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American Family Mutual Insurance Company v. Bonnie L. Roth

Court of Appeals for the Seventh Circuit
25 I.E.R. Cas. (BNA) 1771, 485 F.3d 930, 82 U.S.P.Q. 2d (BNA) 1701 (2007)
ELI5:

Rule of Law:

A contractual provision that indefinitely prohibits a former agent from using customer information is enforceable without a time limitation if that information qualifies as a trade secret under the Uniform Trade Secrets Act.


Facts:

  • Defendants were insurance agents working for the plaintiff, an insurance company.
  • The agents signed a contract addendum requiring them to submit all business through the plaintiff's digitized database of customer information.
  • The addendum stipulated that the database was the plaintiff's confidential and trade secret information, which agents could not use except in the ordinary course of business with the company.
  • During the agency relationship, the plaintiff reassigned approximately 2,000 existing customer policies to the defendants.
  • The plaintiff terminated its agency contract with the defendants.
  • After termination, the defendants began soliciting the plaintiff's customers for new business.
  • The defendants used a customer list (Exhibit 34) they maintained, the vast majority of which contained names that were also in the plaintiff's database.

Procedural Posture:

  • The plaintiff insurance company sued the defendant former agents in U.S. District Court, alleging breach of contract and theft of trade secrets.
  • The plaintiff moved for a preliminary injunction to prevent the defendants from soliciting its customers.
  • Following an evidentiary hearing, a magistrate judge recommended, and the district court granted, a preliminary injunction against the defendants.
  • The defendants, as appellants, appealed the district court's grant of the preliminary injunction to the U.S. Court of Appeals for the Seventh Circuit. The plaintiff is the appellee.

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Issue:

Does a contractual provision that prohibits former agents from using customer information contained in a company's database, which is classified as a trade secret, constitute an unenforceable restrictive covenant if it lacks a specific time limitation?


Opinions:

Majority - Posner, Circuit Judge

No, the contractual provision is not an unenforceable restrictive covenant. A prohibition on the use of a trade secret is not subject to the same reasonableness limitations, particularly regarding duration, as a standard non-compete or non-disclosure agreement. The court reasoned that the customer information in the plaintiff's database meets the Wisconsin statutory definition of a trade secret because it derives independent economic value from not being generally known and was subject to reasonable efforts to maintain secrecy. The curated list represented a 'defined, manageable and economically viable universe of uniquely receptive potential customers.' The agency contract effectively transferred ownership of all customer information entered into the database to the plaintiff. Because the information is a trade secret owned by the plaintiff, the contractual prohibition against its use by the former agents is enforceable even without a time limit. While affirming the plaintiff's right to an injunction, the court found the existing injunction's wording to be overbroad and vague, remanding the case for it to be redrafted more precisely.



Analysis:

This decision clarifies the distinction between enforcing a standard restrictive covenant and protecting a trade secret. It establishes that when customer information qualifies as a trade secret, a contractual ban on its use by former employees or agents does not need to contain the typical time and scope limitations required for other non-compete agreements. This strengthens protections for employers who invest in developing proprietary customer databases, shifting the legal analysis away from the 'reasonableness' of the restriction and toward whether the information itself meets the statutory definition of a trade secret. The case underscores that parties can contractually assign ownership of information, transforming what might have been an agent's work product into the company's protected intellectual property.

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