Trade Secret Litigants Face Heavy Burden of Proof in Court

• Pages: 22-22
• Date: 01 July 2022
• Author: Kelso L. Anderson
• Subject Matter: Civil Law

Trade Secret

Litigants Face Heavy

Burden of Proof in

Court

By Kelso L. Ande rson, Litigation News

Associa te Editor

A federal appellate court has ruled that

a plainti failed to satisfy its burden of

proof in establishing trade secret pro-

tection of information that was argu-

ably public knowledge, even though

public data may be protected as a trade

secret. The ruling highlights the heavy

burden plaintis face in proving the

existence of protectable trade secrets

but also reveals strategies and lessons

that litigators may use to protect their

clients’ trade secrets, according to ABA

Section of Litigation leaders.

In TLS Management & Marketing

Services v. Rodriguez-Toledo, the

plainti sued the defendants in the

U.S. District Court for the District of

Puerto Rico alleging breach of con-

tract and misappropriation of trade

secrets. The plainti, TLS Management

and Marketing Services, LLC, was a tax

planning and consulting f‌irm based in

Puerto Rico. Its business was divided

into a consulting division and a Puerto

Rico division.

The consulting division prepared a

Capital Preservation Report based on

statutes and regulations and made tax

recommendations to clients based on

the analysis therein. The trade secret

was alleged to be the portion of the

report that was not specif‌ic to a cli-

ent. The Puerto Rico division provided

tax services to clients based on a U.S.

Possession Strategy. Under the strategy,

a U.S.-based client became a member of

one of the plainti’s divisions and pur-

chased shares of the plainti by signing

a buy-sell agreement that limited the

client’s rights to transfer its membership

shares. The plainti and its aliate lim-

ited liability companies had tax-exempt

grants pursuant to Puerto Rican law that

aorded them favorable corporate tax

rates and made dividend distributions

to their members tax-free under certain

conditions. Therefore, the net eect of

the strategy was to provide a favorable

tax rate and tax-exempt dividends for

U.S.-based, Puerto Rican clients.

The defendant Ricky Rodriguez-

Toledo was an employee of the

plainti. Defendants Accounting

Solutions Group, Inc. (ASG) and Global

Outsourcing Services, LLC (GOS) were

tax planning and accounting compa-

nies in which Rodriguez-Toledo had a

majority interest. ASG signed a sub-

contractor agreement with the plainti

that included a nondisclosure provision.

The defendant Rodriguez-Toledo also

signed a conf‌identiality and nondis-

closure agreement. After Rodriguez-

Toledo ended his employment with the

plainti, he provided tax services in

competition with the plainti through

ASG and GOS.

The plainti alleged that Rodriguez-

Toledo misappropriated the plainti’s

trade secrets by using the strategy to

provide tax services to two of the plain-

ti’s former clients. Those clients sought

advice from the defendants to exit their

“membership” with the plainti, so the

defendants created a limited liability

company to minimize the tax conse-

quences for the two clients. The plainti

also alleged that the defendants misap-

propriated trade secrets by download-

ing copies of particular reports without

the plainti’s authorization. The district

court found that the plainti’s report

and the strategy were trade secrets and

that the defendants misappropriated the

same by downloading two reports with-

out authorization.

In reversing the district court, the

U.S. Court of Appeals for the First

Circuit noted that the def‌inition of

trade secrets under Puerto Rican law

is similar to the def‌inition under the

Uniform Trade Secrets Act and requires,

among other things, proof that the

alleged trade secret was “not readily

ascertainable” and distinct from general

knowledge. Here, the court of appeals

concluded that the plainti did not

prove that the report and the strategy

were distinct from public knowledge or

not readily ascertainable.

“This was a unique case because

the plainti tried to argue that a com-

bination of tax laws could be a trade

secret,” observes Gregory S. Bombard,

Boston, MA, cochair of the Trade

Secrets Litigation Subcommittee of the

Section of Litigation’s Commercial &

Business Litigation Committee. “There

is plenty of case law to support the

proposition that a particular combina-

tion of publicly known information can

qualify as a trade secret, but the di-

culty for a plainti is articulating why a

particular combination diers from the

public domain,” Bombard explains.

Given the burden of proof and

contentious nature of trade secret

litigation, Section leaders see some

key strategies and lessons from the

opinion. “As a defendant, it is best

to force the plainti to be as spe-

cif‌ic as possible when identifying a

trade secret, “ advises Travis S. Hunter,

Wilmington, DE, cochair of the Trade

Secrets Litigation Subcommittee of

the Section’s Commercial & Business

Litigation Committee. “This can limit

discovery and bolster a potential

motion if the trade secret changes

later,” Hunter continues.

Having a plan prior to any potential

litigation is especially critical, advises

Dawn Mertineit, Boston, MA, cochair of

the Intellectual Property Subcommittee

of the Section’s Woman Advocate

Committee. “Obviously, this decision

puts a lot more pressure on plaintis

to put forth facts establishing that the

information at issue is in fact a trade

secret subject to protection. I would

expect savvy defendants to put plain-

tis through their paces by pushing

hard early on for detailed disclosures

as to the basis for the claim that infor-

mation is not publicly available. At a

minimum, this will force plaintis to

do more work up front, and, at best, it

could lead to success on a dispositive

motion before the matter proceeds to

trial,” Mertineit emphasizes.

Evidence of Juror

Dishonesty Requires

Evidentiary Hearing

By John M. Mc Nichols, Litig ation

News Associa te Editor

When evidence emerges that jurors lied

about their involvement in prior litiga-

tion, a court must conduct an eviden-

tiary hearing to investigate whether

juror bias requires a new trial. In Torres

v. First Transit, Inc., the defendant dis-

covered, after losing at trial, that two

jurors failed to disclose that they had

previously been defendants in multiple

22 | LITIGATION SECTI ON

Published in Litigation News Volume 47, Number 4, Summer 2022. © 2022 b y the American Bar Ass ociation. Reproduc ed with permission. A ll rights reserv ed. This information or an y portion there of may not be copied or dis seminated in any

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