Home
Insights
Newsletter
2019
Protection of Confidential Customer Information

Protection of Confidential Customer Information

Intellectual Property Update

10.07.2019

Protection of Confidential Customer Information

Can an employee take customers and customer information when she moves to a new employer? If the customers followed the employee when she was originally hired, then they probably can (and will) follow that employee to the next job. But if the employer paid the employee to develop confidential customer relationships, the law may protect that investment by allowing the employer a chance to introduce the customers to a replacement employee.

State law and statutes provides some protection for customer information that is confidential, but not qualified as a trade secret. Stronger protection is available for information that meets the definition of a trade secret. However, contract terms in the form of nondisclosure or confidentiality agreements best protect the employer’s investment in customer relationships.

I. Good –Protecting Confidential Information That Is Not a Trade Secret

Merely Confidential Information. A trade secret must be subject to “reasonable” efforts to maintain confidentiality; consequently, not all confidential information will qualify as a trade secret. Information may in fact remain confidential even if there has been only minimal effort to prevent public disclosure. As long as the employee understands the employer considers the information confidential, “merely confidential” customer information may still be protected from disclosure by tort law. In Nevada and Arizona state law may protect employers from misappropriation of confidential information that is not a trade secret¹.

Fiduciary Duties Regarding Confidentiality. An employee has a fiduciary duty of confidentiality that survives employment termination and extends to information that does not satisfy the formal statutory requirements for protection as a trade secret. An employee’s duty of confidentiality prevents disclosure or use of knowledge confidentially acquired from a former employer.²

Fiduciary duties extend beyond formal employment relationships to agency relationships. Generally, an agent may not use its principal’s confidential information.

“An agent is not free to use or disclose a principal’s trade secrets or other confidential information whether the agent retains a physical record of them or retains them in the agent’s memory. If information is otherwise a trade secret or confidential, the means by which an agent appropriates it for later use or disclosure should be irrelevant.” ³

A former employer or principal can invoke this fiduciary duty to protect against use or disclosure of confidential customer information by a former employee or agent.

Implied Contract Duties Regarding Confidentiality. Disclosure of customer information intended to be confidential is “inconsistent with” the employer’s reasonable expectations and deprives the employer of the “expected benefits” of the employment relationship. Courts in Nevada and Arizona recognize the implied duty of good faith and fair dealing, which means “neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship.” ⁴

Thus, disclosure of customer information may violate an obligation of good faith implied in a written employment contract that does not explicitly discuss confidentiality.

II. Better — Protecting Customer Information as Trade Secrets

A trade secret is information that (a) is confidential (b) is subject to “reasonable” efforts to maintain confidentiality and (c) “derives independent economic value” because it is confidential. A.R.S. §44-401(4); N.R.S. §600A.030(5). A “trade secret may consist of a compilation of information that is continuously used or has the potential to be used in one’s business and that gives one an opportunity to obtain an advantage over competitors who do not know of or use it.”⁵ If confidential information rises to the level of a trade secret, an employer seeking to protect the information may invoke relief under the Trade Secrets Act.

Cases in Arizona and Nevada protect customer lists as trade secrets.⁶ “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.’”⁷

An employer can sue a former employee for misappropriation of trade secret customer information used or disclosed in violation of the state trade secret statute. Indeed, a Nevada statute specifically states an employer owns trade secrets developed by an employee in the scope of employment and related directly to work the employee performed. N.R.S. §600.500.

The trade secret statutes specifically provide for damages (including a reasonable royalty) and in some cases for recovery of the attorneys’ fees incurred in litigating the issue.

III. Best – Protecting Customer Information by Contract

“A duty of confidence … can be created by an express promise of confidentiality made by the recipient of the disclosure.”⁸ Contract promises coexist with and reinforce the protection provided by the Trade Secrets Act. A.R.S. §44-407(B)(1); N.R.S. §600A.090(2)(a). A contract promise to treat information as confidential is referred to as a “confidentiality” or “nondisclosure” agreement — a form of “restrictive covenant” (because it restricts what the promisor can do).⁹

The leading trade secret treatise explains the benefit of a contract provision protecting a customer list.

“Whereas a clear majority rule cannot be stated as to the status of customer lists in the absence of restrictive covenants, it is almost universal that a customer list which has some basis for a claim of secrecy can be protected by a restrictive covenant.”¹⁰

Indeed, properly drafted restrictive covenants prohibiting use or disclosure of proprietary information may broadly protect both confidential information and trade secrets.¹¹ A Nevada statute expressly allows a contract to prohibit “disclosing any trade secrets, . . . lists of customers, . . . or confidential information learned or obtained during the course of his or her employment.” N.R.S. §613.200(4)(b).

A restrictive covenant must be “reasonable” and not unduly restrict the promisor’s conduct. A confidentiality agreement is reasonable when it prevents “competitive use, for a time, of information or relationships which pertain peculiarly to the employer and which the employee acquired in the course of the employment.”¹² A contract restriction against using confidential information is reasonable for as long as the information remains a trade secret.¹³ Confidential information that does not satisfy the standard for a trade secret is not entitled to “protection of indefinite duration” but still may be protected long enough to allow the employer to hire and train a replacement for the departing employee and seek to maintain the customer relationships.¹⁴

An overreaching restrictive covenant will be void; so it is critical to draft appropriate contract language carefully.¹⁵ At least one Nevada case found a restrictive covenant drafted “without professional assistance” was unreasonable and therefore unenforceable.¹⁶

Conclusion

For confidential information that does not qualify as a trade secret, a narrowly written contract provision (for example, a confidentiality agreement) supplements tort claims protecting that information. For trade secrets a narrowly written confidentiality agreement enhances protection under the trade secret statute. Whether a customer list is a trade secret or merely confidential information, a properly drafted contract provision can help protect an employer’s investment in customer relationships when an employee leaves. Employers should rely upon well-drafted and up-to-date contract provisions for protection wherever possible.

[1] Orca Communications Unlimited, LLC v. Noder, 236 Ariz. 180, 181, 337 P.3d 545, 546 (2014); Custom Teleconnect, Inc. v. Int’l Tele-Services, Inc., 254 F. Supp. 2d 1173, 1183 (D. Nev. 2003). In some other states courts have held the trade secret statutes preempt any state law protection for merely confidential information.
[2] Balboa Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1345, 267 Cal. Rptr. 787, 797 nn. 20-21, 802-03, cert. denied, 111 S. Ct. 347 (1990).
[3] Restatement (Third) of Agency § 8.05 comment c (2006)(emphasis added). See Restatement (Third) of Unfair Competition § 39 comment d (1995).
[4] Rawlings v. Apodaca, 151 Ariz. 149, 153-54, 726 2d 565, 569-70 (1986). See Custom Teleconnect, Inc. v. Int’l Tele-Services, Inc., 254 F. Supp. 2d 1173, 1182 (D. Nev. 2003); Frantz v. Johnson, 116 Nev. 455, 465 n.4, 999 P.2d 351, 358 n.4 (2000).
[5] Enterprise Leasing Co. v. Ehmke, 197 Ariz. 144, 148, 3 P.3d 1064, 1068 (Ct. App. 1999).
[6] See, e.g., Joshua David Mellberg LLC v. Will, 96 F. Supp. 3d 953, 976 (D. Ariz. 2015); Finkel v. Cashman Professional Inc., 270 P.3d 1259, 1264 (Nev. 2012); Prudential Ins. Co. of Am. v. Pochiro, 153 Ariz. 368, 371, 736 P.2d 1180, 1183 (App. 1987).
[7] Calisi v. Unified Fin. Services, LLC, 232 Ariz. 103, 106, 302 P.3d 628, 631 (Ct. App. 2013), quoting Enterprise Leasing Co., 197 Ariz. at 149, 3 P.3d at 1069.
[8] Restatement (Third) of Unfair Competition § 41 comment b (1995).
[9] Other forms of restrictive covenants may prohibit former employees from competing with the former employer or soliciting customers of the former employer.
[10] 1 R. Milgrim, Trade Secrets, § 1.09[7][a][ii] (2011).
11 Restatement (Third) of Unfair Competition § 41, comment d; 1 R. Milgrim, Trade Secrets, § 4.02[1][d][ii] (2011); J. Dratler, Jr., Intellectual Property Law: Commercial, Creative and Industrial Property, § 4.05[2] (2012).
12 Valley Medical Specialists v. Farber, 194 Ariz. 363, 367, 982 P.2d 1277, 1281 (1999) (citation omitted).
13 Enterprise Leasing Co. v. Ehmke, 197 Ariz. 144, 150, 3 P.3d 1064, 1070 (Ct. App. 1999).
14 Bryceland v. Northey, 160 Ariz. 213, 217, 772 P.2d 36, 40 (Ct. App. 1989); Amex Distributing Co., Inc. v. Mascari, 150 Ariz. 510, 517, 724 P.2d 596, 603 (Ct. App. 1986).
15 See generally Joshua David Mellberg LLC v. Will, 96 F. Supp. 3d 953 (D. Ariz. 2015); Camco Inc. v. Baker, 113 Nev. 512, 520, 936 P.2d 829, 834 (1997).
16 Jones v. Deeter, 112 Nev. 291, 292, 913 P.2d 1272, 1273 (1996).