Key Takeaway

• Companies seeking to establish trade secretion protection over a customer list must take steps to protect the list, and be able to demonstrate that the list has value by not being known to competitors. At times, courts will construe these requirements strictly against the company.

A recent decision by a federal judge in Seattle construed the requirements for protecting customer lists as trade secrets with unprecedented rigor, denying a company’s motion for summary judgment and granting it instead – on her own motion – to the defendants. The decision rejected secrecy measures that effectively protected the lists because they were legally required by HIPAA. The decision held that the customer list did not have value because the company did not use it for marketing, despite its use by departing employees to solicit customers who would otherwise have been unknown to them.

While this decision does not represent the mainstream of trade secret law on customer lists, it can serve as a reminder of the requirements to establish a trade secret. It can also serve as a cautionary tale that current trends favoring free movement of employees versus non-compete agreements may influence trade secret decisions.

In Traverse Therapy Services, PLLC v. Sadler-Bridges Wellness Group, PLLC, et al., a counseling and therapy service sued former therapist employees for copying and using patient identities and contact information to solicit their business. The service claimed that its patient lists were protectible trade secrets. Instead, the federal court dismissed the trade secret claim, holding that former therapists who resigned from plaintiff’s employ and e-mailed fifty clients about their new practice, including a list of insurance providers that their new practice would accept, did not misappropriate trade secrets because the company failed to establish trade secret protection over that list. Case No. C23-1239, 2024 WL 1701970 (W.D. Wash., April 19, 2024).

The first step to establish trade secret protection for a customer list is to show it is a compilation of information, which the plaintiff here did. But that was as far as plaintiff made it. The court found that plaintiff failed to satisfy the remaining requirements: (i) the customer list was valuable because unknown to others, and (ii) the owner took reasonable steps to keep the information secret.  

The court found that the customer information at issue did not have value to plaintiff by being unknown to others because plaintiff did not use the compilation to market its services.  The court cited no authority for the proposition that a company must use a patient list for marketing in order for it to be a trade secret. The court disregarded the facts that patient identities are not publicly available, that knowing that the company’s patients were good prospects for therapy services would therefore be valuable to a competitor and that, in fact, the former employees who became competitors used the lists for precisely that purpose.

The court also found that plaintiff did not take reasonable steps to keep the patient list a secret. The court acknowledged that the company kept the patient list secret through password-protected computer systems and locked physical files, which are common and good practices to establish the secrecy element of trade secret protection. The court disregarded those secrecy controls because they are also requirements for health care providers under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).  The court, however, did not explain how those controls lost their effectiveness in maintaining secrecy because they are legally required. The court cited no authority that legally required secrecy measures don’t count in a trade secret analysis. The court did not say what else the company was required to do to establish the secrecy requirement with these effective measures already in place.

This case would represent new law in the area of customer list trade secrets if followed. Whether or not it is followed, it does highlight the fact that trade secret status for useful company information cannot be assumed: The holder of the information will be required to prove each element required for a protectible trade secret. This case also highlights how fact intensive trade secret cases can be, and reminds companies to continually maintain and upgrade existing trade secret protection measures. The alternative is to risk losing ownership and control of precious proprietary and confidential information.

If you have any questions regarding the information covered in this blog, please contact Valeria Castanaro Galotta, John Baranello, or your primary attorney at Moses Singer.