American Credit Indemnity Co. v. Sacks, B034560

CourtCalifornia Court of Appeals
Citation213 Cal.App.3d 622,262 Cal.Rptr. 92
Decision Date29 August 1989
Docket NumberNo. B034560,B034560
PartiesAMERICAN CREDIT INDEMNITY COMPANY, a Maryland corporation, Plaintiff and Appellant, v. Lola N. SACKS, an individual doing business as LNS Insurance Services, Defendant and Respondent.
Ervin, Cohen & Jessup, Allan Gabriel, Calvin E. Davis and Deborah A. Berthel, Beverly Hills, for plaintiff and appellant

Karns & Karabian and Lawrence Graze, Los Angeles, for defendant and respondent.

KLEIN, Presiding Justice.

Plaintiff and appellant American Credit Indemnity Company (ACI) appeals an order of the trial court denying its application for a preliminary injunction against defendant and respondent, its former employee, Lola N. Sacks (Sacks), now doing business as LNS Insurance Services. 1

The issue presented is whether, under the Uniform Trade Secrets Act (UTSA) (Civ.Code, § 3426 et seq.), Sacks may solicit ACI policyholders she serviced during her employment, or whether she must limit the use of ACI's customer list to an announcement of new affiliation.

We hold the UTSA protects ACI's customer list as a trade secret, and Sacks's solicitation of ACI's clients constituted a misappropriation within the meaning of the UTSA, and should have been enjoined by the trial court.


ACI is a national underwriter of credit insurance. This esoteric insurance is sold to manufacturers, wholesalers and certain service organizations which sell on credit terms to other businesses, and is designed to protect an insured against excessive bad debts. As far as can be discerned from the record, only three firms write this type of insurance. ACI is a leader in the field, and in 1987 it had 42 offices which generated gross premiums in excess of $56 million.

ACI estimates that although any company in the described category of potential customers with annual revenues in excess of $2 million, might insure its accounts receivable, only 6.5 percent actually do. ACI claims it has captured more than half of this market.

Sacks became an ACI agent on February 5, 1979. She formerly had worked in the toy industry and had been an ACI policyholder. By 1987, Sacks had become a top ACI agent. She personally serviced 43 of the 136 Los Angeles office policies. Although some of these policies had been "inherited" by Sacks when other ACI agents left the office, she had been the responsible sales person on the majority. Some of the leads which resulted in policies On March 4, 1988, Sacks resigned from ACI. She sent a letter dated March 7, 1988, to each of the approximately 50 ACI policyholders she personally had serviced. It stated: "After almost fifteen years as both an agent and policyholder, I have left [ACI] and am very pleased to announce the formation of an independent insurance agency. [p ] I shall continue to specialize in Credit Insurance but will now primarily be representing FIDELITY AND DEPOSIT COMPANY OF MARYLAND [F & D], who [sic] is offering companies a very interesting alternative to the types of policies being written by both [ACI] and Continental. If you would like to learn more about the [F & D] policy, I will be happy to discuss it in detail with you when you are ready to review your ongoing credit insurance needs at renewal time. [p ] In the meantime, ACI will assign a new agent to your policy. If I can be of assistance to you during the transition period or answer any questions for you at any time, please do not hesitate to call me. [p ] I have really enjoyed our past association and hope we don't lose touch!"

written by Sacks had been provided by ACI; others Sacks had developed.

a. ACI's complaint allegations.

On March 23, 1988, ACI filed a verified complaint against Sacks seeking injunctive relief which alleged Sacks had used ACI's " 'Trade Secrets' " to solicit ACI's clients. 2 The complaint defined as " 'Trade Secrets' " its client list, the expiration dates of ACI policies, lists of all leads for potential business, claims histories, and other information concerning the special needs of clients. ACI alleged it required its employees to sign confidentiality agreements with respect to this information.

The complaint further alleged that in the course of discovery in another lawsuit (the Wixom action), Sacks had received log books containing the names of approximately 3,000 ACI leads and clients maintained by ACI from 1985 through October, 1986. In that case, Sacks had stipulated to a protective order as to the log books. 3 ACI characterized the Wixom action as a suit for defamation brought by Sacks against a former ACI secretary.

b. Temporary restraining order (TRO) issued.

Based upon the allegations of the complaint, the trial court issued a TRO which directed Sacks not to divulge, make known or make any use of ACI's trade secrets and not to solicit business from any person or entity which had been an existing ACI client during the time Sacks had been employed by ACI or any potential ACI client Sacks had become aware of as a result of her ACI employment.

c. Facts disclosed by subsequent discovery.

After issuance of the TRO, the parties conducted expedited discovery which disclosed the following facts: 4

Sacks first contemplated leaving ACI in approximately April 1987. She began discussions with F & D in October 1987, and attended meetings at F & D's Baltimore headquarters in late January 1988. Sacks told F & D her ACI policyholders represented approximately $800,000 in annual premiums and "perhaps half of [those] policyholders In February, 1988, Sacks signed a lease and installed phone service at her new office but averred "until the last day as an agent with ACI (March 4, 1988) I properly serviced all ACI policyholders including but not limited to submitting policy renewal applications and obtaining new business. Indeed, between January, 1988 and March 4, 1988, I obtained 18 renewal applications for ACI and obtained three new applications for ACI, ..." (Italics deleted.)

might be interested in writing business with" F & D.

Sacks told several ACI clients of her possible association with F & D at the time she met with them for the purpose of renewal of their policies. Of these clients, she advised at least two to stay with ACI even though the clients wanted to follow her, and the great majority of these policyholders renewed with ACI.

Sacks claimed the March 7th letter had been "carefully drafted ... to refute any charge of wrongdoing that might be brought by ACI." Sacks pointed out the letter specifically suggested waiting until renewal time before making any change in coverage and assured the client that ACI would continue to service the policy.

Although Sacks also telephoned each client to which she had sent the March 7th letter in order to convey a personal communication of her departure, she denied soliciting business or discouraging continuation of coverage with ACI during those calls.

One major policyholder with which Sacks had discussed her new affiliation decided to change carriers to F & D. This policy, which expired on March 31, 1988, accounted for approximately $230,000 in annual premiums or almost 30 percent of the premiums Sacks generated. Sacks admitted she had provided information about F & D to this client in a manner which differed from her earlier practice with respect to competitors, and in fact, acted as an intermediary on behalf of the client with F & D. However, she also wrote a letter dated February 6, 1988, to ACI's home office, in accordance with a written ACI policy, which advised ACI management of competition from F & D on the renewal of this policy. The purpose of the letter was "to see if [ACI] would be willing to change any terms on the renewal in light of the potential competition."

On February 23, 1988, approximately one week after Sacks told this client she intended definitely to join F & D, the client told Sacks it would not renew the ACI policy but would place its business with F & D. Although Sacks at some point in the discussions had referred the client to a F & D agent, Sacks earned a commission on the issuance of the F & D policy. 5

Sacks admitted it is easier to renew a policy than to sell it in the first instance because a prospective client must be sold on the concept of credit insurance. Sacks's renewed policies at a rate that ranged between 65 and 75 percent.

Sacks believed the sales leads produced by ACI belonged to ACI but the sales leads she had developed belonged to her.

Regarding the log books, Sacks claimed the Wixom action, in addition to defamation, involved her claim ACI wrongfully had limited her acquisition of new accounts by depriving her of telephone leads. Sacks estimated the success rate on telephone leads at 20 percent. During her early tenure at ACI, Sacks had received 3 to 5 telephone leads per month which resulted in 10 to 12 new accounts per year. Sacks contrasted such leads with responses to direct mail which had a success rate of about 5 percent. Sacks claimed she had rarely received telephone leads after 1985.

d. The trial court's ruling.

After two oral hearings on the application for the preliminary injunction, the trial court indicated it would consider all the evidence, including the deposition testimony, and took the matter under submission. At the first such oral hearing, the trial court had stated the March 7, 1988, letter constituted a solicitation but, the trial court's written order concluded Sacks had a right to solicit the clients of her former employer with which she personally had become acquainted during the course of her employment.

The trial court also found the evidence did not support ACI's allegation of misappropriation of trade secrets. To the extent ACI's unfair competition claim had merit, the trial court held money damages provided an adequate remedy.


ACI contends its customers list, policy expiration dates...

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