Reprinted with permission from the Los Angeles Lawyer.
The “route cases” represent an effort to balance the rights of employers and former employees in trade secret lawsuits
California courts have consistently protected the trade secrets of companies from unscrupulous employees who misappropriate those secrets after they quit. At the same time, they also have recognized the rights of former employees to pursue gainful employment, even in competition with their former employers. In order to balance these two competing goals, employees must understand what is and is not a trade secret when they strike out on their own.
Employers, too, must understand what are and are not their trade secrets when training employees or pursuing litigation against them after they leave.
Trade secrets play an increasingly important role in determining the outcome of a variety of litigation,1 especially in light of the increasing attention given to California's Unfair Competition Law and the limited enforceability of noncompetition agreements.2 Often the trade secret at the center of these disputes is a former employee's knowledge or use of a former employer's customer list or customer information.3
In determining one such recent case,4 the California Court of Appeal, for the first time in decades, referred to the “route cases,” a group of decisions dating from the first half of the last century that drew the boundaries for the protection of customer information learned from regular service on the routes of delivery and sales people. Today, customers' preferences and buying habits are more likely stored electronically than on route cards in a delivery truck. But a consideration of the milkman's, iceman's, and laundryman's historic efforts to maintain customer loyalty form a distinct area of common law trade secret jurisprudence and provide an excellent rubric for analyzing whether customer lists are worthy of protection as trade secrets under the Uniform Trade Secrets Act.5
As one court noted, route salesmen “constitute a very small and unique group” of employees.6 Traditionally, they serviced a distinct group of customers using heavily annotated customer lists or customer books.
[A]s a rule, the books…contained information as to the days when the driver was to call, the nature and quantity of the goods usually required and other information which prepared the driver to render the particular type of services required by the many housewives who were his customers. The lists had been prepared after much inquiry and effort and they were in such form that if one driver quit his employment another could take his place to carry on effectively the business of his employment in the particular district covered by the route.7
The routes involved in these cases spanned a broad range of industries,8 but the common thread drawn from the cases is the extensive customer information compiled over months or years of service, accompanied by an expectation of continued business. For instance, a history of service could establish the customer's confidence that a deliveryman would check the icebox for eggs and milk every Friday morning and that, if these staples were below what the customer liked, the supply would be replenished with the usually required amount.9
Ordinarily, information acquired in the course of employment is the property of the employer.10 But before considering what is protected when a former employee solicits the business of a former employer's customers, it should be recognized that an employee can advise former customers of the termination of employment and accept business from them without using the former employer's confidential information.11 It is equally well settled, and often repeated, that employees cannot “be compelled to ‘wipe clean the slate of their memories.'”12 Nowhere is that inability to do so clearer than for sales personnel.
For instance, in Mathews Paint Company v. Seaside Paint Company,13 the court of appeal refused an injunction to a paint company whose former employee went to work for a competitor in a situation in which there was no allegation that the lacquer formulas of the former employer were trade secrets and in which the purchasers of lacquer in large, wholesale quantities could be readily identified from phone books. If there is nothing confidential or special about the individual customers' requirements and if the competitors are ready and willing to fulfill those requirements, there is no use of trade secret information. As the court in Mathews Paint concluded, “A salesman necessarily becomes somewhat acquainted with the particular requirements of his customers, but the knowledge that he obtains in this manner is not in and of itself confidential information which is the property of the employer.”14
In Aetna Building Maintenance Company v. West,15 the California Supreme Court established the test for determining what information will be protected from a former employee's use in route cases:
[T]o obtain relief against a former employee it must be shown:
(1) The information was confidential and not readily accessible to competitors;
(2) The former employee solicited the customers of his former employer with intent to injure him;
(3) The former employee sought out certain preferred customers whose trade is particularly profitable and whose identities are not generally known to the trade;
(4) The business is such that a customer will ordinarily patronize only one concern;
(5) The established business relationship between the customer and the former employer would normally continue unless interfered with.16
In Aetna, the plaintiff employer alleged that West, a former salesman and supervisor, had misappropriated trade secrets when he solicited and obtained the business of 3 of Aetna's 200 janitorial customers. Aetna alleged that West had misappropriated customer information because he knew “the extent and type of service required by its customers, the use of certain procedures, material and equipment, the net costs of performing service for each customer and the charges made for it.”17 The court, however, held the route cases did not apply to the janitorial services at issue:18
Prospective customers are commonly known to the trade or may easily be discovered through business directories or by observation. There is no evidence that [the former employee] sought out preferred customers. In any event, the evidence produced by Aetna is to the effect that there are no preferred customers in the trade. Accounts are sold upon the open market at flat rates without regard to either their duration or profitableness. The evidence shows that the business is highly competitive and patronage depends upon efficiency of service rather than personal relationship. Contracts are of brief duration and cancellations are frequent. Under such trade conditions, equity will not enjoin the solicitation of the former employer's customers.19
The conduct of the former employee in Aetna contrasts starkly with that of former employees in Reid v. Mass Company, Inc.20 Reid involved the Green Book, a brochure distributed to new homeowners that listed individual vendors of home services in a particular area. The former employees knew when advertisers' annual subscriptions to the brochure were going to expire. They then set out to create a competing Red Book with statewide customer lists and knowledge of their expiration dates in mind. The former employees lied about the anticipated demise of the Green Book and made other misstatements to get advertisers to switch. In addition, they purposefully avoided particular advertisers who they knew were late payers. The identity of advertisers was not readily apparent to the public and could not easily be drawn from phone books or other public materials. Furthermore, compilation of the advertiser list would have required a substantial amount of work because of the statewide nature of the advertisements. Upon these facts, Reid affirmed the trial court's award of injunctive relief and damages.21
Elements of Trade Secret Protection
Aetna's five-part test establishes the basis for determining what customer information is protected by trade secret law. The threshold requirement for qualification is, of course, that the information be confidential and not readily accessible to others. In order to be “confidential” within the meaning of Aetna, and therefore qualify as a trade secret, a customer list must have indicia of value beyond the names, unless those names themselves are of value. For instance, in Morlife, Inc. v. Perry, the court explained that because of the “relatively unusual roofing service” provided by Morlife, the customer list itself was protected because “the identity of those particular commercial buildings using such services is not generally known to the roofing industry.”22
The information in Morlife was, as the courts sometimes phrase it, not “readily accessible.” The secrecy of the information provides a “substantial business advantage.”23 This advantage exists if disclosure would allow a competitor to direct its sales efforts to those customers who have already shown a willingness to use a unique type of service or product as opposed to those who only might be interested,24 enabling the former employee “to solicit both more selectively and more effectively.”25 It can be as important to know those who are not customers as those who are. For instance, in Reid, it was significant that the former employees were not required to waste time soliciting businesses that had never advertised in the Green Book, because they only solicited businesses that were already receptive to the idea.26
The confidential information at issue can be as minimal as the expiration dates of customers' contracts. In the case of an advertising contract, for example, advertisers will be looking for a new contract shortly before expiration of their old one.27 What matters is how accessible the information is to the company's competitors. In Pasadena Ice Company v. Reeder,28 the court found that customers' “places of residence, their peculiar likes and fancies and other characteristics, a knowledge of which would greatly aid them in securing and retaining the business” constituted a trade secret.
Several cases also consider the intent and manner of the competitive behavior in deciding whether particular information is confidential. For instance, in American Loan Corporation v. California Commercial Corporation,29 the court recognized that the manner in which the defendant competed with his former employer in the purchase and sale of secured loans on real property itself demonstrated the value of the customer list. Prior to leaving the company, the employee had a secretary prepare a copy of the list, and “took a duplicate copy of the index cards with the customer's preference indications.” The court reasoned that “if the list was easily obtainable there could have been no reason for him to be at pains to take duplicate copies of the card index or the list.”30
Relationships with, as opposed to mere knowledge of, the customers can also be dispositive. In Peerless Oakland Laundry Company v. Hickman, the court reasoned that because the manager of a linen supply service not only came to know the likes and dislikes of his customers, but became friends with them as well, he was properly enjoined from soliciting his former employer's customers:
[T]he appellant, as a part of his duties of supervising the delivery routes and receiving and adjusting complaints, had many personal contacts with customers and established friendly relations with them. It is this personal acquaintance and additional influence of the friendship developed during his employment with Peerless which makes solicitation of former customers by appellant so unfair to his former employer.31
However, a former employer's skills of salesmanship and knowledge of the markets in which the goods are sold are not protected as trade secrets if they cannot be characterized as confidential information imparted to the employee during the employment. The distinction is illustrated in Metro Traffic Control, Inc. v. Shadow Traffic Network, a case involving the alleged inducement of a competitor's traffic reporters to violate noncompetition clauses. The court refused to deem the “quality, sound and personality” of the reporters a trade secret, terming them “subjective dimensions” and not part of an informational base belonging to Metro. The court concluded, “A stable of trained and talented at-will employees does not constitute an employer's trade secret.”32
Similarly, in King v. Pacific Vitamin Corporation, the court held that “[w]hat the employee acquires in his own right by way of experience and useful knowledge of a business may be of far greater value to him than knowledge of the identity of the employer's customers and their business connections.”33 Indeed, the court referred to the solicitation of a competitor's salesmen and executives as a “universal custom.”
The Aetna test's intent-to-injure element can be established by proving that the former employee intends to take business away from the former employer.34 An intent to divert business from one's competitor through legitimate trade practices, even if the competitor is a former employer, does not constitute an intent to injure that would support injunctive relief.35 Instead, the employees must be “motivated by express malice and with the express intention of deliberately and maliciously injuring plaintiffs in their business.”36
For example, an intent to injure cannot be shown by the mere employment in a field that inevitably requires a former employee to use confidential information learned in the prior employment. Under a theory of inevitable disclosure, the employer of the former employee would be entitled to an injunction without proving actual misappropriation merely if the former employee cannot perform his or her new job without inevitably using or disclosing the trade secrets of the former employer. However, In Whyte v. Schlage Lock Company, the California Court of Appeal rejected the theory of inevitable disclosure because the theory “is contrary to California law and policy because it creates an after-the-fact covenant not to compete restricting employee mobility.”37
If an employer's customer list is its primary source of business, the employer also probably needs to show that the former employees targeted certain, preferred customers.38 It may be enough, however, to demonstrate that certain customers were simply considered the “best business prospects.” In the language of Reid, it may thus be inferred that the former employees were not “merely reaping plaintiffs' particularly profitable harvest; they were separating the wheat from the chaff as well.”39
For instance, in Klamath-Orleans Lumber, Inc. v. Miller, employees (while still employed by the company) prepared to start up a competing industrial binder business. From memory, one of the employees jotted down the customers of the firm from across the nation. The new company then marketed only to the customers of the old company using materials that directly compared the new company's and old company's products. The court recognized that this “preferred” or “select” list of customers is of substantial economic value and constitutes a trade secret.40
Cases in which courts have considered the Aetna test of whether a business would ordinarily only patronize one concern suggest that a factually intensive inquiry concerning the specific company at issue may be required. Indeed, this element of the test may turn on whether only one service was actually used. Sometimes, identical products and prices are necessary for personal relationships with customers to matter. For example, in Western Electro-Plating Company v. Henness, the court, noting the absence of any distinction in the services provided by competitors in the chrome-plating business, found that personal and friendly contact formed the core of customer relationships. It therefore affirmed an injunction because the new business of former employees was founded upon the personal relationships created for their former employer.41
If the products or services are not the same, or of the same quality, a court will likely not grant injunctive relief to prevent a former employee from selling to former customers. For instance, in DeLuxe Box Lunch & Catering Company v. Black, the court refused to prevent a former employee from selling box lunches at the same plant where he had sold them for his former employer. The court noted that the plant had granted permission for the defendant to sell there “on condition that the food be of a greater variety, improved quality and larger quantities than he had brought for the former employer; and also that service should be made on Saturdays, which had been discontinued by the former employer.”42
In its essence, a route is premised upon an expectation that customers' business will continue regularly and indefinitely. Like the “one concern” element, the sales records for particular customers may also be determinative of whether there is the expectation of a continued business relationship. For instance, in Reid, evidence that 50 to 70 percent of plaintiffs' subscribers renew their contracts, along with deposition testimony from some of those subscribers, gave rise to the inference that the established business relationship would more often than not continue unless interfered with.43
But in an industry in which personal relationships and efforts are less important than a ready supply of a variety of goods, a continued business relationship is unlikely to be found. For instance, in King v. Pacific Vitamin Corporation, injunctive relief was denied because of the openness of the wholesale drug market.44 The court rejected the plaintiff's argument that:
[T]he same friendly relationship exists between a salesman of drugs at wholesale and his customers as that which characterizes the personal relations between a route salesman and the householders who buy his butter and eggs.…There is entirely lacking the friendly and confidential relationship which exists between housewives and laundrymen or dairy salesmen who are privileged to enter homes to pick up or deliver laundry, or fill the refrigerator with the usual requirements of the family.
In Continental Car-Na-Var Corporation v. Moseley,45 one of the seminal cases determining what is permissible business practice by former employees, the court reversed the issuance of an injunction preventing a former employee involved in the manufacture and sale of floor finishing and cleaning products from doing business in the territory in which he had worked for his former employer. The former employee even sent out a letter thanking his former customers for their patronage, and assuring them of the “same conscientious treatment and attention” to their future needs.46 Yet, the court expressly distinguished the route cases:
In the “route” cases the services rendered or the products sold were essentially the same, and the quality of the service rendered is similar. In the case of a salesman in a commercial field, there is no assurance of an order unless he can satisfy the customer that his merchandise is better, cheaper or more salable than that of his competitor. The customer usually desires to examine, inspect and compare merchandise and prices offered to him. Each sale is a distinct transaction, not necessarily implying that another will follow.47
Although the industries that gave rise to them have long since disappeared from daily life, the route cases remain useful in determining whether customers' identities and information can be protected as a trade secret. With the principles of the route cases in mind, employers and employees should be able to aggressively, fairly, and legally compete in their respective industries, and prevent the former from taking undue advantage of trade secret law.
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