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050707 Trade Secret Law: AFM Insurance

By Sean Fowler

American Family Mutual Insurance Company v. Roth, 7th U.S. Circuit Court of Appeals, No. 06-3412 (May 7, 2007):

Issue:
Roth and at least one other insurance agent working with AFMI left and started out on their own using a client list called Exhibit 34 by Judge Posner and his court.

"An addendum to the agency contract [they signed] required the agent 'to submit all new business and changes through the system as directed by the Company.' By 'system' the company meant its digitized database of customer information. The addendum provided 'that software and database provided contains confidential, proprietary and trade secret information and that the agent and its employees will not use nor disclose to third parties such information unless in the ordinary course of the agent's business with the Company.' The agent had access only to the information in the database that concerned the customers whom he served. It might be customer information originated by the agent or information furnished to it by the company when another agent resigned and his customers had therefore to be reassigned. Some 2,000 policies were reassigned to the defendants in the course of their agency relationship with the plaintiff. "

Exhibit 34 was a 1,847 client-name long client list that contained AFMI client names almost exclusively, but not entirely.

The lower court granted an injunction against the rogue AFMI agents asserting that they could not download client names from AFMI, could not solicit any of the names in Exhibit 34, and could not service AFMI's customers. The agents appealed the injunction.

Pertinent issues of trade secret law:
1) Was it a trade secret?
2) Was the injunction properly granted?

Conclusion:
Posner said that the contract and addendum terms specifically stated that the agents were to treat the information and clients of the database as a trade secret and were not to use or disclose this information except in the normal course of business for AFMI. Posner said that whether this restriction was enforceable as a matter of trade secret law was a matter of whether it had value outside of as a measure to limit competition and was not otherwise contractually unconscionable. Posner found that since this database was contractually deemed confidential and a trade secret and was a pared down -- by AMFI -- list of potential and existing clients based on their suitability to buy insurance, he found that it met the Wisconsin UTSA's requirements (as it "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use" and "is the subject of efforts to maintain its secrecy that are reasonable under the circumstances"). It was a trade secret and so had value outside of as a means of limiting competition. Further, the limitation was reasonable. The agents were given access to potential clients they did not previously have and inherited accounts; in return, they gave AMFI the right to keep as a trade secret all the clients the agents developed during their agency. While duration was not mentioned, Posner said this was not fatal when the clause met the WUTSA and was not contested as a trade secret by the other party. That was the case here.

Posner turned his attention to the injunction itself. Even though an injunction was merited in the case, the injunction required some editing. First, Posner suggested that downloading be expanded to include transcription of data into hardcopy. Second, he found that Exhibit 34 should not be off limits to the rogue agents with regard to those customers that were not in the database as it was when the agents left. Third, Posner found that "servicing" AFMI's customers was an overbroad and vague proscription. "Servicing" was too broad a word to have meaning in the injunction, and an injunction against soliciting AFMI's customers would go beyond those clients to which the agents had access prior to their departure; it would, for instance, require that they keep from future AFMI clients. With this one suggestion and these two orders for amending, the injunction was affirmed.

Full post as published by Cogito Ergo Teneo; an intellectual property blawg on August 25, 2007 (boomark / email).