American Family Mut. Ins. Co. v. Roth

Decision Date07 May 2007
Docket NumberNo. 06-3412.,06-3412.
Citation485 F.3d 930
PartiesAMERICAN FAMILY MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, v. Bonnie L. ROTH, et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

James P. DeNardo (argued), McKenna, Storer, Rowe, White & Farrug, Chicago, IL, for Plaintiff-Appellee.

William P. Tedards, Jr. (argued), Washington, DC, for Defendants-Appellants.

Before POSNER, FLAUM, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

The defendants—insurance agents who sold a variety of insurance products on behalf of the plaintiff, their principal— appeal from the grant, after an evidentiary hearing conducted by a magistrate judge, of a preliminary injunction. After being terminated by the plaintiff, the defendants had begun to solicit its customers, precipitating this suit, which charges the defendants with breaking their agency contract and stealing trade secrets. The appeal challenges so much of the injunction as bars the defendants "from using for any reason any information downloaded from [the plaintiff's] database, including the names contained in Exhibit 34," and "from servicing [the plaintiff's] customers." The issues presented by the appeal are governed by Wisconsin law.

An addendum to the agency contract 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 customer list that the defendants maintained separately from the plaintiff's database and used as a source of names for customer solicitations that they conducted after being terminated by the plaintiff. The list contained 1,847 names, of which the vast majority were also in the plaintiff's database. It is highly likely, though not certain, that most of those were names of customers in the group of 2,000 customers that the plaintiff had assigned to the defendants. The plaintiff points out that the contract forbade the defendants to use any name in the database, whatever the source of the name.

The contract can't really mean that agents are forbidden to solicit anyone whose name happens to appear in the database. They are not forbidden to solicit customers of the company's other agents, for having no access to the names of customers in the company's database they would not be free riding on the company's resources by soliciting such customers without having learned their names, or other information about them, from the database. It would be sheer coincidence if they happened to solicit a customer whose name was in the database.

But once agents enter customer information in the database, the information becomes the exclusive property of the plaintiff, or at least exclusive as against the agent. The information, insofar as it had been developed by the agent rather than supplied to him by the plaintiff, would be his trade secret initially—but only until he uploaded the information into the plaintiff's database, at which point it would become the plaintiff's trade secret. (This provision of the contract is a "grantback" clause, common in patent and other intellectual-property settings.) Trade secrets can be sold, see, e.g., Minnesota Mining & Mfg. Co. v. Pribyl, 259 F.3d 587, 609 (7th Cir.2001) (Wisconsin law); Ametex Fabrics, Inc. v. Just In Materials, Inc., 140 F.3d 101, 103 (2d Cir.1998); Painton & Co. v. Bourns, Inc., 442 F.2d 216, 225 (2d Cir.1971) (Friendly, J.) ("the validity of agreements for the sale or license of trade secrets has been upheld for generations"), and once sold (rather than just licensed) can no longer be used by the seller. Hooker Chemicals & Plastics Corp. v. United States, 219 Ct.Cl. 161, 591 F.2d 652, 660 (1979) (per curiam); Belmont Laboratories, Inc. v. Heist, 300 Pa. 542, 151 A. 15, 18 (1930).

There is nothing unconscionable, or even one-sided, about the arrangement that we've just sketched. The agents benefited from being able to use the plaintiff's database, as well as from receiving customers (the 2,000) from the plaintiff; in exchange they gave the plaintiff the right to keep, after termination of the agency relationship, any customer information that they'd acquired in the course of the relationship. Apparently they had, or at least think they had, some legal protection against termination designed to appropriate the customer information that they uploaded into the database, for they have sued the plaintiff for wrongful termination in a separate action pending in the district court.

But we have merely assumed up to now that any customer information in the plaintiff's database is a trade secret (originally the defendants' except for the names of customers furnished to them by the plaintiff). It would not be if it "was known outside the [employer's] business and the list could be readily reproduced [and] the information was available to all the employees of the firm, and much of the information that was available was far more pertinent to [the business] than the skeletal customer list." Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 267 N.W.2d 242, 249 (1978). But does it matter whether there was a trade secret? The addendum to the agency contract forbids the defendants to use the information "unless in the ordinary course of [their] business with the [plaintiff]," and a contract forbidding disclosure of customer information is enforceable—but only if the contractual prohibition is reasonable in time and scope and, specifically, only if its duration is limited. E.g., id. at 249-51; Nalco Chemical Co. v. Hydro Technologies, Inc., 984 F.2d 801, 803-04 (7th Cir. 1993) (Wisconsin law); AMP, Inc. v. Fleischhacker, 823 F.2d 1199, 1201-02 (7th Cir.1987); Howard Schultz & Associates of the Southeast, Inc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265, 269-70 (1977). Because such a prohibition limits competition, courts view...

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    ...unauthorized use or disclosure,” which C & F gave up in exchange for the settlement payment in 2002. See Am. Family Mut. Ins. Co. v. Roth, 485 F.3d 930, 932 (7th Cir.2007) (noting that trade secrets, once sold, can no longer be used by the seller). The facts of the case undermine their posi......
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