Federal Court Addresses Defend Trade Secret Act Immunity

The Defend Trade Secrets Act, 18 U.S.C. 1030, et seq., provides immunity from liability for misappropriation of trade secrets in certain circumstances, namely if the disclosure:

(A) is made–

(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and

(ii) solely for the purpose of reporting or investigating a suspected violation of law; or

(B)  is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Since the DTSA was enacted in May 2016, there have not been many cases analyzing this portion of the statute. The Eastern District of Pennsylvania examined it in a recent opinion, Christian v. Lannett Co., Inc., E.D. Pa. Case No. 16-963 (the opinion can be downloaded below).

Christian is an unusual trade-secret case, as it started when the plaintiff asserted claims for employment discrimination. During discovery, the defendant learned that the plaintiff had retained a company laptop, which led to the plaintiff producing 22,000 pages of documents. Per the defendant, these contained trade secrets.

The defendant then filed a counterclaim under the DTSA, as well as other related claims, based on the plaintiff’s disclosure of trade secrets. But there was apparently no evidence of disclosure to anyone except the plaintiff’s lawyer, who only received the documents to produce them in the litigation.

The court concluded that “Plaintiff’s alleged disclosure was made to Plaintiff’s counsel pursuant to a discovery Order of this Court, within the context of a lawsuit regarding violations of Title VII, the ADA, and the FMLA,” and applied the immunity provision above to bar the DTSA claim.

The court did not specifically cite the immunity provision. And a strict application of that provision would seem to exclude the plaintiff from its protection, since the disclosure was not “solely for the purpose of reporting or investigating a suspected violation of law.” But the court’s decision is well within the spirit of the DTSA, which should not be used to prevent parties in litigation from communicating freely with, and providing discoverable documents to, their counsel.

Christian v Lannett


S.C. Supreme Court Addresses Trade Secrets in Discovery

A previous post talked about how trade-secrets issues can come up in lawsuits having nothing to do with trade-secrets claims. Recently, the South Carolina Supreme Court examined when a party is entitled to discovery of its opponent’s trade secrets.

In Meadwestvaco Corp. v. Rayonier Performance Fibers, LLC, 2013 WL 3761622 (S.C. July 15, 2013), the plaintiff and defendant sued each other for breaching a contract. Under this contract, the defendant was to provide the plaintiff with certain materials to use in connection with the plaintiff’s cellulose fiber manufacturing business.

At several depositions of the defendant’s employees, the plaintiff asked for specific details about the defendant’s manufacturing process, including “the ‘recipe’ information for its mill processes.” The defendant’s counsel instructed the deponents not to answer and filed a motion for a protective order, arguing that these details were trade secrets.

The court applied S.C. Rule of Civil Procedure 26(c), which is identical to Federal Rule of Civil Procedure 26(c), and the South Carolina Trade Secrets Act. This analysis required a three-part inquiry: (1) the party opposing discovery must show that the information sought is a trade secret, after which (2) the requesting party must show that the information is relevant and necessary to bring the matter to trial, after which (3) the court must weight the potential harm of disclosure against the need for the information.

Here, the plaintiff did not dispute that the information sought was a trade secret. Thus, the court focused on whether disclosure was necessary, and concluded that it was not. Most importantly, the contract’s terms did not address the recipe behind the defendant’s mill processes, and the plaintiff did not offer any evidence showing that the recipe was necessary for, or even relevant to, its claims. On this latter point, the court took issue with the plaintiff’s failure to offer any expert testimony connecting the defendant’s trade secrets to its claims.

There are takeaways in this case for attorneys seeking and defending the disclosure of trade secrets. When trying to get an opposing party to produce trade-secret information, be sure to clearly explain the connection between the information sought and the claims/defenses in the case. If the information at issue is complicated or technical, consider using expert testimony. On the flip side, attorneys need to be aware of their clients’ trade secrets so that they can properly object to discovery and move for a protective order.

Damages for Trade-Secret Misappropriation: Unjust Enrichment

In many commercial cases, damages models begin and end with a loss-profits analysis. But in trade-secrets cases, a plaintiff can go one step further.

Under the Uniform Trade Secrets Act, “Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.”

Thus, in addition to lost profits (and injunctive relief, which I’m not addressing in this post), the plaintiff can also recover damages to the extent the defendant was unjustly enriched, as long as those amounts aren’t included in the lost-profits model. This provision is particularly helpful where the plaintiff has difficulty quantifying its loss.

To lay the foundation for unjust-enrichment damages, a plaintiff’s discovery plan should include seeking documents and information that show how the defendant benefited by using the plaintiff’s trade secrets. This discovery will necessarily involve financial information. While defendants may object to providing financial information absent a judgment, courts should permit it, given the statute’s plain language.

Seeking financial information early in a trade-secrets case can also create leverage for a settlement, as most companies have no interest in sharing financial information with a competitor. These concerns can be mitigated somewhat with a protective order, as I discussed in a prior post. When representing a defendant, consider moving to bifurcate the trial into liability and damages phases, with the financial discovery delayed until after a finding of liability.

But unjust-enrichment damages can be hard to prove, particularly where it is difficult to link the misappropriation to the defendant’s profits. To overcome these issues, or to identify when unjust enrichment is not worth pursuing, the plaintiff should consider hiring a consulting damages expert early in the case. This expert can help formulate discovery requests and analyze the information produced, as well as help prepare for depositions on this issue.

At trial, expert testimony will likely be needed to show how the defendant’s profits flowed from the misappropriation and to quantify these damages.

In sum, a trade-secrets plaintiff should focus on damages early in the case. As part of this process, consider whether the damages model should include unjust enrichment.

Protecting Trade Secrets During Litigation With A Protective Order

Even when trade secrets are not at issue in a litigation, companies and their lawyers need to be vigilant about protecting their proprietary information. When litigating with a competitor—or, under certain circumstances, a customer—this becomes even more important.

One of the most effective tools for protecting trade secrets in litigation is a protective order governing confidential information. In any case where there’s a chance that discovery will involve confidential or proprietary information, a protective order should be entered. To be effective, a protective order should include the following:

  • what information and documents are considered confidential,
  • how confidential information/documents are designated as such,
  • how to deal with inadvertent production of confidential information without the proper designation,
  • how to challenge a designation,
  • to whom confidential information can be disclosed,
  • the requirement that any third parties, such as experts, who receive confidential information acknowledge in writing that they are bound by the order’s terms,
  • how confidential information and documents can be used during litigation (e.g., filed under seal),
  • how to respond to a third-party subpoena seeking confidential information, and
  • what happens to confidential information after the litigation ends.

In addition to documents, the parties should be able to designate portions of deposition transcripts and other discovery responses as confidential. For deposition transcripts, the order should specify that the entire transcript is designated as confidential for a set period (say 30 days), during which time the parties can designate specific portions of the transcript as confidential.

When there is a chance that discovery will involve proprietary information, and the litigants are competitors or could otherwise benefit from having the proprietary information, it is critical to include an additional tier of confidentiality protection: the “attorneys’ eyes only” designation. Documents or information designated as “attorneys’ eyes only” can only be viewed by the parties’ attorneys — not the parties themselves.

Of course, if the information is going to be used at trial, it will become necessary for it to be disclosed in some form. I have had success including provisions requiring the parties to meet and confer on how information will be used at trial, with the court obviously having the ultimate say.

Most times, the parties are able to submit an agreed order. But where opposing counsel is unwilling to agree to material terms, such as the inclusion of an attorneys’ eyes only provision, it is worth litigating the issue.

Guest Post: Florida Court Discusses Trade Secrets in Discovery

By Solomon Genet

Trade-secrets issues often arise in cases that have nothing to do with misappropriation. Thus, all litigators need to know how to protect their clients’ trade secrets in discovery.

In a very recent Florida appellate court decision, Cooper Tire & Rubber Co. v. Cabrera et al., (Fla. 3d DCA May 8, 2013),  the plaintiff sued a tire company for negligent design and manufacture of tires, after the plaintiff’s car was involved in an accident. The defendant objected to certain discovery based on the “trade secret privilege,” and provided the documents at issue to the court for an in camera inspection. The court then entered an order that, among other things, directed production of the documents, but—noting that certain documents contained trade secret information—limited disclosure to only those persons “in connection with trial preparation in the case.”

The defendant sought appellate review under a petition for writ of certiorari, which the appellate court granted, quashing the trial court order. The appellate court found that prior to ordering production of the documents, the trial court had to make findings  (i) of expressly what documents contain trade secret information; and (ii) that, as to those, there is a “reasonable necessity” for production of those documents.

Parties and non-parties need to be aware of possible trade secrets or proprietary information in documents sought in discovery. These issues can often be resolved through an agreed protective order, including perhaps “attorney’s eyes only” designations.

When the parties cannot agree and litigation is necessary, the party seeking discovery needs to make sure that the judge makes specific findings. And the producing party should first try to establish that the documents contain trade secrets and are not needed in the case. If that doesn’t work, make sure that the order limits disclosure. The order in this case left way too much wiggle room that could have led to inappropriate disclosure.

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

%d bloggers like this: