The concept behind trade secret protection can be useful for confining discovery in product liability suits. One potential strategy is to review the material a plaintiff is seeking to discover to determine if any of the responsive information can qualify as a trade secret or as confidential. If the information is a trade secret (or even just confidential) there is a process in many jurisdictions to exempt that information from discovery.
I. What is a Trade Secret?
The law of trade secret protection is for the most part a creature of state law. Generally speaking, information that is valuable for any commercial purpose but is not generally known may qualify for protection as a trade secret. The states have taken two basic approaches to the law of trade secrets. Approximately forty states have adopted versions of the Uniform State Trade Secrets Act (“UTSA”), which was first proposed in 1979. Another ten states declined to adopt the UTSA and continue to rely upon common law principles.
In addition, a large number of states look to the Restatement of Torts to dictate what falls into the definition of trade secret. The Restatement provides that:
[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.... A trade secret is a process or device for continuous use in the operation of the business.
Restatement of Torts § 757, cmt. b, 5 (1939).
Whether relying upon the Restatement or the UTSA, most states have adopted three general requirements for trade secret protection:
‣ the trade secret must actually be a “secret”;
‣ the trade secret must be novel or original; and
‣ the trade secret must give its owner some competitive advantage.
See accord Cherne Indus., Inc. v. Grounds & Assoc., Inc., 278 N.W.2d 81, 89-90 (Minn. 1979); Cal. Civ. Code Ann. § 3426.1(d)(1)(2) (West 2000); S.C. Code Ann. §§ 39-8-1 to -130 (Law. Co-op. Supp. 1997).
An eclectic array of material has been found to qualify as trade secrets. Certainly, a mainstay of recent trade secret protection has been the skim stock formula of various tires. Courts have consistently held these formulae to be trade secrets. In re Continental General Tire, Inc., 979 S.W.2d at 613; In re Bridgestone/Firestone, Inc., 106 S.W.3d 730, 732 (Tex. 2003).
But more offbeat items have earned the coveted designation as well. In San Francisco, an established news organization, Paperloop.com, Inc. (“Paperloop”) sued its maverick competitor, Forestweb, after several of Paperloop’s journalists jumped ship and began working for Forestweb. Paperloop.com, Inc. v. Gow, 29 Media L. Rep. (BNA) 2406 (Cal. Super. (S.F.) filed Aug. 9, 2001). Of course, these turncoat reporters began using on behalf of Forestweb the news sources they had developed while employed by Paperloop.
Exhibiting creative lawyering par excellence, Paperloop sued, heralding, “[t]his isn’t a First Amendment case. . . [w]e view it as a trade-secret case.” Paperloop argued that the sources were trade secrets because they are novel (they are new sources developed by Paperloop reporters), they provide Paperloop an economic advantage (after all, the strength of a information service is the ability to get the best and freshest information), and the sources are secret (the reporters were further instructed to keep the information and identity of the sources in strictest confidence). Moreover, all of the reporters contacted and developed the sources in the course and scope of their employment with Paperloop. Forestweb countered that news sources just cannot be trade secrets, in light of the First Amendment, freedom of the press and free speech. Judge A. James Robertson II disagreed, holding, “Paperloop has provided evidence sufficient to make a prima facie showing that its source lists qualify as a trade secret . . . .”
Accountants have been creative as well. Auditors often claim that their work papers, internal auditing manuals and other documents are trade secrets. And they vigorously oppose their discovery on that basis. See Gohler v. Wood, 162 F.R.D. 691, 693 (D. Utah 1995) (defendant Deloitte & Touche resisted discovery of its audit practice manuals claiming that they were trade secrets and disclosure would be harmful to Deloitte’s business). For example, Peat, Marwick, Mitchell & Co. (“Peat, Marwick”) objected to the production of many documents that a creditor’s committee in bankruptcy had requested. The bankruptcy court sUTSAined Peat, Marwick’s objection to production of a vast number of the documents that related solely to internal audit plans and operations. Peat, Marwick, Mitchell & Co. v. Creditors, Comm. of Northeast Dairy Coop. Fed. Inc., 65 B.R. 886, 889 (N.D.N.Y. 1986).
A. The secrecy requirement
For information to qualify as a trade secret it must be a secret known only to the owner and those authorized by the owner — it must not consist of general knowledge or be part of the public domain. Restatement (Third) of Unfair Competition, § 39, cmt. f. (there must be sufficient secrecy “to confer an actual or potential economic advantage on one who possesses the information”); Unif. Trade Secret Act § 1(4)(ii) (efforts for maintaining secrecy must be reasonable under the circumstances); R. Milgrim, Milgrim on Trade Secrets, § 1.03 (“indispensable to an effective allegation of a trade secret is proof that the matter is, more or less, a secret”).
There is a multitude of cases in which information, otherwise not “secret” as that word is commonly understood, is acknowledged as a trade secret because of the manner in which the information has been gathered. See, e.g., Imperial Chem. Indus., Ltd. v. National Distillers & Chem. Corp., 342 F.2d 737, 743-44 (2d Cir. 1965) (trade secret can exist in a combination of characteristics and components each of which, by itself, is in the public domain, but the unified process and operation of which, in unique combination, affords a competitive advantage and can be protected); ISC-Bunker Ramo Corp. v. Altech, Inc., 765 F. Supp. 1310, 1321-22 (N.D. Ill. 1990) (the effort of compiling useful information is, of itself, entitled to protection even if the information is otherwise generally known); Continental Data Sys., Inc. v. Exxon Corp., 638 F. Supp. 432, 443 (E.D. Pa. 1986) (fact that information includes components within the public domain does not preclude a finding that the combination afforded plaintiff a competitive advantage). Hence, a machine that includes only one part not generally known to the industry may be a trade secret. Imperial Chem., 342 F.2d at 742. A computer software program that contains nothing more than forms and samples common to the legal practice may be a trade secret. Continental Data Sys., 638 F. Supp. at 443. Customer lists, long recognized as trade secrets because of the competitive advantage they provide, consist of nothing more than names and addresses that also are available in a phone book. Zoecon Indus. v. American Stockman Tag Co., 713 F.2d 1174, 1179 (5th Cir. 1983).
B. The novelty requirement
For information to qualify as a trade secret, the owner must establish that the alleged secret is somehow novel, original or unique. This requirement can generally be satisfied by a showing of some degree of advancement or change over what is already known. Whether or not something is generally known is a question of fact. In product cases, quite often this requirement is established by the affidavit of or live testimony by a representative of the product manufacturer or an expert in the relevant field.
C. The advantage requirement
Finally, to qualify as a trade secret, information must give the owner “an opportunity to obtain an advantage over competitors who do not know or use it.” Restatement of Torts, § 757, cmt. b (1939). This advantage can either be:
‣ the time and effort devoted to developing the information; or
‣ the fact that the information is unknown and only available from the developer at a price.
Salisbury Labs, Inc. v. Mercury Labs, Inc., 908 F.2d 706, 710 (11th Cir. 1990) (information must have commercial value to be protected as a trade secret); see alsoR. Milgrim, Milgrim on Trade Secrets § 1.02 (discussing various approaches to requirement of competitive advantage). The advantage requirement represents the legal requirement to show that harm will result from production of the information. When the defendant is a company that manufactured the product under scrutiny, the company’s interest in the product is financial – it is the source of revenues and hopefully profitability. If the information requested does not directly relate to building an economic advantage over competitors to sell more product and generate greater revenues for the company, it may be difficult to convince a court that production of the information will be harmful to the product manufacturer.
D. How about confidential information?
When the party seeking to limit discovery is unable to show that the information qualifies as a trade secret, its next assertion is often that the challenged documents are nonetheless entitled to protection because they are confidential. Fed. R. Civ. P. 26(c)(7) (also protecting “confidential research”). Courts define confidential information as information which, if disclosed, will cause a “clearly defined and very serious injury” to the defendant’s business. United States v. International Bus. Mach. Corp., 67 F.R.D. 40, 46 (S.D.N.Y. 1975); see also Reliance Ins. Co. v. Barron’s, 428 F. Supp. 200, 202-04 (S.D.N.Y. 1977). The often cited federal standard for determining confidentiality of information related to a product is set out in Parsons v. General Motors Corp., 85 F.R.D. 724 (N.D. Ga. 1980). In Parsons, the manufacturer claimed that crash tests and other information regarding the design and manufacture of the allegedly defective vehicle had always been restricted, even within the corporation, and were therefore entitled to protection. Id. at 725. The court considered the following factors, many of which overlap with the factors that tend to show that information qualifies as a trade secret:
‣ how many employees had knowledge of the information or worked on a confidential project;
‣ how the defendant maintained the secrecy of the information;
‣ how the defendant controlled or limited the reproduction and circulation of the information;
‣ the age of the information; and
‣ whether any of the information was required by law to be reported to the government.
Id. at 726. While the Parsons court denied the motion for a protective order, emphasizing that the allegedly confidential information was ten years old, Parson cements into at least federal law the concept that even information that does not qualify as a trade secret — but which does qualify as confidential — is entitled to some level of protection from discovery. See id.
When both trade secret and confidential information arguments have failed, all is not lost. The party seeking to limit production can try the “last-ditch” argument: that the information is entitled to protection to avoid “annoyance, embarrassment, oppression, or undue burden or expense.” Fed. R. Civ. P. 26(c). To convince a court with this argument, the party must establish that releasing the requested information will, “by itself, have a direct impact” on financial standing. Bic, 869 F.2d at 201; Cippolone v. Liggett Grp, Inc., 113 F.R.D. 86, 90 (D.N.J. 1986)).
II. How Do You Protect A Trade Secret Or Confidential Information From Disclosure?
Once the party seeking to protect information has established that the information is a trade secret or confidential and that production would cause harm, under Rule 26(c)(7) (and similar state laws), the party seeking production must prove that the trade secret or confidential materials are peculiarly relevant to the issues in the lawsuit. The party also must demonstrate a true need for the materials.
Even if the moving party demonstrates peculiar relevance and true need, however, the court may prevent disclosure if the potential harm to the trade secret owner outweighs the other party’s need. See 8Wright & Miller, Federal Practice and Procedure, § 2043 at 559 (1970) (stating that the trial conduct conducts a balancing test and “the burden is on the party seeking discovery to establish that the information is sufficiently relevant and necessary to his case to outweigh the harm disclosure would cause to the person from whom he is seeking the information.”); see also Centurion Indus. v. Warren Steurer & Assocs., 665 F.2d 323, 325 (10th Cir. 1981) (“The district court must balance the need for the trade secrets against the claim of injury resulting from disclosure.”). Thus, federal courts applying Rule 26(c)(7) recognize that “[t]here is no absolute privilege for trade secrets and similar confidential information.” See 8Wright & Miller, Federal Practice and Procedure, § 2043, at 300 (1970).
If the court decides to order discovery of trade secrets, it must take the measures necessary to protect the secrets from improper use or disclosure. See 8Wright & Miller, Federal Practice and Procedure, § 2043 at 565 (1970). The measures should limit use of the materials to the necessity demonstrated and provide clear procedures for handling the materials during and after the litigation. Id.
III. Maneuvering Through The Process To Reach Protection
Upon a request to protect material from discovery based upon its confidential or “trade secret” character, under the federal system and most state procedures, the process involves five steps:
‣ a party files a motion for protective order or motion to enforce discovery either seeking to obtain or seeking to protect trade secret or confidential information;
‣ the party seeking to avoid production must show that the materials are trade secrets using affidavits or other evidence;
‣ the party seeking to avoid production must show that some harm will result from disclosure using affidavits or other evidence;
‣ if the party seeking to avoid production has satisfied the threshold issues, the burden shifts to the party seeking production to show that the material sought is peculiarly relevant and truly necessary; and
‣ if the party seeking the production meets its burden, the court weighs and balances the competing interests of the parties and fashions a remedy consistent with the rules.
A. Prove the information is a trade secret
Quite often it is very appropriate to offer affidavit or live testimony to present evidence of the general novel or original nature of the information. Then, the party seeking to protect the information might be wise to request some form of confidential review of the material. Courts are often willing to provide this kind of initial protection. In one case a court ruled that plaintiff’s in-house counsel, a computer expert, could not have access to the materials during the threshold process for fear of improper disclosure of the purported trade secret. Brown Bag Software, 960 F.2d at 1471. In another case a court struck a balance between the need to examine trade secrets to determine the extent of damages with the rights of the trade secret holder to nondisclosure by requiring the parties to agree upon a neutral third party to examine the trade secrets. Battle Creek Equip. Co. v. Roberts Mfg. Co., 90 F.R.D. 85, 89 (W.D. Mich. 1981).
An in camera proceeding or appointment of a special master may resolve the difficulty of demonstrating a trade secret without revealing its contents. These are perfect tools to balance claims of privilege with claims of necessity. Kerr v. United States Dist. Ct., 426 U.S. 394, 406 (1976). There is no absolute requirement in the Federal Rules of Civil Procedure that a district court conduct an in camera proceeding. In camera proceedings offer the greatest amount of protection to the party seeking to protect a trade secret. However, they also can be time consuming, cumbersome, and expensive. When the court conducts in camera proceedings, the court’s objectivity substitutes for the “truth finding” aspects of the adversarial discovery process.
After convincing the trial court that the material is novel, the party must then demonstrate that it has taken steps to protect the confidentiality of its secrets. See, e.g., Coca-Cola Bottling Co. v. Coca-Cola Co., 107 F.R.D. 288, 294 (D. Del. 1985). If the purported trade secret has been revealed to outsiders for business purposes without any promise of confidentiality, it may not be considered a trade secret. Id.; See, e.g., Hudson Hotels Corp., 995 F.2d at 1177 (party could not have a trade secret in a concept for a “micro-hotel” when it had attempted to sell the idea to another party).
B. Prove disclosure will harm.
After surviving the requirement to prove the material is a trade secret or confidential, the party seeking to prevent disclosure must next show that disclosure is likely to result in a serious and identifiable injury. Cuno Inc. v. Pall Corp., 117 F.R.D. 506, 507 (E.D.N.Y. 1987). Any doubts in determining the threshold questions of existence of a trade secret and the harm that disclosure would cause should be resolved in favor of the party seeking trade secret protection. Due credence must be given to claims of ownership because of the harm that improperly mandated disclosure can cause. Remington, 952 F.2d at 1033. In contrast, an improper finding against the party seeking discovery at this stage of the process results only in additional procedural steps, not significant prejudice.
C. Then, require those seeking the information to show they really need that material.
If the court makes a threshold finding that the matters are trade secrets and that disclosure would be harmful, the burden shifts to the party seeking discovery to show relevance and need. Remington, 952 F.2d at 1032 (citing American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 740-41 (Fed. Cir. 1987); Centurion Indus. Inc. v. Warren Steurer & Assoc., 665 F.2d 323, 325 (10th Cir. 1981); Hartley Pen Co. v. United States Dist. Ct., 287 F.2d 324, 331 (9th Cir. 1961); Empire of Carolina, Inc. v. Mackle, 108 F.R.D. 323, 326 (S.D. Fla. 1985); and Coca-Cola Bottling Co., 107 F.R.D. at 291)). The Eighth Circuit ruled in In Re Remington that discovery should be denied unless the plaintiff demonstrated “relevance of the trade secrets to his case, demonstrated a true need for the information, and showed the potential for harm to Remington is outweighed by [plaintiff’s] need for discovery.” Remington, 952 F.2d at 1033. The court did not define “relevance” or “true need.” However, it is obvious that these are two requirements and that they are stricter than the ordinary standards for discovery.
Relevance for trade secret discovery should mean relevance in the sense of admissibility, not relevance as it has been defined for ordinary discovery. A showing that the trade secrets “may lead” to the discovery of admissible evidence should not be sufficient. See Deitchman v. E.R. Squibb & Sons, Inc., 740 F.2d 556, 562 (7th Cir. 1984). In Re Remington seems to illustrate this. Significantly absent from the Remington court’s formulation of the plaintiff’s burden to show necessity is the phrase “or reasonably calculated to lead to the discovery of admissible evidence.” Remington, 952 F.2d at 1033.
“True need,” as required by the Eighth Circuit in In re Remington,is a relative term, but it must mean something that is material, not collateral. It must also mean something that is not cumulative or merely supportive. American Standard, 828 F.2d at 742-43. Some courts have equated “need” with “indispensable.” See Curtis v. Complete Foam Insulation Corp., 498 N.Y.S.2d 216, 217 (App. Div. 1986). In courts exhibiting this bent, disclosure will not be compelled unless and until it is clear that nondisclosure will deprive the plaintiff of the means to prove his case. Cities Serv. Oil Co. v. Celanese Corp., 10 F.R.D. 459, 460 (D. Del. 1950).
D. If Everyone Satisfies Their Burdens, It All Comes Down To A Balancing Test.
If the materials are trade secrets, harm will result from their disclosure, and the materials are relevant and needed, both parties will have met their threshold burdens. Then, the court must face what is likely to be a very difficult decision. It must weigh and balance the parties’ rights, including constitutional property rights of the trade secret holder, against the policy of full discovery. Here, the goal for the product defender is to convince the court that the potential harm to product manufacturer is greater than the plaintiff’s need for the information. Then, the material is exempt from discovery. Hartman, 143 F.R.D. at 678 (finding a limited number of materials not discoverable). After this trek, your product will have reached the safe haven. And with creative and careful lawyering, it is a destination worthy of your efforts.