June 2007
How Not to Protect Trade Secrets
A federal judge in Texas recently issued an opinion which underscores companies’ need to treat “trade secret” information in an appropriate manner and to act quickly upon learning that such information has been inadvertently produced.
In Mugworld, Inc. v. G.G. Marck & Associates, Inc., 2007 U.S. Dist. LEXIS 43543 (E.D.Tex. June 15, 2007), the defendant inadvertently produced a two-page e-mail chain containing a list of chemical ingredients found in the company’s sublimation coatings, for which the defendant claimed trade secret status. The information was produced on approximately January 19, 2006, and the defendant learned of its production on October 19, 2006. However, the company took no steps to seek protection of the e-mail chain until February of 2007, when it filed a motion for protective order seeking to have the list of chemicals declared “trade secret” and thus protected under Fed. R. Civ. P. 26(c)(7).
The court denied the defendant’s motion and declined to afford trade secret protection, for several reasons, each of which provides a lesson:
First, the court found that the parties had entered into an agreed protective order which stated that no documents, other than certain purchase orders, produced before October 27, 2006, could be deemed “confidential” (and thus protected) under the protective order. Since the e-mail chain in question had been produced ten months earlier, it was not covered under the agreed protective order.
Lesson: Parties, particularly companies exchanging commercially-sensitive information, must be particularly careful about entering into agreements which limit the coverage of a protective order to series of documents produced or to documents produced before, during or after certain timeframes. The corollary to this lesson, of course, is that companies must conduct a careful review, by personnel trained to recognize trade secret or other sensitive information, of documents prior to their production.
Second, the court found that the e-mail chain / list of ingredients did not constitute a “trade secret” which could be protected under Rule 26(c)(7). Under Texas law, which incorporates the Restatement of Torts’ six-factor test, whether information is trade secret depends on: (1) the extent to which it is known outside the claimant’s business; (2) the extent to which it is known by employees and others inside the claimant’s business; (3) the extent of the measures taken to safeguard its secrecy; (4) the value of the information to the claimant and competitors; (5) the amount of effort or money expended by the claimant in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. Here, the court found that the defendant “has not shown how the coating information at issue fits the criteria of a trade secret.” Specifically, the court noted that the very e-mail at issue, transmitting the allegedly trade secret ingredients list, was directed to a person at another coatings company. Thus, “the communication was clearly made to an individual outside” the defendant’s business.
Lesson: The obvious lesson is that intentional disclosure or sharing of information for which a company would like to claim “trade secret” status is almost certain to vitiate that status. The more subtle lesson, which plays off prongs (1) through (3) of the Restatement test, above, is that there may be business reasons that a company would want to share its information. When such reasons arise, companies need to take steps to create a record demonstrating that the sharing or disclosure was undertaken for a business purpose and was done in a limited manner which was designed to protect the commercial value of the information. For example, it may be that the instant defendant shared the ingredients list for some marketing purpose. Had the company first agreed with the recipient that the sharing was done only for that limited purpose and that the recipient would take steps to safeguard and not diminish the commercial value of the information, it is possible and perhaps even likely that the court would have found that the information remained protected. As well, if a company makes the business decision to share its sensitive information, it should ensure that the medium used for sharing, be it e-mail or a traditional letter, contain evidence of the agreement described above. In other words, make the business decision, reach an agreement about the limited nature of the sharing, and, when transmitting the information, either attach a copy of the agreement or include a specific reference to the agreement. Such an arrangement would make for a much more credible argument should litigation later ensure that the company in fact intended to protect the claimed “trade secret” information.
Finally, the court found that, even if it could ascribe trade secret status to the information, the company’s delay in seeking protection constituted a waiver of “any grounds to afford them the protection of a confidential designation in this case.” The court noted the five-factor test used in the Fifth Circuit (and many others), which includes: (1) the reasonableness of precautions taken to prevent disclosure; (2) the amount of time taken to remedy the error; (3) the scope of discovery; (4) the extent of the disclosure; and (5) the overriding issue of fairness. While no factor is determinative and courts are generally required to consider all of the circumstances of disclosure on a case-by-case basis, the court in Mugworld found that “it is clear that any claim of trade secret privilege has been waived.” Notably, the defendant “waited more than four months after learning of its disclosure to seek protection and failed to otherwise secure its purportedly confidential nature.” Thus, the court held that, even if the document contained information protected by a trade secret, “that ground for protection has been waived as a result of” the defendant’s delay.
Lesson: The lesson could not be more clear – if a company learns that it has inadvertently disclosed a trade secret (or any privileged / protected) information, it must act quickly to (1) seek the information’s return and (2) seek its protection with the court. In large part, this is a lesson about credibility. Quick action signals to the court that a company is sincere about its trade secret (or other privilege) claim, and that it is taking all possible steps to protect that claim. The importance of credibility under these circumstances cannot be understated.