Commercial Division Blog

Posted: December 29, 2014 / Categories Commercial, Intellectual Property, Unfair Competition

Supplier Lists Not Trade Secrets

On December 19, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Knit Knit LLC v. Unitrade Enterprises, Inc., 2014 NY Slip Op. 51784(U), examining whether supplier lists constitute trade secrets.

In Knit Knit LLC, the plaintiff "was engaged in purchase, importation and wholesale distribution of off-price apparel." Among the claims that the plaintiff brought against defendants was misappropriation of trade secrets based on their use of "the names and addresses of plaintiff's Guatemalan broker and suppliers, as well as its customers" in a new business started by one of the plaintiff's former employees. The court granted the defendants summary judgment on the plaintiff's misappropriation of trade secrets claim, explaining:

Claims for unfair competition in New York fall into two categories: palming off and misappropriation. The gravamen of a claim of unfair competition is the bad faith misappropriation of a commercial advantage belonging to another by infringement or dilution of a trademark or trade name or by exploitation of proprietary information or trade secrets.

The Court of Appeals has explained that New York courts, in seeking to define trade secret, frequently turn to the Restatement (First) of Torts. Comment b of § 757 of the Restatement (First) of Torts defines a trade secret as any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it, and it specifically includes customer lists as potential trade secrets. The Court of Appeals also embraced using six factors suggested by the Restatement in determining whether certain information may be considered a trade secret:

the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to [the business and its] competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Appellate case law illustrates that information may not be considered a trade secret if it was not properly developed and guarded as a secret.

A former employee may generally solicit a business's customers, so long as the employee is not bound by a non-compete agreement, does not solicit customers while still employed by the business and does not rely on customer information that was wrongfully obtained or which constitutes a trade secret. Although the Restatement specifically identifies customer lists as potential trade secrets, not every collection of customer information will receive such protection. Indeed, courts that have treated customer lists as trade secrets have generally focused on the great amount of time and money that the plaintiff spent assembling the customer list, the difficulty in ascertaining potential customers without the list or the efforts that the plaintiff took to guard it. New York courts have applied a similar standard when evaluating whether a business's suppliers may be treated as a trade secret, often also considering whether the plaintiff businesses had exclusive arrangements with those suppliers.

Here, plaintiff essentially alleges that Torres and associated Guatemalan factories constituted trade secrets, which Halpern misappropriated to the benefit of Unitrade and himself. Even construing the evidence in the light most favorable to plaintiff, however, Torres and the unidentified factories cannot be considered trade secrets when applying the factors enumerated by the Restatement and embraced by the Court of Appeals. Plaintiff makes no suggestion that Torres or the factories had promised to or did, in fact, sell exclusively to plaintiff or Russo and does not show that the suppliers from which Halpern bought for Unitrade were not otherwise publicly ascertainable. Furthermore, no evidence indicates that plaintiff or Russo undertook great effort in discovering factories, establishing a business relationship with Torres or keeping those contacts secret. Defendants thus make a prima facie showing that they misappropriated no trade secrets from plaintiff, and plaintiff fails to raise any factual issues that could support that claim. Accordingly, summary judgment must be granted to defendants dismissing plaintiff's claim for misappropriation of trade secrets.

(Internal quotations and citations omitted) (emphasis added).