Earlier this year, we picked mandatory public disclosure laws as a trend to watch in 2014. Developments in California seem to bear that out, and trade secrets owners will want to keep a close eye on the “green chemistry” movement and expanded public disclosure requirements for manufacturers of a wide range of consumer products. Companies that make or sell products in California — ranging from electronics and household cleaners to children’s toys and cosmetics — will need to map out a plan that complies with the new requirements while at the same time protecting their valuable intellectual property, including trade secrets.
California’s Safer Consumer Product Regulations
On October 1, 2013, California’s Safer Consumer Product (SCP) regulations became effective. The regulations brand roughly 1,200 chemicals as “chemicals of concern,” meaning that manufacturers of products produced or sold in California must disclose whether their products contain these chemicals. By April 2014, California will select up to five “priority products” for which manufacturers will be required to seek safer alternatives.
Almost by definition, mandatory public disclosure laws create a problem for owners of trade secrets. To address this dilemma, the SCP regulations carved out some exceptions to the disclosure rules that would protect certain trade secrets from disclosure, subject to an approval process. Manufacturers would be able to avoid disclosure of anything the California Department of Toxic Substances Control (DTSC) determines to be a trade secret. The specifics of the process for trade secret approval are still under consideration, but for the time being, the best strategy for trade secrets owners is to make sure they explicitly claim and request DTSC review of any and all trade secrets and be prepared to back up their trade secrets claims with concrete evidence.
Last year, California’s Office of Administrative Law (OAL) rejected the trade secret provisions of the SCP regulations. The OAL is responsible for reviewing administrative regulations proposed by state agencies for compliance with California’s Administrative Procedure Act (APA). The OAL found that the trade secret provisions lacked sufficient clarity as to: (1) what “substantive criteria” that DTSC will apply in determining whether materials as trade secrets, and (2) whether the regulations vested the DTSC with the discretion to decline to make such a determination altogether. The DTSC proposed revisions to the regulations to address these concerns (calling for use of the California Uniform Trade Secrets Act as the applicable criteria and making DTSC review mandatory). These revisions have been incorporated into the final regulations that went into effect in October 2013.
Manufacturers should be mindful of the following key elements of the SCP regulations:
The DTSC must review a trade secret claim and substantiating information before it discloses any information designated as trade secret;
If DTSC determines that a trade secret claim does not meet regulation requirements, the agency must notify the submitter that the information will be made subject to public disclosure thirty (30) days after the notification; and
During that 30-day window, the submitter may file a lawsuit for a preliminary injunction and/or declaratory relief to protect that information from disclosure (or risk waiving that right).
Companies making or selling products in California will want to carefully evaluate and safeguard their trade secrets and confidential business information as part of the SCP compliance process. Failure to do so might lead to a waiver of the confidentiality or trade secret status of their information as it would become publicly available to any interested parties (including watchdog groups, government agencies, or rival companies).
The DTSC submission process allows for redactions as necessary to protect confidential intellectual property. But public disclosure of even a redacted version might jeopardize trade secret protection by offering clues to competitors about the nature of particular trade secrets. Companies will want to engage in strategic and careful redaction to maintain trade secret protection and confidentiality and — as might become necessary — to preserve a record of their reasonable efforts to protect the secrecy of the information.
In determining trade secret status, the SCP regulations rely on the substance of the California Uniform Trade Secret Act (Civil Code §§ 3426 et seq.), and the public disclosure limits identified in the Government Code (§ 6254.7). And while the facts of each situation will vary greatly from product to product, one key takeaway for companies is that they must be ready to respond quickly if the DTSC rejects their trade secret claims. Judicial intervention within thirty (30) days of the DTSC’s final determination is the only recourse for a party whose trade secret claim is denied.
California Safe Cosmetics Act
A related problem has arisen in connection with a new California state website that allows consumers to find out what chemicals are contained in their cosmetics products. A number of companies objected that certain information should not be disclosed on the website because it constitutes their trade secrets. The companies’ withholding of this information has sparked criticism and public debate.
On January 10, 2014, the California Department of Public Health (CDPH) rolled out a searchable online database that allows the public to learn more about possible risks associated with the cosmetic products they use. The California Safe Cosmetics Act requires companies that manufacture cosmetics to report any cosmetics products that contain ingredients known or suspected to cause cancer, birth defects, or other reproductive harm. The California Safe Cosmetics Program (CSCP) collects this data and makes it available to the public via a website that allows consumers to search by product category, product name, or brand/company name.
The act requires companies to report to the CSCP if their products are sold in California and the company has more than $1 million per year in cosmetic sales. Reporting is required regardless of the amount of the reportable chemical in the product. The CSCP points out that just because a product is included in the reporting database does not necessarily mean the product has been shown to cause harm. As a way to facilitate compliance, the CSCP maintains this list of chemicals to be disclosed.
Just like the Safer Consumer Product Regulations, the Safe Cosmetics Act creates a dilemma for companies that want to protect their trade secrets while ensuring compliance with the law. One strategy that companies appear to be using is to list “Trade Secret” as an ingredient in their products (in some cases, the only ingredient, but in others as one ingredient along with others). As of February 7, 2014, “Trade Secret” was listed as an ingredient in 1,445 products.
According to the CSCP website:
“Trade secret information, including ingredients exempt from disclosure on cosmetics labels, is not exempt from CA Safe Cosmetics Program reporting requirements. However, the California Department of Public Health (CDPH) cannot make any confidential and/or trade secret information available to the public unless the outcome of a CDPH investigation deems the information is not confidential and/or a trade secret.”
According to the CSCP submission guidelines, companies that claim information as confidential and/or a trade secret on the online reporting forms must also submit supporting written documentation to justify this designation. (Note that the FDA has its own process for seeking exemption from disclosure requirements on the basis of trade secret status.)
* * *
California is not alone in its interest in using public disclosure laws to promote green chemistry and restrict the use of potentially harmful chemicals. At least 33 states are considering new regulations of toxic chemicals in products. As other states enter the fray, the regulatory regime could get a lot more complicated and result in a patchwork of complex regulations that differ from state to state, much like we have seen in the fracking area.
One thing is for sure: these two recent developments in California underscore the need for companies to ensure that they are protecting their trade secrets when complying with mandatory public disclosure laws. Even though these laws carve out exceptions for trade secrets, there is always a risk that a government agency might reject a company’s trade secret claim. Companies in this area will be well-served to stay on top of these regulations in order to protect their secret business information, or consider alternatives to trade secret protection as a way to maintain their competitive edge.