Legal Question in Business Law in California

This is an area of the law and business that results in a very large amount of litigation. The simple answer is that the client information is proprietary trade secret information belonging to your employer. If you use that information to set up your own company, your former employer could successfully sue you. With that said, however, there are some exceptions and ways around that basic rule that apply in some situations and industries, but they are very fact specific. If you really want to set up your own company and would need your current employer's clients, you must get good thorough legal counsel. You're not going to get the guidance you need in a free internet forum.

First, in the practical world, we have to distinguish between being sued and being sued successfully. Even if what you do is perfectly legal, your new company could be ruined financially by having to defend a lawsuit waged against you by a well-heeled plaintiff. On the other hand, you might get away with misappropriating a client list because your former employer lacks the ambition or resources to investigate, initiate and pursue a lawsuit, or is uncertain about the applicable facts and law.

Second, lawyers aren't supposed to threaten criminal or administrative actions against the other side to gain an advantage in a civil suit. Therefore, while your attorney or you could report the former employer to the IRS, neither of you should use a threat of making a report to force a settlement of a trade-secret misappropriation suit. For the lawyer, it would be a breach of the code of professional conduct, and for both of you it could be extortion.

So, what factors increase or lessen the likelihood of losing a suit for misappropriation of trade secrets? Those factors include (1) whether the owner made any effort to identify the client information as "secret" and then made efforts to maintain the secrecy; and (2) the degree of expense or difficulty involved in compiling the client data in the first place.

If a company lets everyone at every level know all about its clients (such as by proudly listing them on its Web site), and never tells any of the staff that client information is hush-hush and valuable, it will have a harder time in court establishing that there has been any actionable misappropriation. You can't misappropriate a "trade secret" if it isn't a secret in the first place.

Also, if the information is little more than what you can get from the phone book or a directory of the particular industry the firm works with, and could be compiled quickly and with little expense or effort by anyone entering the business, even though it has been kept secret, it is a worthless secret and not entitled to legal protection because there is no appreciable harm done by its "misappropriation." No harm, no foul.

Finally, just because you know that ABC and XYZ are clients of your current employer and have certain needs and certain potential for future business, and you start a competing company, and ABC and XYZ come to you for services, doesn't necessarily mean that you have misappropriated a trade secret. Your former employer would also have to show that the migration of ABC and XYZ to your new firm involved actual improper use of the trade secret. This is usually proven when it is discovered, or admitted, that the new firm actively solicited the clients from the old firm. So, if you proceed with the new business, have a lawyer with experience in this area show you what you CAN do and CANNOT do... often it's OK to send out a vague general announcement about the new business, but NOT ok to call, e-mail or write the purchasing managers or contracting officers and solicit their business.

You can't 'get around' the conflict of interest risks you face. If you steal customers or improperly use company confidential information, you can be sued. If serious about getting proper education and your questions answered about what your rights and limits are, feel free to contact me.