Despite the altruistic nature of some non-profits, they too are entitled to trade secret protection.  The American Red Cross, a venerable stalwart in the disaster relief sector, recently found itself in the precarious position of seeking trade secret protections in responding to a letter from the New York State Attorney General’s office seeking information on how it spent Hurricane Sandy disaster relief donations after ProPublica, an independent news source, filed a public records request pursuant to New York’s Freedom of Information Law (FOIL).

In response, and in a new development at the intersection of trade secrets and the non-profit industry, the American Red Cross requested an exception from FOIL disclosure under FOIL’s trade secret exemption.  Specifically, the Red Cross objected to the disclosure of what it deemed “highly proprietary and confidential…information relating to the American Red Cross’s operational procedures and fundraising methodology” and “internal strategy” which included “detailed information about…internal and proprietary methodology and procedures for fundraising, confidential information about its internal operations, and confidential information that is not normally made publicly available both in regards to its response to Super Storm Sandy and disaster relief in general.”  Moreover, the American Red Cross alleged the disclosure of this information would cause economic harm because its competitors would be able to replicate its “business model” to their competitive advantage.  The Attorney General of New York agreed, finding the information proprietary trade secrets and citing case law in support.  See Matter of Physicians Comm. For Responsible Medicine v. Hogan, 29 Misc. 3d 1220 (A) (Sup. Albany 2010). Specifically, the Attorney General’s office withheld portions of the documents that “describe business strategies, internal operational procedures and decisions, and the internal deliberations and decision-making processes that affect fundraising and the allocation of donations,” finding “that this information is proprietary and constitutes trade secrets, and that its disclosure would cause the Red Cross economic injury and put the Red Cross at an economic disadvantage.”

While the American Red Cross’s seeking trade secret protection has caused some attention in the blogosphere, it highlights a major tension for non-profits: balancing the need to protect trade secrets with the constant pressure of transparency.  Non-profits thrive on the money raised by donors and thus donor lists – an apt analogy as to customer lists – as well as the potentially complex machinery that maintains and generates these funds are essential.  Indeed, charities and non-profits should be aware of and take measures to proactively protect potential trade secrets in the unfortunate event they are hauled into court or required to respond to requests like the FOIL request made by ProPublica.

Some steps non-profits should consider are:

  1. Identify and consistently label trade secrets – for example, label documents with this type of information “Confidential – Unauthorized Disclosure Prohibited.”
  2. When possible use Confidentiality and Non-Disclosure Agreements with employees
  3. Use technology wisely – keep truly confidential information on select protected computers
  4. Limit the third-party disclosure of information

But non-profits should be forewarned before rushing to protect potential trade secrets.  The growing trend in the non-profit industry is more transparency, not less.  Both government agencies and the public demand a greater picture of where money is allocated, the effectiveness of programs and services, and an accounting of executive and staff expenses.  In fact, one organization, GuideStar, widely regarded as the industry leader in monitoring non-profit transparency, published a helpful list of suggestions as part of its 2009 report “The State of Non-Profit Transparency, 2008: Voluntary Disclosure Practices” which, combined with the steps outlined above on trade secret protection, should help organizations in this unique balancing act:

  1. Regularly update the organization’s web presence with current, detailed programs and evaluation information, including general strategy and evidence-based evaluation metrics.
  2. Post board, staff, and associate names, titles, job functions, and credentials.
  3. Post the organization’s annual report.
  4. Post audited financial statements.
  5. Post the organization’s IRS letter of determination.

Notwithstanding the FOIL ruling, the American Red Cross recently revealed additional details regarding its spending for Hurricane Sandy to watchdog group ProPublica.