A federal appellate court has ruled that a plaintiff failed to satisfy its burden of proof in establishing trade secret protection of information that was arguably public knowledge, even though public data may be protected as a trade secret. The ruling highlights the heavy burden plaintiffs face in proving the existence of protectible trade secrets but also reveals strategies and lessons that litigators may use to protect their clients’ trade secrets, according to ABA Section of Litigation leaders.
November 16, 2020 Top Story
Trade Secret Litigants Face Heavy Burden of Proof in Court
Federal court shuts door to trade secret protection for data in the public domain
By Kelso L. Anderson
Capital Report and Tax Strategy
In TLS Management & Marketing Services v. Rodriguez-Toledo, the plaintiff sued the defendants in the U.S. District Court for the District of Puerto Rico alleging breach of contract and misappropriation of trade secrets. The plaintiff, TLS Management and Marketing Services, LLC, was a tax planning and consulting firm based in Puerto Rico. Its business was divided into a consulting division and a Puerto Rico division.
The consulting division prepared a Capital Preservation Report based on statutes and regulations and made tax recommendations to clients based on the analysis therein. The trade secret was alleged to be the portion of the report that was not specific to a client. The Puerto Rico division provided tax services to clients based on a U.S. Possession Strategy. Under the strategy, a U.S.-based client became a member of one of the plaintiff’s divisions and purchased shares of the plaintiff by signing a buy-sell agreement that limited the client’s rights to transfer its membership shares. The plaintiff and its affiliate limited liability companies had tax-exempt grants pursuant to Puerto Rican law that afforded them favorable corporate tax rates and made dividend distributions to their members tax-free under certain conditions. Therefore, the net effect of the strategy was to provide a favorable tax rate and tax-exempt dividends for U.S.-based, Puerto Rican clients.
Alleged Misappropriation
Defendant Ricky Rodriguez-Toledo was an employee of the plaintiff. Defendants Accounting Solutions Group, Inc. (ASG) and Global Outsourcing Services, LLC (GOS) were tax planning and accounting companies in which Rodriguez-Toledo had a majority interest. ASG signed a subcontractor agreement with the plaintiff that included a nondisclosure provision. The defendant Rodriguez-Toledo also signed a confidentiality and nondisclosure agreement. After Rodriguez-Toledo ended his employment with the plaintiff, he provided tax services in competition with the plaintiff through ASG and GOS.
The plaintiff alleged that Rodriguez-Toledo misappropriated the plaintiff’s trade secrets by using the strategy to provide tax services to two of the plaintiff’s former clients. Those clients sought advice from the defendants to exit their “membership” with the plaintiff, so the defendants created a limited liability company to minimize the tax consequences for the two clients. The plaintiff also alleged that the defendants misappropriated trade secrets by downloading copies of particular reports without the plaintiff’s authorization. The district court found that the plaintiff’s report and the strategy were trade secrets and that the defendants misappropriated the same by downloading two reports without authorization.
In reversing the district court, the U.S. Court of Appeals for the First Circuit noted that the definition of trade secrets under Puerto Rican law is similar to the definition under the Uniform Trade Secrets Act and requires, among other things, proof that the alleged trade secret was “not readily ascertainable” and distinct from general knowledge. Here, the court of appeals concluded that the plaintiff did not prove that the report and the strategy were distinct from public knowledge or not readily ascertainable.
“This was a unique case because the plaintiff tried to argue that a combination of tax laws could be a trade secret,” observes Gregory S. Bombard, Boston, MA, cochair of the Trade Secret Litigation Subcommittee of the Section of Litigation’s Commercial & Business Litigation Committee. “There is plenty of case law to support the proposition that a particular combination of publicly-known information can qualify as a trade secret, but the difficulty for a plaintiff is articulating why a particular combination differs from the public domain,” Bombard explains.
Lessons Learned and Strategies
Given the burden of proof and contentious nature of trade secret litigation, Section leaders see some key strategies and lessons from the opinion. “As a defendant, it is best to force the plaintiff to be as specific as possible when identifying a trade secret, “ advises Travis S. Hunter, Wilmington, DE, cochair of the Trade Secret Litigation Subcommittee of the Section’s Commercial & Business Litigation Committee. “This can limit discovery and bolster a potential motion if the trade secret changes later,” Hunter continues.
Having a plan prior to any potential litigation is especially critical, offers Dawn Mertineit, Boston, MA, cochair of the Intellectual Property Subcommittee of the Section’s Woman’s Advocate Committee. “Obviously, this decision puts a lot more pressure on plaintiffs to put forth facts establishing that the information at issue is in fact a trade secret subject to protection. I would expect savvy defendants to put plaintiffs through their paces by pushing hard early on for detailed disclosures as to the basis for the claim that information is not publicly available. At a minimum, this will force plaintiffs to do more work up front, and, at best, it could lead to success on a dispositive motion before the matter proceeds to trial,” Mertineit emphasizes.
Hashtags: #tradesecrets #nondisclosure #misappropriation #intellectualproperty #publicdomain
Related Resources
- Act to Promote the Export of Services, 13 L.P.R.A. § 10831 et seq. (2012).
- 10 L.P.R.A. § 4139 (2011).
- Gregory S. Bombard, et al., Guide to Protecting and Litigating Trade Secrets, (2d ed. American Bar Association 2020).
- Daniel S. Wittenberg, “Trade Secret Litigation Continues to Soar,” Litigation News (Oct. 31, 2018).
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