Trade Secrets Trolls

by Glenn Schieck, Alexander Goldman, and Tom Bengera

Summary: We have identified several cases in which trade secrets law is being invoked for no competitive purpose. It is being used to protect information that, if known, would lower the value of the product to consumers. In light of this trend, it may be time to reexamine the requirements of what constitutes a trade secret worthy of judicial protection. If trade secret trolls can use the protection of this law not to protect innovation, but to withhold unpopular information from the public, the law is being used for a purpose that is not justified, and we all seem to lose. The bulk of trade secrets law is state law. We hope that courts will act to identify and to remedy the problem by using the tools of statutory construction. If they do not or cannot, then legislatures may need to act.

Introduction

The Uniform Trade Secrets Act (UTSA), § 1(4)(i), requires that a trade secret “derive[] 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. . . .” This provision makes clear that trade secret protection is intended to protect information from reaching the hands of specific competitors. Of course, trade secret law achieves this goal by secreting the information from everyone. From a practical standpoint, this overly protective approach makes sense. Even though most consumers would not start producing their own Coca-Cola if they knew the recipe, it is impossible to determine who would use the information and who would not, and there is usually little to no harm resulting from such overprotection. For example, most people haven’t lost sleep wondering just how curlicue fries are made. See Lamb-Weston, Inc. v. McCain, 941 F.2d 970 (9th Cir. 1991).

But what happens when harm does result from this overprotection? In an age of increased transparency and access to information, trade secret law appears to be emerging as a powerful tool for companies to keep information secret from the general public. So long as there is at least one ostensible competitor who could “obtain economic value from [the information]’s disclosure or use,” trade secret protection offers blanket protect of that information, in most cases for an unlimited amount of time. People who abuse trade secrets law in this way can only be known as trade secrets trolls.

The word "troll" is convenient because it is familiar in the context of patent law. Both patent trolls and trade secrets trolls abuse intellectual property law in order to protect an interest that is not justified by the policy of the law. But there are significant differences between patent trolls and trade secrets trolls. Patent trolls extract a fee from inventors by using the law in a manner that is outside the justification of the patent contract between the inventor and the state. Patent trolls hope to never have their claims tested in court and in order to avoid court, they ask for a significant sum of money from each victim that is less than the amount it would cost each victim to litigate their case. In contrast, trade secrets trolls use the law to hide embarrassing information. Unlike patent trolls, trade secrets trolls do not make money from their use of the law. Trade secrets trolls expect to litigate their secrecy claims. They expect to win because each case will turn on the letter of the law and not reach the policy behind it.

All intellectual property trolls may benefit from a trend in case law and statute that increasingly sees intellectual property as analogous to tangible property. See, e.g. Mark A. Lemley, Property, Intellectual Property, and Free Riding, 83 Tex. L. Rev. 1031 (2005). Lemley notes, for example, that Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1010-20 (1984) held "that trade secret laws confer a property right that cannot be 'taken' by government disclosure of the secret unless the government pays just compensation." Id. at 1036, n.11. Trade secrets trolls may benefit from this trend if courts are so blinded by the property analogy that they fail to require that the trade secrets plaintiff prove that the defendants will "obtain economic value from its disclosure or use." UTSA § 1(4)(i).

A hypothetical may help to illustrate the point. Imagine that a non-profit consumer rights organization obtains a casino company’s internal customer list from one of the company’s former employees. The list contains the names and addresses of people the company considers to be highly susceptible customers. The consumer rights organization wants to publish the list to alert the customers that they are on this list. The company could likely invoke trade secret protection to enjoin the disclosure of the list, even though the real purpose in protecting the information is not to protect the contents of the list from competitors (as required by the UTSA), but is instead to prevent the customers from learning that they are on the list.

In recent months, several real life examples of this trend have been playing out around the country, situations where individuals and companies claim to be protecting business information from their competitors, but where the real goal is to prevent public access to information.

Fracking Regulation

Hydraulic fracturing (fracking) involves injecting a mixture of sand, chemicals, and water into the ground in order to release oil deposits located beneath rock formations. As states grapple with how to properly regulate fracking, many oil companies have stated that the recipe for the mixture pumped into the ground constitutes trade secrets, and that this should prevent public disclosure.

States have enacted a hodgepodge of approaches to determining whether the information at issue constitutes trade secrets. This chart, details a state-by-state breakdown of how states apply trade secret protection to fracking recipes. While some states require full public disclosure of the chemicals used in the process, setting a high hurdle for trade secret protection, other states only require oil companies to disclose the use of those chemicals deemed hazardous by OSHA. This article at JD Supra gives a nice rundown of the “tug of war” this patchwork of regulation has created.

The claim that these fracking recipes need to be protected against competitors as trade secrets should be met with some skepticism. While new competitors have steadily entered the fracking market, three large and highly sophisticated companies, Halliburton, Schlumberger, and Baker Hughes, still account for over 60% of the fracking activity in the country. Further, an oil company fracking in multiple states is only protected by the lowest common denominator of state level protection offered. Put differently, what purpose is served by allowing an oil company to maintain secrecy in one state, while requiring full disclosure in another state?

It seems much more likely that these recipes are being deemed trade secrets to prevent their disclosure to the public through government regulatory agencies, in order to stem the almost certainly negative publicity that would result for these companies. And if this is the case, these oil companies are trade secrets trolls.

Obamacare in North Carolina

When a government entity invokes trade secret protection, it usually does so to protect companies that have submitted confidential information to it. The North Carolina Department of Insurance (NCDoI) recently declared that health care premiums are a trade secret.

The NCDoI said that it could not release the rates until they were final. "The three insurers who will be on the North Carolina exchange, one of 33 to be run by the federal government, say that their rates are not final until the feds sign off on the plans. Until then, they consider it a competitive secret." NCDoI's claim was unusual because the secrecy was to last for only a few weeks.

Could the state have done more to release the information? In Minnesota, the state could not publish the rates until the "effective date" of the policy. "So state officials have asked insurers who will offer plans on the exchange to change the effective date to Sept. 6, from Oct. 1, so residents can get access to the information before the exchanges open."

Minnesota's solution to the trade secrets problem makes sense — if your goal is to provide information to the public. If North Carolina's officials called the data a secret in order to hinder that state's healthcare exchange, then they are using trade secrets laws for political purposes. If North Carolina's officials are using trade secrets laws for political purposes, that would make them trade secrets trolls.

Voting Booth and Election Technology: Behind the Curtain

Recently, litigants have tried but failed to persuade a court to require companies that make voting machines to disclose their proprietary software. Of particular interest is a Florida case in which the court highlighted the value of maintaining transparency throughout the voting process, but nevertheless allowed the election company litigant to shield their source code during discovery. Jennings v. Elections Canvassing Comm’n, 958 So. 2d 1083 (Fla. Dist. Ct. App. 1st Dist. 2007) (the voting machines were made by Election Systems & Software, Inc.) (for commentary, see Jessica Ring Amunson & Sam Hirsch, The Case of the Disappearing Votes: Lessons from the Jennings v. Buchanan Congressional Election Contest, 17 Wm. & Mary Bill Rts. J. 397 (2008)).

The absence of a specific competitor seems once again to run afoul of UTSA § 1(4)(i). If election companies are using trade secret protection as a shield to protect flawed software from public scrutiny, then the election companies are trade secrets trolls.

Safety Protocols at Sea World

SeaWorld is trying to prevent the Occupational Safety and Health Administration (OSHA) from publishing its killer whale show safety protocols. A SeaWorld trainer was killed by a killer whale in 2010. Tilikum, the whale that killed the trainer, had killed another trainer in 1991 in Canada. The case has received renewed attention with the release of the film "Blackfish," which describes the story of Tilikum. One review of the film called the trainer's death "inevitable."

An OSHA administrative law judge issued a preliminary ruling that the safety protocols are not secret because they would be obvious to anyone attending a SeaWorld killer whale show, but the judge's ruling is pending, subject to review by the agency. If the safety measures are obvious to tourists, why is SeaWorld arguing that they are secret? What if SeaWorld is not invoking trade secrets law to protect innovation, but instead to protect itself from the negative media attention that would ensue from releasing its safety protocols? What if SeaWorld's killer whale trainer safety is embarrassingly inadequate, and that is why SeaWorld does not want OSHA to publish its safety protocols? That would make SeaWorld a trade secrets troll.

Conclusion

The question in these cases is whether the mere existence of a competitor should be enough to allow a company to invoke trade secret protection. Trade secrets law is traditionally based on two justifications: a property right in the secret, enforced by law against anyone who misappropriates it and uses it to compete unfairly against the inventor of the secret; and a right established by the relationship between the parties requiring the party to whom the trade secret has been disclosed to keep it confidential. Justice Holmes preferred the relational tort, writing, "[t]he property may be denied, but the confidence cannot be." E. I. Du Pont De Nemours Powder Co. v. Masland, 244 U.S. 100 (1917). Justice Blackmun later used the property justification (in a takings case in which Monsanto claimed that the EPA had taken its trade secret pesticide data, cited by Lemley supra), writing "[t]he value of a trade secret lies in the competitive advantage it gives its owner over competitors." Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1020, n. 15 (1984). Justice Blackmun limited the property justification by explaining, "[i]f, however, a public disclosure of data reveals, for example, the harmful side effects of the submitter's product and causes the submitter to suffer a decline in the potential profits from sales of the product, that decline in profits stems from a decrease in the value of the pesticide to consumers, rather than from the destruction of an edge the submitter had over its competitors, and cannot constitute the taking of a trade secret." Id.

Trade secrets law protects innovation. Like most intellectual property laws, it gives a right to an inventor in order to incent innovation. Society pays a cost in terms of the free flow of information, and expects a benefit: more innovation. When trade secrets law is used for other purposes, society not only receives no benefit; society may be harmed.

We have identified several cases in which trade secrets law is being invoked for no competitive purpose. It is being used to protect information that, if known, would lower the value of the product to consumers, in the manner described by Justice Blackmun. In light of this trend, it may be time to reexamine the requirements of what constitutes a trade secret worthy of judicial protection. If trade secret trolls can use the protection of this law not to protect innovation, but to withhold unpopular information from the public, the law is being used for a purpose that is not justified, and we all seem to lose. The bulk of trade secrets law is state law. We hope that courts will act to identify and to remedy the problem by using the tools of statutory construction. If they do not or cannot, then legislatures may need to act.