Ryan Koppelman, Alston & Bird partner
Image: courtesy photo
Maureen Gorsen, Alston & Bird partner
Image: courtesy photo
The protection of trade secrets and confidential business information is critical to maintaining a competitive position. Manufacturers and sellers of consumer products, however, may find it more difficult to protect their trade secrets under the proposed Safer Consumer Products Regulations issued by the California Department of Toxic Substances Control, or DTSC.
In 2008, California adopted statutes known as the Green Chemistry Initiative, which was intended to reduce the chemical hazards by requiring the DTSC to establish a process to identify, prioritize and evaluate chemicals of concern in consumer products sold in California by Jan. 1, 2011 (See Health & Safety Code, §25252(a)).
The January 2011 deadline for adoption regulations has come and gone but the DTSC is now nearing its final set of proposals. The agency's most recent draft regulations — issued on July 27 — are expected to undergo another round of revisions before being finalized in early 2013. However, certain elements of the DTSC's Safer Consumer Products Regulations already appear to be virtually final. Amongst those provisions are the requirements that all manufacturers and sellers of consumer products in California publicly disclose all chemical ingredients contained in their products for regulatory review.
In anticipation of the final regulations, it is important for impacted manufacturers and sellers of consumer products in California to begin their preparations now. Without an early and comprehensive strategy, compliance with the DTSC's expected requirements will likely present a number of potential pitfalls for the unprepared.
Risk of Disclosure under the Proposed Regulations
Through both generalized "information call-ins" and specific data requests to individual companies, the draft regulations provide DTSC the authority to require companies to provide information on their products that the DTSC determines "is necessary to implement" its regulatory scheme.
This authority of the DTSC is not limited to those products which it has designated as "priority products," but rather extends to manufacturers and sellers of virtually any product that reaches the consuming public in California, from toilet paper to airplanes, if the DTSC considers the information to be "necessary to implement" the Safer Consumer Product Regulations. At the DTSC's discretion, these required disclosures may include:
• Identification of all product ingredients and their respective quantities.
• Proprietary market data, including customer lists and sales records.
• Any records relating to the redesign of a product to remove a listed "chemical of concern" from the product if that redesign occurred after the chemical was identified by the state, including information describing both the original and redesigned product and the intended uses and consumers for the product.
The DTSC has recognized the impact such disclosures would have on the protection of trade secrets and included a procedure to assert trade secret protection. To protect sensitive information, the DTSC allows a person to claim trade secret protection and substantiate it by providing documentation that demonstrates the substantive elements of a trade secret as defined by the California Uniform Trade Secrets Act.
In California, a trade secret is any information, including a formula, compilation, program or process, that derives some independent economic value from being unknown to the public or to competitors. The information must be the subject of reasonable efforts to maintain its secrecy. Some of the most common efforts to maintain secrecy include limiting access, as well as requiring employees to sign confidentiality and assignment agreements and third parties to sign nondisclosure agreements. Once the information becomes generally known to the public or to competitors, or if the owner fails to take appropriate measures to protect its secrecy, the secrecy is gone and the protections of trade secret law expire.
Potentially Damaging Disclosures
Under the proposed regulations anyone asserting trade secret protection must provide sworn information and documents to support each individual trade secret claim including:
• The extent to which the information is known by both internal employees and the public, and whether those with knowledge are bound by nondisclosure agreements.
• The measures taken to protect the secrecy of the information.
• The value of the information to the owner and his competitors, and the amount of effort or expense put into developing the information; and the ease with which a competitor could discover or reverse engineer the information on its own, among several other administrative disclosures.
This list of substantiating information largely mirrors California's requirements for a trade secret, but goes beyond it by being very specific as to the type of proof required.
If the DTSC considers the submitted information insufficient to substantiate a trade secret claim, the person seeking protection will receive a notice and have 30 days to correct the identified deficiencies or seek judicial review by filing a legal action for appropriate protection. Failure to take either of these actions results in the public disclosure of the information submitted, and hence, the termination of any trade secret.
Manufacturers and sellers of consumer products subject to the DTSC's proposed regulations will need to include sufficient detail to substantiate their trade secret claim. Nevertheless, manufacturers and sellers should be careful not to reveal the trade secrets themselves in the underlying documentation. One should be certain to closely follow the proposed procedures for designating and redacting trade secret material, even in the substantiating information or documents, to assure that these supporting materials are not themselves publicly disclosed.
Ideally a trade secret claim would be supported by describing the trade secret in nonconfidential terms. The line, however, between confidential and nonconfidential information can be difficult to trace. For example, certain trade secrets may comprise a unique and economically advantageous combination of public elements, making the exercise of carving out nonconfidential matter particularly difficult. Given these challenges, manufacturers and sellers may be tempted to err on the side of designating and redacting material they consider to be proprietary. However, overdesignation and over-redaction should be avoided to the extent possible.
Instead, it is recommended that impacted companies make an up-front investment of time and resources. In advance, determine which information and processes are truly proprietary and most plausibly constitute protectable trade secrets. Doing so will likely help manufacturers and sellers most effectively protect business information that deserves protection and not waste resources attempting to unnecessarily overprotect information. Businesses and individuals will be better able to evaluate which information or materials are worth protecting and which options for protection are best for them.
How to protect Trade Secrets
Covered businesses will need to ensure they have a well-developed and secure process for assessing, maintaining and protecting their confidential business information and trade secrets. Not only will this analysis help define which materials are worth fighting over, it will also serve as an important auditing function to ensure that the proper policies, practices and procedures are in place to create a clear record of protectable trade secret status. For example, if any company policies to limit access, procedures to designate key confidential documents, or employee confidentiality and assignment agreements are deemed in need of improvement, now is the time to remedy this.
Furthermore, the nonconfidential description of the nature of the chemical, as required by the draft regulations, can be a trap for the unwary and should be thoughtfully considered well in advance. It will require companies to draw a line between the confidential and nonconfidential information. This is no trivial task and is not best done at the last minute before a submission. Conducting this kind of internal evaluation early enough will pay dividends in the long run, both legally and commercially.
If a company has extremely valuable trade secrets, it may want to consider researching the level of security at the DTSC. If the security measures offered by the DTSC are deemed insufficient, a company may need to consider going to court before submitting its information. This would be an extraordinary procedure not contemplated by the regulations, but depending on the value of the trade secrets and dangers associated with them ending up in the wrong hands, the extraordinary measure could be necessary.
In general, a company can lose its trade secrets by not taking reasonable steps to maintain confidentiality or by them becoming generally known regardless of whether it has taken reasonable steps. If a company does not go the extra step of researching the agency security and taking extraordinary action, it is unlikely that would be held against it as having not taken reasonable steps, but it may, as a practical matter, result in its trade secrets becoming generally known if the receiving agency is susceptible to security breaches or inadvertent disclosures. One option short of filing a pre-emptive lawsuit would be to negotiate a special confidentiality agreement with the DTSC. There is precedent for this at the federal level when companies enter government contracts, and such agreements could provide for specific security measures obligating the DTSC to keep any trade secrets in a locked cabinet in a locked office with restricted access and/or maintained on computers that are password-protected.
Lastly, if a company is licensing technology and trade secrets from a third party, usually the company would be bound by nondisclosure agreements obligating them not to disclose these trade secrets to anybody without the prior consent of the licensor. In such a scenario, the company will want to get the licensor involved as soon as possible to provide it notice and work together for mutual benefit as allowed by any nondisclosure agreement.
Ryan W. Koppelman is a partner in the Silicon Valley office of Alston & Bird and focuses his practice on intellectual property. He can be reached at ryan.koppelman@alston.com. Maureen F. Gorsen is a partner in the firm's Los Angeles office and focuses her practice on environmental and regulatory issues. She can be reached at maureen.gorsen@alston.com.
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