Law Professors Oppose Federal Trade Secrets Acts, Ignore Their Benefits

I’ve written about the Defend Trade Secrets Act and the Trade Secrets Protection Act previously. I’ve expressed enthusiastic support for these laws, which have bipartisan and widespread corporate backing. Today, 31 law professors issued a letter opposing these proposed statutes. Their harsh critique ignores clear benefits and overstates the statutes’ risks.

These professors’ thesis is explained at the end of the letter: “[T]he Acts are dangerous because the many downsides explained above have no—not one—corresponding upside.”

This statement and attitude ruins the letter’s credibility. These statutes have real, concrete benefits. They provide for federal jurisdiction, allowing for federal magistrates—experts in e-discovery—to oversee the complicated e-discovery issues often attendant to trade-secrets-misappropriation cases. They would allow for a uniform national trade-secret-misappropriation standard, thereby providing companies with greater certainty regarding enforcement. And the provision creating the most controversy, the ex parte seizure provision, will reduce the real risk of deliberate evidence destruction.

If these professors are not able to acknowledge that these proposed statutes offer benefits to companies facing the threat of misappropriation, I find it hard to take their critique seriously. But let’s look at their five reasons to reject these statutes:

1. Effective and uniform state law already exists. True, most states have adopted the Uniform Trade Secrets Act, with slight variations. But the state-by-state patchwork of statutory interpretation is not uniform. For example, different states apply different standards to determine whether a customer list is a trade secret. And state courts are often overburdened. I have personally experienced difficulty getting expedited hearing dates for emergency temporary injunction motions in state courts. Federal courts are better equipped to hear these types of motions expeditiously.

2. The Acts will damage trade secret law and jurisprudence by weakening uniformity while simultaneously creating parallel, redundant and/or damaging law. Despite this heading, the professors do not explain how applying a uniform federal standard will weaken uniformity. Instead, the professors argue that the Acts do not preempt state law, but only apply to trade secrets used in interstate or foreign commerce. Apparently, they believe that giving companies a choice between filing a misappropriation action in federal or state court is a bad thing. If companies want to litigate in state court, based on state law, these Acts permit them to do so. But these statutes would provide a second option. Given the tremendous corporate support for these statutes, companies themselves seem to want this new option.

The professors also criticize the interstate commerce provision, calling it “unclear and unsettled.” But like all statutes, this provision will become settled once tested in the courts. And the concept of interstate commerce is certainly not a new one, since federal courts routinely apply this standard to many federal statutes.

The professors also criticize the ex parte seizure provisions. Of all their critiques, this one has the most merit. I responded to this issue here. Keep in mind that evidence destruction is a real threat. I believe that it occurs routinely, particularly in misappropriation cases. In the end, I have faith that the federal judiciary will limit these orders to those cases where they are justified.

3. The Acts are imbalanced and could be used for anti-competitive purposes. The professors next argue that the Acts do not explicitly limit the length of injunctive relief. But the proper length of an injunction can vary widely based on the circumstances of a case. The judge hearing the supporting evidence is in a much better position than Congress to determine its length.

The professors are also concerned that parties will misuse the ex parte seizure provisions for anticompetitive purposes. This ignores the fact that (1) the moving party will have to convince a federal judge that the ex parte seizure order is necessary, and (2) the defendant will have the opportunity to challenge the order very soon after its entry. Again, I believe that the benefits of this provision outweigh its risks, given the built-in protections.

4. The Acts increase the risk of accidental disclosure of trade secrets.  Here, the professors argue that because of possible jurisdictional challenges based on the interstate commerce provision, plaintiffs will face motions to dismiss for lack of subject-matter jurisdiction that will “require the plaintiff to identify and disclose its trade secrets early in the litigation.” It’s hard to reconcile the professors’ concern for anticompetitive uses of the Act (number 3 above) with their concern that plaintiffs will have to identify the trade secrets at issue. Regardless, in reality, defendants already seek more detailed information about the trade secrets at issue at the case’s outset as a matter of routine, either through a motion to dismiss/for more definite statement, or through discovery requests. This new statute will have a marginal effect, if any at all, on the timing for identifying the trade secrets at issue.

5. The Acts have potential ancillary negative impacts on access to information, collaboration among businesses and mobility of labor. The letter discusses how companies are able to label information as a trade secret to prevent public and regulatory access to important information. (Again, this is inconsistent with point 4, where the professors wanted to enable companies to delay disclosure of the trade secrets at issue.) But the professors don’t explain how the Acts would increase this practice, other than to mention the ex parte seizure provision. Yet any company (and its attorneys) that obtains an ex parte seizure order in bad faith will have to face the ire of a federal judge who they manipulated into entering the order. I think the risk is overblown.

Look, neither of the Acts are perfect. But the threat of misappropriation is real. Companies need stronger weapons in their arsenal to protect their proprietary information. These Acts accomplish that, with limited real—as opposed to academic—downside.


Discovery: Keeping Trade Secrets Secret

All litigators need to be familiar with trade-secrets law, since discovery requests often seek  proprietary information. When this happens, you need to protect your clients’ trade secrets in the discovery process. Last week, Florida’s Second District Court of Appeal addressed this issue in Bright House Networks, LLC v. Cassidy, 2014 WL 84237 (Fla. 2d DCA Jan. 10 2014) (opinion linked below). This case offers multiple takeaways for lawyers when your clients are faced with discovery requests calling for production of trade secrets.

In this case, the plaintiffs had a contract with their cable company that entitled them to perpetual free cable. After the defendant, Bright House Networks, purchased the cable company, it terminated the plaintiffs’  free services. The plaintiffs sued Bright House and won — a court ruled that they were entitled to lifetime free cable. In response, Bright House started issuing 1099s to the the plaintiffs for the free cable’s value. (Aside: cable companies are the worst.) The plaintiffs sued again, arguing that the 1099s violated the previous judgment, and that Bright House does not issue 1099s to other customers receiving free services.

In discovery, the plaintiffs sought information about all customers receiving free services. Bright House objected, arguing that this information was confidential and proprietary. The lower court overruled this objection, leading to this appeal.

The appellate court reversed, noting that

The Florida Evidence Code contains a privilege against the disclosure of trade secrets. . . . When a party objects to the disclosure of a trade secret, first a court must determine whether the requested information is, in fact, a trade secret. . . . Usually this determination requires the trial court to perform an in camera review of the information. . . . Second, if the trial court determines that the information is a trade secret, then the court must determine if the party requesting the information has shown a reasonable necessity for the information. . . . If the court orders disclosure, it must make findings to support its determination. . . . [T]he trial court may need to order safeguards to prevent the unnecessary dissemination of the information.

Here, the trial court never made an in camera review. The appellate court ordered the trial court to conduct this review and, if necessary, conduct a hearing to determine whether Bright House’s customer information is a trade secret.

There are several takeaways from this case. Carefully review all discovery requests to determine whether they call for the production of proprietary information. If so, timely object and be prepared to have the court review the material in camera.

If the court orders production, the company should avail itself of an immediate appeal if possible. In Florida, that is done through a petition for writ of certiorari, which allows interlocutory review of orders compelling discovery where compliance could cause irreparable harm.

Also, here Bright House conceded that it had offered free services to other customers but had not issued 1099s. In this opinion, the appellate court noted that “In determining necessity for the information, the trial court should consider the significance of Bright House’s stipulation.” Bright House knew what the information sought would show, and tried to prevent disclosure by conceding the point. This may prove successful. When faced with the possibility of producing trade secrets, you should balance the risk of disclosure with the effect a concession of the relevant point will have on the litigation.

Bright House Networks LLV v. Cassidy

Five Trade Secrets Businesses Don’t Know They Have

When a business owner or executive asks what kind of law I practice, and I tell them about my trade-secrets work, I often get a response along the lines of “Interesting stuff, but we don’t have any trade secrets.” Most of the time, they are wrong. Almost all businesses have some kind of proprietary information that can qualify as a trade secret, as long as the business reasonably protects that information.

Here are five categories of common information that can qualify as trade secrets, under the right circumstances:

  1. Customer Information. Many companies spend significant time and money gathering information about their customers. Some maintain simple address and demographic information, while others compile detailed customer databases with order history and precise customer preferences. The more detailed the information, and the more time spent compiling it, the more likely it could be a trade secret.
  2. Pricing Information. In many industries, pricing information is not publicly known. Such pricing information can qualify as a trade secret, as long as the company reasonably protects it. At a minimum, customer contracts should include a confidentiality provision.
  3. Profit-Margin Information. Like pricing information, profit-margin information can also be a trade secret.
  4. Contracts. I’ve had clients who spend years developing proprietary contracts that help them better serve their customers. In these cases, the contract can become a trade secret. Again, a confidentiality provision would likely be required, along with other protections, before a court will recognize a contract as a trade secret.
  5. Business Plans. Business plans inevitably include some kind of proprietary information, whether it be pricing-related, or market forecasting. If this information is not outdated, and is properly protected, it can be a trade secret.

If your company has one or more of these types of information, it may have trade secrets. But to enjoy protection under the trade secrets act, you must take reasonable measures to protect your information.  Consult with an attorney to make sure you’re in the best possible position to protect your proprietary information.

Can Business Relationships Be Trade Secrets? VA Federal Court Says No.

Business relationships are certainly valuable. But can they be trade secrets? In Cablecom Tax Services, Inc. v. Shenandoah Telecommunications Co., 2013 WL 2382969 (W.D. Va. May 30, 2013), the court said no.

Here, the plaintiff offered services designed to reduce its clients’ ad valorem and sales tax liability. The defendants, cable companies, contracted with the plaintiff for this purpose. After the plaintiff apparently obtained tax reductions, the defendants allegedly did not pay amounts owed to the plaintiff. The plaintiff sued for misappropriation of trade secrets under Virginia’s Uniform Trade Secrets Act, among other claims.

The plaintiff identified two trade secrets allegedly misappropriated, including its “valuable relationships with taxing authorities.” (The case does not explain how the defendants used these relationships, but that’s not important for our purposes.) Essentially, the plaintiff is saying that it spent time and money developing these relationships, which offered it economic value.

The court spent little time flatly rejecting this theory:

The court cannot fathom how Cablecom’s alleged ‘valuable relationships’ with taxing authorities could conceivably fall under the definition of a trade secret. Simply put, such a relationship is not information that derives independent economic value from not being generally known and which could be the subject of reasonable efforts to maintain secrecy.

This is the right result. A relationship exists between people; it is not possible for another person to misappropriate a relationship.

But this got me thinking. Perhaps there is a way to protect business relationships as trade secrets, the same way customer information can become a trade secret. If a company invests time and money creating and reasonably protecting a database containing information about its business relationships, there’s certainly an argument that the database—as opposed to the relationship itself—could be a trade secret. But as I’ve discussed in prior posts, it can be difficult to convince courts to treat customer information as trade secrets. It would likely be even more difficult to do so with business relationships.

Customer Lists as Trade Secrets: What Protections Are Sufficient?

Customer lists are frequently a source of trade-secret-misappropriation litigation. Under the Uniform Trade Secrets Act, a plaintiff must establish that it took reasonable efforts to protect its customer list. In Farmers Ins. Exchange v. Steele Ins. Agency, Inc., 2013 WL 2151553 (E.D. Ca. May 16, 2013), the court found that Farmers reasonably protected its customer list.

Here, Farmers sued several of its former agents, who were working for a new insurance agency started by one of the former agents. Farmers maintained a customer database that contained identifying information about its current and former policyholders, along with “policy expiration date, insured property, claims history, financial and other information.”

Farmers presented evidence that the defendants improperly accessed Farmers’ database and downloaded huge amounts of data regarding customers the defendants serviced while at Farmers. Farmers sought, and the court granted, a preliminary injunction barring use of this information.

After the court determined that the customer database contained information that could be protected as a trade secret (another critical issue surrounding customer lists and trade secrets, which I am not discussing in this post), it examined whether Farmers took reasonable steps to protect this information.

Farmers did an excellent job explaining how it protected its customer database. Farmers used the following protective measures:

  • Maintained the database on a password and user-ID protected system;
  • Solely provided each agent with information about that agent’s clients, not the entire customer database;
  • Implemented company policies regarding access to the database;
  • Periodically reminded employees about Farmers’ confidentiality policies via bulletins, yearly compliance memoranda, and other communications;
  • Required employees to acknowledge that they were accessing confidential information each time they logged on to the database; and
  • Immediately disabled access at the end of an agent’s employment with Farmers.

Given these steps, the court concluded that Farmers reasonably protected its customer database.

A customer database is often one of a company’s most valuable intangible assets. It is worth spending the time and money to implement protections like those listed above to reduce the likelihood of misappropriation and put the company in the best possible position should litigation become necessary.

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