Coalition Stops Proposal to Force Trade Secret Reveals

The California Chamber of Commerce and a broad coalition of associations have blocked legislation that would have unfairly leveraged California companies into costly settlements to avoid having to publicly disclose trade secret information.

AB 889 (M. Stone; D-Scotts Valley) would have unfairly leveraged California companies into costly settlements to avoid having to publicly disclose trade secret information based upon an unproven allegation that a product is defective. AB 889 would have also overwhelmed the already-crowded dockets in civil courts with motions and hearings by parties seeking to protect their trade secrets.

January 31 was the deadline for legislation to pass the house in which it was introduced. Although AB 889 was amended as recently as January 29, it had not come up for a vote by the Assembly before the deadline.

Jeopardizes Trade Secrets

In civil litigation, it generally is presumed that trade secrets are not subject to public disclosure, in keeping with a 1992 court decision (Bridgestone/Firestone, Inc. v. Superior Court).

Under the guise of informing the public of potentially harmful products or environmental conditions, AB 889 flipped this existing standard. The bill created a presumption that all information exchanged during civil litigation shall be publicly disclosed, including confidential trade secret information, based upon an allegation that a product is defective or an environmental condition is harmful.

The only potential way under AB 889 to avoid public disclosure of such valuable information was by having a company representative sign a declaration under penalty of perjury that none of the confidential documents contained evidence of any product or condition that has or is likely to create a public harm. This declaration was based not just upon actual knowledge, but also a “should know” standard.

No company representative would have been willing to make such an attestation and risk a felony perjury conviction in California with up to 4 years in prison.

The outcome of such an onerous declaration requirement is that companies will be unfairly leveraged into costly settlements to avoid public disclosure of their confidential trade secret and proprietary information. A similar type of unfair leverage was previously recognized and resolved by courts with regard to document requests for a company’s financial information based upon the mere allegation of punitive damages (Rawnsley v. Superior Court, (1986)).

Flooding Civil Courts

The new presumption AB 889 created that trade secret and proprietary information will be disclosed would undoubtedly have attracted significantly more product defect and environmental cases to California. Forum shopping by trial attorneys in California is already a problem. AB 889 would only have exacerbated this problem and overwhelmed California’s court dockets.

Once lawsuits were filed, given the significant implications of this bill with regard to disclosure of trade secret information, courts would undoubtedly have been swamped with demurrers challenging the factual basis for the claims and discovery motions for protective orders to prevent the disclosure of confidential/trade secret information.

Interference with Negotiations

AB 889 sought to preclude settlement agreements that contain nondisclosure or confidentiality provisions related to the case. Many businesses settle cases as a business decision to resolve the issue before spending significant fees through litigation. A settlement is in no way an admission of liability or a concession of the validity of the plaintiff’s claims. Confidentiality provisions are included to prevent the risk of attorneys and consumers assuming companies will automatically settle and, therefore, are easy targets in litigation.

By preventing these provisions, AB 889 placed companies in an unfair predicament. If they did not settle, they were faced with being forced to publicly disclose confidential information, such as trade secrets. If they settled, they risked having to fight off future, repeated, meritless claims by consumers/attorneys that piggyback off the original settlement, seeking a quick financial recovery.

There is no policy basis to include settlement agreements under the purview of AB 889 and risk discouraging the resolution of civil disputes outside of the court room.

Of further concern was the deletion of language in the prior version of AB 889 about the confidentiality of pre-agreement negotiations and settlement discussions between mediation participants. The prior version of AB 889 explicitly protected these negotiations and discussions from disclosure pursuant to Section 1153.5 or 1154 of the Evidence Code.

By removing this explicit protection, the most recent amendments raised concern that the bill would have extended to even these most sensitive and highly protected discussions amongst litigants. This would have further discouraged and deterred the informal resolution of claims.

Public Already Has Access

AB 889’s stated intent was to make sure the public is aware of products or environmental conditions that pose dangers to public health or safety. AB 889 is unnecessary for the following reasons:

  • An individual’s complaint in civil litigation, which sets forth the allegations upon which the lawsuit is based, is never confidential. The complaint is always accessible to the public to review and determine the allegations of danger to public health or safety.
  • The plaintiff and his/her attorney also are able to communicate to the public through media or any other means the allegations of danger to the public health or safety both before and after a civil lawsuit is filed.
  • The Consumer Product Safety Commission already requires any manufacturer, importer, distributor, and/or retailer of consumer products to report to the commission any defective product that could create a substantial risk of injury to the public, at which time the commission can investigate to determine if a public notice or recall is necessary. Whether a product poses a risk to the public is determined by the commission, rather than a trial attorney seeking a financially lucrative settlement, as would have been the case under AB 889.

There already are numerous ways for the public to receive information regarding a dangerous consumer product or environmental condition without exposing individuals to felony prosecution, jeopardizing trade secret and proprietary information, interfering with the settlement of such cases, and creating an unfair litigation advantage for plaintiffs as AB 889 proposed.

Staff Contact: Jennifer Barrera

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