It is frightening to think that valuable corporate trade secrets could be lost with the click of a mouse. But as electronic court filing becomes increasingly prevalent, the risk of inadvertent disclosure of sensitive information online—and the resulting loss of trade secret protection—is becoming more and more real.
A litigant in New York recently learned this lesson firsthand, narrowly escaping what could have been extremely harsh consequences from an accidental e-filing. In HMS Holdings Corp. v. Arendt, the Supreme Court of New York refused to create a per se rule that would unfairly punish Plaintiff HMS Holdings Corp. (“HMS”) for its mistaken disclosure of more than 1,500 pages containing corporate trade secrets, but the court did leave room for serious consequences in future cases.
The HMS court has created a ten-factor test that could result in loss of trade secret status under some circumstances. However, careful study of these factors can help avoid—or at least mitigate—damage in the event a mistake is made.
HMS Holdings Corp. v. Arendt
HMS owns certain proprietary systems, methodologies, and technologies specific to a niche market: state Medicaid agencies who need assistance identifying and verifying alternative forms of healthcare coverage and funding from third-party payors. HMS carefully guards these systems, methodologies, and technologies as trade secrets. So when a group of employees left to go work for a rival and attempted to bring several of HMS’s customers to the competing business, HMS sought preliminary injunctive relief against them.
But the trouble really began for HMS when it filed its motion papers in preparation for its injunction hearing. Although a stipulated protective order was in place that allowed the company to designate its supporting affidavit and annexed exhibits “Attorneys’ Eyes Only,” HMS inadvertently e-filed an unredacted affidavit with more than 1,500 pages attached that detailed the trade secrets at issue.
The company learned of this mistake in the worst way possible: defense counsel raised the issue during the injunction hearing, insisting that filing on the New York State Courts Electronic Filing (“NYSCEF”) system rendered the information public and thus vitiated its trade secret status.
Indeed, the information had been available on the Internet via NYSCEF for almost a month between the filing and the hearing, when the court issued an immediate sealing order on consent. Luckily for HMS, the court rejected the defendants’ argument, noting that although NYSCEF could be accessed online, “it does not follow that the inadvertent e-filing of an unredacted document on NYSCEF necessarily constitutes a posting to the Internet that renders the information generally known.”
The Ten Factor Test
Ultimately, the HMS court was hesitant to adopt a “rigid and formulaic” rule regarding inadvertent e-filing, as there was no clear precedent governing the issue. Defendants cited cases that either did not involve e-filing or predated its widespread adoption, with the exception of a single opinion finding waiver of trade secret status after “multiple, unrectified publications in court records over a span of several years.” Furthermore, there were overarching public policy concerns to consider. According to the court, creating a per se rule in this context would “frustrate the Judiciary’s important objective of promoting a modern, technologically advanced court system.”
Therefore, the court analyzed the issue by adopting factors set forth in the Restatement of Torts to determine whether “the alleged trade secrets have become generally known or readily ascertainable through proper means.”
Specifically, the court started by considering six factors:
- the means by which access to the filing was available;
- the class of persons who have (or had) access to the information;
- how long the filing remained accessible;
- the extent to which the filing actually was viewed and/or downloaded;
- the extent to which the material was indexed and/or made searchable on the Internet; and
- whether the material remains cached or otherwise available on the Internet.
- The court noted that in cases where the alleged trade secrets have, in fact, been accessed and downloaded by third parties, it is also proper to consider:
- the extent of any re-dissemination;
- the likelihood of any future re-dissemination;
- the extent to which recipients already knew the secrets; and
- the extent to which such recipients are obliged to maintain the secrecy of the information.
HMS’s Trade Secret Status Remains Intact…For Now…
Certain facts in the HMS case raised the court’s suspicion: two former HMS employees claimed they happened to independently download the affidavit and exhibits from NYSCEF on the very same day, “simply out of a desire to stay abreast of developments concerning HMS.” The court noted that these particular individuals were former vice presidents of HMS who had access to much of the same material during their employment and who are subject to both common law and contractual obligations preventing them from re-disseminating it. Under those circumstances, the court refused to punish HMS for the inadvertent e-filing, holding that the e-filing did not destroy trade secret status so as to deprive HMS of a likelihood of success on the merits of its trade secret claim. However, the court promised to revisit trade secret status after discovery, when “the myriad of factors necessary to the determination of that issue can be applied to a fuller and firmer factual record.”
The HMS court’s analysis is helpful in formulating proper internal controls for e-filing procedure. Access to trade secret information should be limited to as few individuals as possible, but not so few that an organization cannot put checks in place to ensure that each electronic court filing is completed without release of sensitive information. Prompt review after each filing should ensure that, in the event a mistake has been made, the secret information can be removed as soon as possible, reducing the number of people who can access, view, and/or download the material.
The U.S. District Court for the Northern District of California offers guidelines on its website for ensuring prompt and effective removal of erroneous e-filings. The Court suggests taking the following steps upon discovery of an inadvertent filing containing confidential information:
- If your judge has a docket correction e-mail, send a message to that address immediately, including your case number, docket number, and a brief description of your problem. If possible, mark your message “urgent.”
- If during business hours, call the court to request expedited handling.
- File a Motion to Remove Incorrectly Filed Document(s) as soon as possible. If your Motion is granted, the erroneously filed document(s) can be permanently removed from the court’s online records system.
- E-file a corrected (i.e., redacted) version of the document. Note: you can do this right away, without awaiting the outcome of steps 1 through 3 above.
Ideally, with these protocols in place, compromises to valuable trade secret information can be kept to a minimum in the future—at least when it comes to e-filing.