Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

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Your best salesperson has just left for your major competitor.  Although you are fairly certain she didn't take any company documents or written customer lists, you are equally sure that she knows EXACTLY who your best customers are and the most effective way to contact them.  You always meant to get an Employment Agreement, complete with noncompetes and confidentiality provisions, signed up with this employee, but somehow never quite got around to it.  So what now?  Is there anything you can do?

Well, last week the Ohio Supreme Court brought joy to the hearts of procrastinating employers everywhere in the state when it ruled that the use of a memorized customer list by a former employee to the detriment of his one-time employer constituted a trade secret protected under Ohio's Uniform Trade Secrets Act.  In Minor & Assoc. v. Martin, 2008 Ohio 292, a unanimous Ohio Supreme Court upheld a trial judgment in favor of the employer in the amount of $25,973 even though the employee had no employment agreement and was not subject to any noncompete or confidentiality provisions.  The Public Information Office of the Ohio Supreme Court issued this summary of the decision.

Issue Presented. The new Employer Law Report blog [welcome to the blogosphere], in a post prior to the issuance of the decision, framed the dilemma facing the Court as "creating what in  most cases would be a non-solicitation prohibition of an indefinite term" and a ruling that "could open the doors to the creation of de facto non-competition/non-solicitation agreements for which neither employers nor employees bargained."  As seen by the Ohio Supreme Court itself, the positions of the parties were as follows:

Martin asserts that a client list memorized by a former employee cannot be the basis of a trade secret violation and that the appellate court's decision in this case overly restricts his right to compete in business against AMA.  He also argues that AMA should not have the right to control the use of his memory and that AMA had the opportunity to protect its confidential information by way of an employment contract, which it did not do.

 

AMA counters that public policy in Ohio favors the protection of trade secrets, whether written or memorized; that the definition of a trade secret should focus on the nature of the information and the potential harm that its use would cause the former employer; and that no meanigful difference exists between a written and memorized client list.  

Decision.  This decision resolved a split in Ohio appellate courts.  Despite initially framing the issue somewhat more broadly, the Ohio Supreme Court chose to focus on the extremely narrow issue of whether the fact that the client list in question was memorized took it outside the protection of the Uniform Trade Secrets Act, codified in Ohio Rev. Code Chapter 1333.  After noting that the majority view made no distinction "between information that has been reduced to some tangible form and information that has been memorized" and recognizing that protection of trade secrets involves a balancing of public policies, the Ohio Supreme Court held:

the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee.  Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.  It is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one's memory, or in any other medium.  

In somewhat interesting dicta, the Ohio Supreme Court hastened to add:

Every employee will of course have memories casually retained from the ordinary course of employment.  The Uniform Trade Secrets Act does not apply to the use of memorized information that is not a trade secret pursuant to R.C. 1333.61(D).

>>Unintended Consequence.  Jon Hyman of the Ohio Employer's Law Blog sees the decision as an expansion not only of trade secret protection, but also the class of employees against whom noncompetes can be enforced.  While that might initially appear to benefit employers wanting to protect sensitive information, Jon adeptly points out that this may also complicate matters for employers hiring former employees of competititors.  Just asking these new hires whether they are subject to noncompetes or confidentiality provisions and ensuring they've brought no documentation with them may no longer be enough.  

For some of the other thorny questions raised by the decision, read Kevin Griffith's post in the Employer Law Report Blog.  In particular, Kevin wonders whether the "simple knowledge that the Al Martin clients were in need of pension analysis services would have trumped the publicly available information  [obtained through Google] to preserve the protection of the trade secret."  He also agrees with Jon that employers hiring employees from competitors may now have addditional hurdles to that decision.

Issue Not Addressed.  I agree with Jon and Kevin that the decision raises troubling questions for employers considering hiring one of the employees of the competition.  However, one of the  things I find most interesting about the decision is what WASN'T ADDRESSED, namely the scope of what constitutes a "trade secret" in the first place.  While Martin briefed this issue, it apparently was never raised in his memordandum in support of jurisdiction so the Ohio Supreme Court made it clear that this issue was not before it, in essence assuming without deciding that the customer list in question was in fact a trade secret.

To really evaluate what this decision means for the future, I think you have to go back to the Franklin County Tenth Appellate District Court of Appeals decision, 2006 Ohio 5948 , which spends considerable time on this particular question.  It notes that "[a] customer list is an intangible asset that is presumptively a trade secret when the owner of the list takes measures to prevent its disclosure in the ordinary course of business to persons other than those the owner selects."  The Court of Appeals then goes into some detail about the measures taken by the employer in this particular instance:

the trial court determined AMA's client list was an intangible asset that AMA acquired by devoting considerable time and resources over a 20-year period.  The trial court also concluded AMA took sufficient precautionary measures to assure the client list remained confidential, including (1) informing its employees that its client information was confidential and was not to be made public; (2) circulating a Computer Usage Policy that reminded its employees the client names and associated information were confidential, were not to be made public, and were not to be removed from the confines of the office; and (3) securing client information from those entering AMA'a office....

 

the trial court, through its magistrate, found that although a browser could enter an individual client's name into http://www.freeerisa.com/ and obtain the client's contact information, a browser could neither independently obtain a compiled list of the clients AMA serviced nor determine which clients needed third-party pension plan administrative services....

 

The evidence demonstrates AMA spent considerable time and energy compiling its client list and used adequate measures to protect the client information from its competitors.  Because the evidence reflects no readily available means by which someone outside the employ of AMA can specifically identify AMA's clients and readily determine which clients need third-party pension plan administrative services, AMA's client list is a trade secret under R.C. 1333.61(D).            

What is perhaps even more interesting is the Court of Appeals take on the "tension between a company's right to be protected against unfair competition and an individual's right to the unhampered pursuit of livelihood."  Because the request for injunctive relief had been withdrawn, the Court of Appeals felt that it was not called upon to resolve this tension and explicitly states that "the trial court's judgment does not enjoin defendant from contacting AMA clients in the future but only requires defendant to compensate AMA for past monetary damages."  In addition, the Court of Appeals rather tantalizingly takes note of "the constantly changing nature of business information and the relatively short period of time during which such information can be deemed sufficiently relevant to warrant trade secret status." 

So what I'm wondering is how would this all come out if a former employee of a start-up business (which never really had a chance to implement precautinary measures to protect customer lists) moves to a more established competitor with a customer list in his head largely consisting of customers this employee brought into the former employer, especially if a few months go by between the time the employee leaves the start-up and starts working for the established corporation. 

Bizpointers.  So what does this all mean for the mobility of key employees and the effect on businesses?

• If you're an employer concerned about protecting customer lists and other sensitive information, you are certainly in a stronger position than before, especially with respect to information being carried around in the heads of key employees.  However, you can't just assume that you're now covered as far as trade secret protection.  DO take the time to implement at least some precautionary measures emphasizing the confidentiality of this information with employees.  Formal written policies would be best, but even customary office practices will help.  And, yes, having employment agreements, noncompetes, and/or confidentiality agreements for key employees is still a good idea.  

• If you're an employer considering hiring away some of the competition's best people, the recruiting process may have gotten more complicated.  You still need to ask about noncompete and confidentiality agreements, but now even if the prospective employee isn't subject to one, there could be trouble down the road.  If you really want to be safe, consider having these individuals work in other capacities within your company for a few months.

• If you're an individual considering making a move across the street, understand that the process may now be more complicated, even if you are not subject to a noncompete or confidentiality provision.  Go easy on contacting customers of your old employer for the first few months at your new position.

• And one more thing....  If you're considering selling a business with confidential customer lists and other trade secrets and ensuring that key employees stay with the company following the change in ownership is important to the value of the business, recognize that this new decision by the Ohio Supreme Court may mean you can assign some additional value to the business that a prosective buyer may be willing to pay. 
  • To the extent it just got harder for competitors to hire top employees, the buyer can be more assured of retaining the employee base and the extra value associated with that continuity.   
  • In addition, if the seller of a business can be prevented from using "customer lists" that are in his/her head, there is a value to that.  This is particularly true when the seller has operated a business for many years and has long-time customers who have become friends.  (In other words, the seller did not review a customer list, repeat the list to himself over and over until he/she got to the car, and then scribbled the list frantically before leaving his former employer's parking lot).  Apparently, under this decision, the seller may NOT solicit, contact or use that knowledge to compete with the buyer--even when the buyer did not protect himself by negotiating a non-compete/non-solicitation agreement, at least for some period of time.  When negotiating an asset purchase transaction, this decision might be relied upon to create value and designate some sum of the purchase price to this intangible asset.  Hat tip to my colleague Chris Pettit here at Lane Alton for suggesting this possibility.