Discovery of Trade Secrets: How Courts Analyze Disclosure Issues

The first part of this series, published last month, addressed the definition of trade secrets in the context of discovery. As efforts to obtain trade secret information increase, a clear definition of trade secret is vital for the courts to analyze this issue correctly. This second installment addresses that analysis, and the standards and terminology courts apply to decide whether trade secrets should be disclosed, the arguments and evidence that parties resisting this discovery can present to the trial court, and strategies to limit the potential for additional damage if trade secrets are ordered produced.

The Test for Discovery

Federal courts and most states follow the same test. Initially, the party resisting disclosure must demonstrate that the information sought is trade secret. The burden then shifts to the requesting party to prove a “compelling need” for that information. See, e.g., In re Remington Arms Co., 952 F.2d 1029 (8th Cir. 1991); In re Continental General Tire, Inc., 979 S.W.2d 609 (Tex. 1998). While the test appears relatively simple, the standard by which “compelling need” is determined can be elusive. The traditional discovery standard of “relevant to the subject matter” of the litigation is patently insufficient. If mere relevance were enough to require disclosure, the protection afforded trade secrets would be meaningless. In re Continental General Tire, Inc. at 613-614. Rather, courts refer to a somewhat nebulous, heightened burden. Further, courts have also required that the requesting party establish “compelling need” with competent evidence in the form of affidavit, live testimony, or documentary evidence. The argument of counsel does not suffice.

Courts have not established a uniform definition of “compelling need,” other than to suggest it is determined on a case-by-case basis. For example, a Texas opinion required that the information be material and unavailable from any other source. Automotive Drilling Machines, Inc. v. Miller, 515 S.W.2d 256, 259 (Tex. 1974). On the other hand, a California decision held that the information must be necessary to prove the underlying cause of action or serve as a predicate for an expert conclusion. Bridgestone/Firestone, Inc. v. Superior Court of the County of Alameda, 9 Cal. Rpr. 2d 709, 713 (Cal. App. 1992). Still another court required that the “issues cannot be fairly adjudicated unless the information is available.” Kleinerman v. U.S. Postal Service, 100 F.R.D. 66 (D. Mass. 1983). No court, however, has been willing to articulate an “outcome-determinative” standard — that compelling need can only be established when the plaintiff's entire claim cannot proceed at all without the trade secret information.

Regardless of the approach, courts look to the requesting party to supply convincing proof of need. A good example of this is In re Bridgestone/Firestone, Inc., 106 S.W.3d 30 (Tex. 2003), decided by the Texas Supreme Court last year in a series of consolidated cases involving Firestone. After a lengthy pretrial hearing, the trial court found that disclosure of the manufacturer's rubber compound formula was warranted and “necessary to a fair adjudication” of the cases. The Texas Supreme Court disagreed, requiring the requesting party to “demonstrate with specificity exactly how the lack of information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat.” The court then analyzed the plaintiffs' considerable evidence and reversed the trial court's order. Ironically, the court used the evidence the plaintiffs presented to find that they had no real need for the formula.

Protective Orders Are Not the Solution

If the discovery analysis establishes that the requesting party's need for the trade secret information outweighs the harm to the owner, the court should then determine the type and degree of protection required to limit dissemination. However, some courts have disregarded this two-step analysis, ordering disclosure of trade secrets simply because a protective order is already in place. To avoid this confusion, the party resisting disclosure should identify specific examples of how trade secrets could be lost without additional protection. This is particularly evident if the protective order permits “sharing” of trade secret information among cases involving alleged “similar” products.

In reality, protective orders offer limited protection. As experts and attorneys openly market their knowledge of a company's documents and procedures, inadvertent or even intentional dissemination of protected information is possible. Even if a protective order requires return of documents at the end of the case, it is impossible to confirm the receipt of all documents distributed to all experts, attorneys and others who may have gained access. Once the information is disseminated, the cat's out of the bag — the trade secret is lost forever and no sanction imposed on the violator can retrieve it. See In re Remington Arms, 952 F.2d at 1033.

The efficacy of the protective order will likely be lessened by “inevitable disclosure.” See, e.g., Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 148 F.Supp.2d 1326, 1335-36 (S.D. Fla. 2001); PepsiCo. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). An expert or other witness who knows a trade secret may be unable to segregate that information from other nonproprietary materials. This is particularly true in the age of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), when courts increasingly scrutinize proposed expert testimony for a reliable foundation and methodology. As a result, experts may feel pressured to rely on trade secret information obtained in one case to support their opinions about the same defendant, or even a different defendant, in another case. Again, this is more than an ephemeral risk, with both experts and attorneys being held in contempt for disclosing confidential documents that were covered by a protective order. See, e.g., Kehm v. Proctor & Gamble Manufacturing Co., 724 F.2d 630 (8th Cir. 1984).

If the court permits “sharing” of the defendant's trade secret information with other litigants, protection beyond a traditional protective order is essential. One example is to require any proposed sharee to post a sizable bond before accessing the information. Another example is establishing a procedure for the court to act as a “gatekeeper,” requiring the collateral litigants to prove “compelling need” for the information and similarity of their case to the subject case before gaining access. Although these requirements might not completely eliminate the risk of improper dissemination, they could prevent the discovering party from having unfettered discretion in determining who is an appropriate sharee, as well as assist the defendant in tracking access to the information.

Conclusion

The discovery of trade secrets is the latest battlefield in civil discovery. One measure of the intensity of this battle is the exposure in Texas after the seminal opinion in In re Continental General Tire, supra. Since 1998, there have been at least six published mandamus petitions of trade secret discovery orders in Texas state and federal courts, and many times that number of unpublished orders. The battle seems far from over.

The first part of this series, published last month, addressed the definition of trade secrets in the context of discovery. As efforts to obtain trade secret information increase, a clear definition of trade secret is vital for the courts to analyze this issue correctly. This second installment addresses that analysis, and the standards and terminology courts apply to decide whether trade secrets should be disclosed, the arguments and evidence that parties resisting this discovery can present to the trial court, and strategies to limit the potential for additional damage if trade secrets are ordered produced.

The Test for Discovery

Federal courts and most states follow the same test. Initially, the party resisting disclosure must demonstrate that the information sought is trade secret. The burden then shifts to the requesting party to prove a “compelling need” for that information. See, e.g., In re Remington Arms Co., 952 F.2d 1029 (8th Cir. 1991); In re Continental General Tire, Inc., 979 S.W.2d 609 (Tex. 1998). While the test appears relatively simple, the standard by which “compelling need” is determined can be elusive. The traditional discovery standard of “relevant to the subject matter” of the litigation is patently insufficient. If mere relevance were enough to require disclosure, the protection afforded trade secrets would be meaningless. In re Continental General Tire, Inc. at 613-614. Rather, courts refer to a somewhat nebulous, heightened burden. Further, courts have also required that the requesting party establish “compelling need” with competent evidence in the form of affidavit, live testimony, or documentary evidence. The argument of counsel does not suffice.

Courts have not established a uniform definition of “compelling need,” other than to suggest it is determined on a case-by-case basis. For example, a Texas opinion required that the information be material and unavailable from any other source. Automotive Drilling Machines, Inc. v. Miller , 515 S.W.2d 256, 259 (Tex. 1974). On the other hand, a California decision held that the information must be necessary to prove the underlying cause of action or serve as a predicate for an expert conclusion. Bridgestone/Firestone, Inc. v. Superior Court of the County of Alameda , 9 Cal. Rpr. 2d 709, 713 (Cal. App. 1992). Still another court required that the “issues cannot be fairly adjudicated unless the information is available.” Kleinerman v. U.S. Postal Service , 100 F.R.D. 66 (D. Mass. 1983). No court, however, has been willing to articulate an “outcome-determinative” standard — that compelling need can only be established when the plaintiff's entire claim cannot proceed at all without the trade secret information.

Regardless of the approach, courts look to the requesting party to supply convincing proof of need. A good example of this is In re Bridgestone/Firestone, Inc., 106 S.W.3d 30 (Tex. 2003), decided by the Texas Supreme Court last year in a series of consolidated cases involving Firestone. After a lengthy pretrial hearing, the trial court found that disclosure of the manufacturer's rubber compound formula was warranted and “necessary to a fair adjudication” of the cases. The Texas Supreme Court disagreed, requiring the requesting party to “demonstrate with specificity exactly how the lack of information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat.” The court then analyzed the plaintiffs' considerable evidence and reversed the trial court's order. Ironically, the court used the evidence the plaintiffs presented to find that they had no real need for the formula.

Protective Orders Are Not the Solution

If the discovery analysis establishes that the requesting party's need for the trade secret information outweighs the harm to the owner, the court should then determine the type and degree of protection required to limit dissemination. However, some courts have disregarded this two-step analysis, ordering disclosure of trade secrets simply because a protective order is already in place. To avoid this confusion, the party resisting disclosure should identify specific examples of how trade secrets could be lost without additional protection. This is particularly evident if the protective order permits “sharing” of trade secret information among cases involving alleged “similar” products.

In reality, protective orders offer limited protection. As experts and attorneys openly market their knowledge of a company's documents and procedures, inadvertent or even intentional dissemination of protected information is possible. Even if a protective order requires return of documents at the end of the case, it is impossible to confirm the receipt of all documents distributed to all experts, attorneys and others who may have gained access. Once the information is disseminated, the cat's out of the bag — the trade secret is lost forever and no sanction imposed on the violator can retrieve it. See In re Remington Arms, 952 F.2d at 1033.

The efficacy of the protective order will likely be lessened by “inevitable disclosure.” See , e.g., Del Monte Fresh Produce Co. v. Dole Food Co., Inc. , 148 F.Supp.2d 1326, 1335-36 (S.D. Fla. 2001); PepsiCo. v. Redmond , 54 F.3d 1262 (7th Cir. 1995). An expert or other witness who knows a trade secret may be unable to segregate that information from other nonproprietary materials. This is particularly true in the age of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), when courts increasingly scrutinize proposed expert testimony for a reliable foundation and methodology. As a result, experts may feel pressured to rely on trade secret information obtained in one case to support their opinions about the same defendant, or even a different defendant, in another case. Again, this is more than an ephemeral risk, with both experts and attorneys being held in contempt for disclosing confidential documents that were covered by a protective order. See, e.g., Kehm v. Proctor & Gamble Manufacturing Co. , 724 F.2d 630 (8th Cir. 1984).

If the court permits “sharing” of the defendant's trade secret information with other litigants, protection beyond a traditional protective order is essential. One example is to require any proposed sharee to post a sizable bond before accessing the information. Another example is establishing a procedure for the court to act as a “gatekeeper,” requiring the collateral litigants to prove “compelling need” for the information and similarity of their case to the subject case before gaining access. Although these requirements might not completely eliminate the risk of improper dissemination, they could prevent the discovering party from having unfettered discretion in determining who is an appropriate sharee, as well as assist the defendant in tracking access to the information.

Conclusion

The discovery of trade secrets is the latest battlefield in civil discovery. One measure of the intensity of this battle is the exposure in Texas after the seminal opinion in In re Continental General Tire, supra. Since 1998, there have been at least six published mandamus petitions of trade secret discovery orders in Texas state and federal courts, and many times that number of unpublished orders. The battle seems far from over.