list "derives independent economic value from its
secrecy, and gives the holder of the list a demonstrable competitive
advantage over others in the industry."
In addition, courts have considered the extent to which the company divulged
its customer list externally and internally, i.e., to people outside of its
business as well as to its own employees. If the company does not treat the list
as confidential, then neither will the courts.
In the Calisi case, UFS's claim for trade secret protection was hamstrung by the
fact that, at trial, UFS did not present evidence actually describing the
confidential customer information it argued constituted a trade secret. UFS
attempted to cross-sell financial products to its tax clients by using
information gleaned from their tax returns, but the company failed to show that
it had actually acquired any specialized, valuable information about its
customers, such as information concerning their financial requirements, tax
strategies, investment objectives, and risk and investment preferences, that
could give rise to trade secret protection under the law.
The Court noted that the record was "completely silent" about "the cost, time,
frequency and success rate" of UFS's advertising and marketing methods. The
Court therefore found that, because UFS did not explain what unique and original
information it had acquired in the course of its business, or show it had
invested substantial time and effort to acquire information unknown to its
competitors, it failed to meet its burden of proving its customer lists were a
Citing its 1999 ruling in Enterprise Leasing Co. of
Phoenix v. Ehmke, the Court reaffirmed that "not every commercial secret
will be a trade secret; only those secrets 'affording a demonstrable competitive
advantage' will qualify."
Further undermining UFS's position was its failure to demonstrate that it had
actually treated its customer lists as a secret. As evidence of the lack of
secrecy, Messina had testified at trial that he knew the identity of several UFS
clients, in part through the years-long mutual referral arrangement that his
company and UFS maintained. Their joint marketing efforts resulted in an overlap
in clientele, and he had included these overlapping clients in the mass email he
sent out announcing Calisi's association with his company. Further, at trial
Calisi testified that Messina had "flagged" customers in his database who were
also UFS clients. Thus, Calisi could have readily and independently ascertained
UFS clients through Messina.
The Court noted, "although secrecy does not need to be
absolute, the claimant must nevertheless show 'it made reasonable efforts to
maintain the secrecy of the information such as to ensure that it would be
difficult for others to discover the information without using improper means.'"
To gain trade secret protection for its customer list, a company would be
prudent in taking these cues from the Court's Calisi ruling:
Include in the customer list more than mere contact information. Other fields
might include types of services provided, notes from client meetings and phone
calls, billing histories, reminders about client preferences regarding how they
are to be served and communicated with, notes about plans for future products
and services to be purchased, etc.
Gathering the additional information should be the result of an intentional
process that goes beyond basic, routine information gathering.
Maintain records of the marketing methods used to build a client list as well
as the success rate of those methods. By having a record of the expense and
effort that goes into building a client list, a company will be in a better
position to protect that list as a trade secret.
Communicate to all employees the secret nature of client information and
ensure that only those employees requiring the information to perform their
functions are granted access. Such communication should be included in the
employee manual, new employee training, periodic reminders, and continuing
Vendors and consultants should be required to sign an acknowledgement
regarding the confidentiality of customer information to which they may be