Protecting trade secrets Featured

7:13am EDT October 26, 2006
In business, competitors can battle to grab more than a slice of your market share. The wily rival also will make claims on your proprietary market or product information through lawsuits or the threat of suits. Must you hand over hard-won data about your enterprise to the opposition? Not necessarily, says Jonathan Ellis of Shumaker, Loop & Kendrick LLP.

“The defendant often is not even aware that confidential business information is being sought, because the requests are couched in arguments that seem to be anything but an attempt to uncover business secrets,” Ellis says. “Above all else, there must be a legitimate business interest in order for someone to request details about your operation.”

Smart Business spoke with Ellis about steps to take when sued by the competition.

Under what scenarios might a competitor ask for information that you would deem confidential?
For example, a former employee starts a business and asks for various documents alleging that, as a shareholder of your company, he needs this information to perform a valuation analysis. Or a competitor could ask for your supply contracts when you’ve hired away his key employee.

What are the general guidelines for when you must divulge information to your competition in a lawsuit?
The courts will always look for a legitimate business interest in the information being sought. For example, if you developed secret knowledge about a product or technology and nobody else has it, you can prevent sharing this information. Or, if the information is readily available in the marketplace, such as a price list that you’ve published on your Web site, then there is no reason not to give it. The key here is to ask, If the information is not readily available, why are they asking for it? What purpose does it have in the lawsuit? Is the requested information reasonably likely to lead to discovery for admissible evidence? If the answer is no, you shouldn’t be required to produce it and you object to it. If the answer is, yes, then you want to be more careful. Is it a trade secret, and does it fall under the Trade Secret Act?

How do you continue to protect your business interests and yet meet your legal obligations to the plaintiff — your competitor?
Before you just turn information over, you need to ask yourself if you can protect the material from other parties or whether you can provide only part of the information that’s requested — and then only for the attorneys’ eyes.

For example, if the plaintiff asks for production costs from your enterprise, you could suggest that he review the raw numbers from your consolidated financial statements to arrive at a figure. If he asks for your customer list, you need to determine whether that is relevant to the litigation. Keep asking yourself, What’s at stake if I provide this information? Will it bust the company if I continue with a lawsuit? Is it worth the money to continue meeting these document requests and responding to demand letters? Is it worth it to settle up front, or should I fight the claim and go to trial?

Are many of these requests for information from a competitor legitimate?
There seem to be more cases coming up in which the ultimate goal behind the litigation is not what’s on the face of the lawsuit. There are suits that are brought undercover to determine confidential business information. And sometimes that is realized only in the middle of a lawsuit during the discovery phase.

In one case, a group of employees left to start a competing business and demanded a majority of their former company’s documents, such as accounting records and major contracts. The defendant asked why these records were necessary. The plaintiffs answered that they had to determine the value of the shares they held in the firm, and the contracts (which spelled out the dollar value of purchase agreements) were the only way to get at a true figure.

Our answer would be: Get the numbers from the firm’s balance sheet. If that doesn’t work, we make sure that confidential data is provided for review only by the opposing attorney and not his clients. If we do provide information or trade secrets to the opposing party, we want to include provisions that confidential data is not filed in public records, that it is kept under seal and not released to the public at large. This could include client lists, contact books, Social Security numbers or other financial information.

JONATHAN ELLIS is a partner in the Tampa office of Shumaker, Loop & Kendrick LLP. Reach him at (813) 229-7600 or at jelllis@slk-law.com.