Are customer identities a trade secret?

, ,

When employees quit, can they take a customer list? Can they open a new business and target their marketing toward the customers of their former employer? What control does a business owner/employer have over records which reveal the identity and purchasing habits of customers?

These questions were the subject of a case that was recently decided by the Pennsylvania Superior Court. The parties involved were a beauty salon owner and a group of former employees who quit and opened a rival salon. Claiming that the employees took customer lists on index cards and computer disks, the salon owner sued to get the lists back and to prevent the employees from servicing those customers on the lists. She argued that customer identities and their styling histories and preferences were trade secrets of her business and were entitled to legal protection.

Both the Court of Common Pleas and the Superior Court disagreed. There was no evidence that the employees took or stole the customer lists, and the employees claimed that they knew their customers well, remembered their names, and solicited their patronage by looking them up in the telephone directory or by marketing their new business to them by word of mouth.

The court stated that while business owners have the right to be protected against unfair competition, employees are absolutely entitled to quit, establish new businesses, and service old customers. The tendency of customers to follow former employees was described by the court as “inevitable.” Given the loyalty customers develop for service providers like plumbers, travel agents, hair stylists, and others, prohibiting employees from servicing customers was deemed impractical. Furthermore, an injunction that prohibited solicitation of the customers in question was unlikely to inspire those customers to return to the former employer’s salon.

While customer lists are valuable assets and may be considered confidential, employees are not presumed to have stolen their employer’s secrets or assets simply because they later do business with the employer’s customers. A departing employee should never take a customer list or any other documents that are not regularly shared with the public and that could fairly be described as confidential to the employer’s business. Employers who wish to prevent competition from former employees can best do so through a written employment contract. Such contracts must be carefully drafted, generally at the time of hiring, and must not unduly restrain the employee’s entitlement to pursue a livelihood. If properly drafted, they are enforceable and can be a valuable safeguard for a wise employer.