Companies that want to sue former workers who have stolen what they say are trade secrets need to prove that what was taken is truly a secret, the Arizona Court of Appeals has ruled.
And they have to prove they made a real effort to keep the information secret.
Judge Patricia Norris, writing for the court, said customer lists can be considered trade secrets. But the judge said that, by itself, is not enough.
To gain legal protection, Norris said, a company needs to show it had actually acquired any “specialized, valuable information about its customers.” In this case, that includes their financial requirements, tax
strategies, investments objectives, and risk and investment preferences.
Norris also said a company needs to show it had made “substantial efforts to develop its customers and their personal information” and that this information would be difficult for a competitor to duplicate or acquire.
The case involves Michael Calisi, a certified public accountant, who was hired to work in 2006 at United Financial Services. He was the company’s only CPA, focusing primarily on corporate accounting, though he sometimes prepared tax returns for individual clients and hoped to develop a practice in financial planning.
The following year he was promoted to vice president of operations.
He left the company in 2009, though the record is disputed whether he was fired or quit.
Calisi associated with a mortgage firm which sent out an e-mail to its more than 2,000 clients, some of whom also were clients of UFS. It announced Calisi had joined the firm as its in-house CPA and offered a discount on tax preparation services.
Since that time Calisi started his own firm and began to provide personal and business tax services.
A trial judge eventually concluded that Calisi had misappropriated UFS’s customer lists and personal information, resulting in this appeal.
Norris said the case turns on common law principles of what is a “trade secret.” That, she said, requires two things.
First, it has to have independent economic value by virtue of not being generally know and not being “readily ascertainable by proper means” by others. Second, it must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Norris said customer lists can be considered trade secrets when it includes a “selective accumulation of detailed, valuable information about customers.” That includes their particular needs, preferences or characteristics that would not otherwise be normal to someone in that trade or business.
And she said customer lists can also be considered trade secrets if a firm demonstrates in complied it with substantial efforts to the point it would be difficult for a competitor to acquire or duplicate the same information.
But factored into all that, Norris said, is the extent to which a company has divulged that information, not only to its own employees but others outside the business.
Looking at that case, the judge said UFS failed to show that it actually developed, compiled or captured any specific information about their customers and their particular needs, preferences, strategies or characteristics that made the list worthy of trade secret protection.
Norris also said UFS did not present any evidence it had expended substantial efforts to develop its customers and any personal information about them in a way that its competitors could not duplicate.
The judge also said there was no evidence presented to show UFS had actually treated its customer lists as secret. As proof, she noted that the mortgage firm which later associated with Calisi knew the identity of several UFS clients, with the two firms sharing a mutual referral arrangement for years.
What that means is that Calisi could have readily — and without using improper means — independently ascertained UFS’ clients through the mortgage firm.