Insurance Clusters Not Immune from Trade Secret Liability

An insurance cluster — sometimes called an alliance, network or aggregator — is a group of agents and brokers combined under a common association for mutual support and the ability to market their individual books of business as part of a group.

Clusters provide independent brokers and agents access to larger markets, new lines of business, profit sharing and other services, while still maintaining the ownership of their own books. The association generates revenue through a percentage of the profit sharing and membership fees.

This structure seems like a win-win for the independent brokers/agents and the association, but they are complex and present a host of ambiguities. For example, is the association responsible when one of its members misappropriates the trade secrets of a non-member, competing agency, or when it steals a book of business? Does the association “acquire,” “use,” or “disclose” these misappropriated trade secrets as a part of its business model, opening itself up to potential liability? What steps can the association take to insure that it will not be brought into a lawsuit against one of its members? As part of its business, an insurance cluster may sometimes obtain information concerning its members’ customers. In a legal matter, this information is classified as “trade secrets.” California Uniform Trade Secret Act categorizes misappropriation into three areas: (1) acquisition; (2) disclosure; and (3) use.

Likewise, if an insurance cluster receives profit sharing from its insurer member, it may also have access to the customer information privy to these members. In fact, the cluster may even use this client information to pay direct commissions, share profits or pay contingent commissions to its members, and itself. However, the question still looms: Is this enough to constitute “acquisition,” “disclosure” or “use?”

There is no case law on this issue as it relates specifically to clusters, but there is a limited amount of authority in California that imputes misappropriation of trade secrets onto third parties who use or profit from them. For example, in the 2000 case of PMC, Inc. v. Kadisha, the court found that “employing the confidential information in manufacturing, production, research or development, marketing goods that embody the trade secret, or soliciting customers through the use of trade secret information, all constitute use.”

In PMC, the plaintiff filed suit against its former employees, the corporation where the misappropriated trade secrets were used, and the corporation’s officers, directors and principal shareholders.

The defendants filed a declaration stating they had never authorized any of the corporate officers or employees to engage in misappropriation. Further, they produced evidence that the corporation had investigated the situation, and concluded that there was no wrongdoing. With this evidence, the trial court granted the defendants summary judgment motion. The Court of Appeal reversed the judgment and found that under California’s Trade Secret Act, the defendants were liable if they used the plaintiffs’ trade secrets despite knowing or having reason to know they were derived from a person who owed a duty to the plaintiffs to keep them secret.

To this end, the Court of Appeal found there were triable issues regarding whether, in anticipation of personal and corporate gain, the defendant invested in and continued operating the corporation notwithstanding the corporation’s misappropriation and the defendants’ notice of it. As the Court of Appeal explained, “A reasonable trier of fact could conclude there was no real attempt to determine, and no basis upon which to conclude, that [the corporation] had not engaged in, and was not continuing to participate in, tortious conduct.” Finally, the Court of Appeal rejected the notion that the defendants could not be liable, since the misappropriation occurred before they became officers and investors.

Best Practices

In the case of a cluster, it may or may not have access to customer information in light of the profit sharing from its members’ insurance sales both before and after being put on notice by a plaintiff who is alleging misappropriation. To the extent the cluster has plaintiff’s trade secrets in its possession, or is using these trade trades secrets for gain, it may constitute misappropriation under California’s Trade Secret Act per the PMC case.

Following are best practices if a cluster finds itself in this position:

• Discuss the contract with the member and the indemnity agreements which should be in place;
• Discuss removing the misappropriated customers from under the cluster’s umbrella by having the member write the insurance directly through the insurer(s);
• Discuss removing the member from under the umbrella if it refuses to cooperate in moving the clients or resolving the matter;
• Educate members on CUTSA.