Trade Secret Litigants Face Heavy Burden of Proof in Court

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.

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.