In Colorado, employers often claim that noncompetes signed by salemen are enforceable because the company has customer lists and other proprietary information which are trade secrets. Employers resort to the “trade secret” exception in Colorado’s noncompete statute, because many salesman don’t have management responsibilities and the statutory exception for executive and management personnel can’t be invoked. It is true that the trade secret exception can be used by employers against salesmen or non-managers. And Colorado courts repeatedly have held that sales histories, buying patterns and customer preferences can, under the right circumstances, be trade secrets even if the names and addresses of the company’s customers are publicly available.
A recent decision once again demonstrated, however, that not all customer lists are trade secrets. In Lifetouch Church Directories v. Colleen Ingalsbe, Lifetouch purchased the church directory and photography business of Olan Mills. Ingalsbe was an employee of Olan Mills, who signed an employment agreement when she joined Lifetouch Church Directories. That agreement had nondisclosure and nonsolicitation provisions. When Ingalsbe quit and joined a competitor, Lifetouch was quick to file an action against her in which it claimed that Ingalsbe had breached the nonsolicitation agreement and misappropriated trade secrets involving Lifetouch’s client and prospective client list, pricing data and other relevant data.
At trial, however, the jury found for Ingalsbe on all the claims that were asserted. Evidence appears to have been admitted that Olan Mills did not treat the customer information as a trade secret. Customer information was kept on index cards. There was no indicia of confidentiality on the customer information. The computer system did not have any special protections for the customer information. Employees weren’t told that the information was confidential or a secret. Lifetouch did not recover the information from employees when they quit.
This case does not create any new law in Colorado. The Court of Appeals decision in 2014 was not published, and the Supreme Court merely declined to hear the employer’s appeal. Nonetheless, the case demonstrates why employers should confirm that they actually have trade secrets before they launch their company on a lawsuit against a former employee who elects to join a competitor. It’s easy for employers to claim that their customer lists are trade secrets. It can be easy to include a provision in an employment agreement that states that the company has various trade secrets. It can be a hard, long slog, however, to prove that information really is confidential and has been treated as a trade secret.
The practical lesson from the case may be that a company that buys a business faces significant practical problems when it attempts to prove that the purchased business had trade secrets. To make that showing, the buyer may need to rely on testimony from employees who are no longer with the company. Relying on former employees is problematic because those employees may have resented how they were treated and may not be sympathetic to the company.