Employment Law Alert
Lack of Secrecy Dooms Employer’s Suit to Stop Form Sales Reps’ Use of Customer Lists
The Illinois Trade Secrets Act (ITSA) prohibits misappropriation of trade secrets and allows recovery of attorneys’ fees in suits to enforce the Act. A recent decision by the Appellate Court of Illinois is a cautionary tale for employers wanting to protect customer lists and other information.
And now, a word from our sponsor
Multimedia Sales & Marketing (MSM) contracts with radio stations to buy and sell airtime to businesses that want to air public service announcements. To acquire new customers, MSM purchases sales leads from third-party sellers. If a sale is made, the customer becomes a renewal customer, and MSM generates a “renewal lead,” which contains the customer’s name and address.
MSM says it treats sales leads and renewal leads as confidential and maintains the information in a secure database. Sales reps are given hard copies of sales leads, and the copies are collected and destroyed at the end of a particular sales run.
The nature of the business, however, requires MSM to send its purchased sales lead list to radio stations for approval because the stations have restricted customers who don’t want MSM to contact them. Further, after a sale, MSM also sends the customer information to the radio station. Notably, while MSM requires its employees to sign confidentiality and nondisclosure agreements (NDAs), it doesn’t enter into NDAs with customers or the radio stations.
Three sales reps (William Marzullo, Thomas Genovese, and Tom O’Connor) left MSM to go to work for Radio Advertising, Inc. (RAI)—a competitor in the radio advertising business. MSM sued the three former employees and RAI alleging, among other things, violations of the ITSA. Specifically, MSM claimed the three former sales reps improperly took its sales leads lists and renewal leads lists and used them to solicit MSM customers and encourage them to move their business to RAI.
Remarkably, the former employees didn’t deny taking and using the information on RAI’s behalf to solicit MSM’s customers. For example, in his deposition, Marzullo admitted about 70 to 75 percent of his sales at RAI came from former MSM customers. Armed with the information, one might think MSM had an open-and-shut case for misappropriation of trade secrets. Think again.
Inform and educate
To recover under the ITSA, MSM had to prove the information at issue was (1) a trade secret (2) misappropriated and (3) used in the former employees’ business, i.e., at RAI. As a preliminary matter, the appellate court rejected the employees’ argument that MSM’s customer and lead lists weren’t eligible for protection under the Act. To the contrary, because they contained the customer’s name, contact information, and purchase history, the information could qualify as a trade secret warranting protection.
By definition, a trade secret is information sufficiently secret to give its owner a competitive advantage and about which the owner took appropriate measures to prevent others from acquiring or using it. MSM’s problem was that it didn’t show it kept the information sufficiently secret or made reasonable efforts to maintain its secrecy, as required under the law. MSM acknowledged it provided customer names to radio stations—indeed, it says it was required to do so.
MSM argued the information shouldn’t lose protection just because the radio stations and customers are aware of one another and cited a 2009 federal court decision (SKF USA, Inc. v. Bjerkness) to support the point. But that case turned on an enforceable restrictive covenant in an employment agreement as the basis for protecting the information. Here, in contrast, the Illinois Appellate Court observed MSM didn’t have enforceable postemployment restrictive covenants to protect its information, and so the SKF case was distinguishable.
Not only did MSM fail to require its sales reps to enter valid restrictive covenant agreements, as noted above, but it also didn’t require the radio stations to enter NDAs to protect the customer information. Because the former employer couldn’t show it kept the customer information secret, judgment was properly entered in favor of the three former sales reps and RAI.
To add insult to injury, the court also upheld the trial court’s decision to award the defending parties more than $71,000 in attorneys’ fees. Section 5 of the ITSA permits a court to award reasonable attorneys’ fees to the prevailing party when a “claim of misappropriation is made in bad faith.”
Here, the lower court found the depositions of MSM’s own witnesses showed the information in question wasn’t kept confidential. The appellate court found the trial court didn’t abuse its discretion in awarding the fees. So not only did MSM lose on its bid to protect the customer information, but it also must pay the attorneys’ fees of the parties whom it claims misappropriated the data. Multimedia Sales & Marketing, Inc. v. Marzullo, 2020 IL App (1st) 191790 (Dec. 21, 2020).
Safety tip: Only you can prevent misappropriation
MSM’s case is a good reminder of the best practices to follow when you’re trying to protect business information. You must keep the details confidential to have any viable claim under the ITSA that they were misappropriated. Here are some best practices:
- Maintain the information in a secure database, and don’t share it with others (including outside parties) unless they’re bound to maintain its confidentiality under an NDA.
- For employees given access to use the confidential information, don’t rely only on the ITSA to protect it. Also require them to sign valid restrictive covenant agreements, which, as the court acknowledged, may afford broader protection of confidential business details that don’t qualify as trade secrets.
Consult with Steve Brenneman, Kelly Smith Haley, or the Fox Swibel attorney you regularly work with to ensure your restrictive covenant agreements are enforceable in the jurisdictions in which you operate.