Corroon & Black-Rutters & Roberts, Inc. v. Hosch

325 N.W.2d 883, 109 Wis. 2d 290, 1982 Wisc. LEXIS 2775

• Court: Wisconsin Supreme Court
• Decided: November 2, 1982
• Docket: 80-2337
• Status: Published

Opinions

LOUIS J. CECI, J.

The question presented is whether it is unfair competition for an insurance agent to use his former employer’s customer lists to direct clients to the agent’s new insurance agency.

A jury found that the defendant, Jack Hosch, had unfairly used confidential information to compete with the plaintiff, Corroon & Black-Rutters & Roberts, Inc. The court of appeals reversed and remanded for judgment notwithstanding the verdict, holding that the verdict was not supported by credible evidence and was contrary to public policy. We conclude that the information gleaned by the defendant from the plaintiff’s files does not constitute a trade secret under Wisconsin law and, therefore, affirm the decision of the court of appeals.

Jack Hosch has been an agent licensed to sell insurance since 1958. In that year, he began his employment with the Roberts Company, a general insurance agency. In 1973, the business and assets of Roberts, including all of its insurance accounts, were acquired by Corroon & Black through an exchange of the stock of Roberts with the stock of Corroon & Black.

During his employment, Hosch was responsible for procuring and servicing insurance accounts for a large number of Corroon & Black’s customers. Hosch himself brought about half of these accounts to Corroon & Black. Servicing an account involved, among other things, contacting a customer when the policy was about to expire and reviewing and updating the coverages before renewing the policy.

When the two agencies merged in 1973, Hosch and other employees of Roberts who joined Corroon & Black were required to sign a covenant not to compete. Hosch’s covenant not to compete terminated on December 31, 1977. He entered into no other such agreement.

When the term of the covenant not to compete ended, Hosch left Corroon & Black to work for a competitor. Shortly thereafter, in January of 1978, Corroon & Black's president learned that numerous agent-of-record letters had been issued in favor of Hosch and his new agency. These letters notified insurance companies that certain accounts were being switched to a different agency. This resulted in substantial losses of commissions for Corroon & Black, since approximately two-thirds of Hosch’s Cor-roon & Black customers changed to his new agency.

It is clear that Hosch actively solicited his former Cor-roon & Black clients. That he utilized information gained during his employment with Corroon & Black is not in dispute. This information was of help to him in contacting former customers. Corroon & Black presented testimony that Hosch may have taken detailed information in the expiration lists. Such lists contain names and addresses of policyholders, key personnel to contact, renewal dates and amounts of coverage. Hosch disputes this.¹ While we recognize the dispute in the evidence on this issue, we can accept Corroon & Black’s statement of facts on this point and still reach a conclusion adverse to them.

Corroon & Black’s customer files were kept in filing cabinets, which were never locked. Expiration lists were kept in cabinets which were locked on rare occasions. There were approximately 75 employees, all of whom had access to these files.

Corroon & Black commenced an action against Hosch, alleging that Hosch had unlawfully used “privileged and confidential information in the nature of trade or business secrets” from Corroon & Black’s files to solicit his former customers.

The complaint demanded compensatory damages in the amount of the commissions for the diverted accounts and further demanded punitive damages. Corroon & Black also asked for an order enjoining any future solicitation by Hosch of his former Corroon & Black clients. The jury found that the files were confidential and that Hosch had made unauthorized use of them. It awarded Corroon & Black $50,000 compensatory damages and $4,000 punitive damages. The trial court approved the verdict.

Hosch appealed, contending that there was no trade secret involved. He also challenged the damages award. The court of appeals concluded that no liability existed because no trade secrets were involved. Therefore, the court did not address the damages issues.

The jury determined that it was unfair competition for Hosch, an insurance agent, to use customer lists of his former employer to divert clients to his new insurance agency. Corroon & Black emphasizes the unfairness of this situation and asserts that Hosch was untrustworthy. The plaintiff in Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242 (1978), made a similar argument. However, any perceived unfairness should not be the determining factor. As we stated in Van Zeeland:

“[S]o long as a departing employee takes with him no more than his experience and intellectual development that has ensued while being trained by another, and no trade secrets or processes are wrongfully appropriated, the law affords no recourse.” Id. at 214.

We also feel compelled to point out that there was no covenant not to compete in effect when Hosch began working for a competitor of Corroon & Black.

Since the protection of a covenant not to compete is not available to Corroon & Black, the outcome in this case necessarily turns on the question of whether the information taken by Hosch was a trade secret.

At the outset, we must address Corroon & Black’s contention that the jury’s verdict was supported by credible evidence. The court of appeals properly characterized the issue of whether a trade secret exists as a mixed question of law and fact. In Department of Revenue v. Exxon Corp., 90 Wis. 2d 700, 281 N.W.2d 94 (1979), we stated that when a mixed question of law and fact is presented to this court, there are two component questions which must be answered. The first question is what, in fact, actually happened. The second question, whether those facts as a matter of law fulfill a particular legal standard, is a question of law. Id. at 713. Thus, we hold that whether the information taken by Hosch constitutes a trade secret is a question of law for the court.² This court need not give special deference to the determinations of the trial court on an issue of law. Compton v. Shopko Stores, Inc., 93 Wis. 2d 613, 287 N.W.2d 720 (1980); First Nat. Leasing Corp. v. Madison, 81 Wis. 2d 205, 260 N.W.2d 251 (1977).

The conclusion that an insurance agency’s customer list is not a trade secret is consistent with current Wisconsin law, as enunciated in our decisions in Abbott Laboratories v. Norse Chemical Corp., 33 Wis. 2d 445, 147 N.W.2d 529 (1967), and Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242 (1978).

In Abbott, an employee took, among other things, a customer list for artificial sweeteners and used it to compete against his former employer. In the Abbott opinion, we noted that the law concerning trade secrecy features two basic themes. Some courts have emphasized the breach of confidence aspect of the law of unfair competition.³ Usually, however, such cases also involve an assumed trade secret. The second theme is the requirement of the existence of an actual trade secret as the sine qua non of a cause of action for unfair competition. The emphasis is on the nature of the ideas and concepts which employees take with them to their new jobs. 33 Wis. 2d at 455-56.

Corroon & Black’s analysis in the instant case bears close resemblance to the first theory in trade secret law discussed in Abbott. As mentioned previously, Corroon & Black emphasizes the alleged confidentiality of its customer lists and apparently equates confidentiality of information with trade secret status. We find this to be an inaccurate statement of existing law. This court in Abbott adopted the Restatement view of the law of trade secrets, finding that it:

“. . . gives proper balance to the two factors that have cropped up throughout the development of the law of trade secrets.” Id. at 456.

In discussing the definition of a trade secret, we quoted with approval the following language from Restatement, 4 Torts, § 757, comment b (1939):

“Some factors to be considered in determining whether given information is one’s trade secret are: (1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.” Id. at 463-64.

Applying the Restatement definition, this court held that Abbott’s customer list was not a trade secret, because it was not sufficiently secret or confidential and because it contained only the names and addresses of the individual to be contacted, rather than complicated marketing data concerning the customer’s projected market needs or the customer’s market habits.

We also noted that customer lists are the periphery of the law of unfair competition.⁴ This is because legal protection would not provide the incentive to compile such lists; most are developed in the normal course of business, anyway.⁵

This court applied the Restatement definition to a customer list in Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 267 N.W.2d 242 (1978), and reached a similar result. When the defendant, Sandas, left Van Zeeland, a talent booking agency, he made copies of Van Zeeland’s customer list. Shortly thereafter, Sandas started his own talent agency. The trial judge concluded that the list did not constitute a trade secret and ordered summary judgment for the defendant. We affirmed the trial court.

The trial court in Van Zeeland determined that the list did not meet the Restatement definition of a trade secret. The list did not contain complicated marketing data; it merely included names of customers. Moreover, the list was reproducible by many persons.

We are not unmindful of the fact that the Corroon & Black list may have contained more detailed information than the “bare bones” customer lists in Abbott and Van Zeeland. However, we do not agree with Corroon & Black’s contention that this should be a deciding factor. Even though it contains more than just names and addresses of customers, an insurance agency customer list, such as the one in this case, is not entitled to trade secret protection under Wisconsin law.

Corroon & Black contends that the six Restatement elements are not requirements for trade secret status, but rather are factors under which the defendant must show that a trade secret does not exist. It is argued that the expiration lists qualify as trade secrets under this interpretation of the Restatement definition.

We hold that an insurance agency expiration list does not meet the six-factor Restatement definition of a trade secret. Each of the six factors should indicate that a trade secret exists if the information is to be afforded legal protection.

Corroon & Black asserts that considerable time and money were expended in the development of the information on the expiration lists. In Abbott and Van Zeeland, we stated that the customer lists in those cases were “merely the outgrowth of normal marketing endeavors” and were “nothing unique or confidential that should be protected in order to prevent competition.” Van Zeeland, 84 Wis. 2d at 217. The court of appeals below correctly determined that the time and money expended by Corroon & Black were spent on the development of the market which the customer list represents, rather than on the compilation of the information. Thus, the fourth and fifth elements of the Restatement definition are lacking. To afford protection to insurance agency customer lists, which are developed in the normal course of business anyway, would be contrary to public policy.

Corroon & Black’s president testified that the files were, in his opinion, confidential. However, the evidence shows that most, if not all, of Corroon & Black’s employees had access to this information. On this basis, the customer lists fail to meet the Restatement definition under the second and third elements.

Finally, there is some evidence which indicates that the information on many of the larger insurance clients could have been obtained by Hosch and others even without the customer lists.

Aside from the Restatement definition of a trade secret, this court also considered the route-nonroute distinction in Abbott and Van Zeeland. As we explained in Abbott, a nonroute customer is likely to purchase from several suppliers. Courts are less likely to afford protection against “unfair” competition by a former employee, because there is no particular relationship developed between a customer and a salesman (the employer) which is enduring. 33 Wis. 2d at 467. In Van Zeeland we pointed out that certain professionals, for example, dentists, doctors, attorneys and accountants, may be considered to be covered by the route sales rationale, even though they do not meet the traditional definition of “route salesman.”⁶

Corroon & Black asserts that insurance agents are in the route salesman category. We disagree. To the extent that the route-nonroute rationale applies⁷ in this situation, it appears that insurance agents are nonroute salesmen. It seems clear to us that many insurance customers do not depend on one agency for all of their insurance needs. Moreover, many persons change com-pañíes and agents quite frequently in order to save a few dollars in premium.

Finally, public policy reasons militate against affording trade secret status to insurance agency customer lists. As we pointed out in Van Zeeland :

“[C]ustomer lists are at the very periphery of the law of unfair competition, because legal protection does not provide incentives to compile lists, because they are developed in the normal course of business anyway.” 84 Wis. 2d at 221-22.

We also noted:

“The enforcement of a concept that one may not use trade secrets can only be justified as an unusual exception to the common law policy against restraint of trade.” Id. at 209.

This court stated in Van Zeeland that it was the public’s right to have reasonable competition. Worker mobility should also be encouraged. Legal protection for customer lists works against these goals.

“[I]t is contrary to public policy to afford special protection to a restraint-of-trade mechanism where to do so does not give a special incentive for creativity that will inure to the benefit of the public at large.” Id. at 217.

Therefore, we conclude that the insurance agency customer list in this case was not a trade secret and that the defendant should not be restrained from contacting the customers of the plaintiff.

By the Court — The decision of the court of appeals is affirmed.

Beilfuss, C.J., took no part.

1 Hosch contends that he wrote a customer’s name down when it came to mind; only then did he go to the customer files for the address and phone number.

2 We need not discuss whether the jury instructions correctly stated the law with regard to legal protection of customer lists, since we have concluded that this is a question of law which is not appropriate for determination by the jury.

3 See, e.g., Standard Brands, Inc. v. U.S. Partition & Packaging Corp., 199 F. Supp. 161 (D.C. Wis. 1961) and Franke v. Wiltschek, 209 F.2d 493 (2d Cir. 1953).

4 See, Developments in it he Law — Competitive Torts, 77 Harv. L. Rev. 888, 955 (1964).

5 Soon after the Abbott decision, this court applied its rule in American Welding & Engineering Co. v. Luebke, 37 Wis. 2d 697, 155 N.W.2d 576 (1968), and found that the customer list in question did not constitute a trade secret.

6 “The typical and classical case of a route customer is the relationship between a householder and a milk delivery salesman. In that situation, the householder, during the course of the relationship, typically buys exclusively from the particular salesman; and it is assumed that, therefore, a special personal relationship will develop which will continue even though the salesman should commence his own enterprise or switch employers.” Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 215, 267 N.W.2d 242 (1978).

7 Apparently the route-nonroute rationale is most often employed in cases where there is a covenant not to compete and the enforceability of the covenant is being questioned. See, Trade Secrets, Customer Contacts and the Employer-Employee Relationship, 37 Ind. L J. 218, 230 (1961-62).