Customer List Not a Trade Secret and Related Torts are Preempted Under Ohio Law

*Originally published by LaszloLaw

In Hanneman Family Funeral Home and Crematorium v. Orians, et al., the Ohio Supreme Court considered (1) whether information about a funeral home’s customers who had preneed funeral contracts with the funeral home is a trade secret protected by the Ohio Uniform Trade Secrets Act, R.C. 1333.61 through 1333.69 and (2) whether related claims for tortious interference with business contracts, tortious interference with business relationships, and conversion are preempted by the Act.

In this case, the Hanneman Family Funeral Home and Crematorium purchased a funeral home but did not retain the funeral home’s director – Mr. Patrick Orians. Before leaving, Mr. Orians copied the funeral home’s customer information and went to work for another funeral home.  Mr. Orians then used this customer information to solicit business for his new employer.  Hanneman then sued Mr. Orians and his new employer alleging misappropriation of trade secrets, tortious interference with business contracts, tortious interference with business relationships, and conversion.

Is a Customer List a “Trade Secret” under Ohio Law?

Generally speaking, information is a protected trade secret when (1) it has economic value because it is not generally known to and readily ascertainable by proper means by others who could obtain economic value from its disclosure or use and (2) the owner has taken reasonable efforts to maintain its secrecy. R.C. 1333.61(D).

Ohio courts have established a six-factor test for determining whether information constitutes a trade secret under R.C. 1333.61(D), requiring a court to consider:

(1) [t]he extent to which the information is known outside the business; (2) the extent to which it is known to those inside the business, i.e., by the employees; (3) the precautions taken by the holder of the trade secret to guard the secrecy of the information; (4) the savings effected and the value to the holder in having the information as against competitors; (5) the amount of effort or money expended in obtaining and developing the information; and (6) the amount of time and expense it would take for others to acquire and duplicate the information.

In the Hanneman case, the Court determined that the customer list was not a trade secret because the customer information at issue had been provided to a third party, was accessible by a number of the funeral home’s employees, and was available as a public record upon request. Therefore, the information was not protected by the Ohio Uniform Trade Secrets Act as a trade secret.  Essentially, once the “cat is out of the bag” there can be no trade secret. We find most courts in the U.S. follow this approach. The lesson here is to take measures to protect your intellectual property — especially information you consider a trade secret. A good rule of thumb is all trade secrets are confidential information, but not all confidential information is a trade secret. Trade secrets require a heightened level of security.

What Torts Are Preempted Under Ohio Uniform Trade Secrets Act?

The Court then went on to address the related tort claims and held that the Ohio Uniform Trade Secrets Act expressly supersedes other civil remedies sounding in tort that are based on the misappropriation of a trade secret. R.C. 1333.67 preempts tort claims that are based on the misappropriation of a trade secret.

R.C. 1333.67 “prevents a plaintiff from merely restating their trade secret claims as separate tort claims,” Thus, tort claims that are based on the same factual allegations that make up Hanneman Family’s misappropriation-of-trade-secrets claim are barred.

What Lessons Can we Learn from Hanneman?

What we’re taking from the Hanneman case is two-fold, pre-litigation strategy and pleading strategy. First, it is clear that a thorough pre-litigation investigation with the client is critical to determining whether trade secrets even exist. Second, with the clarification regarding preemption and related torts, it might make sense to avoid pleading such causes of action, to eliminate time consuming and expensive motions to dismiss. Instead, pay attention to the facts as they develop during the case, and if appropriate, seek leave to amend the complaint — there, you get to introduce the claims to the court in a motion, and if granted leave to amend, you’ll have more confidence in the claims headed into trial – or better yet, settlement.