Presented by Jennifer E. Novoselsky, Reyes Kurson, Ltd. at 2018 NAMWOLF Conference A company’s client lists and related intelligence, such as risk tolerance or purchasing history, are extremely valuable and must be protected. This program will explore the application of trade secret law to client lists, provide practical steps to safeguard these lists and quickly detect misappropriation, and identify the litigation options available when a former employee pilfers the company client list and uses it to solicit clients. With a Chicago pop culture theme, the program will help you answer three critical questions: (1) Are my client lists and information protected trade secrets? (2) What steps should the company take to protect this information and our client relationships? (3) Our employee just resigned, copied our client list and is soliciting our customers – how can I stop her?

1. HEY, THAT’S MY CLIENT!
PROTECTING CLIENT LISTS AND CONFIDENTIAL
INFORMATION WHEN A STAR EMPLOYEE JUMPS SHIP.

2. 2
The Panel
Jennifer Novoselsky
Reyes Kurson Ltd.
Cindy S. Stuyvesant
Wintrust Financial Corporation
Donyelle Gray
Illinois Human Rights Commission
Gavin McCarty
WEC Energy Group, Inc.
Anna Aguilar
Aguilar Bentley LLC
Who are these people and why are we here?

3. What is a Trade Secret?

4. 4
The Uniform Trade Secrets Act (UTSA) – What is it and where has it been adopted?
• The UTSA was first published by the Uniform Law Commission in 1979, and amended
in 1985.
• The stated goals of UTSA include “clarifying and simplifying the law” and “providing
uniformity.”
• Adopted in some form by 47 states
• New York, Massachusetts and North Carolina have not adopted the UTSA as yet,
although the North Carolina Act is very similar to the UTSA.
The Uniform Trade Secrets Act

5. 5
“Trade secret” means information, including a formula, pattern, compilation,
program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclose or
use, and
(ii) is the subject of efforts that are reasonable under the circumstances
to maintain its secrecy.
The UTSA Definition of “Trade Secret”

6. 6
Not Very.
Approximately half the states adopting the UTSA modify the definition of “trade secret” in some
form.
•Most commonly, the Preamble of the UTSA is modified to expand the list of information that
“may” qualify for trade secret protection, including “a list of actual or potential customers.”
See, e.g., 765 ILCS § 1065/2(d).
•However, this does not fundamentally change the analysis of whether a client list will be a
trade secret: it still must meet the requirements identified in the UTSA.
How “Uniform” Is the “Uniform” Definition of Trade Secret?

7. 7
Governed by common law, “trade secrets” are generally defined as:
“any formula, pattern, device or compilation which is used in one’s business, and which gives
[the owner] an opportunity to obtain an advantage over competitors who do not know or use it.”
Definition of Trade Secret – Non-UTSA

8. 8
In Plain English – What does “trade secret” mean?
•For any information – including client/customer lists – to fall within the
definition of trade secret, courts will require the information to:
(a) have independent economic value, actual or potential;
(b) not be generally known to other persons who would benefit from it;
(c) not be readily ascertainable by proper means; and
(d) subject to reasonable efforts to maintain secrecy.
•Courts frequently blend – appropriately – the elements evaluating whether the
information is publicly known and not ascertainable by proper means.

9. 9
• Despite general agreement as to factors to consider when determining if information qualifies as a trade
secret, application varies widely based on the facts of the case as well as the jurisdiction.
As one court aptly observed, “The concept of a trade secret is at best a nebulous one.”
• For this reason, many courts also consider the six (6) factors
identified in a comment to the Second Restatement of Torts
and utilized by non-UTSA adopting jurisdictions.
Fact Specific Inquiry Without Brightline Rules

10. 10
Client/Customer Lists Are Subject to Same “Nebulous” Standard
•Client lists are not entitled to blanket protection as trade secrets. Instead, the content of
the list, its treatment by the company, and the availability (or lack thereof) of the information contained on
the list from other sources are key considerations.
Client Lists Too?!

11. 11
What is the DTSA?
•The DTSA, 18 U.S.C. § 1831 et seq., provides a
federal cause of action to the owner of a trade
secret that is misappropriated and is related to a
product or service used in, or intended for use in,
interstate or foreign commerce.
The Defend Trade Secrets Act of 2016

12. 12
Information is protectible as a trade secret under the DTSA if:
•the owner of the information “has taken reasonable measures to keep such
information secret;” and
•“the information derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertainable through proper means
by, another person who can obtain economic value from the disclosure of use of the
information.”
18 U.S.C. § 1839(5).
How Does the DTSA Define “Trade Secret?”

13. Practical Steps to Protect Your Client List – Be
Prepared

14. 14
It cannot be emphasized enough:
if you want your client list to be
afforded trade secret protection,
you must treat it that way.
It seems obvious, but… keep your secrets actually secret

15. 15
Absolute secrecy not required.
Reasonable Efforts and Measures: Instead, the relevant inquiry is whether “reasonable” efforts
were made to maintain its secrecy “under the circumstances” (UTSA) or whether “reasonable
measures” were taken to protect the information (DTSA).
Roxie: “But he was trying to burgle me!”
Harrison: “From what I hear, he’s been burgling you three times
a week for the past month.”
What Level of Security is Actually Required?

16. 16
While there are no explicit requirements set forth in the relevant statutes, courts
often consider whether:
(1) the employee was required to sign a confidentiality agreement;
(2) the company’s policy, procedures and/or employee handbook identifies the information as
confidential;
(3) employees received reminders of company policies regarding confidentiality;
(4) access to the information was limited to those employees with a “need to know;”
(5) procedures were in place to monitor efforts to access the information; and
(6) the company has a secure network and physical facility.
Measures to Protect “Secret” Information

17. Our Former Employee Copied Our Client List And Is Soliciting – What
Do We Do Before We Sue?

18. 18
Identify precisely what information was taken.
Did anyone else receive the information?
•Was it sent to competitors?
•New employers?
Stop the leak!
•Determine how the breach occurred
•Have any additional employees accessed similar information in the same time period?
•In short – lock it down.
Implement Document Preservation Measures.
•While companies always hope to avoid litigation, it is crucial to be prepared and ensure that any
potentially relevant documents are preserved.
We Have a Breach – What To Do Now

19. 19
•Determine if the former employee executed a non-solicitation, non-compete
and/or non-disclosure agreement.
•If so, identify the provisions of the agreement concerning accessing and
utilizing “confidential” company information.
•Pay particular attention to whether the specific type of information – here,
client lists – is included in the definition of “confidential” or “proprietary”
information.
Do you have a non-compete or non-solicitation agreement?

20. 20
It is essential to send a cease and desist letter as soon as possible following discovery of breach.
Who should receive the letter?
•The former employee, of course, must receive the letter.
•New employer? If you have reason to believe the new employer is aware of the misappropriation, it is appropriate
to send the cease and desist to the new employer as well.
What should be contained in the letter? At minimum:
•demand return of misappropriated information;
•destruction of any original documents and physical or electronic copies in the possession of the former employee;
and
•demand that the former employee cease and desist from utilizing the misappropriated information to solicit
customers.
Cease and desist

21. Our former Employee Ignored Our Cease &
Desist – Time to sue!

22. 22
Choice of law.
•UTSA or DTSA claims follow the traditional choice of law analysis.
•Choice of law and forum selection clauses, often contained in employment agreements, will
also be enforced.
Defendants.
•Former Employee.
•New Employer? Depends on the facts. Generally, third parties – such as new employers –
may be found liable for misappropriation when they have actual or constructive knowledge
of the misappropriation.
Procedural Considerations

23. 23
Preliminary Injunctions & Emergency Relief: Time is of the essence.
Claims arising under the UTSA almost always require filing for a TRO or a Preliminary Injunction.
•Likelihood of Success on the Merits: This will be discussed in a subsequent sections.
•Irreparable Harm.
•Common non-compete/non-solicitation agreements
include provisions providing that a breach of the relevant
provision will cause the non-breaching party irreparable harm.
•Courts routinely recognize that the loss of clients and client
goodwill may cause irreparable harm.
Our Lady of Blessed Acceleration, don’t fail me now.
Procedural Considerations

24. 24
While specific elements or the description of these elements will
vary by jurisdiction, in general, a plaintiff must establish two
things:
•the existence of a trade secret; and
•misappropriation (i.e., acquisition by improper means).
Elements - Misappropriation of Trade Secrets

25. 25
Remember, client lists are not entitled to blanket protection as trade secrets.
The same key questions courts ask when evaluating whether any type of information is a trade
secret apply to client lists:
•Does the client list have independent economic value?
•Does the client list contain information that is not generally known?
•Does the client list contain information that is not readily ascertainable by those in the industry via
proper means?
•Have reasonable efforts been made to maintain the secrecy of the client list?
Is Your Client List a Trade Secret?

26. 26
•The more information, the more likely it is to be a trade secret.
•A “bare bones” client list which simply identifies the names of customers and their contact
information will usually not be considered a trade secret.
•However, trade secret status will be accorded to lists
of customers in limited circumstances, depending
on the nature of the industry. For example, a list
of purchasers of HIV medications is treated as
a trade secret, as are lists of purchasers of such
unusual goods or services that are generally not
known to even the industry at large.
How much information is on the client list?

27. 27
•Does the client list include information about customer preferences and/or
confidential personal information?
•A client list that includes additional, non-public information about the client such as credit
history, net worth, purchasing history, specific pricing information, sales volume, risk
tolerance, and other client preferences, is more likely to be afforded trade secret
protection.
•The same is true for a list that includes additional, non-public information about the
employer’s efforts to service the client, including information like costs, project staffing,
profit margin, and plans to propose expansion of services.
Does the list have confidential customer information?

28. 28
Stale data frequently fails to establish the economic value of the client/customer list.
Is the information on the client list current?
We all miss those Frango mints!

29. 29
If the information is available publicly – even if assembling it would be time-consuming – it will not
be afforded trade secret protection.
The ability of a competitor to discover the information through legitimate channels likewise often
dooms a claim that a client list is a trade secret.
Courts have rejected client list claims when the identities of the customers can be obtained
through:
• independent development,
• reverse engineering,
• licenses,
• published observations and literature,
• membership in trade associations, and/or
• simple legwork, such as searching information found on the internet or calling local businesses.
Is the information publicly available or discoverable by proper means?

30. 30
How did the company treat the client list?
Has the information been shared outside the company?
•If shared outside the company without requiring the recipient contractor, business partner or purchaser to
execute a confidentiality agreement, many courts will refuse to grant the information trade secret
protection.
Is access to the list limited to “need to know” within the company?
•Limiting the number of employees within a company who are aware of or have access to the information
tends to protect trade secret status.
Within the company, are there confidentiality agreements and policies concerning non-
disclosure in place and applicable to customer lists?
•Courts carefully analyze both whether the company has policies and procedures established to guard the
secrecy of client lists and whether those policies and procedures are adequately enforced.

31. 31
•Who developed the client list and information contained therein?
•Courts are often hesitant to afford trade secret status to a customer list that has been primarily generated by the
individual, departing employee
•How much time, effort and money was expended on developing the information?
•Courts frequently consider whether the client list and information contained therein was developed through
significant time, effort and/or expense.
Who developed the client list and how?

32. 32
Compensatory Damages
• May include actual loss caused by the misappropriation and unjust enrichment caused by the misappropriation that is not taken
into account in calculating actual loss.
• Means of calculating damages may also include lost profits or the imposition of liability for a reasonable royalty
Exemplary Damages
• The UTSA also permits a court to award exemplary damages where “willful and malicious” misappropriation is shown.
Attorneys’ Fees
I’m feeling saucy today…Do you accept cash?
What May I Recover?

33. 33
Check Your State Statute and Authority!
• Interpretation varies widely across jurisdictions. To determine whether additional causes of action are appropriate and the scope of
damages, look to the relevant state’s statute and caselaw for guidance.
Preemption. States vary significantly on how broadly they will permit the UTSA to preempt other claims.
• The majority of jurisdictions take a broad view, finding that the UTSA preempts common-law torts based on the misappropriation
of information even if that information does not meet the definition of a “trade secret” under the UTSA.
• A minority – though still significant number – of jurisdictions takes the opposite approach and concludes that the UTSA only
preempts claims involving misappropriation of information that qualifies as a “trade secret” under the statute.
Damages. States vary with respect to remedies and damages available as well.
• The issue frequently arises in connection with “unknowing misappropriation” and the question of whether monetary damages may
be imposed on an unsuspecting defendant.
• The measure of compensatory damages and the availability of punitive damages and attorneys’ fees varies by state.
Additional Causes of Action - Procedure

34. 34
Breach of Non-Compete, Non-Solicitation and/or Non-Disclosure Agreement.
• A simple breach of contract claim may be asserted based on violation of the relevant provision of the non-solicitation/non-disclosure
agreement.
Unfair Competition.
• Preemption - whether unfair competition claims are preempted by state trade secrets acts varies by state, so it is key to evaluate the
relevant jurisdiction’s statute and caselaw. If not preempted, an unfair competition claim may be asserted in connection with a
misappropriation of a client list.
Tortious Interference with Contract/Business Advantage.
• These claims may be asserted against the new employer in limited circumstances. This claim is most frequently asserted when the
employee has a non-compete/non-solicitation/non-disclosure agreement with their former employer and: (1) the new employer is aware
of that contract; (2) the new employer intentionally or improperly procures the breach; and (3) the former employer loses customers as a
result. The sticking point is most commonly the third element – intentional or improper procurement of a breach.
Conversion.
• A claim for conversion may be asserted arising from the deprivation of the company’s right in, or use or possession of, its property – the
client list – without its consent and without justification. While specific conversion elements will vary by jurisdiction, this claim if often
included despite the likelihood of preemption should the court reach a decision on the merits.
Causes of Action Frequently Included in Misappropriation Complaint

35. Conclusion/Q&A