What do European digital consumer or business entities need to know about litigation in the United States? Following a detailed analysis of this in the article published in August 2020, in this article we focus on requests for production of what a European business entity might consider to be “secret,” regardless of whether the information in issue might be subject to the GDPR or an equivalent. It will introduce the concept of the protective order, how such an order might be obtained, and what it might protect. We will also distinguish the protective order from a “sealing order.” The principles described in the article will, as a general matter, apply whether (1) the entity is a plaintiff or a defendant in litigation in the United States and (2) the litigation is in a federal court or a State court.
We can put the subject matter of the article into context by suggesting circumstances under which an entity might want to keep information that must be produced in discovery from disclosure to anyone other than a party to specific litigation. Absent a protective order (or an agreement), a party that receives information in discovery is free to disclose that information to anyone, including the press. But if the value of the information lies in its confidentiality, such disclosure would diminish its value.
To expand on the subject matter, we can look back to an article in the Dentons Privacy and Cybersecurity Law blog published October 29, 2020, “Dentons Privacy Committee Does Artificial Intelligence.” That article addressed the “developing landscape” of artificial intelligence (AI). Here are some examples of AI-related information which an entity might want to keep confidential for reasons other than a data privacy law:
- In the automotive sector, the source code for a fully autonomous vehicle developed by a car manufacturer;
- In the financial institutions sector, the algorithm and data used to determine whether to grant a loan to an individual or corporate applicant and the amount of the loan; or
- In the retail sector, the algorithm used by a high-end department chain to develop a business plan that will target customers for a highly-competitive clothing line.
To take one example for the purposes of this article, assume that a European car vehicle manufacturer (the “plaintiff”) has filed a civil action in a United States district court against an American company (the “defendant”) and accused the defendant of “theft” of the source code for an autonomous vehicle system that performs identically to one that the plaintiff offers on its vehicles. Then assume that a judge has ordered the plaintiff to produce the source code so that it can be compared against that used by the defendant. The plaintiff is concerned that the defendant will share the source code — which is proprietary and considered a trade secret — with other vehicle manufacturers and that doing so will nullify the value of the algorithm and the autonomous driving system as a vehicle sales incentive. The failure to comply with the court order to produce the source code might have dire consequences. What might the plaintiff — through its attorneys — do to protect its business interests and still comply with its discovery obligations?
First, the plaintiff’s attorney must confer with the defendant’s attorney and attempt to reach an agreement on the need for, and the terms of, a confidentiality agreement that can be expressed in a confidentiality order. If the parties reach an agreement, it may be endorsed by the judge in an order, which would make its terms enforceable by the court. Absent agreement, the plaintiff must file a motion for a protective order pursuant to Federal Rule of Civil Procedure (“Rule”) 26(c). It provides, in pertinent part:
The court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense, including one or more of the following:
“(B) specifying terms, including time and place or the allocation of expenses, for the disclosure or discovery;
(G) requiring that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a specified way…”
Note that the standard that the court will apply in deciding to issue a protective order is “good cause.” As explained by the United States Court of Appeals for the Third Circuit, “[g]ood cause is established on a showing that disclosure will work a clearly defined and serious injury to the party seeking closure.” Pansy v. Borough of Stroudsburg, 23 F.3d 772 (3d Cir. 1994). The moving party — in our example, the plaintiff — must make that initial showing. Once it has done so, a court will balance other factors to decide whether to issue an order, which will likely encompass more than the source code. As explained in Pansy, “because of the benefits of umbrella protective orders in cases involving large-scale discovery, the court may construct a broad umbrella protective order upon a threshold showing by the movant of good cause… After delivery of the documents, the opposing party would have the opportunity to indicate precisely which documents it believed not to be confidential, and the party seeking to maintain the seal would have the burden of proof with respect to those documents.”
In other words, and, again using our example, the court could issue a protective order that would apply to other information designated as confidential by the plaintiff or the defendant, including the source code for the defendant’s autonomous driving system. The order would provide that “covered” information not be disclosed to anyone other than the attorney who receives it. The order could even prohibit that attorney from disclosing the information to her client without permission of the court. It could also provide that the information could be disclosed to an expert or to other witnesses only if they sign a declaration that they have read the protective order and understand the nondisclosure obligations imposed by it.
Failure to comply with a protective order can have serious consequences. For example, under Rule 37(b)(2)(a), if a party “fails to obey an order to provide or permit discovery,” a court can issue an order,
(i) directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims;
(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence;
(iii) striking pleadings in whole or in part;
(iv) staying further proceedings until the order is obeyed;
(v) dismissing the action or proceeding in whole or in part;
(vi) rendering a default judgment against the disobedient party; or
(vii) treating as contempt of court the failure to obey any order…
What all this means is that the plaintiff can keep information confidential in the course of discovery on a showing of good cause, with an order enforceable by the court. However, now assume that discovery in the litigation is complete (or “closed”) and that the parties have not reached a settlement of their dispute. The plaintiff now has a choice: Drop the litigation or proceed to adjudication by the court. Most parties would proceed, but the plaintiff must now consider the possible effect on its business income should the source code become public.
Why might information that was subject to the protective order become public?
The plaintiff, to continue to judgment, may have to disclose its source code as evidence in a filing in support of a dispositive summary judgment motion (or in opposition to one filed by the defendant). That act of filing with the court is likely to make the filing (and the proprietary source code disclosed in it) a “judicial document” which, under the American common law, means that the public has a “right of access” to the formula unless the plaintiff could demonstrate a “compelling interest” to keep it secret and an absence of reasonable alternatives to public access. This is a significantly higher standard than “good cause.”
Now, assume that summary judgment was denied or that the plaintiff never sought it. The litigation would then proceed to trial, either before a jury or at a “bench trial” with a judge sitting as the finder of fact. The Sixth Amendment to the United States Constitution explicitly grants a right to a public trial to a criminal defendant. Although the United States Supreme Court has not addressed the right to a public trial in civil litigation, many federal and State courts have concluded that a compelling interest and absence of reasonable alternatives to disclosure must be shown to seal part or all of a civil trial.
What does all this mean for a European business entity that may have a trade secret or other commercial confidence and litigates about that confidence in an American court, either as a plaintiff or a defendant?
- The litigation will presumably be conducted in public.
- If the entity wants to protect its “secrets” during discovery, it should secure a protective order.
- If the litigation proceeds beyond discovery, and there is neither a settlement nor a withdrawal of the litigation, the entity will need to demonstrate a “compelling interest” to prevent that secret from public disclosure, which is a difficult standard to meet.
(Note: Bear in mind that this is intended to be an overview of what can be a complicated analysis).