Takings, trade secrets, and tobacco: mountain or molehill?

• Author: Hur, Robert K.

INTRODUCTION

Passed in 1996, chapter ninety-four, section 307B of the Massachusetts General Laws (hereinafter "the Disclosure Act" or "the Act") imposes two substantive requirements on manufacturers of cigarettes and other tobacco products selling their wares in the state. First, the Act requires such parties to furnish the state Department of Public Health (DPH) annually with a list of the ingredients added to each brand of product sold in Massachusetts.(1) Tobacco companies add hundreds of ingredients to each product to create flavors that will cause a person to use a particular brand of tobacco product.(2) All ingredients "other than tobacco, water or reconstituted tobacco sheet made wholly from tobacco" and any minimal ingredients proven non-harmful by the FDA must be listed "in descending order according to weight, measure, or numerical count," although the actual amount of each ingredient need not be provided.(3) This portion of the Act is uncontroversial, for the tobacco industry currently complies with substantially similar regulation imposed by the federal and other state governments.(4)

However, the Act also provides for public disclosure of such ingredient lists, thereby eliciting vigorous protest from the tobacco industry. According to the Act, if DPH finds a "reasonable scientific basis" that disclosure of any collected information "could reduce risks to public health," and the state attorney general advises that such disclosure would not work an unconstitutional taking, such information "shall be public records."(5) In this respect, the Massachusetts statute goes beyond the scope of any prior regulation of the tobacco industry;(6) its subjects challenged its reach under the Takings Clause of the Fifth Amendment as unconstitutionally invasive by virtue of its disclosure and destruction of valuable trade secrets: brand-specific product formulae.(7) The most recent judicial statements on the topic are Philip Morris v. Harshbarger,(8) a First Circuit decision on interlocutory appeal, and Philip Morris v. Reilly,(9) a District Court decision upholding the tobacco industry's takings claim.(10)

In the initial stages of litigation, the District Court granted the tobacco manufacturers' motion for a preliminary injunction restraining state officials from enforcing the Act; the matter came before the First Circuit when Massachusetts officials brought an interlocutory appeal. The Court of Appeals affirmed, finding that the manufacturers showed a likelihood of success on the merits of their Fifth Amendment takings claim.(11)

In providing a determination of the likelihood of success of plaintiffs' takings claim, Judge Selya of the First Circuit voiced confidence that the takings claim would ultimately prevail: "[W]e are comfortable in concluding that [the Commonwealth's argument against the takings claim] probably will bear no fruit."(12) He concluded thus by applying the analysis prescribed by the Supreme Court in Ruckelshaus v. Monsanto Co.,(13) finding that the tobacco companies held a reasonable expectation of continued confidentiality of the trade secrets it disclosed to DPH, and that the state's permission to continue doing business in Massachusetts failed to duly compensate the taking.(14)

Judge Selya's prediction was proved correct in the District Court's subsequent holding in Philip Morris v. Reilly that the Disclosure Act did indeed constitute a taking of tobacco companies' intellectual property.(15) The District Court permanently enjoined enforcement of so much of the Act as requires tobacco companies to disclose brand-specific ingredient lists.

At first blush, these cases provide a portentous foray into significant questions of intellectual property law, at a time when such forms of property are assuming a more central and redefined role in the information age. Will the judiciary stiffen constitutional protections of trade secrets and, by extension, other forms of intellectual property? What is the proper way to conceptualize takings of trade secrets? At the same time, interest in the Takings Clause continues to run high,(16) at least partly because this area of constitutional law remains "a muddle,"(17) and many share the opinion that "only the right of privacy can compete seriously with takings law for the doctrine-inmost-desperate-need-of-a-principle prize."(18) In the tussle between the government's power to regulate for the common good on the one hand, and private citizens' property interests on the other, has the balance shifted away from public welfare? How will the Supreme Court's recent redefinition of many takings issues in land regulation cases--e.g., the "rough proportionality" test to determine the necessary nexus between the property owner's loss and the government's goal(19)--apply to intellectual property takings? Read broadly, the Philip Morris cases seem to offer valuable (and, to some, alarming) answers to these questions.

The tobacco industry recently has come under intense scrutiny from legislatures, courts, regulatory agencies and litigants (both public and private). Now that the Supreme Court has ruled that the Food and Drug Administration (FDA) lacks the authority to regulate tobacco under its current mandate from Congress,(20) the controversy swirling around the industry will be concentrated at the state level until Congress extends the FDA's authority. However, the furor is bound to continue, to the dismay of tobacco companies and their shareholders. Public concern over tobacco use and its effects continues to run high, and understandably so: According to the FDA, in 1996 tobacco consumption was "the single leading cause of preventable death in the United States."(21) Nor is its position at the top of the list threatened; tobacco alone kills more people each year in the United States than acquired immunodeficiency syndrome (AIDS), car accidents, alcohol, homicides, illegal drugs, suicides, and fires, combined.(22)

Despite evidence to the contrary, however, I will argue that these cases are actually quirky oddities in Takings Clause jurisprudence, offering few of the momentous insights suggested above. I reach this conclusion for two reasons.

First, government regulation like the Disclosure Act is currently rare and is unlikely to arise with sufficient frequency in the future to make the issues in the Philip Morris cases ones of broad concern. Despite the intense unpopularity of particular industries (e.g., tobacco and firearms), it is unlikely that legislatures will establish this new type of regulatory taking, legislative window-breaking, as a burgeoning and significant one, especially given its initial greeting by the judiciary.

Second, much less is at stake in these cases--from both litigants' perspectives--than there appears at first glance. The tobacco manufacturers argue that disclosure destroys valuable brand-associated trade secrets without any bona fide health rationale. Indignantly citing the enormous sums of money they have invested in establishing their products' flavors and brands, they portray the Disclosure Act's impact as an unconstitutional and crippling economic blow. However, careful analysis reveals that the actual impact on Philip Morris and its peers would be minimal, even negligible.

Massachusetts' mountain of concerns can also be shrunken into a molehill. The state argued that the invalidation of the Disclosure Act threatens its power and duty to protect public health and safety.(23) However, despite Massachusetts' powerful rhetoric, the only deprivation that the legislature suffered as a result of the Philip Morris courts' holdings was the loss of a popular way to rattle the cage of an unpopular industry.

Therefore, the real issue of interest in the Philip Morris cases is how the courts have and will continue to deal with legislation that amounts to malicious mischief directed against private industry.(24) No matter how politically unpopular the industry, harassing regulation that has no bona fide anchor in the legitimate grounds of the police power must be struck down. As the Philip Morris courts found, the description of an unconstitutional taking fits the Disclosure Act like a glove, and striking down such legislative window-breaking as a regulatory taking is as good a way to handle these cases as any.(25)

In this discussion, I will depart from the cases' facts and details, using it as a platform from which to consider issues both resolved and unresolved by the courts. The First Circuit dwelt extensively on applying the takings analysis established by the Court in PruneYard Shopping Center v. Robins(26) and Monsanto(27): consideration of "the character of the governmental action, its economic impact, and its interference with reasonable, investment-backed expectations."(28) The test itself is fairly well settled,(29) making the detailed thicket of its application much less interesting than the broader issues of trade secret takings and consideration of the cases' situation in the takings landscape.

In Parts I and II, I provide an overview of established takings jurisprudence and trade secret law, respectively. In Part III, I make the case for the Philip Morris cases' broad significance, then reveal the mountain as a mole-hill.

1. TAKINGS JURISPRUDENCE

   1. A Conceptual Introduction

      To begin, it will be helpful to consider quickly the concept of a "taking" from an abstract perspective. What purpose does the Takings Clause serve? What values does it affirmatively promote, and against what contingencies does it protect? The answers to these questions, rather than being mere window-dressing, serve as a foundation, both logical and normative, for an assessment of the Philip Morris cases and the practice of protecting intellectual property via takings law. Consistency with the stated judicial purposes of the Takings Clause dictates that courts continue to follow the Philip Morris cases in the face of such legislative initiatives.

      ...