TRADE SECRETS: INSURER DESIGNATION OF INTERNAL DOCUMENTS AS TRADE SECRETS
By Mike Abourezk and Marialee Neighbours
There is no absolute privilege for confidential, proprietary or trade secret information. Paulsen v. Case Corp., 168 F.R.D. 285, 289 (C.D. Cal.1996).
Often, insurance companies allege that protective orders are needed because their internal documents are confidential, proprietary or constitute a trade secret. However, instead of proving the protected nature of these documents, many insurers simply make "blanket" objections, relying on conclusory statements to support their allegations.
Uniformly, courts hold that it is insufficient to make broad, conclusory objections that requested materials are confidential, proprietary or trade secrets. These kind of allegations must be proved. For instance, in Grange Mutual Insur. Co. v. Trude, a bad faith case, the Kentucky Supreme Court upheld a lower court ruling, which refused to issue a writ of prohibition based on insurer's trade secret objections. The Kentucky Supreme Court agreed that insurer had failed to demonstrate that production would cause it irreparable harm. 151 S.W.3rd 803, 817 (Ky. 2004). In that case, the insurer alleged that its training and/or internally created manuals, reserve setting data, policy and procedure manuals, claims payment averages, personnel and management guidelines, and wage and benefits data were trade secrets. Id. The court found that broad descriptions of the documents followed by conclusory statements that the documents contained proprietary trade secrets was insufficient to justify issuance of a writ of prohibition. Id. Emphasizing this point, the court said: ""But such a blanket, vague claim of privilege is not enough."
In Paulsen, another case involving allegations of confidentiality, proprietary or confidential information, the court stated:
The defendant corporation, moreover, has not shown the requested information to be a trade secret or similar confidential information. Rather, defendant corporation has merely made these claims as conclusory assertions. If defendant corporation believes that disclosure of this information might be harmful, it must explain and support its objections.
Id., citing Nestle Foods Corp. v. Aetna Casualty and Surety Co., 135 F.R.D.101,104 (D.N.J.1990).
"To resist disclosure under Rule 26(c)(7), a person must first establish that the information is a trade secret, or other confidential research development, or other commercial information and then demonstrate that its disclosure might be harmful." American Maplan Corp. v. Heilmayr, 2001 WL 1718366 * 2 (D.Kan. 2001), citing Centurian Industries, Inc. v. Warren Steurer & Asso., 665 F.2d 323, 325-326 (10th Cir. 1981); See also Federal Open Market Committee v. Merrill, 443 U.S. 340, 362, 99 S.Ct. 2800, 2813, 61 L.Ed. 2d 587 (1979); Gohler v. Wood,162 F.R.D. 691(D.Utah 1995).
South Dakota Codified Law § 37-29-1(4) provides that a trade secret is:
Information including a formula, pattern, compilation, program, device, method, technique or process that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
In determining whether information is a trade secret for discovery purposes, courts have considered these factors:
(1) The extent to which the information is known outside the business;
(2) The extent to which it is known by employees and others involved in the business;
(3) Measures taken to guard the secrecy of the information;
(4) The value of the information to the holder and his competitor;
(5) The amount of effort or money to develop the information; and
(6) The ease or difficulty with which the information could properly be acquired or duplicated by others.
See D.D.S., Inc. v. Lucas Aerospace Power Transmission Corp., 182 F.R.D. 1 (N.D.N.Y. 1998), citing Wright, Miller and Marcus, 8 Federal Practice and Procedure, Civ. 2d, § 2043.
Trade Secrets Are A Very Narrow Category of Records
According to commentators who have analyzed court decisions on this subject,
genuine trade secrets are "a very narrow category of records." Morrison, Protective Orders, Plaintiffs, Defendants and the Public Interest in Disclosure, 24 U.Rich.L.Rev. 109, 111, 118 (1989). Unless a moving party demonstrates the manner in which it will be placed at a "competitive disadvantage" by disclosure of information, it is not entitled to a protective order. Essex Wire Corp. v. Eastern Electric Sales, 48 F.R.D. 308, 311-12 (D.C. Pa. 1969).
Paying Insurance Claims Imbued With Public Interest
Clearly, the payment of insurance claims does not involve trade secrets. Insurance companies are required by law to pay claims. There is no "competitive advantage" involved in paying claims properly and the methods of paying claims can easily be duplicated. Insurance companies are required to keep detailed records of all claims activities, and make them available for examination by the Department of Insurance upon demand. S.D.C.L. § 58-3-7.4. They are required to agree to these examinations before they are granted a license to do business in South Dakota. The Department issues reports detailing its findings of insurance company examinations, which become public 30 days after the report has become final. S.D.C.L. § 58-3-14. The entire subject of paying insurance claims is a matter of state regulation and public scrutiny. Thus, it is heavily imbued with a public interest.
Documents In Public Domain Not Trade Secrets
Often, insurers seek protective orders on materials that are already in the public domain. A number of courts have held that documents in the public domain are not trade secrets. In Coalition Against Police Abuse v. Superior Court, the plaintiff brought a petition for writ of mandate seeking review of a trial court order. 170 Cal. App. 3d 888, 216 Cal. Rptr. 614 (Cal. App. 2 Dist. 1985). Upon settlement of the litigation, the order required the plaintiff to return police documents produced in discovery subject to protective orders. In that case, the appellate court held that a trial court order could not prohibit release of documents disclosed to the public and in the public domain.
In Coalition, the court said:
Truthful publication and dissemination of information which has been disclosed to the public cannot be prohibited by protective order.
170 Cal. App. 3d at 902. See also Law Finders Assocs. Inc., v. Legal Research Center, Inc., 65 F. Supp.2d 414 (N.D. Tex. 1998) ("courts have refused to give material or a procedure trade secret protection when that which is sought to be protected has been publically disclosed;" court found that formulation procedure was in the public domain and consequently not a trade secret); Enterprise Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 3Pd 1064 (Ariz. App. Div. 1 1999) ("Indeed, to allow the protection of material in the public domain would contradict the very purpose of trade-secret law, which is to protect valuable confidential information from discovery."); General Elect. Co. v. Fung, 843 F. Supp. 776 (D. Mass. 1994) (in misappropriation of trade secret case, jury instructed that it must find that documents " were not in the public domain"); Castano v. American Tobacco Co., 896 F. Supp. 590 (E.D.LA 1995) (held that documents were already within the public domain and thus no injunction against dissemination would issue); Vital State Canada, Ltd. v. DreamPak, LLC, 303 F.Supp.2d 516 (D. N.J. 2003) (Publication of patent applications disclosing proprietary information to public effectively ended information status as trade secret.); In re Providian Credit Card Cases, 96 Cal.App.4th 292, 116 Cal.Rptr.2d 833 (Cal.App. 1 Dist. 2002)("Public disclosure, that is the absence of secrecy, is fatal to the existence of a trade secret. 'If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.'" ); Hammock by Hammock v. Hoffmann-LaRoche, Inc., 142 N.J. 356, 662 A.2d 546 (N.J. 1995)( (information that is in the public domain or which has been reverse engineered cannot be protected as trade secrets).
The conclusion that documents in the public domain are generally not considered trade secrets is reinforced by noting that protective orders often exclude these documents. See, e.g., Owner-Operator Independent Drivers Assn. v. Bulkmatic Transp. Co., 2004 WL 1212096 (N.D. Ill.)(protective order excluded information in public domain); Kamyr AB v. Kamyr, Inc., 1992 WL 317529 (N.D. NY 1992)( stipulated protective order covered confidential and sensitive information not in the public domain); O' Connell v. Purdue, 2002 WL 1455773 (Conn. Super 2002)(parties' stipulation to protected orders did not include documents or information in the public domain).
Routine Designation of Documents As Trade Secrets, Confidential, or Proprietary Is Suspect
Courts are wary of the routine stamping of materials as trade secrets, confidential or proprietary in order to avoid disclosure. For instance, in THK America, Inc. v. NSK Co. Ltd.,157 F.R.D. 637 (N.D.Ill.1993), defendants in a patent infringement case routinely designated documents " Attorney's Eyes Only." In that case, the court found that the defendants made this designation in bad faith. Id. at 643.
In response to the defendants' position on this issue, the court said: "This is not an appropriate standard, and never was. Under this standard, defendants' trade secrets and other confidential research, development and commercial information would never be produced .... " Id.
Moreover, the court called defendants' in-house-counsel's description of the confidential nature of designated documents " preposterous and contemptuous" - a calculated intentional effort to avoid the consequences of the court's orders. Id. at 642. See also In re Providian Credit Card Cases, 96 Cal.App.4th 292, 116 Cal.Rptr.2d 833 (Cal.App. 1 Dist. 2002 )(where credit card issuer scammed consumers by improperly assessing fees and charges, court found statements by company executives did not settle facts as to the confidentiality/trade secret nature of documents; presumption was in favor of public access).