Protecting Or Obtaining Trade Secrets During Discovery In Federal Court (Part I)

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

The federal rules allow a court, in the discovery context, to “make any order which justice requires to protect a party or person from . . . undue burden or expense, including . . . that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way . . . .” FED. R. CIV. P. 26(c)(7). Federal courts applying this rule recognize that “[t]here is no absolute privilege for trade secrets and similar confidential information.” Federal Open Mkt. Comm. v. Merrill, 443 U.S. 340, 362, 99 S. Ct. 2800, 61 L.Ed.2d 587 (1979) (quoting 8 Wright & Miller, Federal Practice and Procedure § 2043, at 300 (1970)); see also Centurion Indus. v. Warren Steurer & Assocs., 665 F.2d 323, 325 (10th Cir. 1981); National Util. Serv., Inc. v. Northwestern Steel & Wire Co., 426 F.2d 222, 227 (7th Cir. 1970); A.H. Robins Co. v. Fadely, 299 F.2d 557, 561 (5th Cir. 1962); Kleinerman v. United States Postal Serv., 100 F.R.D. 66, 69 (D. Mass. 1983); 6 Moore’s Federal Practice § 26.46[16], at 26.144 (3d ed. 1998). Rather, federal courts apply a balancing test with shifting burdens.

Specifically, in federal court, the party resisting discovery must establish that the information sought is indeed a trade secret and that disclosure would be harmful. The burden then shifts to the requesting party to establish that the information is “relevant and necessary” to his or her case. If the trial court orders disclosure, it should enter an appropriate protective order. See, e.g., 8 Wright & Miller, Federal Practice & Procedure § 2043 (1994); see also, e.g., American Standard, Inc. v. Pfizer Inc., 828 F.2d 734, 740- 41 (Fed. Cir. 1987); Heat & Control, Inc. v. Hester Indus., Inc., 785 F.2d 1017, 1025 (Fed. Cir. 1986); Centurion Indus. v. Warren Steurer & Assocs., 665 F.2d 323, 325 (10th Cir. 1981); In re Independent Serv. Org. Antitrust Litig., 162 F.R.D. 355, 356 (D. Kan. 1995); Exxon Chem. Patents, Inc. v. Lubrizol Corp., 131 F.R.D. 668, 671 (S.D. Tex. 1990); Culligan v. Yamaha Motor Corp., 110 F.R.D. 122, 125 (S.D.N.Y. 1986). Cf. Kleinerman v. United States Postal Serv., 100 F.R.D. 66, 69 (D. Mass. 1983) (discovery of trade secrets required where “the issues cannot be fairly adjudicated unless this information is available”) (quoting Melori Shoe Corp. v. Pierce & Stevens, Inc., 14 F.R.D. 346, 347 (D. Mass. 1953)); Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1185 (D. S.C. 1974) (“[T]he courts are loath to order disclosure of trade secrets absent a clear showing of an immediate need for the information requested.”) (quoting 4 Moore’s Federal Practice, ¶ 26.60[4], at 242-45 (2d ed.1970)).

This is ultimately a balancing test, in which the trial court must weigh all pertinent facts and circumstances. See Wright & Miller, § 2043 at 559 (“[T]he burden is on the party seeking discovery to establish that the information is sufficiently relevant and necessary to his case to outweigh the harm disclosure would cause to the person from whom he is seeking the information.”). See also Centurion Indus., 665 F.2d at 325 (“The district court must balance the need for the trade secrets against the claim of injury resulting from disclosure.”).

In Farouk Systems, Inc. v. Costco Wholesale Corp., 700 F. Supp. 2d 780 (S.D. Tex. 2010), Judge Keith Ellison found that although “supplier information [regarding Costco’s suppliers] sought by Farouk is a trade secret, Farouk has adequately demonstrated that it needs this information to effectively adjudicate its claims and defenses.” Id. at 788. Judge Ellison rejected Costco’s argument that disclosure only occur after Farouk made out a colorable claim. Id. Judge Ellison entered a protective order limiting disclosure to Farouk’s outside counsel “unless, after receiving the information, outside counsel finds that it cannot reasonably use the disclosed information, [in which case] it may make a motion with this Court to designate a neutral third party with knowledge of the industry to examine the issue.” Id. at 789. Costco also proposed that the protective order restrict Farouk from using the information found in Costco’s trade secrets to sue suppliers that sold Farouk products to Costco. Judge Ellison rejected that proposal, stating that “the Court does not consider it appropriate to require Farouk to relinquish its substantive rights simply to obtain discovery in this matter.” Id.

Even more recently, in M-I LLC v. Stelly, 733 F. Supp. 2d 759 (S.D. Tex. 2010), Judge Ellison again ordered discovery of trade secrets. This time, the lawsuit was a misappropriation of trade secrets case. The defendants, however, still resisted discovery of their alleged trade secrets. In rejecting the defendants’ arguments, Judge Ellison stated:

Parties are generally given wide latitude in conducting discovery, even as to trade secret matters. Indeed, in most cases concerning trade secret discovery, “the key issue is not whether the information will be disclosed but under what conditions.” 8 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & RICHARD L. MARCUS, FEDERAL PRACTICE AND PROCEDURE § 2043 (2d ed. 1994). The Supreme Court has recognized that “orders forbidding any disclosure of trade secrets or confidential com-mercial information are rare.” Federal Open Mkt. Comm. v. Merrill, 443 U.S. 340, 362, 99 S. Ct. 2800, 61 L.Ed.2d 587 (1979). “More commonly, the trial court will enter a protective order restricting disclosure to counsel, or to the parties.” Id. (internal citations omitted). Defendants have failed to cite to any federal cases that prohibited trade secret disclosure outright. Indeed, from the Court’s own research, it is clear that such action is exceedingly rare. Defendants have failed to set forth compelling reasons for why this material should be entirely exempt from discovery. The Court finds that the material is relevant and necessary to the claims at issue in this case.

Id. at 804.

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