Supreme Court Discusses Trade Secrets During Oral Argument

Yesterday, the Supreme Court held oral argument Food Marketing Institute v. Argus Leader Media, a case involving an exemption to the Freedom of Information Act (FOIA). The Supreme Court’s Public Information Office granted me a press pass to cover the arguments for this blog, since the case involves trade-secrets issues.

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As I discussed previously, the FOIA contains an exemption for “trade secrets and commercial or financial information obtained from a person and privileged or confidential,” which does not need to be disclosed publicly. 5 USC 552(b)(4). This case addresses the scope of this exemption.

First, some background. Food Marketing Institute is a trade association representing retailers who operate tens of thousands of retail food stores. Argus Leader is a newspaper in Sioux Falls, South Dakota. As part of an investigation of food-stamp fraud, the newspaper filed a FOIA request with the USDA for data showing the amount of Supplemental Nutrition Assistance Program (SNAP)—formerly the Food Stamp Program—redemptions at individual stores.

While much SNAP data is publicly available, this store-level information is not. At the District Court, USDA presented evidence that the store-level data would provide a competitive advantage to other companies if released publicly. After a two-day trial, the District Court disagreed and ordered disclosure. The USDA gave notice to the retailers that it would not appeal, at which point Food Marketing Institute intervened to appeal on the USDA’s behalf.

The Eighth Circuit affirmed, relying on the D.C. Circuit’s test in Nat’l Parks & Conservation Ass’n v. Morton, 498 F.2d 765 (D.C. Cir. 1974), which eight circuits subsequently adopted. Under this test, the above exemption only applies if (1) the information at issue is kept private and not disclosed, and (2) “substantial competitive harm” would likely result if the information is publicly disclosed.

Food Marketing Institute argues that the National Parks test ignores the common meaning of the word “confidential,” thereby adding an “extratextual” requirement of showing competitive harm. Instead, it argues, the Court should apply its longstanding rules of statutory construction and give “confidential” its ordinary meaning, i.e., information “that is privately held and not disseminated,” without the need to show competitive harm if disclosed.

During oral argument, much of the Court’s questions for Food Marketing Institute’s lawyer, Evan Young, involved threshold justiciability issues that are outside this blog’s scope.

But, for our purposes, things got more interesting when Argus Leader’s lawyer, Robert Loeb, got his turn. One of Argus Leader’s primary arguments is that the Court should not look to the ordinary meaning of the term “confidential.”  Instead, because Congress used the language “trade secrets and commercial or financial information,” the Court should look to the then-existing common-law meaning of that term of art.

In its brief, Argus Leader argues that when the above exemption was enacted:

There was an established common-law term of art for non-public business information, disclosure of which would be tortious because it would cause competitive harm. Both courts and the relevant (and near-universally adopted) provisions in the first RESTATEMENT OF TORTS (1939) used the term “trade secrets and other confidential commercial information” (or some near-identical equivalent) to refer to this body of protected materials. Thus, in saying “trade secrets and other confidential commercial information,” courts and commentators meant non-public business information that would likely cause competitive harm if released.

Much of the Court’s questioning of Loeb focused on this argument. Justice Kagan, sounding like her more conservative colleagues, asked him to “give me your best textual argument” for why National Parks correctly interpreted the statute. Loeb responded by saying that the Court needs to look at the words Congress used in context, and that under common law, trade secrets included a competitive-harm requirement.

Justice Sotomayor responded by saying that the Court normally only applies common law to interpret statutory language when there is a term of art. Here, case law used different terms and phrases to cover trade secrets and confidential information. In response, Loeb argued that under the common law, there were two categories, trade secrets and confidential information. And both required a showing of competitive harm.

This didn’t seem to satisfy Justice Gorsuch, who noted that when a statute uses different words from the common law, it’s usually presumed that Congress intended a meaning other than the common law.

Justice Breyer focused on the concept of harm and how such a term would be defined. Noting that “you don’t have to write this opinion, but I might,” Justice Breyer pushed Loeb to clarify what words should be used in the opinion to describe the nature of harm that must be shown. Loeb again pointed to the common law.

Justice Alito asked whether, under common law, a showing of competitive harm was part of the claim itself or only a means for proving damages. Per Loeb, under common law, competitive harm is part of the essence of a trade secret.

Based on the Justices’ comments at oral argument, at least some of them have issues with the justiciability of this case, questioning whether Food Marketing Institute’s claims can be redressed or if they are moot. But if the Court reaches the merits of this case, I predict that it will strike the National Parks test, opting for the customary definition of “confidentiality,” without a showing of competitive harm.

Supreme Court to (Possibly) Address Trade Secrets

The U.S. Supreme Court rarely hears cases involving trade secrets, primarily because trade secrets have historically been governed by state law. Now that we have the Defend Trade Secrets Act (DTSA), it is more likely that the Court will have to address Circuit splits on statutory interpretation. But thus far, no such issues have reached the Supreme Court.

In a few weeks, however, the Court will hear oral argument in Food Marketing Institute v. Argus Lender Media, a Freedom of Information Act (FOIA) case that involves trade-secrets issues.

The FOIA contains an exemption for “trade secrets and commercial or financial information obtained from a person and privileged or confidential,” which does not need to be disclosed publicly. 5 USC 552(b)(4). This exemption has been interpreted to require proof that disclosure would cause substantial harm to the information source’s competitive position. Circuits have split on how to interpret this test.

The petitioner is asking the Court to dispense with this test and instead hold that the term “confidential” be interpreted under its ordinary meaning, i.e., information “that is privately held and not disseminated,” without the need to show competitive harm if disclosed. See Petitioner’s Brief at p. (i). Alternatively, the petitioner wants the Court to clarify that the substantial harm test is satisfied if “the party opposing disclosure establishes a reasonable possibility that disclosure might injure financial or competitive interests.” Id.

Since the statutory exemption includes trade secrets alongside confidential information, the Court may offer insight into how trade secrets are defined under the FOIA. In such a case, the Court’s comments could carry substantial weight in DTSA cases. Regardless, this case presents important issues for any company that seeks to protect its confidential information  and trade secrets when contracting with the government.

Video Blog: Start-Up Trade Secrets

TRANSCRIPT & LINKS:

Welcome to Protecting Trade Secrets. I’m Eric Ostroff. I’m a partner at Meland Russin & Budwick and I’m coming to you from my office in Miami Florida. I’m doing something new here on the Protecting Trade Secrets blog. Obviously, I’m on video right now, and I’ll be using video to create blog posts for at least some of the blog posts in the future. I’ll also go ahead and post a transcript of the video down below.

Today I want to talk about issues facing start-up companies who are looking to protect their proprietary information and trade secrets. I recently read an article on inc.com and I’ll go ahead and post a link to the article in the transcript below.

This article told the story of a company called HIDEit Mounts. They had a product that mounted video game consoles and camouflaged them so you didn’t have wires and things sticking out all over your living room.

When this company started out, it was a husband-and-wife team. They didn’t have any experience with product development, product design, or manufacturing, so they did with a lot of startup companies do; they partnered with a manufacturing company and worked with that company to design a prototype and then manufacture these products.

Things were going great. They were selling a lot of products; there were no direct competitors, and the company seemed like it was going to be successful. But then they hit a problem. Another company all of a sudden started selling very similar products, except they were actually a little bit better. And the HIDEit company thought that they might have to go out of business.

They did some research and were able to figure out that it was actually their manufacturer who was behind this competing company. Now thankfully for HIDEit, they went ahead and had their manufacturers sign a nondisclosure agreement early in the relationship. And they were able to use that contract to protect their IP rights and to protect their business. But a lot of startup companies just either ignore, try and use self-help, or don’t give enough thought to potential ways that having a lawyer or using legal solutions can protect against major problems down the road. A lot of companies will use forms off the internet or just won’t use lawyers at all.

The reality is that an extremely modest investment on the front end for a startup company in a competent lawyer who can can create agreements and give advice about ways that this company can protect its proprietary information can go a tremendous way to mitigate against and to deter really serious issues in the future.

So the lesson from this inc.com article for start-up companies is: Don’t think that you’re too early or you don’t have enough money to hire a lawyer. Speak with a lawyer early on in the process. Doing that can solve a lot of really terrible problems in the future.

That’s all for today. I appreciate your time.

 

Federal Circuit Invalidates Financial Analysis Patent, Suggests Trade Secret Protection

Since the Supreme Court decided Alice Corp. v. CLS Bank International in 2014, companies have had a difficult time patenting software and business methods. I am not a patent lawyer and this is not a patent blog. But a recent Federal Circuit case shows how companies with this type of IP may want to look to trade-secret laws for protection.

Last week, the Federal Circuit decided SAP America, Inc. v. InvestPic, LLC (a pdf of the opinion can be downloaded here). In this case, a judge in the Northern District of Texas granted judgment on the pleadings in favor of SAP, which filed a declaratory-judgment action seeking to invalidate InvestPic’s patent. The Federal Circuit affirmed.

InvestPic’s patent involved a technique that “utilizes resampled statistical methods for the analysis of financial data[.]” InvestPic claims this is superior to typical financial-market forecast methods that rely on the flawed assumption that “financial data follows a normal or Gaussian distribution.” (This reminds me of The Black Swan’s chapter on “The Bell Curve, That Great Intellectual Fraud.”)

Citing Alice, the Federal Circuit invalidated InvestPic’s patent, finding that it was directed to an abstract idea and did not contain an innovative concept.  This is not an uncommon post-Alice result. But at the end of its opinion, the Federal Circuit made a comment that caught my attention:

There is, in short, nothing “inventive” about any claim details, individually or in combination, that are not themselves in the realm of abstract ideas. . . . [P]atent law does not protect such claims, without more, no matter how groundbreaking the advance. An innovator who makes such an advance lacks patent protection for the advance itself. If any such protection is to be found, the innovator must look outside patent law in search of it, such as in the law of trade secrets, whose core requirement is that the idea be kept secret from the public.

Given the current state of patent law, many companies face a dilemma when trying to monetize potentially abstract ideas: make the disclosures necessary to seek a patent and risk having the patent rejected or invalidated, or adopt a business model that allows for trade-secret protection. This is a complicated analysis that involves many business and legal factors.

As the Federal Circuit noted, trade secrets cannot be publicly disclosed, and they must be reasonably protected. Business models can incorporate these restrictions. For example, it may be possible for a company to license its technology and include confidentiality obligations in the licensing agreement. Companies facing this choice need to involve trade-secret lawyers in strategy discussions and decisions.

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

 

AIPLA Trade Secrets Summit in San Diego, March 1-2

The American Intellectual Property Law Association’s annual Trade Secrets Summit is next week in San Diego. This event, which I have attended for the past three years, is a great opportunity to learn from and network with trade secret practitioners, while racking up CLE credits.

I will be moderating a panel on Corporate Best Practices, and there are a number of great presentations scheduled. You can find out more information here.

Hope to see you there!

Blockchain & Trade Secrets: Miami Conference 1/18-19

Tomorrow and Friday, I will be attending the North American Bitcoin Conference, which will take place two blocks from my office in downtown Miami. A number of startup and more established companies in the blockchain space will be presenting. I’ll be live tweeting the conference from @BlogTradeSecret, with a focus on trade-secrets and related legal issues facing companies in this developing field.

Will Two Lawyers Go to Jail for Asserting Trade Secrets in Bad Faith?

Two South Florida lawyers are facing possible jail time, in part because of allegedly asserting in bad faith that documents contained trade secrets. They supposedly wanted to prevent disclosure of documents that proved their witness testified inaccurately. In a case pending in Miami-Dade County Circuit Court, Green Tree Servicing v. Sibon, the judge decided yesterday to go forward with an arraignment for the two lawyers representing the plaintiff, a large loan servicer, on charges of indirect criminal contempt.

This started as a mortgage foreclosure case. The defendants asserted defenses relating to the plaintiff’s “loan boarding” process, i.e., how the plaintiff uploads information from prior servicers’ records, including borrowers’ payment history.

During a deposition, the plaintiff’s representative testified that the company’s training manuals included protocols for verifying this information, including a flow chart showing the process. But the plaintiff had not previously produced those manuals. Not surprisingly, the defendants’ lawyers demanded their production.

The court entered an order requiring production of the manuals and a further deposition of the plaintiff. Three days before the deposition, the plaintiff filed an emergency motion, asserting that the manuals contained trade secrets and work product. The next day, the court entered an order ruling that the motion was not an emergency and directed the plaintiff to set the motion for a hearing (the usual protocol in Miami-Dade Circuit Court for having a judge rule on a motion).

The deposition went forward without production of the manuals. But the plaintiff never set its emergency motion for hearing. Several months later, the court entered an order requiring production of the manuals by noon that day. At 11:59, the plaintiff produced them.

Apparently, the manuals contradict the witness’s testimony. According to the judge, “the document does not contain any ‘flow chart’ that mentions ‘red flags’ that prevent loans from boarding as Mr. Ogden testified he reviewed. To the contrary, it appears from the document produced that [the plaintiff] boards the prior servicer’s records . . . and makes the loan live on its system before any verification process would even begin.”

And then it got interesting. The judge entered an order to show cause, which can be downloaded here. That order informs both the witness and the plaintiff’s attorneys that “this is now a criminal matter” and directs them to appear to show cause why they should not be held in indirect criminal contempt:

It appears that [the plaintiff] and its counsel willfully and contumaciously ignored this Court’s order by refusing to turn over the training materials. Moreover, it appears [the plaintiff] and its counsel improperly sought to have the records deemed confidential to avoid disclosure of the fact that its witness gave grossly inaccurate testimony[.]

According to an article in the Daily Business Review, yesterday, the new judge handling the case (the prior judge recused himself) “ruled that [the witness] was ‘operating at the will of the lawyers’ and dismissed him from the criminal contempt proceedings.” But she will be going forward with the criminal case against the lawyers, pending an appeal.

If true, this is an egregious abuse of the trade-secrets laws. It’s one thing to be over broad when asserting trade-secret protection. It’s another thing entirely to assert trade secrets when none exist, solely to hide a witness’s inaccurate testimony. It will be interesting to see whether these lawyers are sanctioned, and if so, how harshly.

Bitcoin, Blockchain & Trade Secrets: An Introduction

I’m willing to bet that most readers of this blog have heard of Bitcoin. But I’m not sure how many know about the technology it’s based on, called blockchain. If you haven’t heard of blockchain, now’s the time to learn, since it has the potential to be the most transformative technology since the internet.

I’m going to be writing more about blockchain and the unique trade-secrets issues facing the many companies rushing to develop applications and other technology based on blockchain. But first, I want to give a primer for those who haven’t heard of it.

Blockchain is essentially a database that is distributed among a large number of computers on a network. Each computer with access to the blockchain has an identical copy of the database. Here’s a simple example to explain how it works, from this explanatory post that compares blockchain to a “record book”:

To be clear, this isn’t just one record book stored in a central location that is shared by many. There are thousands of copies of this record book, stored on computers all around the world, both home computers and business servers – hence the term “decentralised”. This record book can be used to record many kinds of things, however I’ll use sending and receiving money as the primary example, as it’s the most common one right now.

When John wants to send money to Sue, a new line item is created detailing that transaction. This line item then gets sent off to hundreds of other computers who have a copy of the record. Those computers confirm that this transaction is authorised, and ultimately they agree (or disagree) that everything about the transaction is legitimate before giving that line item a tick of approval. It has to match up perfectly on every copy of the record.

Each transaction, here John sending money to Sue, is a “block,” which when added to all the prior blocks forms a kind of “chain.” Hence, blockchain.

Since each computer with access to the blockchain has an identical copy of the database, fraudulent transactions are nearly impossible. If any one computer has a blockchain entry that all of the others don’t recognize, that entry is rejected. Entries are only added if all of the computers with access to the database agree.

The first “app” based on blockchain is Bitcoin, a cryptocurrancy. You can watch a short video that explains Bitcoin here. Bitcoin was the first truly digital currency, which allowed the transfer of money without the need for any centralized institution like a bank. Now there are a number of cryptocurrancies with names like Ether and litecoin.

But blockchain’s potential goes far beyond currencies. It can be used to streamline, simplify, and secure a wide variety of transactions, such as supply-chain management, digitial voting, collecting taxes, and recording real estate transfers and ownership. Essentially, any transaction involving value could be conducted—and improved—on the blockchain. Some think that the entire worldwide financial system will eventually move to blockchain — and I agree. Additionally, developers are using a blockchain platform called Etherium (which also underpins the Ether cryptocurrancy) to create “smart contracts” — essentially programming code that is capable of executing or enforcing contractual terms. This is a powerful, but complicated, concept that I will discuss in more detail in a future post.

Companies large and small are racing to develop new “apps” based on blockchain technologies.  This entire industry is essentially in the research-and-development phase, which means that trade-secrets issues abound. These companies can benefit from tech-savvy lawyers who understand how to protect this rapidly developing information.

This post is a very basic introduction to blockchain. I’m fascinated by the technology and see virtually limitless potential. If you want to learn more, I’d recommend The Internet of Money, an excellent book by Andreas M. Antonopoulos. And stay tuned — I intend to explore the intersection of blockchain and trade secrets here at Protecting Trade Secrets.

One Simple Step in Outlook to Protect Your Trade Secrets

If you and your employees use Outlook, you can take one simple step now to dramatically reduce the risk of inadvertent sharing of confidential information: Disable email-address auto fill.

Everyone loves this feature. You type the first few letters of someone’s name, and Outlook fills in an email address. But the increased efficiency comes at a cost, as everyone occasionally sends an email to the wrong person whose name is similar to the intended recipient.

If that email contains confidential info, you’ve just compromised it. Hopefully, you sent it to someone friendly who will comply with your embarrassed request to delete the email. Even if there’s no confidential information, the recipients may question your ability to exercise discretion when necessary. (Also, imagine later trying to prosecute a trade-secrets action and having to produce in discovery an email sending the info at issue to some random guy.)

So I strongly recommend that you disable this feature. And have your IT department disable it for all employees. The relatively minor loss of efficiency is outweighed by the reduced risk of unwanted disclosure. And there’s an added benefit: not having to send sheepish apology emails to the mistaken recipients (and sometimes to the other intended recipients who now have an interloper privy to the discussion).

Here’s how you disable this feature:

File –> Options –> Mail –> Send Messages –> Deselect the radio button for “Use Auto-Complete List to suggest names when typing in the To, CC, and Bcc lines”

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