What Are "Trade Secrets" in Arizona and Can Companies Protect Them?

In Arizona, a “trade secret” is a statutorily defined term that is protected by the Arizona Uniform Trade Secret Act (“AUTSA”). See Enter. Leasing Co. of Phx. v. Ehmke, 197 Ariz. 144, 148 (Ct. App. 1999) (“Like the majority of states, Arizona has adopted the Uniform Trade Secret Act, which codifies the basic principles of common-law trade-secret protection, to govern the resolution of trade-secret issues.”). The AUTSA broadly defines “trade secret” as (see A.R.S. § 44-401[4]):

Regarding the first prong, only that information affording a “demonstrable competitive advantage” or “economic advantage over others in the industry” will be deemed a trade secret. Enter. Leasing Co. of Phx., 197 Ariz. at 150 (citations omitted).

As to the second, “most important” factor, the owner must be able to demonstrate that it “has taken such precautions as are reasonable under the circumstances to preserve the secrecy of the information.” Id. (citations omitted). To establish this prong, the owner must show that its efforts to maintain the secrecy of the information ensure that it would be “difficult for others to discover the information without using improper means.” Id. The owner’s efforts need not be unduly expensive, nor is the owner prohibited from disclosing the information to employees when necessary or from publishing the information on a limited basis for a restricted purpose. See id. However, if an owner of a trade secret makes no or minimal effort to maintain the secrecy of the alleged trade secret, a court will likely find that the information is not protectable as a trade secret. See, e.g., id. ; B2B CFO Partners, LLC v. Kaufman, 856 F. Supp. 2d 1084, 1091–94 (D. Ariz. 2012) (applying Arizona law and finding that information that is publicly revealed or subject to only scant precautions is not eligible for trade secret protection).

Compilation of Customer-Service Factors. The Arizona Court of Appeals concluded that a compilation of customer-service factors in managing a car-rental business and financial records that the owner treated as secret, even though the information contain therein was old and possibly outdated, was entitled to trade secret protection. See Enter. Leasing Co. of Phx., 197 Ariz. at 150.

For example, a customer list may be entitled to trade secret protection if it “represents a selective accumulation of detailed, valuable information about customers—such as their particular needs, preferences, or characteristics—that naturally ‘would not occur to persons in the trade or business.’” Id. (quoting Enter. Leasing Co. of Phx., 197 Ariz. at 149); see Prudential Ins. Co. of Am. v. Pochiro, 153 Ariz. 368, 371 (Ct. App. 1987) (holding that under Arizona common law, specific policyholder information, including amount of outstanding loans and dividends accrued, was a trade secret); c.f. Wright v. Palmer, 11 Ariz. App. 292, 296 (1970) (holding that under Arizona common law, general knowledge of business and customers acquired during employment was not a trade secret).

“A customer list may also be entitled to trade secret protection if the claimant demonstrates it compiled the list by expending substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information.” Calisi, 232 Ariz. at 106; see Prudential Ins. Co. of Am., 153 Ariz. at 371 (holding that under Arizona common law, a list of customers, “if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money . . . is in the nature of a trade secret” (citation omitted)).

A relevant factor in this analysis is, of course, whether the information contained in the customer list derives independent economic value from its secrecy, and gives the holder of the list a “demonstrable competitive advantage” over others in the industry. Enter. Leasing Co. of Phx., 197 Ariz. at 148; see Amex Distrib. Co., Inc. v. Mascari, 150 Ariz. 510, 517 (Ct. App. 1986) (holding that under Arizona common law, a customer list was not a trade secret when the customers were known and generally accessible to competitors).

In addition, courts also consider the extent to which the company divulged its customer list externally and internally, i.e., to people outside of its business as well as to its own employees. See Miller v. Hehlen, 209 Ariz. 462, 470–71 (Ct. App. 2005) (customer list was not trade secret when employer gave it to former employee and did not condition its use); Enter. Leasing Co. of Phx., 197 Ariz. at 150 (while employer does not relinquish trade secret by disclosure to employees on a necessary basis or by limited publication for a restricted purpose, business that takes only scant precautions in safeguarding trade secret will not receive protection).

Training Videos. One federal court sitting in Arizona recently held that an insurance agency’s allegations were sufficient to state an AUTSA-based claim against its former employee for misappropriation of trade secrets arising from the agency’s training and educational videos. See Joshua David Mellberg LLC v. Will, 96 F. Supp. 3d 953 (D. Ariz. 2015). The agency asserted that the former employee illegally downloaded the videos, launched a similar website, and approached a competing agency to develop a web-based program mirroring the agency’s program. Id. at 965–66. According to the court, such claims adequately set forth a claim for trade secret misappropriation under AUTSA. Id.