Protecting Your Customer List
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Protecting Your Customer List

Q: I am worried that one of my employees may want to leave soon and go to work for one of my competitors. Even worse is that I think he may try and take some of my best customers (or a list of my customers) along with him when he goes. There must be some way to stop that and I was wondering if you knew what that was? Thanks in advance. — Tony

A: The very nature of any small business is that your employees will learn plenty about your best customers: Who they are, their contact information and their needs, for starters. Employees will also likely have substantial contact with those valuable customers of yours.

That said, the first thing to understand is that, of course, your customers are not your property. They are free to hire whomever they want to provide them with the products or services they like. As long as your (former) employee did not illegally recruit the (former) customer, there is not much you can do about it in a free economy.

You may have noticed that the operative phrase here is "illegally recruit." Here is the general rule: An employee certainly can notify customers that she is leaving the employment of her company before she actually leaves, but the employee may not solicit her employer's customers while still working for your company. What is "solicitation?" That's what lawsuits are for, my friend! Solicitation is determined on a case-by-case basis.

After the employee has left the company, she is generally free to solicit the customers of her former employer, unless she uses the former employer's trade secrets to do so, or the customer information itself is a trade secret.

According to a typical law, a trade secret is information, including ...

"a formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value…from not being generally known to the public…and is the subject of efforts … to maintain its secrecy."

Note too that different states enforce trade secret laws to different degrees, but generally speaking, if you have made efforts to keep customer information confidential (your "compilation"), you can expect exiting employees to do the same. Many employees think that they can take customer lists with them when they leave, so you have to show them, and maybe even scare them into believing, that you sincerely consider your customer list to be secret and valuable.

In the future, you can more easily prevent employees from taking valuable customers with them if you have you employees sign certain agreements when they start their employment with you:

A Non-Compete Agreement: A non-compete agreement prevents employees from working for your competitors for a certain amount of time. Note that state laws differ (California for instance basically has done away with non-compete agreements), so you need to make sure all of these sorts of agreements are permissible in your locale.

A Non-Solicitation Agreement: Under the terms of a non-solicitation agreement, an employee agrees not to solicit any of your current customers or prospects. Employees are not prevented, however, from accepting your customers if the customer voluntarily chooses to go your former employee.

A Non-Disclosure Agreement: Also known as an NDA, this agreement states that in the course of their employment with you, employees will be learning confidential information (your customer list for example) and that they promise not to use it or share it with anyone without your permission for, say, five years.

Such agreements will go a long way towards preventing problems down the road. A great place to find some is Nolo.com.

Today's tip: The key to making your customer list a trade secret is to make sure that it contains non-public, confidential information such as key contacts within the company, the company's particular requirements, and so forth. Then take efforts to keep it confidential and tell your employees that it is confidential.

© 2010 Steven D. Strauss, www.MrAllBiz.com