A Double-Edged Sword: The “Attorney’s Eyes Only” Designation in Trade-Secrets Cases

Trade-secrets cases present a unique set of challenges in the discovery process. In particular, many of these cases are litigated between competitors. Thus, issues arise when producing competitively sensitive documents. Almost always, the parties agree to (or the court enters) some sort of protective order that allows the producing party to designate highly sensitive documents as “attorney’s eyes only” (AEO). In other words, those documents can only be reviewed by the receiving party’s attorneys, not the representatives/employees of the party itself.

But as is the case in many aspects of discovery, this process is subject to abuse. Invariably, producing parties over-designate documents as AEO. This can lead to various problems, as it is difficult to litigate a case without sharing with your client the nature of documents produced by the other side.

Recently, a magistrate judge in the Northern District of Illinois addressed this issue in the case of Global Material Technologies, Inc. v. Dazheng Metal Fibre, Co. The full opinion is worth a read, as it gives a comprehensive discussion of the law applicable to these situations. There’s a link to download the opinion below.

This case involves a trade-secrets misappropriation claim brought by a metal fiber manufacturer against a company to whom it previously outsourced manufacturing operations. Allegedly, the defendant gained access to the plaintiff’s proprietary customer information and pricing strategies and used that information to compete with the plaintiff.

Both the defendant and a non-party produced a number of documents designated as AEO, and the plaintiff filed a motion to challenge these designations.

The court went through the law applicable to these situations:

[T]he party seeking to protect documents . . . must continue to show good cause for confidentiality when challenged. . . . To make that showing, the designating party must show that disclosure will result in a clearly defined and serious injury, by pointing to specific demonstrations of fact. . . . The harm must be significant, not a mere trifle. Conclusory statements—including broad allegations of potential harm or competitive injury—are insufficient to meet the good cause standard. . . . If there is any doubt as to whether the material should be sealed, it is resolved in favor of disclosure.

The court also explained how the AEO designation should be used sparingly:

[T]he AEO designation should only be used on a relatively small and select group of documents where a genuine threat of competitive or other injury dictates such extreme measures. . . . The AEO designation must be used selectively because discovery and trial preparation are made significantly more difficult and expensive when an attorney cannot make a complete disclosure of relevant facts to a client[.]

After reviewing the documents at issue, the court sustained the designations in part and overruled them in part. In particular, the court focused on whether documents produced had become stale — i.e., the passage of time had mooted the documents’ sensitive nature. The court rejected broad allegations of harm, and only sustained those designations that were supported by an affidavit articulating the specific damage that would flow from disclosure.

The court also distinguished between the defendant and a non-party, noting that the non-party bears a lower burden in establishing a right to the AEO designation.

I can’t recall a trade-secrets case that I’ve litigated that did not touch on these issues. The issues presented are far too varied and complex to discuss in a single blog post. But at a high level, lawyers need to start thinking about discovery prior to filing the lawsuit, including what documents will likely be produced by both sides and how those documents will need to be protected.

These issues add a layer of complexity and strategy to discovery, and proactive thinking is necessary to protect your client and prevent/challenge abusive designation by the other side. This starts with the terms of the negotiated (or ordered) protective order, and continues as documents are produced and as litigation strategies shift over time.

GMT v. DMF

Florida Appellate Court Upholds Prohibition on Soliciting Referral Sources

It’s been a while since I’ve posted, as I was in trial and then on vacation. But I’m back and will endeavor to post regularly.

Employee mobility cases often involve the use of customer information or relationships. Many companies try to protect these relationships with restrictive covenants that prohibit competition or solicitation, or both. In Florida, restrictive covenants are governed by statute, Section 542.335, Florida Statutes.

Under this statute, a person trying to enforce a restrictive covenant must plead and prove one or more legitimate business interests. A recent Florida appellate decision, Infinity Home Care, LLC v. Amedisys Holding, LLC, addressed a twist on the typical non-solicitation case: can referral sources be a legitimate business interest? The opinion can be downloaded here.

In this case, a home healthcare company (Amedisys) sued its former employee and her new company, one of Amedisys’s competitors. The employee had signed a non-compete and non-solicitation agreement, which specifically prohibited solicitation of Amedisys’s referral sources.

While at Amedisys, the defendant’s primary job was to develop relationships with case managers at heath care facilities, who could then refer patients to Amedisys for home-care services. After leaving Amedisys, the defendant immediately started soliciting those same case managers to refer business to her new employer.

The lower court ruled that these referral sources were a legitimate business interest. Florida’s Fourth District Court of Appeal agreed. The appellate court noted that the statute lists “substantial relationships with specific prospective or existing customers, patients, or clients.” But the court found that the statute reaches beyond just these specific customer relationships:

Section 542.335, however, clearly states that the legitimate business interests listed in the statute are not exclusive. This allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection. . . . Here, it is undisputed that the relationships Amedisys is trying to protect are its referral sources. As the record shows, these doctors and clinics with whom it has developed substantial relationships are the “lifeblood” of its home health care business.

The appellate court acknowledged conflicting holdings among other Florida District Courts of Appeal on the issue of whether referral sources can be a legitimate business interest. But this result strikes me as the correct one. Plenty of companies rely heavily on referral sources to generate business. Given Florida’s broad restrictive-covenant statute, a company should be able to protect these types of relationships.

But given the divergent holdings, this issue is by no means settled. Any company operating in Florida that wants to protect its referral sources needs to consult with an attorney who can help make sense of the somewhat confusing law in this area.

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