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The Federal Reserve is prepared to ratchet up the penalty for bankers caught misappropriating their employer’s trade secrets. Although bankers were already subject to civil liability under state laws governing trade secrets and breach of contract, the Federal Reserve now appears willing to subject guilty bankers to an outright ban from working with any institution specified in 12 U.S.C. § 1818(e)(7)(a), pursuant to section 8(e) of the Federal Deposit Insurance Act.

Two Wyoming bankers are seemingly harbingers of this newfound willingness by the Federal Reserve to ban bankers caught misappropriating an employer’s trade secrets. The two culprits misappropriated Central Bank & Trust’s (“Central”) proprietary business information in connection with their plan to acquire employment and an ownership interest in Farmers State Bank (“Farmers”). The bankers’ malpractice included dissuading Central from pursuing an opportunity they conspired to exploit once at Farmers, moving loans from Central to Farmers, and the sharing of other proprietary (non-customer) information with Farmers’ employees. Although a Wyoming state judge ruled against the bankers last April, they retained their new jobs; this apparently irked the Board of Governors. In seeking to ban the bankers, the Federal Reserve alleged unsafe or unsound banking practices, as well as breaches of fiduciary duty. If banned, the duo will likely struggle to make good on their court-ordered $2.2 million civil judgment.

Whether the Federal Reserve is instituting a policy change regarding enforcement of trade secrets law or is merely punishing an instance of exceptionally brazen illicit behavior is still unclear. That said, aggrieved banks certainly have another arrow in their quiver when confronting unscrupulous ex-employees. Regardless, any employee should proceed with extreme care when handling an employer’s confidential and proprietary business information.

The case is In the Matter of Frank E. Smith and Mark A. Kiolbasa, Docket No. 18-036-E-I, before the Board of Governors of the Federal Reserve System.

In a recent decision, the Supreme Court of Vermont affirmed its commitment to protecting commercial secrets of private companies, even if they may have been disclosed to a public agency. Long v. City of Burlington, 199 A.3d 542 (Vt. 2018). The Burlington City Council was working with its consultant, ECONorthwest, and private property owners Devonwood Investors, LLC and BTC Mall Associates LLC (collectively BTC) to redevelop several downtown city blocks. The parties entered into a Predevelopment Agreement that required BTC to provide the City with market studies and feasibility analyses, but also acknowledged that this information, if disclosed to BTC’s competitors, could harm BTC’s business. Therefore, when BTC provided its studies to the City, it redacted any commercially competitive information. But because BTC and ECONorthwest had also entered into a nondisclosure agreement, BTC provided ECONorthwest with unredacted copies. Plaintiff filed suit alleging that the City violated the Vermont Public Records Act by failing to disclose the unredacted study its consultant had received. The trial court dismissed the case, holding that the study was not a public record, and even if the study was a public record, the redacted information was exempt from disclosure as a trade secret.

On appeal, the Court assumed without deciding that the unredacted study was a public record, and focused solely on the trade secret question. The Public Records Act exempts from disclosure “trade secrets” defined as “confidential business records or information, including any … plan, … production data, or compilation of information which is not patented, which a commercial concern makes efforts that are reasonable under the circumstances to keep secret, and which gives its user or owner an opportunity to obtain business advantage over competitors who do not know it or use it.” Vt. Stat. Ann. tit. 1, § 317(c)(9) (2018). Relying on an earlier Supreme Court of Vermont decision, the Court explained that the plain language of the exemption, specifically the inclusion of “compilation of information,” indicated that the Vermont Legislature did not intend to limit the definition of trade secrets to just information in the nature of intellectual property. See Springfield Terminal Railway Company v. Agency of Transportation, 816 A.2d 448 (Vt. 2002). Here, the private corporate information at issue would give its possessor a commercial advantage. Furthermore, BTC made a reasonable effort to keep such information secret by requiring ECONorthwest to sign a nondisclosure agreement. BTC’s information therefore met the definition of a trade secret and was exempt from disclosure.

Any other finding under the Public Records Act would have led to absurd results. The exemption “promotes not only the private company’s interest in protecting its commercial secrets, but also the government’s interest in its continuing ability to secure such data on a cooperative basis … to make intelligent, well-informed decisions.” 199 A.3d at 550. The Court’s decision should provide comfort to private companies that their commercial secrets are safe from disclosure when contracting with the government.

The Freedom of Information Act (FOIA) Exemption 4 provides that “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential” can be withheld when responding to a FOIA request. But what does this exemption mean? Many district courts and circuit courts have ruled on this issue but the rulings have been inconsistent regarding the standard to justify withholding information.

On January 11, 2019, the Supreme Court granted certiorari in the case of Food Marketing Institute v. Argus Leader Media, 889 F.3rd 914 (8th Cir. 2018), cert. granted, 2019 WL 166877 (Jan. 11, 2019). The question raised is whether FOIA Exemption 4 applied to individual Supplemental Nutrition Assistance Program (SNAP) retailer redemption data. Argus Leader Media, a South Dakota newspaper, had submitted a FOIA request to the USDA for annual SNAP redemption totals for stores that participate in the SNAP program. The USDA issues SNAP participants a card (like a debit card) to use to buy food from participating retailers. When a participant buys food using their SNAP redemption, the USDA receives a record of that transaction, which is called a SNAP redemption. The USDA refused to produce the SNAP data, citing several FOIA exemptions, which includes trade secrets and commercial information.

For the first time, the Supreme Court will address when the federal government may withhold information from a FOIA request based on the contention that responsive information is confidential or a trade secret. This decision will be critical for companies who submit sensitive information to the government.

Stay tuned.

In December 2017, Swarmify, Inc. filed a lawsuit against CloudFlare, Inc. in the U.S. District Court for the Northern District of California. The tech companies both have video streaming products. According to the Swarmify complaint, CloudFlare stole Swarmify’s trade secrets revealed during negotiations between the two companies. Specifically, Swarmify alleged that CloudFlare used its trade secrets to create a faster, more efficient video streaming service. After seven months of litigation, on June 21, 2018, and on the eve of the close of discovery in the case, Swarmify filed a motion to dismiss its claims. While Swarmify had initially sought dismissal without prejudice, when the Court informed Swarmify that it would not permit dismissal without prejudice, Swarmify agreed to a dismissal with prejudice. Swarmify’s request that its claims be dismissed was made after the trial court had ruled against it on its request for a preliminary injunction, the decision of which was entered on March 2, 2018.

After the dismissal with prejudice on Swarmify’s complaint was entered, on July 24, 2018, CloudFlare filed a motion for attorneys fees under the California Uniform Trade Secrets Act and Defend Against Trade Secrets Act, arguing that Swarmify had made its trade secret misappropriation claim in bad faith. Specifically, CloudFlare alleged that “Swarmify’s trade-secret claims were objectively specious and pursued in bad faith,” in particular after the Court had denied Swarmify’s motion for preliminary injunction. CloudFlare further alleged that Swarmify was using discovery costs in an improper attempt to obtain leverage for a settlement. CloudFlare asserted that Swarmify “made no realistic attempt to participate discovery or support its own claims” and “ignor[ed] the evidence” presented by CloudFlare, which proved that CloudFlare’s video streaming technology was both independently developed months before any negotiations between the parties had begun, and that the trade secrets at issue were also within the public domain from numerous sources. Further, CloudFlare pointed out that Swarmify’s request for dismissal came only after CloudFlare refused to capitulate to Swarmify’s settlement demands, which, according to CloudFlare, was further indication that Swarmify’s claims were independently baseless. In its motion for fees, CloudFlare claims to have incurred approximately $380,000 in attorney’s fees, but only requested $200,000 (the amount spent after the Court’s ruling on Swarmify’s preliminary injunction).

The federal district court is scheduled to hear CloudFlare’s motion for attorneys’ fees on September 13, 2018. While there is precedent for awarding attorney’s fees for pursuing misappropriation claims in bad faith under CUTSA, if the Court rules in favor of CloudFlare, it could be the first time an award of attorney’s fees is granted under DTSA.

Check back next month to find out how the Court rules.

New York has recently enacted disclosure laws that could impact clean product manufacturers’ ability to protect their trade secret chemical formulations. While California was the first U.S. state to pass a law requiring disclosure of all substances contained in cleaning products, New York’s Department of Environmental Conservation (“DEC”) Household Cleansing Product Information Disclosure Program imposes stricter requirements than California on what must be disclosed.

Both laws require manufactures of cleaning products to disclose all chemicals used in household cleaning products on their websites, and identify any ingredients that appear on authoritative lists of chemicals of concern. However, the New York law also requires manufactures to identify any ingredient that is a nanoscale material.

While both laws have an exemption allowing trade secrets to not be disclosed there are some key differences:

California’s Cleaning Product Right to Know Act of 2017

New York’s Household Cleansing Product Information Disclosure Program

Disclose all intentionally added ingredients unless it is confidential business information (“CBI”) Disclose all intentionally added ingredients, including those present in trace quantities, PLUS all ingredients present only as an unintentional consequence of manufacturing and present above trace quantities (0.1%) where the manufacturer knows or should reasonably know of such ingredients, impurities, or contaminants, unless they are withheld as CBI
Provide CBI justification only on request for audit by the Attorney General Provide CBI justification only on request of the DEC for evaluation
Penalty: prohibited from selling product Penalty: prohibited from selling product PLUS an initial fine of up to $2500, and $500 for each additional day of violation

 

California’s requirements for manufacturers are a lot clearer than New York’s: the “knew or should have known” standard in New York may make full disclosure more difficult. But in either state, manufacturers are able to protect their trade secret information and withhold it from disclosure. What remains to be seen is how (and if) litigation arises challenging a company’s decision to withhold CBI, what kind of information falls within that scope, and what justification is required to maintain trade secret protection.