McAfee & Taft tIPsheet - March 2013: Is your trade secret safe with me? Trade secrets and the federal Freedom of Information Act

by McAfee & Taft
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Most states have adopted some version of the Uniform Trade Secrets Act, which is designed to prevent the disclosure of trade secrets. FOIA, or the Freedom of Information Act, allows individuals to access records collected by federal governmental agencies. USTA laws prevent the disclosure of information while FOIA promotes it. There are legitimate public policies behind both. (Some states have similar laws but focus here is on the federal level). We want to allow companies to safeguard confidential information they have developed in order to protect their competitive positions and encourage continued development of opportunities, but we also want some degree of transparency, so that, for instance, we can find out certain information that might be relevant to health and safety or environmental issues. What happens when those worlds collide?

Let’s say that you run a manufacturing plant and have developed some trade secrets surrounding your processes. However, that plant is subject to regulation by the Environmental Protection Agency, and it’s inspected. In the course of the inspection, the EPA representative requires that you provide information on a part of the process that you consider to be a trade secret. If you comply with the EPA demand and the information winds up in their reports or records (which may immediately or at some time in the future be subject to the Freedom of Information Act), can your competitor get the information by filing a FOIA request? Possibly. What if you refuse to turn the information over to the EPA, or what if it is another agency involved? Depending on the regulatory body you’re dealing with, they may have the power to shut you down. In regulated industries, the landscape is typically that participation subjects you to compliance with certain rules and regulations. So it may be that, in this example, the EPA could take adverse action, possibly even close your plant.

FOIA requires that certain types of government records be published in the Federal Register. Other records can be made available for public inspection and copying, or are subject to being made available to the public in response to requests made in writing.

FOIA is a broad statute that covers many types of information, but not everything is subject to disclosure. Typically, Exemption 4 of the FOIA exempts from public disclosure two types of information:

  1. Trade secrets; and
     
  2. Information that is
    • Commercial or financial, and
    • Obtained from a person, and
    • Privileged or confidential

Congress intended this exemption to protect the interests of both the government and those who submit information. Its existence encourages submitters to voluntarily furnish useful and reliable commercial or financial information to the government without fear that they will suffer a competitive disadvantage from disclosure. With regard to the two categories of information, “commercial or financial” information is pretty easily understood. Although the precise definition can vary, trade secrets are generally defined as information that is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage.

It’s not difficult to see if a document is commercial or financial in nature, so the main issue is usually whether the information is privileged or confidential. This has come to be known as the “substantial competitive harm” test, and it has two prongs. Will the disclosure of the information:

  1. Impair the government’s ability to obtain necessary information in the future, or
     
  2. Cause substantial harm to the competitive position of the person from whom the information was obtained?

If the answer to either is yes, the information is confidential and is exempt from disclosure through a FOIA request. The challenge is that the trade secret owner or the submitter is not the one who decides whether or not to release the information pursuant to a FOIA request; rather, the agency that collected the information decides if it should be exempt or not. So, you have a person working for a government agency who is unlikely to be unfamiliar with the development of the information, its marketplace worth, or the protective measures that surround it making the decision about whether or not it’s a trade secret. Not great, right? Moreover, under FOIA, agencies must prove that any information they withhold from disclosure was properly withheld because it was subject to a FOIA exemption. The result is that agencies have no real incentive to withhold information unless it’s absolutely clear that the information is really confidential. In other words, close calls are likely to be disclosed.

Is there anything at all you can do to keep information safe from competitors if you’re required to submit it to a regulatory agency? First, as discussed further below, when confidential business information is disclosed, you should define it as such to the agency and request in writing that you be advised prior to any disclosure of the information under FOIA or otherwise. Second, there is a mechanism to minimize damage if the agency releases the information. If you submit the information and it’s disclosed under FOIA, you can file a reverse FOIA administrative procedure action demanding a review of the agency’s decision to disclose. Unfortunately, the review action won’t put the trade secrets back in the bag, and the process stacks the cards in the agency’s favor for the most part, so your chances at any real relief are pretty minimal.

It’s better to try to prevent the disclosure to begin with. Of course, the first thing to do with an agency’s request for confidential information is to confirm with your regulatory counsel that compliance is required under that particular agency’s rules and regulations.

If you do have to submit the information, check with counsel or the agency representative to find out what particular procedures the agency might have to help protect the information from further disclosure, and comply with them. Most agencies do have some type of trade secret substantiation procedure in place. You should assume that if you don’t follow the agency’s specific procedure, they’re likely to disclose your information under FOIA.

If the agency doesn’t have well-defined substantiation procedures in place, follow these steps:

  1. Create a paper trail with the agency to establish that you consider the information to be a trade secret. Transmittal e-mails or letters that set out your belief that the information is confidential could become part of the record that might either make it easy for the agency to refuse a FOIA request under Exemption 4, or establish that the disclosure was “arbitrary and capricious” if it’s the subject of a reverse FOIA action.
     
  2. Properly mark any submissions as confidential… but only if it really is confidential. Mismarking information as confidential when you haven’t treated it that way will create credibility issues.
     
  3. Unless the agency requires otherwise, submit the information in a format that is different from the one it’s kept in during your ordinary course of business. In one case, the court drew a distinction between the paper information that a competitor received through a FOIA request and the same information (though in electronic format and thus more readily accessible) that the competitor stole from its rival.
     
  4. Document, with your submission, who has access to it, what measures you typically take to keep it confidential in the ordinary course of business, and any warnings that typically accompany the information on those occasions where it must be disclosed.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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