On July 21, 2020, the First Circuit clarified the high burden that a plaintiff faces when asserting that certain types of business materials are protected trade secrets. In TLS Mgmt. & Mktg. Servs., LLC v. Rodriguez-Toledo, No. 19-1104, 2020 WL 4187246, at *6 (1st Cir. July 21, 2020), the court reversed a district court’s bench trial verdict in favor of the plaintiff in a trade secret misappropriation case on the ground that the business materials at issue did not constitute trade secrets. Plaintiff TLS Management and Marketing Services, LLC, a Puerto Rico-based tax planning and consulting firm, argued that the defendants misappropriated two of its protectable trade secrets: (1) a portion of its “Capital Preservation Reports,” which contained tax recommendations specific to an individual TLS client based on an analysis of applicable statutes and regulations; and (2) its “U.S. Possession Strategy,” which consisted of a scheme that would allow Plaintiff’s clients to take advantage of a lower tax rate on outsourced services by contracting with Plaintiff and buying its shares.
Defendant Rodriguez-Toledo was the founder of Plaintiff’s competitor, Defendant ASG Accounting Solutions Group, Inc., and for some time worked for Plaintiff TLS as a Managing Director under a subcontract between Plaintiff and ASG. After departing from TLS, Rodriguez-Toledo provided tax advice to Plaintiff’s former clients regarding how to avoid certain tax penalties triggered by terminating their relationships with TLS, which TLS’s U.S. Possession Strategy was also intended to avoid. Rodriguez-Toledo also allegedly downloaded the Capital Preservation Reports from TLS’s Dropbox account without authorization before he left TLS. TLS filed suit against both ASG and Rodriguez-Toledo for misappropriation of the two trade secrets and violation of a nondisclosure agreement. The district court found they had misappropriated both trade secrets following a bench trial, and the defendants appealed.
The First Circuit considered whether the Capital Preservation Reports and U.S. Possession Strategy were trade secrets under the Puerto Rico’s Industrial and Trade Secret Protection Act. Noting that this statute is based on the Uniform Trade Secrets Act and provides a similar definition of “trade secret,” the court considered Uniform Trade Secrets Act caselaw in making its decision.
The court found that the Capital Preservation Reports did not constitute trade secrets because, at trial, TLS did not “separate the [purported] trade secrets from the other information … [that was] known to the trade” and generally failed to describe the trade secret with “sufficient definiteness.” Instead, TLS’s characterization of the trade secrets consisted of general references to tax liability reduction “methods or techniques” that it might recommend to clients, without describing them in detail. Moreover, TLS did not show the trial court which aspects of the reports were public and which were not. Further, despite TLS’s allegation that its process for creating the reports was also a protected trade secret, TLS “failed to identify the process with specificity, let alone establish what aspects were not readily ascertainable,” a required element under the UTSA. The First Circuit clarified that “the proper inquiry is not whether the documents describing TLS’s tax scheme were readily ascertainable but rather whether the ‘substance’ of that tax scheme was readily ascertainable.”
The court also held that the U.S. Possession Strategy did not constitute a trade secret because “to a large extent” the strategy “consisted of public knowledge.” For example, the court reasoned that “the general concept of ‘tax arbitrage’ based on Puerto Rico tax exemption laws was hardly secret.” Moreover, TLS advertised the strategy’s use of outsourcing of business functions to Puerto Rican entities in publications directed to prospective clients. The court did not resolve whether one specific feature of the strategy, “the use of promissory notes and security agreements to enable clients to access distributed profits” may was publicly known or not, holding that either way, this portion still was not a trade secret because TLS had not established that “that this aspect of the Strategy was not readily ascertainable from public sources.”
Properly identifying trade secrets early in discovery and ultimately proving trade secrets at trial can be difficult for plaintiffs, and disputes over these issues are some of the most commonly litigated. This decision is another important reminder to be sure when litigating over trade secrets contained in business materials to carefully isolate and describe the non-public, non-ascertainable, protected aspects of those materials early and often for the court. This is particularly important where the material is by nature composed of a mixture of client information, publicly known information, and trade secrets, like the Capital Preservation Reports at issue here.