FALL 2008

Trade Secrets


Course No. 9200-704 (and 804)-801

ID No. 16545

MW 3:00 - 4:30 p.m.
Room L-134
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
Copyright © 2000, 2002, 2003, 2006, 2008   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Customer-List Cases

1.  Quite apart from the specific requirements of trade-secret law, a number of consistent themes emerge from these cases.  The first is the kind of information a customer list contains, which in turn determines the amount of time and effort needed to create or re-create it.  Is the list more like a pile of business cards that any saleperson would collect in making "cold calls"?  Or is it more like a database containing specific information about customers and their requirements, accumulated over long relationships and at considerable effort?  The Sandas court uses the term "bare bones" customer list to distinguish the former from the latter.

The second theme relates to who developed the list.  Does the list contain just the identities of customers served by the departing employee, or is it an institutional asset of the employer, including names of customers and information about them accumulated by many people over some time?

The final common theme relates to the others and is one we have seen before—competition.  What better way to curtail unwanted competition from an ex-employee than to prohibit her from contacting customers she served while employed!  Since trade-secret law is tort law and requires no agreement, an employer can use it as a "back stop" to a noncompetition covenant that the employer neglected to secure.

If an employer secures an explicit noncompetition covenant, in most states it is subejct to the rule of reason.  In order to be enforced, it must be reasonable in subject matter, duration, and geographic extent.  In some states (like California) it is unenforceable (unless made in connection with the sale of a business) except to the extent necessary to protect trade secrets.  Can an employer thrwart these strong state policies requiring restraints on competition to be reasonable (or, in states like California, minimal) simply by neglecting to secure an explicit covenant and then, when an employee leaves, claiming trade-secret protection for something the employee needs to do his work?  Does this question suggest, inter alia, the policy basis for the distinction between an employer's trade secrets and an employee's general knowledge, experience, and skill?

2.  Some judges are receptive to policy arguments, while others are not.  Remember the long discussion of employee mobility and its resulting efficiencies in Wexler v. Greenberg?  The court there was the Supreme Court of Pennsylvania.  As the final arbiter of state law, the highest court in each state has considerable leeway to consider policy in its decisions.  Lower courts, however, usually feel constrained to apply "the law" alone, lest they be accused of "legislating from the bench."

But judges on lower courts are no less wise, on the average, than judges of higher courts.  All judges can appreciate the policy implications of their decisions, especially when those implications are pointed out by able counsel.  Is this why some courts may accept "legal" arguments that, on their faces and as a matter of pure "law" alone, seem a bit stretched?

3.  In this regard consider the Steenhoven court's conclusion on the "economic value" criterion.  Is it really true that the list of Steenhoven's clients had no economic value to the plaintiff's competitors in the insurance business?  If you are trying to sell insurance, isn't it better to approach someone who already has it (even if sold by a competitor) than to make a "cold call" on someone who has never bought insurance?  Isn't the same true of virtually anything sold, except perhaps something sold only once, like a funeral plot?

What about the court's two-step approach: (1) the names had no economic value, and (2) once a competitor had the names, he could readily find the customers' needs and current insurance parameters by contacting the customers themselves?  Wouldn't that same style of argument apply to virtually any customer list?  Doesn't it prove too much?

Was the Steenhoven court right in accepting these "legal" arguments, or was it stretching to do the right thing?

4.  Was the Steenhoven court on more solid ground in applying the "not readily ascertainable" requirement?  Which of our previous cases would be a better precedent for the result in Steenhoven on this point, American Paper and Packaging Co. v. Kirgan (this shipping-supplies case), or Moss Adams & Co. v. Shilling (the departing accountants case)?  Why?

5.  The Sandas case brings to life the hypothetical case discussed in Note 1 above. The employer did secure a nondisclosure agreement with a nonsoliciation clause.  (It also secured a noncompetition covenant but refrained from asserting it for fear it would be held unreasonable.)  Should this foresight on the part of the employer (or the employer's counsel)  change the result appreciably?  If employers, simply by securing such agreements, could alter the balance of policies that protects employers' assets while insuring employees' mobility, wouldn't employee mobility soon be a thing of the past?  Can you see now why the written word in agreements is not necessarily the last word insofar as restraining ex-employees is concerned?

6.  If they had been decided by the same jurisdiction, would Steenhoven be good precedent for Sandas?  Try to analogize or distinguish the two cases on their facts.  Consider the nature of the businesses, the nature of the relationships between the respective defendants and their customers, the effort and money that went into compiling the lists, the competitive advantages that having the respective lists conferred, and the retraint on legitimate competition that would result if the court found the respective lists to be trade secrets.  Was the plaintiff in each case trying to curtail competition using trade secrets as a pretext?  If so, was it entitled to do so?

7.  Sandas joined the defendant at the tender age of 21 as an "impoverished cookware salesman" with some band experience.  He left three years later as an experienced talent scout and a formidable competitor.  Marshall your arguments—factual, legal, and political—for and against allowing him to compete with the defendant in the same community.

 When the Supreme Court of Wisconsin decided this case, it was, in effect, making policy regarding customer lists for the whole state.  Did it do its job well?

8.  Another distinction addressed by the Sandas court (albeit one now falling into disuse) is the distinction between "route" and "nonroute" salespersons.  According to this distinction, it should make a difference whether a saleswoman has personal relationships with customers, as do "route" salespeople (like UPS drivers and delivering dry cleaners), doctors, dentists, and lawyers, or whether the sales relationship is more impersonal.  What difference, if any, should this distinction make, in which direction should it cut, and why?

Do many sales jobs lack personal relationships, other than "boiler room" jobs (i.e., jobs in rooms with many telephones that make "junk" telephone calls)?  Isn't the essence of any good sales job establishing a personal relationship?  Or are some sales jobs so different that doing so is difficult or impossible?

9.  At one point, the Sandas court finds it "contrary to public policy to afford protection to material which is generated in the ordinary course of business."  Is this a useful rule?  Aren't all customer lists generated in the "ordinary course of business?"  Does the Sandas court mean that it will find a customer list protectable only if it is created by the employee specifically for the purpose of stealing it?  Would such a rule provide sufficient protection for employers' investments in customer relations, service, and marketing?  Is there another less extreme interpretation of this statement that might work better?

10.  According to your professor's count, the Sandas court gave twenty-three analytically distinct reasons for reaching the result it did.  Does that make the decision a broad or narrow holding?

Does the thrust of the Sandas court's decision nevertheless come through all the noise?  For example, if the Steenhoven case had come up in Wisconsin after the decision in Sandas, how would the Wisconsin courts have ruled with Sandas as precedent?   Would the result be uncertain or relatively predictable?

11.  Now consider the Zoecon case.  Are there good analogies to Steenhoven and Sandas?  The two defendants, Reed and Poncik, left the plaintiff after the plaintiff started selling through distributors, rather than directly to customers.  Since the product (ear tags for cattle) was simple, this fact suggests that the defendants were active in sales and valued personal relationships with customers.  Just for fun, let us assume that this is the case.  Let us assume that both defendants had personal relationships with, and made personal visits to, all of the plaintiff's customers.

With this assumption, can you distinguish Steenhoven and Sandas from this case?  Doesn't the two-step argument of Steenhoven work just as well here?  Weren't the identities of the customers known from the (assumed) personal relationships?  Once their identities were known, weren't the customers' needs and past purchases readily ascertainable from the customers themselves?  Are ear tags for cattle any more complicated than individuals' insurance needs?

If you are uncomfortable with applying the analysis of Steenhoven and Sandas to this case, and therefore with letting the defendants in Zoecon walk free, can you articulate factual differences or doctrinal analysis to justify your discomfort and a different result?  Did the "odoriferous" facts—the defendants taking equipment, suborning other employees, and starting a new business before actually departing—make all the difference, or were they just icing on the cake?

12.  Can Zoecon be explained by good competitive policy?  Reed and Poncik had been general manager and assistant general manager of the plaintiff, respectively, and Reed had signed her covenant not to compete when she had sold her 10% stake in the plaintiff's predecessor for $270,000.  Do/should these facts make a difference in deciding whether the covenant should be enforced and whether trade-secret law can impinge upon competition?  Why or why not?  Might Reed's covenant be enforceable even in a state like California?

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