Appendix — Wearly v. Federal Trade Commission
Supreme Court brief1980
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lupreme Court, U. &y7"% Fo
EILED” \
Supreme Court of the United
OCTOBER TERM 1979
No. 79-1658
W. L. WEARLY, INGERSOLL-RAND COMPANY, and
THE TORRINGTON COMPANY,
ODAK, JR., CLERR
Petitioners,
—_—V.—
FEDERAL TRADE COMMISSION, et al.
Respondents.
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
JOSEPH W. BURNS
MARTIN J. NEVILLE
LOVEJOY, WASSON, LUNDGREN & ASHTON
Professional Corporation
250 Park Avenue
New York, New York 10017
Telephone: (212) 697-4100
MILES W. KIRKPATRICK
CHARLES W. SMITH
MorGan, Lewis & BOCcKIUS
1800 M. Street, N.W.
Washington, D.C. 20036
Telephone: (202) 872-5000
Attorneys for Petitioners
INDEX TO APPENDIX
Proceedings in the Third Circuit
1. Opinion, February 8, 1980.00.00... eee la
2. Order Amending Opinion, i‘ebruary 13,1980 15a
3. Order Denying Rehearing and Amending Opi-
DAB, BTN BO, BI vaso sisesinssesecessssescosecocetsovenres 16a
4. Judgment, February 8, 1980.00.00... 20a
5. Brief of Amici Curiae Chemical Specialty
Manufacturers Association, et al. ...............000. 21a
Brief of Amicus Curiae Wards Cove Packing
a REREIE aS aang UDO ae Sy WnenS SE ae SO 35a
Proceedings in the District of New Jersey
4. Cppimbem, Cetotber 16, TSTS i....cccccccicsicsscscssscscscscee 52a
8. Final Judgment, November 29, 1978............... 89a
9. Opinion, November 30, 1978.00.00... 93a
Be Se NINE Wh BIO csvcsecicsvsssicescosveiassoisicbcsommseren 110a
11. Plaintiffs’ Exhibit A, FTC Letter to Wearly,
September 16, 1976, and FTC Rule § 2.13
os fe GS 8 ee ewe ene 124a
12. Plaintiffs’ Exhibit B—FTC Subpoena to
<TR TER ae Re one eee ERNE R pon ON 127a
13. Plaintiffs’ Exhibit N, FTC Response and Or-
Se I BM AMET ose cicascskccostcrchiussiciaccincsaneass 128a
14. Excerpts from September 8, 1977 Hearing
; AIT Ce RE OE 135a
ll
PAGE
15. Excerpts from October 19, 1977 Hearing
OI a ssthicsonie neces! liscsimedisaniiavanasncloumustinasaas 139a,
140a
Miscellaneous
16. Excerpts from Senate Report 96-500................ 14la
17. Excerpts from Senate Report 95-197................. 143a
Text of Constitutional Provisions
and Statutes
U8. Comat, Qi F oiiccicnschiieanncmctmeaneane 144a
Statutes:
Federal Trade Commission Act:
§ 6(f), 15 U.S.C. § 46(f)(1976)...00 ccc ssseeeeee 144a
6 8, 16 UDA. 5 GG eee 144a
S 10, BUSES Oe ere ckiosicneeeee 146a
Trade Secrets Act:
LG Ui © TI vccssiiinvnsinsidiceseasucn ea 147a
Administrative Procedure Act:
DUS TRG, Fa vaiciesescccvekinsmiseincisheanancinsdiinan cp aaneeeeeae 148a
SD RS se, OE BA nnsncisasensssnomsnnsiitedashirensidenie cai aaa 149a
BE Pi airs nesicvesecinsiatenlas scence sete Ce 150a
A TIA G. BPO visiisshsinsosinrasscenmisishieiaaaiiellaea tia ane 150a
I OS FIO i ivcesciiaivceiaisisinnmianssinanl bei oieemameaaann 15la
BS UBC, § MOR os cicsicccceeek eee 151a
ill
PAGE
Judicial Code of the United States:
a inissnnnsssharacessesnanccsarassossensvaes 153a
ls. cuvenansarasannusnsscsssonsea 153a
Declaratory Judgment Act:
OE TOL) rc 154a
la
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 78-1115
78-1116
78-1117
78-1827
79-1311
79-1976
WEARLY, W. L., INGERSOLL-RAND
COMPANY, THE TORRINGTON COMPANY,
Vv.
FEDERAL TRADE COMMISSION,
MICHAEL PERTSCHUK, CHAIRMAN,
CALVIN J. COLLIER, DAVID A. CLANTON,
M. ELIZABETH HANFORD DOLE,
PAUL RAND DIXON, MEMBERS
Wearly, W.L., Ingersoll-Rand
Company, The Torrington Company,
Appellants in 78-1115 & 78-1827
Federal Trade Commission, Michael
Pertschuk, Chairman, Calvin J. Collier,
David A. Clanton, M. Elizabeth Hanford
Dole, and Paul Rand Dixon, Members,
Appellants in 78-1116, 78-1117,
79-1311 & 79-1976
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civil No. 77-1860)
2a
Argued November 13, 1979
Before: HUNTER, WEIS and GARTH, Circuit Judges
(Opinion Filed February 8, 1980)
Joseph W. Burns, Esq. (Argued)
Martin J. Neville, Esq.
Sam Radin, Esq.
LOVEJOY, WASSON, LUNDGREN & ASHTON
250 Park Avenue
New York, New York 10017
Attorneys for W.L. Wearly, et al.
Michael N. Sohn, Esq.
General Counsel
W. Dennis Cross, Esq.
Asst. General Counsel
Gerald P. Norton, Esq.
Deputy General Counsel
Mark W. Haase, Esq. (Argued)
Arthur W. Adelberg, Esq.
WASHINGTON, D.C. 20580
Attorneys for the Federal
Trade Commission
Douglas M. Fryer, Esq.
Moriarty, Mikkelborg, Broz, Wells & Fryer
3300 Seattle-First National Building
Seattle, WA 98154
Attorneys for Amicus Curiae,
Wards Cove Packing Company, Inc.
Roger M. Milgrim, Esq.
Robert A. Meister, Esq.
18th Floor
405 Lexingion Avenue
New York, New York 10017
3a
Attorneys for Amicus Curiae, |
Chemical Specialty Manufacturers Association,
American Telephone and Telegraph Company,
Burlington Industries, Inc., Chemical Manufacturers
Association (formerly Manufacturing Chemist Associ-
ation), The Dow Chemical Company, Dow Corning
Corporation, E.I1. DuPont de Nemours & Company,
Eli Lilly and Company, General Instrument
Corportion, Life Savers, Inc., Monsanto Company,
National Association of Manufacturers, PPG Indus-
tries, Inc., Rilsan Corporation, Stauffer Chemical
Company, Union Carbide Corporation and U.S. Steel
Corporation.
OPINION OF THE COURT
WEIS, Circuit Judge.
Reflecting litigants’ growing dissatisfaction with the
Federal Trade Commission’s alleged inadequate protec-
tion of trade secrets, plaintiffs sought injunctive relief
against enforcement of a Commission subpoena duces
tecum. The district court in New Jersey found serious
deficiencies ir. the FTC practices but refused to stay en-
forcement of the subpoena. The court did order, howev-
er, that plaintiffs’ documents be placed in custodia legis,
permitting the FTC to proceed with its investigation only
under protective measures designed to insure the safety
of trade secrets. Like the district court, we do not under-
stand the Commission’s rel ictance to agree to an order
that would protect plaintiffs’ proprietary interests with-
out restricting the agency’s investigation. Nevertheless.
we vacate the district court’s order and direct that the
complaint be dismissed because the matter was not ripe
for judicial review.
The Commission issued a subpoena duces tecum in
1976 to plaintiff, W. L. Wearly, Chairman of the Board of
4a
plaintiff Ingersoll-Rand Comparv. The subpoena sought
documents bearing on the corpo: ate acquisition policy of
Ingersoll and was part of a Commission investigation
into possible antitrust violations by that company and its
subsidiary, plaintiff Torrington Company.
Wearly moved before the FTC to quash or limit the
subpoena, alleging, among other matters, that some of
the documents contained sensitive trade information
justifying confidentiality. The Commission refused to
quash the subpoena, and after negotiations failed to re-
solve the issue satisfactorily, plaintiffs sought declara-
tory and injunctive relief in the United States District
Court for the District of New Jersey. The complaint, filed
in September 1977, sought a declaration that the FTC
did not have the ability to protect the confidentiality of
trade secrets properly; documents passed onto Congress
might be revealed to competitors; the subpoena was
overly broad; and it encroached upon fourth and fifth
amendment rights. Plaintiffs also asked that the enforce-
ment of the subpoena be enjoined.
The district court denied the request for a prelimi-
nary injunction but issued a stay of enforcement pend-
ing appeal. Soon thereafter, the court refused defend-
ants’ motion to dismiss. After this court on the FTC’s
application lifted the stay of enforcement, the Commis-
sion precipitously moved to enforce its subpoena in the
District Court for the District of Columbia rather than
awaiting the outcome on appeal. While the agency’s pe-
tition was pending in the District of Columbia, the New
Je: sey district court denied plaintiffs’ renewed motion
for a preliminary injunction. In response to the Commis-
sion’s request for discovery, the court ordered that the
disputed documents be placed in custodia legis.
On April 27, 1978, the District of Columbia district
court issued an order enforcing the subpoena. Four days
later, partially in response to that action, the New Jersey
district court handed down a more detailed protective or-
5a
der. Under its terms, the FTC was permitted to inspect
the documents only at the plaintiffs’ offices. The hear-
ings conti.1ued in New Jersey but the Commission, in a
most curious stance for a governmental agency, refused
to participate, relying instead on a res judicata defense
grounded on the enforcement order it had obtained in
the District of Columbia. That order was eventually va-
cated by the Court of Appeals for the District of Colum-
bia Circuit.’
The New Jersey district court ultimately agreed
with plainiiffs that their proprietary rights in trade se-
crets and other confidential information would be
jeopardized by surrendering the documents to the Com-
mission. The court ordered that the documents remain
in custodia legis, available for inspection by the FTC un-
der conditions tailored to preserve confidentiality. The
last activity in the district court occurred in July of 1979
when the defendants’ posttrial motions were denied.” All
appeals were subsequently consolidated in this court.°
1. In an unpublished decision, FTC v. Wearly, No. 78-1586
(D.C. Cir. 1979), the court of appeals observed that the forum shop-
ping by both litigants had precipitated a “regrettable” conflict in
court orders that should not continue. It commented that the FTC
could have sought, via counterclaim, the enforcement of its subpoe-
na in New Jersey, which was “not an inconvenient location for this
litigation.”
This panel also questions the propriety of the FTC’s request
that this court lift the stay of enforcement without disclosing that it
intended immediately thereafter to litigate the same controversy in
the District of Columbia. This deliberate creation of conflict be-
tween courts of concurrent jurisdiction reflects no credit upon the
Commission.
2. The principal opinion of the district court is reported at 462
F.Supp.-589 (D.N.J. 1978). The orders disposing of the posttrial mo-
tions were accompanied by unreported opinions.
3. Six appeals have been consolidated: No. 78-1115, plaintiffs’
appeal from the initial denial of their request for a preliminary in-
junction; No. 78-1116, defendants’ appeal from the refusal to re-
move the stay of enforcement pending appeal; No. 78-11 17, defend-
6a
This statement of facts is severely compressed, but
in view of our disposition, we find it unnecessary to re-
view the considerable and to a large extent unnecessary
prolongation of this controversy. The trial court found
that the plaintiffs’ fear that their confidential business
secrets will be made available to competitors, both do-
mestic and foreign, is real. The concern of the district
judge that the constitutional rights of the plaintiffs
would be violated by the FTC through the destruction by
disclosure of valuable trade secrets is understandable. In
response, the FTC contends that, as a matter of policy, it
does screen documents, and as to those it considers con-
fidential agrees to give ten-days notice to the owners be-
fore disclosing pursuant to Freedom of Information Act
requests. If, however, a request comes from a congres-
sional committee, the agency concedes it does not
assure compliance with the ten-day practice. See FTC v.
Anderson, —— F.2d ; (D.C. Cir. 1979). See
generally Johnson, Treatment of Confidential Docu-
ments by the Federal Trade Commission, 46
ANTITRUST L.J. 1017 (1978).
NOTE 3 — (Continued)
ants’ appeal from the denial of their motion to dismiss; No. 78-1827,
plaintiffs’ appeal from the denial of their renewed request for a pre-
liminary injunction; No. 79-1311, defendants’ appeal from the deni-
al of their motion to reconsider the judgment; No. 79-1976, defend-
ants’ appeal from the denial of their final posttrial motions.
Counsel agreed at oral argument that all issues surviving from
the earlier appeals are embraced within the appeal at No. 79-1976.
Our examination of the record leads us to the same conclusion.
Thus our consideration of No. 79-1976 disposes of all issues before
us.
4. We note in passing that at least one court has suggested that
congressional action violative of a constitutional right — such as the
public disclosure of a trade secret rising to the level of a property
interest — could be redressed by judicial action. See Exxon Corp. v.
FTC, 589 F.2d 582, 590 (D.C. Cir. 1978), cert. denied, 441 U.S. 943
(1979).
Ta
Evidence introduced in the district court demon-
strated that in the past the Commission has made inap-
propriate disclosures, and the trial judge noted a number
of instances where “informal arrangements for confi-
dential treatment of proprietary information were not
strictly honored.” Wearly v. FTC, 462 F.Supp. 589, 607
(D.N.J. 1978). He described the disclosures in one case
as “an evasion and a violation of the spirit of an order.”
Id. Although legitimate investigation should not be un-
duly delayed, we agree with the district judge that the
unfortunate disclosures by the FTC of confidential infor-
mation are the kind of governmental behavior that sim-
ply cannot be countenanced.°
Nevertheless, while we acknowledge the serious
and well-founded concerns that impressed the district
court, the initial inquiry must be whether there was Ju-
risdiction to entertain this suit. We start with the basic
premise that a subpoena from the FTC is not
self-enforcing. The agency must go to the district court
and petition for an order directing compliance with the
subpoena. In acting on that petition the district court's
role is not that of a mere rubber stamp, but of an inde-
pendent reviewing authority called upon to insure the
integrity of the proceeding. “The system of judicial en-
forcement is designed to provide a meaningful day in
court for one resisting an administrative subpoena.”
United States v. Security State Bank and Trust, 473
F.2d 638, 642 (5th Cir. 1973). In the discharge of that
duty, the court has the power to condition enforcement
5. As another example of questionable agency practice, during
oral argument, counsel for the plaintiffs described an incident in
which the FTC staff telephoned Wearly directly, ordering him to be
in court on a certain day. The call occurred while Wearly’s attorney
was available and, indeed, was in another part of the Commission's
office. We accept the FTC’s statement at oral argument that such
bypassing of counsel was not the policy of the Commission and will
not be repeated.
8a
upon observance of safeguards to the respondent's valid
interests. ®
Characterizing its jurisdiction as “plenary,” 462
F.Supp. at 604, the district court took strong measures
to insure that confidential information would not be
“leaked.” Although there is evidentiary support for that
action, the court erred in not according adequate signifi-
cance to the possibility that its order might be premature
because judicial intervention had been sought at such
an early stage of the agency proceedings.
Resort to a court by recipients of investigative sub-
poenas before. an action for enforcement has com-
menced is generally disfavored. In Reisman v. Caplin,
375 U.S. 440 (1964), the Supreme Court held that a
preenforcement order enjoining the use of an Internal
Revenue subpoena could not be granted because the re-
spondents had an adequate remedy at law: the enforce-
ment hearing was an adversary proceeding affording a
judicial forum for challenges to the summons and giving
complete protection to the witness. Id. at 446. Years be-
fore Reisman was decided, the Court, in FTC v. Claire
Furnace Co., 274 U.S. 160, 174 (1927), discussed in St.
Regis Paper Co. v. United States, 368 U.S. 208, 225-26
(1961), declined to entertain a suit in equity challenging
the scope of an FTC subpoena at the preenforcement
stage. Several courts of appeals have followed the Claire
Furnace/Reisman principle in dismissing similar suits
brought against the Commission. E.g., American Motors
Corp. v. FTC, 601 F.2d 1329, 1335-37 (6th Cir. 1979),
cert. denied, —— U.S. ——, 48 U.S.L.W. 3309 (No.
79-306 Nov. 5, 1979); Atlantic Richfield Co. v. FTC, 546
' “F.2d 646, 648-49 (5th Cir. 1977); Anheuser-Busch, Inc.
v. FTC, 359 F.2d 487, 489-91 (8th Cir. 1966).
6. In FTC v. Johns-Manville Corp., 5 Trade Reg. Rep (CCH)
162,830 (D. Colo. Aug. 28, 1979), the district court viewed the
ten-day notice procedure of the FTC as “not going far enough to
protect the interests involved” and ordered the parties to prepare a
more comprehensive protective order as a condition of enforcement.
9a
In some circumstances, however, preenforcement
review is necessary. In the trilogy of Abbott Laboratories
v. Gardner, 387 U.S. 136 (1967); Toilet Goods Associ-
ation, Inc. v. Gardner, 387 U.S. 158 (1967); and Gard-
ner v. Toilet Goods Association, Inc., 387 U.S. 167
(1967), the Court indicated that a district court has ju-
risdiction to entertain a preenforcement challenge to
agency action, but may properly do so only under certain
specified circumstances defined in the three cases. In
Abbott, the Federal Drug Administration issued regula-
tions governing the labeling of prescription drugs. Com-
pliance by the drug companies would have required
them to change all of the labels and promotional materi-
al, destroy existing stocks of printed matter, and make
substantial investments in new supplies. Failure to com-
ply would have exposed them to serious criminal and
civil penalties.
The first inquiry undertaken by the Abbott Court
was whether anything in the statute authorizing agency
action prohibited preenforcement review. Finding none,
Id. at p. 78,794. The court reasoned that the standard of review pre-
scribed in FCC v. Schreiber, 381 U.S. 279 (1965), was not control-
ling because in that case the agency had acted pursuant to a validly
promulgated regulation. The FTC, on the other hand, has not
adopted a regulation on confidentiality and acts solely on the basis
of agency “practice.” FTC v. Johns-Manville Corp., supra at p.
78,793; see FTC v. Cockrell, 431 F.Supp. 561 (D.D.C. 1977), where
the court required a ten-day notice so that the plaintiffs would have
an opportunity to protect their interests through subsequent judi-
cial review. Cf. United States v. GAF Corp., 596 F.2d 10, 14-15 (2d
Cir. 1979) (enforcement of Justice Department Civil Investigative
Demand may be conditioned upon protective order).
Apparently, the customary procedure is for the court not to rule
on any documents until the Commission has reviewed them and de-
cided whether it will afford confidential status to them. Some care
should be taken, however, to prevent unwarranted disclosure dur-
ing the periods after the information is handed over to the Commis-
sion but before it has made its judgment on confidentiality and be-
fore the court has had an opportunity to review that determination.
10a
the opinion then moved to the criti :al issue — whether
the controversy was ripe for judicia: determination. Two
factors were addressed: the fitness of the issues for judi-
cial resolution and the potential hardship to the parties
in the event the court were to withhold review. As to the
former, the Court determined that whether the FDA
properly promulgated the regulation was a controversy
essentially legal in nature, one which did not require fur-
ther factual development. Moreover, the agency action
was final in the sense that no further action was contem-
plated. With respect to the hardship factor, the plaintiffs
were faced, on the one hand, with substantial costs of
compliance and, on the other, with the possibility of
criminal prosecution in the event of noncompliance.
Given these circumstances, the Abbott Court held that
“[w]here the legal issue presented is fit for judicial
resolution, and where a regulation requires an im-
mediate and significant change in the plaintiffs’
conduct of their affairs with serious penalties at-
tached to noncompliance, access to the courts...
must be permitted, absent a statutory bar or some
other unusual circumstance, neither of which ap-
pears here.”
387 U.S. at 153.’
We have applied the Abbott ripeness criteria in two
cases where the FTC was a party, A. O. Smith Corp. v.
FTC, 530 F.2d 515 (3d Cir. 1976), and Exxon Corp. v.
FTC 588 F.2d 895 (3d Cir. 1978). After an exhaustive
review of the authorities, the A. O. Smith opinion con-
cluded that an FTC resolution requiring submission of
line of business forms containing extensive accounting
data was reviewable before enforcement was undertak-
en by the agency. In reaching this result, we first ob-
7. In the companion case of Toilet Goods Association, Inc. v.
Gardner, supra, application of the Abbott analysis yielded the oppo-
site r‘sult — a controversy not ripe for judicial decision.
lla
served that the FTC Act did not proscribe pre-
enforcement suits. 530 F.2d at 520. Then, looking to
Abbott, both ‘he fitness for review and hardship phases
of the ripeness test were found to have been met. The
FTC action was final and no factual development was
necessary; considerable expense would have been re-
quired in obeying the regulation; and the agency had ad-
vised plaintiffs that penalties would be imposed for a fail-
ure to file.
A. O. Smith embodies an important policy decision
by this court but differs in critical respects from the case
sub judice. Most importantly, the court there was not
concerned with an agency investigative subpoena,
which in the normal course may be reviewed in an en-
forcement proceeding, but a self-enforcing order de-
signed to expand existing corporate financial reporting.
The second case, however, Exxon Corp. v. FTC, supra,
is quite similar to the one under review.
As in the instant litigation, the Exxon court was
asked to rule on the protection to be given confidential
documents after they had been delivered to the agency.
After the Commission issued a protective order, Exxon
and Gulf surrendered exceptionally voluminous docu-
ments, many of which were confidential. Those two
companies and others then sued the FTC in the district
court in Delaware, seeking a declaratory judgment that
the agency was not providing, and could not, provide
adequate protection for the confidential material, and by
way of further relief, asked the court to rule that the doc-
uments were not obtainable under the Freedom of Infor-
mation Act. Five months later, while the Delaware suit
was still pending, the Commission brought an enforce-
ment suit in the District of Columbia against the other
oil companies. That district court granted enforcement
without modifying the Commission protective order, re-
jecting contentions similar to those urged by Exxon and
Gulf in the Delaware district court.
12a
We concluded that the Abbott test of ripeness
should be applied even though Gulf and Exxon were not
requesting preenforcement but rather “extra enforce-
ment” review. Since the documents were already in the
FTC’s possession and because of the extraordinary vol-
ume of the documents subpoenaed, we held that the
hardship factor was satisfied. The previous FTC review
of the protective order constituted the final agency ac-
tion prerequisite of fitness for judicial decision. But the
question of whether the issues before the district court
were legal or factual required a differentiation between
plaintiffs’ claims. The one addressing possible future
FOIA requests required factual development and, ac-
cordingly, we held the district court was correct in refus-
ing to exercise jurisdiction over that claim. As to the con-
tention that the Commission lacked ability to insure the
confidentiality of documents, however, the issues were
purely legal, and therefore the district court had erred in
refusing to exercise jurisdiction over that claim.
In both Exxon and the case at bar, the plaintiffs
sought, outside of the enforcement action, to contest the
FTC’s disclosure policies. To that extent the two cases
parallel each other. This case diverges at crucial points,
however, from Exxon, as well as A. O. Smith, and com-
pels a different conclusion — that this case is not ripe for
judicial review.
In both Exxon and A. O. Smith, there were final
agency rulings that affected the plaintiffs. In Exxon, for
example, the plaintiffs elected to treat a Commission rul-
ing on confidentiality as final and delivered the docu-
ments to the agency. That is not true, however, with re-
spect to the case at bar. Here the documents have
remained in the custody of the court, and although the
FTC has been free to examine the papers, the court has
retained control.® Thus, the agency has yet to take a po-
8. Although the FTC has been offered the opportunity to re-
view all of the documents in custodia legis, it has consistently re-
fused to do so, even though the district court has shown a willing-
13a
sition on which documents should be subject to what
type of confidential treatment.
Besides failing to satisfy the Abbott requirement of
finality, plaintiffs did not establish whether the decision
to comply with the subpoena placed them on the horns
of a dilemma. Although the FTC sought a contempt ac-
tion for failure to observe the District of Columbia court
order, the court of appeals has resolved that matter by
vacating the enforcement order pending resolution of
the litigation in this court. At this stage, therefore, the
documents being in the custody of the court, Wearly is
under no compulsion to either turn over the documents
to the FTC or suffer civil or criminal penalties as a result.
He is free to await enforcement proceedings, and at that
time, or thereafter, may raise his objections to the
inadequacy of the FTC confidentiality procedures.” Nor
does there appear to be any merit to Wearly’s assertion
that his refusal to comply with the subpoena could ex-
pose him to a criminal contempt citation under §10 of
the FTC Act, 15 U.S.C. §50. As with the statute at issue
in Reisman v. Caplin, supra at 447, “|contempt] does
not apply where the witness appears and interposes good
faith challenges to the summons.” See American Motors
Corp. v. FTC, supra at 1338; First National City Bank v.
ness to consider that the material be taken to Washington D.C. The
agency, therefore, must bear its full share of responsibility for any
delay in the investigation that has occurred to this point. Clearly,
the plaintiffs, though diligent in asserting the alleged deprivation of
their proprietary rights, have not prevented the agency from con-
ducting its investigation.
9. To the extent that Wearly may fear disclosure by the FTC of
those documents heretofore made available to it under the terms of
the district court’s custodial order, Wearly may desire to seek pro-
tective conditions to be attached to the district court's order of dis-
missal. Obviously, any such conditions, if imposed, could only be ef-
fective until such time as the FTC may bring a subpoena
enforcement proceeding against Wearly. If such a proceeding is
brought, Wearly may, at that time, raise all the objections to the
subpoena that he has presented to us here. See note 6 supra.
l4a
FTC, 538 F.2d 937, 938 (2d Cir. 1976); Anheuser-Busch,
Inc. v. FTC, supra at 490. Here, of course, there is noth-
ing in the record to suggest that Wearly’s non-
compliance has been contumacious.
Our conclusion that the district court did not have
preenforcement jurisdiction in this case does not in any
way signify a weakening of the policy established in A.
O. Smith and Exxon but is in fact, in accord with it. The
dispute here is simply one that is on the Reisman side of
the Reisman/Abbott fence. See, e.g., American Motors
Corp. v. FTC, supra; Atlantic Richfield Co. v. FTC,
supra; cf. Dresser Industries, Inc. v. United States, 596
F.2d 1231 (5th Cir. 1979) (SEC subpoena).
Accordingly, the judgment of the district court will
be vacated, and the court will be directed to dismiss the
complaint. Each party to bear its own costs.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
15a
ORDER AMENDING OPINION
It is ORDERED that the slip opinion in the above
matter is hereby amended as follows:
On page 9, first paragraph, line 10, substitute “Food
and Drug Administration” in place of “Federal Drug
Administration.”
BY THE COURT,
JOSEPH F. WEIS, JR.
Circuit Judge
Dated: February 13, 1980
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
16a
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 78-1115
78-1116
78-1117
78-1827
79-1311
79-1976
WEARLY, W. L., INGERSOLL-RAND COMPANY,
THE TORRINGTON COMPANY
v.
FEDERAL TRADE COMMISSION,
MICHAEL PERTSCHUK, CHAIRMAN,
CALVIN J. COLLIER, DAVID A. CLANTON,
M. ELIZABETH HANFORD DOLE,
PAUL RAND DIXON, MEMBERS
Wearly, W. L., Ingersoll-Rand Company,
The Torrington Company,
Appellants in 78-1115 & 78-1827
Federal Trade Commission,
Michael Pertschuk, Chairman,
Calvin J. Collier, David A. Clanton,
M. Elizabeth Hanford Dole and
Paul Rand Dixon, Members
Appellants in 78-1116, 78-1117
79-1311 & 79-1976
Present: SEITZ, Chief Judge, ALDISERT, ADAMS,
GIBBONS, HUNTER, WEIS, GARTH,
HIGGINBOTHAM and SLOVITER, Circuit Judges
17a
ORDER
Upon consideration of the petitions for panel
rehearing, rehearing in banc, and request for amend-
ment of opinion in the above matter, it is
ORDERED that the slip opinion is hereby amended
as follows:
Page 5, footnote 1, delete the first sentence of the
second paragraph. The second sentence of the sec-
ond paragraph is modified to read:
The deliberate creation of conflict between
courts of concurrent jurisdiction is unseemly
and should not be undertaken by _ the
Commission.
Page 7, footnote 5, first sentence is modified to read:
As another example of questionable agency
practice, during oral argument, counsel for the
plaintiffs described an incident in which the
FTC staff telephoned Wearly directly, ordering
him to be “in court” before the Commission on
a certain day.
Page 11, first full paragraph, second sentence is
modified to read:
Most importantly, the court there was not con-
cerned with an agency investigative subpoena,
which in the normal course may be reviewed is
an enforcement proceeding, but an order de-
signed to expand existing corporate financial
reporting and self-enforcing to the extent that
penalties accrued after notice from the
Commission.
Page 11, second full paragraph, first sentence is
modified to read:
18a
The Exxon court was asked to rule on the pro-
tection to be given confidential documents after
they had been delivered to the agency.
Page 13, first full paragraph, is modified to read:
Besides failing to satisfy the Abbott require-
ment of finality, plaintiffs did not establish
whether the decision to comply with the sub-
poena placed them on the horns of a dilemma.
Wearly was under no compulsion to either turn
over the documents to the FTC or suffer civil or
criminal penalties as a result. He was free to
await enforcement proceedings, and at that
time, or thereafter, could have raised his objec-
tions to the inadequacy of the FTC confiden-
tiality procedures.’ Nor does there appear to be
any merit to Wearly’s assertion that his refusal
to comply with the subpoena could have ex-
posed him to a criminal contempt... .
Page 13, footnote 9, lines 5 through 8, are modified
to read:
Obviously, any such conditions, if imposed,
could only be effective until such time as the
FTC secures an enforcement order against
Wearly. In such a proceeding, Wearly may
raise all the objections to the subpoena that he
has presented to us here. See note 6 supra.
In all other respects, the petition for amendment of
the opinion is denied.
IT IS FURTHER ORDERED that the petition for
rehearing filed by W. L. Wearly, Ingersoll-Rand Com-
pany, and The Torrington Company, having been sub-
mitted to the judges who participated in the decision of
this court and to all the other available circuit judges of
the circuit in regular active service, and no judge who
concurred in the decision having asked for rehearing,
19a
and a majority of the circuit ju iges of the circuit in regu- .
lar active service not having voted for rehearing by the
court in banc, said petition for rehearing is denied.
BY THE COURT,
JOSEPH F. WEIS, JR.
Circuit Judge
DATED: March 20, 1980
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
20a
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 78-1115/78-1117
78-1827, 79-1311 and 79-1976
7%
WEARLY, W. L., INGERSOLL-RAND
COMPANY, THE TORRINGTON COMPANY
Appellants in Nos. 78-1115 and 78-1827
vs.
FEDERAL TRADE COMMISSION, MICHAEL PERTSCHUK,
CHAIRMAN, CALVIN J. COLLIER, DAVID A. CLANTON,
M. ELIZABETH HANFORD DOLE, PAUL RAND DIXON, MEMBERS
Appellants in Nos. 78-1116/17
79-1311 and 79-1976
(D. C. Civil No. 77-1860)
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
ee
Present: HUNTER, WEIS and GARTH, Circuit Judges
‘JUDGMENT
This cause came on to be heard on the record from the United States
District Court for the District of New Jersey and was argued by counsel on
November 13, 1979.
On consideration whereof, it is now here ordered and adjudged by this
Court that the judgment of the said District Court, entered December 4,
1978, be, and the same is hereby vacated and the cause is remanded to the
said district court which is hereby directed to dismiss the complaint, all of
the above in accordance with the opinion of this Court. Each party shall bear
its own costs.
ATTEST:
Clerk
February 8, 1980
2la
United States Court of Appeals
FOR THE THIRD CIRCUIT
WEARLY, W.L., INGERSOLL-RAND COM-
PANY, THE TORRINGTON COMPANY,
Piaintiffs-Appellees,
Vv.
Nos. 78-1115/6/7
FEDERAL TRADE COMMISSION, MICHAEL 78-1827
PERTSCHUK, CHAIRMAN, CALVIN J. 79-1311
CoLuier, Davip A. CLANTON, M.
ELIZABETH HANFORD DOLE, PAUL
RAND DIxONn, MEMBERS,
Defendants-Appellants.
BRIEF OF AMIct CuURIAE CHEMICAL SPECIALTY MANUFACTURERS
ASSOCIATION, AMERICAN TELEPHONE AND TELEGRAPH COM-
PANY, BURLINGTON INDUSTRIES, INC., CHEMICAL MANUFAC-
TURERS ASSOCIATION (FORMERLY MANUFACTURING CHEMIST
ASSOCIATION ), THE Dow CHEMICAL COMPANY, Dow Corn-
ING CORPORATION, E. I. DUPONT DE NEMOURS & COMPANY,
Ext Litty AND COMPANY, GENERAL INSTRUMENT CORPO-
RATION, LIFE SAVERS, INC., MONSANTO COMPANY, NATIONAL
ASSOCIATION OF MANUFACTURERS, PPG INDUSTRIES, INC.,
RILSAN CORPORATION, STAUFFER CHEMICAL COMPANY,
UNION CARBIDE CORPORATION AN1 U.S. STEEL CORPORATION
URGING THE CourT TO CONFIRM THE District CourT’s
HOLDINGS THAT A TRADE SECRET OWNER’S PROPERTY RIGHTS
MERIT ADEQUATE AND ENFORCEABLE SAFEGUARDS TO PRE-
VENT AGENCY DISCLOSURE
22a
Preliminary Statement
This amicus brief voices a fundamental, widespread con-
cern that companies not be required to jeopardize their valu-
able trade secrets through disclosure to administrative agencies
unless there are adequate and enforceable safeguards to pre-
vent disclosure to third parties.
The entities submitting this brief represent a cross section
of American industry, companies which—like hundreds of
other large and small enterprises—have invested their funds
and efforts developing trade secrets that enable each developer
to enhance its competitive position. These trade secrets include
processes by which products are made and details of com-
position of products. They also comprise cost and profitability
data, marketing plans, concepts for new products, pricing
Strategies and other competitive concepts. Because of the
importance of such information in our competitive landscape,
and because of the increasing number of instances of its
forfeiture by reason of federal or state agency dis-
closure—intended or inadvertent—we respectfully urge that
this Court affirm the property right analysis of the District
Court, thereby clarifying that regulatory access to such informa-
tion is properly conditioned upon adequate and enforceable
safeguards to prevent unauthorized disclosure.
Statement of the Case
This amicus brief is filed solely on the issue of whether an
administrative agency may compel the disclosure of valuable
trade secrets without first providing reasonable safeguards to
assure that the trade secrets will not be improperly made
available to others. Since we do not address the other issues in
this case, we confine our statement of the case accordingly.
The FTC issued a subpoena duces tecum for information in
connection with an administrative investigation. Among the
documents sought were valuable trade secrets which if disclosed
23a
to respondent’s competitors would terminate respondent’s
significant competitive advantage. The witness declined to
produce only those documents containing the trade secrets
unless the agency first provided adequate and enforceable
safeguards to assure nondisclosure. Failing such safeguards,
respondents sought and obtained orders of the Court below that
disclosure need not be made until adequate and enforceable
safeguards against improper disclosure are provided; this ap-
peal resulted. At all times since the District Court’s orders, the
documents for which the witness seeks safeguards have been
under that Court’s custody and fully available for inspection
and analysis by the FTC for purposes of its nonpublic in-
vestigation.
Unfortunately this case is characterized by a near Baroque
procedural complexity* that may tend to obscure the central
issue of whether certain technological and business information
is property which entitles its holder to adequate and reasonable
safeguards against unauthorized disclosure by an agency. Your
amicus parties therefore earnestly and respectfully urge this
Court to take the occasion, in wending its way through the
procedural thicket here, to lend its imprimatur to the District
Court’s “property right hence need for adequate safeguards”
analysis and lend appropriate guidance. It is, moreover, urged
that the Court’s review and determination of that analysis is
inherently pertinent to determination( of several issues before
this Court, including the FTC’s appeal from the District Court’s
denial of the FTC’s motion to dismiss.
* In this Court, there are several appeals pending, motions for
dismissal, vacation, for alternative relief and the like. In an enforce-
ment action commenced by the FTC in the District Court of the
District of Columbia, enforcement orders were granted but reversed
by the D.C. Circuit, FTC v. Wearly, No. 78-1586, slip op. at 3-6 (D.C.
Cir. May 9, 1979). The FTC has now moved for rehearing before the
D.C. Circuit en banc.
24a
Accordingly, although this Court could render a decision
on alternative grounds, the public policy importance of the
District Court’s property-based analysis, 462 F. Supp. 589, the
leitmotif of all the rulings and opinions below, merits this
Court’s direct attention. Recognition of the public policy
importance of a lower court ruling that has, as it was bound to
do, produced widespread awareness, would not be improvi-
dent. In Painton & Co. v. Bourns, Inc., 442 F.2d 216, 222 (2d
Cir. 1971), Judge Friendly’s election to correct the lower court’s
public policy errors, although an alternative basis for decision
was available, provided a great service to the Bench and the
Bar. Painton’s appellate analysis proved helpful to numerous
courts, including the Supreme Court in its landmark decision in
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 484-90 (1974).
Here, this Court’s recognition of the correctness of the lower
court’s underlying policy analysis would render a similar ser-
vice.
TRADE SECRETS ARE VALUABLE PROPER-
TY RIGHTS WHICH SHOULD BE, AND ARE,
ACCORDED LEGAL PROTECTION AGAINST
UNAUTHORIZED USE AND DISCLOSURE
The commonly accepted definition of a trade secret is
supplied by IV Restatement of Torts § 757, comment b (1939)
(““Restatement, Comment b”). Aronson v. Quick Point Pencil
Co., 99 S. Ct. 1096, 1101 (1979). Under that definition, trade
25a a
secrets are technological or business information* used in one’s
business ig secrecy, not generally known within that sector of
business, which lends a competitive advantage. The Restate-
ment Comment b definition has been adopted by New Jersey
and Connecticut—the states in which the instant trade secrets
subpoenaed by the FTC were located, Sun Dial Corp. v.
Rideout, 29 N.J. Super. 361, 366, 102 A.2d 90, 92 (Super. Ct.
App. Div.), aff'd, 16 N.J. 252, 108 A.2d 442 (1954); Plastic &
Metal Fabricators, Inc. v. Roy, 163 Conn. 257, 264-65 nn.2-3,
303 A.2d 725, 729 nn.2-3 (1972). The Restatement Comment
b definition has also been relied on by the Supreme Court,
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 474 (1974), and
by this Court and other courts in this Circuit. Mixing Equip-
ment Co. v. Philadelphia Gear, Inc., 436 F.2d 1308, 1313 (3d
Cir. 1971); Sperry Rand Corp. v. Pentronix, Inc., 311 F. Supp.
910, 913 (E.D. Pa. 1970); Thiberg v. Bach, 107 F. Supp. 639,
642 (D.N.J. 1952), aff'd mem., 203 F.2d 956 (3d Cir. 1953). It
has been approvingly cited in every other federal circuit, and in
at least 22 states other than New Jersey and Connecticut,
including California, Delaware, Georgia, Illinois, Maryland,
Massachusetts, Michigan, Missouri, New York, North Carolina,
Ohio, Pennsylvania and Texas. See | Milgrim, TRADE SECRETS
§ 2.01 n.2 (1967, as supplemented, 1978).
*The District Court had before it information pertaining to
“trade secrets, secret processes and secret devices, but also a
great mass of management data, evaluation, plans, produc-
tion and production results of a kind that traditionally and
historically is never disclosed outside the company, except on
protected and privileged conditions usually established by
contract, nor even within the company except to those
persons who have a ‘need to know’ the information in order
to execute their functions.” 462 F. Supp. at 593.
The bulk of such information, characterized by the Court below as
“proprietary information,” ibid., falls squarely within the Restatement
Comment b definition.
Certain types of business information, although not strictly
qualifying for trade secret protection, may nonetheless be entitled to
protection from disclosure by federal agencies by reason of 18 U.S.C.
§ 1905 as its principles are imported into APA § 10. See Chrysler
Corp. v. Brown, 99 S. Ct. 1705, 1725-26 (1979). This brief is not
addressed to such information although, for independent reasons,
similar procedural safeguards are appropriate.
26a
Perhaps the most customary recognition of the trade secret
owner’s property is his right to prevent unauthorized use or
disclosure, typically in the employer-emfe oyee situation. See,
e.g., Town & Country Houses & Homes Services, Inc. v. Evans,
150 Conn. 314, 319-20, 189 A.2d 390, 393-94 (1963); Irvington
Varnish & Insulator Co. v. Van Norde, 138 N.J. Eq. 99, 104, 46
A.2d 201, 203 (Ct. Err. & App. 1946); Club Razor & Blade
Manufacturing Corp. v. Bindzsus, 131 N.J. Eq. 283, 288, 25
A.2d 31, 34 (Ch. 1942), aff'd, 133 N.J. Eq. 38, 30 A.2d 31
(1943).
Trade secrets are recognized as property under state law in
a variety of other settings as well. For example, under state law
principles trade secrets are recognized as property (a) subject
to assignineni, Pomeroy Ink Co. v. Pomeroy, 77 N.J. Eq. 293,
296. 78 A. 698, 699 (1910); Painton & Co. v. Bourns, Inc., 442
F.2d 216, 223-25 (2d Cir. 1971) (applying California law);
(b) which is valid consideration for the issuance of corporate
stock, see Vulcan Detinning Co. v. American Can Co., 72 N.J.
Eq. 387, 390, 67 A. 339, 341 (1907); (c) eligible to be licensed,
Painton & Co. v. Bourns, Inc., supra; In re Vericker, 446 F.2d
244, 248 (2d Cir. 1971); and (d) capable of being stolen in
violation of penal statutes, see, e.g., N.J. Rev. Stat. § 2A:119.
Cf. State v. Landecker, 100 N.J.L. 195, 126 A. 408 (Sup. Ct.
1924) (upholding conviction under “corrupt influencing” stat-
ute for bribing employee to wrongfully disclose his employer’s
trade secrets ).
The determination below that the property status of trade
secrets under state law must be considered in implementing the
policies of federal laws is consistent with numerous other
decisi ns recognizing state trade secret law in federal contexts.
The Supreme Court recognized state trade secret law in Ke-
wanee Oil Co. v. Bicron Corp., 416 U.S. 470, 472, 474-76
(1974), holding “that state law ferbidding the mis-
appropriation of trade secrets was not preempted by federal
patent law,” and similarly ruled as governing state contract law
relating to transactions in intellectual property which may or
27a
may not be patentable. Aronson v. Quick Point Pencil Co., 99
S. Ct. 1096, 1099-1101 (1979). This Court has just recently
noted the property interest the holder of such information has,
which right gives rise to the need to provide appropriate
safeguards to preserve them even if they must be used in a
criminal trial. United States v. RMI Co., No. 78-2691, slip op.
at 13-14 (3d Cir. May 2, 1979).*
The District Court’s conclusion—which is at one with this
Court’s expression in United States v. RMI Co., supra—that
trade secrets are property under controlling state law accords
with the wide recognition of their property status under federal
Statutes. For example, federal statutes recognize the property
Status of trade secrets as: (a) property comprising capital assets
in the hands of their owners, for tax purposes, Internal Revenue
Code of 1954 seq., § 1221 and see 9 CCH Stan. Fed. Tax. Rep.
18603, All About Know-How—The Tax Treatment Of Unpat-
ented Technology (1974); (b) property comprising assets for
purposes of Section 7 of the Clayton Act, 15 U.S.C. § 18, United
States v. Allied Chem. Corp., 1964 CCH Trade Cas. 971,193
(S.D.N.Y. 1964), consent judgment entered, id. at 971,311
(1965); (c) “such personal property or chattels as are ordina-
rily a subject of commerce” and hence goods for purposes of
* There are other instances where federal rules or statutes look to
state definitions of property. For example, in the administration of a
bankrupt’s property by a trustee in. bankruptcy, the state law defini-
tion of property is controlling; therefore, if a customer route list is
recognized as property under the trade secret law of the particular
State, it is within the property to be administered. In re Uniservices,
Inc., 517 F.2d 492, 495-96 (7th Cir. 1975).
For purposes of constitutional ana. sis, “property” for which just
compensation must be given if taken is recognized as the citizen’s
rights with respect to the “thing.” United States v. General Motors
Corp., 323 U.S. 373, 377-78 (1945). Since the trade secret owner’s
Property rights primarily consist of the right to prevent unauthorized
use and disclosure, Point II, infra, conduct which significantly puts in
jeopardy those rights does, as the District Court observed, raise
constitutional issues. See 462 F. Supp. at 598-602.
28a
the federal Theft of Goods Act, 18 U.S.C. § 2314, United States
v. Seagraves, 265 F.2d 876, 880 (3d Cir. 1959); accord, In re
Vericker, 446 F.2d 244, 248 (2d Cir. 1971): United States v.
Bottone, 365 F.2d 389, 393 (2d Cir. ), cert denied, 385 U.S. 974
(1966); American Cyanamid Co. v. Sharff, 309 F.2d 790, 796
(3d Cir. 1962); United States v. Lester, 282 F.2d 750, 754 (3d
Cir. 1960), cert. denied, 364 U.S. 937 (1961); (d) property of a
bankrupt subject to the control of the debtor in possession
under federal bankruptcy procedures, Jn the matter of Bettinger
Corp., 197 F. Supp. 273 (D. Mass. 1961) (e) property subject
to seizure under the alien property laws, Mulhens & Kropff, Inc.
v. Ferd Muelhens, Inc., 22 F.2d 191, 192 (S.D.N.Y. 1927); and
(f) property supporting a right of intervention to protect one’s
interest therein, Formulabs, Inc. v. Hartley Pen Co., 275 F.2d
52, 56-57 (9th Cir.), cert. denied, 363 U.S. 830 (1960). See
other federal “property” analyses collected at Zotos Inter-
national, Inc. v. Kennedy, 460 F. Supp. 268, 272-73 (D.D.C.
1978). A listing of numerous federal statutes evidencing
Congress’s pervasive concern to protect matter comprising trade
secrets is collected at | Milgrim, TRADE SECRETS § 6.02B ( 1967,
as suppiemented, 1978).
While the District Court’s rulings to impose safeguards
could be affirmed on a number of independent grounds, we
respectfully urge that this Court give proper recognition to the
property status of trade secrets and the holder’s consequent
entitlement to safeguards. United States v. RMI Co., No. 78-
2691, slip op. at 13-14 (3d Cir. May 2, 1979).
PROTECTION AGAINST DISCLOSURE IS
ESSENTIAL TO MAINTAINING THE PROP-
ERTY RIGHTS IN A TRADE SECRET
The essence of the property right in a trade secret is
protection against “disclosure or unauthorized use of the trade
secret by those to whom the secret has been confided under the
express or implied restriction of nondisclosure or nonuse.”
29a
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (1974);
United States v. E.]. DuPont de Nemours & Co., 288 F.2d 904,
911 (Ct. Cl. 1961). It is the trade secret owner’s right to
disclose subject to limitations on further use or disclosure,
including conditioning future use on payment of royalty, which
is essential to trade secret licensing. Aronson v. Quick Point
Pencil Co., 99 S. Ct. 1096 (1979). Because a trade secret is
effectively destroyed if it is readily available, Restatement
Comment b; Carson Products Co. v. Califano, No. 77-1603, slip
op. 4652, 4660-61 (Sth Cir. May 4, 1979) (information “read-
ily ascertainable without engaging in tortious activity” cannot
continue to be a trade secret), a trade secret owner’s sole hope
of prevention of loss of that property resides in the ability to
safeguard it from unauthorized disclosure. Indeed, to maintain
his property rights, the owner of a trade secret is obliged to take
reasonable measures to guard secrecy. See, e.g., Greenberg v.
Croydon Plastics Co., 378 F. Supp. 806, 812, order vacated and
replaced with one better framed to give effect to trade secret
holding, 378 F. Supp. 806 (E.D. Pa. 1974); Sun Dial Corp. v.
Rideout, 29 N.J. Super. 361, 368, 102 A.2d 90, 94 (Super. Ct.
App. Div.), aff'd, 16 N.J. 252, 108 A.2d 442 (1954).
Thus compelling disclosure in circumstances in which a
competitor might obtain access to a trade secret would con-
Stitute an unconstitutional taking of a key property right,
without compensation, in violation of the fifth amendment to
the Constitution. United States v. General Motors Corp., 323
U.S. 373, 377-78 (1945) (property in the fifth amendment
sense is the rights concerning things).
Trade secret principles and protection against unauthor-
ized disclosure do not hinder independent development by the
use of fair means. Jd. at 476; Restatement, Comment b. Trade
secret law is thus independent of and complementary to the
federal patent scheme and is an important part of our overall
system to encourage innovation and inventiveness. Kewanee
Oil Co. v. Bicron Corp., 416 U.S. 470, 482-93 (1974); Painton &
Co. v. Bourns, Inc., 442 F.2d 216, 223-25 (2d Cir. 1971).
30a
Hil.
SAFEGUARDS ARE NECESSARY IN LIGHT
OF FOIA AND OTHER BASES WHICH MAY
LEAD TO IMPROPER DISCLOSURES
The FTC and its staff is prohibited from disclosing a
company’s trade secrets under the FTC Act itself, 15 U.S.C.
§ 46(f), and federal criminal law, 18 U.S.C. § 1905.
Unfortunately, these provisions might not provide adequate
protection because the FTC’s posture is simply that it, not the
subpoenaed party, “have control of the decision whether to
disclose” the contents of subpoenaed documents. Memo-
randum Op. dated Nov. 30, 1978, p. 2. Thus, absent effective
safeguard procedures, including adequate prior notice of any
proposed disclosure by the agency, and an opportunity for the
submitter to be heard and, if the administrative determination
be adverse, appeal to a court, a trade secret might be dis-
seminated to private parties seeking it under the Freedom of
Information Act, 5 U.S.C. § 552 (“FOIA”), thus destroying the
property right before an opportunity for judicial review. To
prevent such an improper disclosure, the Supreme Court has
held that one who submits information claimed to be a trade
secret may commence an action to prevent an administrative
agency from disclosing it. Chrysler Corp. v. Brown, 99 S. Ct.
1705, 1713 (1979), aff’g in relevant part Chrysler Corp. v.
Schlesinger, 556 F.2d 1172 (3d Cir. 1977).
Unless, however, the agency is required to give the submit-
ter sufficient prior notice of an agency’s intention to release such
information, this right would be meaningless.* And the District
Court expressly found that the FTC had no rule in effect
* See Carson Products Co. v. Califano, No. 77-1603, slip op.
4652, 4658 (Sth Cir. May 4, 1979), confirming that the essence of due
process is the requirement that “the proprietor of an alleged trade
secret must be allowed to respond to the sources cited by the agency
with an opportunity for meaningful agency review of that response
before the [agency] determination [to release FOIA-sought informa-
tion} becomes final.” Accord, Zotos International, Inc. v. Kennedy,
466 F. Supp. 268 (D.D.C. 1978).
3la
assuring such netice and procedural safeguards. 462 F. Supp.
at 602-03. Fo., once there is improvident disclosure by the
FTC to a competitor, the presumably valuable property rights
in the subpoenaed information would be destroyed. That is a
harsh and unnecessary prospect, since the FTC’s interests and
the subpoenaed parties can be fairly balanced by adequate
safeguards. United States v. RMI Co., No. 78-2691, slip op. at
13-14 (3d Cir. May 2, 1979). Indeed, in light of Chrysler Corp.
v. Brown, 99 S. Cr. 1705 (1979), a sister circuit has instructed a
District Court .o hold an evidentiary hearing to determine
whether confidential commercial information claimed to be a
trade secret was, despite the passage of three to four years,
prohibited from disclosure under FTC Act § 6(f), 15 U.S.C.
§ 46(f). Interco Inc. v. FTC, No. 79-1423, slip op. at 2-3 (D.C.
Cir. May 17, 1979).
In the face of a broad legislative scheme to protect trade
secrets and fundamental property rights in them, trade secrets,
although confidentially submitted and legended, frequently are
made available by federal regulatory agencies to persons
demanding them under FOIA, often in a manner which leaves
the submitter no effective rernedy.* Indeed, as the District
Court noted, there was unauthorized publication of matter
submitted by one of the plaintiffs subject to an administrative
judge’s protective order as a third party witness in another
proceeding. See Memorandum Op. dated Nov. 30, 1978 pp. 4-
a
* A sampling of journalistic comment upon the abuse of FOIA
procedures includes, e.g., M. Tuthill, The Problems of Privacy: Despite
Congress’s good intentions, two laws have led to personal and business
abuses of confidentiality, Nation’s Business, March 1979, p. 39;
Freedom of Information Act windfall: Business interests have made big
use of data access law, frequently to get valuable clues to competitors’
activities, Chemical Week, Jan. 4, 1978, p. 37; B. Schorr, Telling
Tales: How Law Is Being Used To Pry Business Secrets From Uncle
Sam’s Files: Public Interest Act Becomes Avenue for Competitors In
Getting Firms’ Data, Wall St. J., May 9, 1977, p. 1, col. 6; Kiplinger
Washington Letter, March 30, 1979 (“Misuse of the Freedom of
Information Act is getting out of hand. Businesses are being hurt,
their secrets revealed to competitors. Data given to gov't under
various other laws are open to anyone who asks.”) (Emphasis in
Original text. )
32a
Certainly the seriousness of the problem justifies the
insistence upon judicial safeguards which will permit effective
administration of agency functions without destruction of valu-
able trade secrets and confidential business information.
Sufficient prior notice to the suomitter is essential to allow,
where necessary, a suit of the type recognized as proper in
Chrysler Corp. v. Brown, 99 §. Ct. 1705 (1979). The District
Court’s insistence on adequate and enforceable safeguards
should be affirmed. It thoughtfully anticipated this Court’s
concern in United States v. RMI Corp., supra, to provide a fair
balance between the competing interests in a manner avoiding
unnecessary clash. Accord, Interco Inc. v. FTC, supra.
This suggestion gives full 2ffect to the long-standing rule
that trade secrets are not privileged from disclosure in judicial
proceedings, to the extent relevant and necessary, 462 F. Supp.
at 594, subject to safeguards adequate to insure that the ends of
justice are accomplished without undue jeopardy to this vaiu-
able property. Judicial superintendance of the disclosure of
matters entitled to secrecy is not only an appropriate function; it
is a function that requires the closest judicial attention. Douglas
Oil Co. v. Petrol Stops Northwest, 99 S. Ct. 1667, 1677-78
(1979) (the District Court abused its discretion by failing to
gather substantiated evidence before ruling on termination of
grand jury secrecy and disclosure). As this Court has succinctly
ruled:
“If such disclosure is actually necessary it must of course
occur, but only with appropriate safeguards taken in the
interest of preserving property rights in confidential busi-
ness information.” United States v. RMI Co., supra.
With strong judicial guidelines, federal and, incidentally,
state agencies may vigorously pursue their proper -activities,
aided by the knowledge that they will be able to receive trade
secret and confidential business information from private
parties—which can be fully cooperative—because the courts
will, in the appropriate case, supply necessary safeguards where
the agency may have failed to do so, as in this case.
33a
Laying out such procedure need not, moreover, impair the
public’s view of governmental functions. To the laudable
extent that FOIA is intended to place government in the
sunshine, in the right belief that sunshine is the best dis-
infectant, it is submitted that under well established, existing
judicial techniques, that goal can be furthered simply by
fashioning protective techniques which will keep proprietary
information proprietary while at the same time disclose
sufficient generalities to permit the public to assess govern-
mental functioning. But there can be no justification for a
situation—which exists de facto with depressing frequency—in
which submission of valuable proprietary information to
agencies is tantamount to dedication to the public. That serves
no proper public interest and, as the District Court below
observes, raises serious, direct constitutional questions, which
the District Courts’ proposed safeguards obviate.
The problem of agency disclosure of trade secrets and
confidential business information is of utmost concern to the
business community.
CONCLUSION
Administrative agencies can duly discharge their duties
without jeopardizing the property rights that trade secret
holders have. By statute or administrative regulation, trade
secret data should be subject to prohibition against disclosure
save after notice to the submitter, an adequate opportunity to
voice objections to proposed disclosure and to have judicial
review of an adverse ruling. In the absence of meaningful
express safeguards governing (and in fact followed by) the
agency, a holder’s property right. in a trade secret merit, at the
holder’s request, imposition of judicial safeguards to achieve
34a
the appropriate balance between the competing interests of
administrative goals and private property rights.
May 31, 1979
Of Counsel:
Respectfully submitted,
ROGER M. MILGRIM
ROBERT A. MEISTER
18th Floor
405 Lexington Avenue
New York, New York 10017
(212) 867-6660
Attorneys for Amici Curiae Chemical Spe-
cialty Manufacturers Association, Ameri-
can Telephone and Telegraph Company,
Burlington Industries, Inc., Chemical Man-
ufacturers Association (formerly Manufac-
turing Chemist Association), The Dow
Chemical Company, Dow Corning Corpo-
ration, E.I. DuPont de Nemours & Com-
pany, Eli Lilly and Company, General
Instrument Corporation, Life Savers, Inc.,
Monsanto Company, National Association
of Manufacturers, PPG Industries, Inc.,
Rilsan Corporation, Stauffer Chemical
Company, Union Carbide Corporation and
U.S. Steel Corporation
MILGRIM THOMAJAN Jacoss & LEE P.C.
18th Floor
405 Lexington Avenue
New York, New York 10017
Jack I. PULLEY, Esq.
Attorney
Dow Corning Corporation
Midland, Michigan 48640
35a NO. 79-1976
IN THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
WEARLY, W.L., INGERSOLL-RAND COMPANY, THE TORRINGTON COMPANY,
Plaintiffs-Appellees,
vs.
FEDERAL TRADE COMMISSION, MICHAEL PERTSCHUK, Chairman,
CALVIN J. COLLIER, DAVID A. CLANTON,
M. ELIZABETH HANFORD DOLE, PAUL RAND DIXON,
Members,
Defendants-Appellants.
ON APPEAL FROM
U. S. DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
Honorable Vincent P. Biunno
BRIEF OF AMICUS CURIAE
WARDS COVE PACKING COMPANY, INC.
Douglas M. Fryer
Moriarty, Mikkelborg, Broz, Wells, & Fryer
Attorneys for Amicus Curiae
Office and Post Office Address:
3300 Seattle-First Natl. Bldg.
Seattle, WA 98154
Telephone: (206) 623-5890
36a
NO. 79-1976
IN THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
WEARLY, W.L., INGERSOLL-RAND COMPANY, THE TORRINGTON COMPANY,
Plaintiffs-Appellees,
vs.
FEDERAL TRADE COMMISSION, MICHAEL PERTSCHUK, Chairman,
CALVIN J. COLLIER, DAVID A. CLANTON,
M. ELIZABETH HANFORD DOLE, PAUL RAND DIXON,
Members,
Defendants-Appellants.
BRIEF OF AMICUS CURIAE
WARDS COVE PACKING COMPANY, INC.
STATEMENT OF THE INTEREST OF AMICUS CURIAE
Amicus curiae Wards Cove Packing Company, Inc., (hereinafter "Wards Cove")
submits this brief pursuant to Federal Rule of Civil Procedure 29. Wards Cove is a
defendant in pending federal civil antitrust litigation, In re Bristol Bay, Alaska,
Salmon Fishery Antitrust Litigation, MDL No. 249 (W.D. Wash., consolidated Dec. 3,
1976), in which it has resisted plaintiffs’ attempts to discover certain trade secrets
and other confidential commercial information on the grounds of irrelevancy and
privilege. Unbeknownst to Wards Cove, plaintiffs in that action have since secured
37a
the information through a Freedom of Information Act request to the Federal Trade
Commission and have disseminated it to Wards Cove's co-defendant competitors. Tis
information was released by the FTC without notice to Waras Cove. It contained
extremely confidential financial data which had remained secure from the public and
from company competitors and employees until its release.2/ Some of the information
was released through an admitted error of the FTC. (Copies of pertinent correspond-
ence are attached hereto, including the unsigned letter of the FTC dated February 1,
1979.)
Amicus is familiar with the issues involved in the case at bar. This court's
disposition of the lower court's decision that a party need not disclose trade secrets to
the FTC without prior assurance against improper disclosure will have widespread
impact on the business community, as other amici curiae herein have discussed. See
Brief of Amici Curiae, Nos. 78-1115-7, 78-1827, 79-1311 (3d Cir., May 31, 1979).
Accordingly, amicus will confine this brief to the following issue:
Whether failure to condition administrative agency access to trade secrets and
other confidential commercial information upon the use of adequate and
enforceable safeguards against unauthorized disclosure will undermine the quali-
fied privilege of such information under the Federal Rules of Civil Procedure.
STATEMENT OF THE CASE
Amicus curiae adopts the statement of the case set forth in the briefs of
plaintiffs-appellees and prior amici curiae.
ARGUMENT
A. Trade secrets and other confidential commercial information enjoy a qualified
privilege against discovery under the Federal Rules of Civil Procedure.
Federal Rule of Civil Procedure 26(b)(1) permits "discovery regarding any
matter, not privileged, which is relevant to the subject matter involved in the pending
1. Wards Cove Packing Company, Inc., is an Alaskan corporation engaged in
the business of seafood processing. It is closely held, being ninety percent owned by
the family of A. W. Brindle (1900-1977), who founded the company in 1928. It is a
dont with Castle & Cooke, Inc., in a joint venture entitled Columbia Wards
heries.
38a
action...." Although trade secrets and other confidential commercial information
are not absolutely privileged against discovery, the courts have generally recognized
that they are subject to a qualified privilege. E.g., Hartley Pen Co. v. United States
District Court, 287 F.2d 324, 330 (9th Cir. 1961).2/ Recognizing that the value of a
trade secret lies in its confidential nature, the Court of Appeals for the Ninth Circuit
has characterized the qualified privilege as a balancing between the right of one party
to discover relevant and necessary evidence and the policy of protecting the other
party from disclosure of secrets that are neither necessary nor relevant. Id. at 328.
Thus, the party seeking disclosure may obtain discovery of trade secrets or other
confidential commercial information only upon a showing of necessity and relevance.
Id. at 328, 330; accord, Covey Oil Co. v. Continertal Oil Co., 340 F.2d 993 (10th Cir.
1965), cert. denied, 380 U.S. 964 (1965).
Even where relevance and necessity exist, the right to obtain discovery of trade
secrets is not absolute. To prevent "annoyance, embarrassment, oppression, or undue
burden or expense," the court may order that trade secrets or other confidential
commercial information "not be disclosed or be disclosed only in a designated way"
under FRCP 26(c)(7). For instance, a protective order may prohibit use of the
confidential information outside the instant litigation or may limit its dissemination to
the party seeking discovery and his counsel. 4 J. Moore & J. Lucas, Moore's Federal
Practice ¥ 26.60[4] at 26-248 (2d ed. 1979). The policy favoring protection of trade
secrets and other confidential commercial information is therefore clearly present in
the Federal Rules of Civil Procedure.
2. The Ninth Circuit granted a writ of mandamus directing that an order
requiring disclosure of a trade secret be set aside. The court granted the
extraordinary remedy even though the discovery order was nonappealable to "prevent a
grave miscarriage of justice". 287 F.2d at 327.
39a
B. Permitting administrative agency access to trade secrets and other confidential
commercial information without prior assurance against unauthorized disclosure would
destroy the qualified privilege against discover /.
The qualified privilege against discovery of trade secrets or other confidential
commercial information will become meaningless if an administrative agency such as
the FTC may compel their disclosure without prior assurance that adequate and
enforceable procedures exist to safeguard against unauthorized disclosure. As the
United States Supreme Court has recognized, this risk of subsequent disclosure has
become particularly acute since the enactment of the Freedom of Information Act,
which permits members of the public to obtain agency files "containing information
submitted by corporations and individuals who thought the information would be held
in confidence." Chrvsler Corp. v. Brown, 99 S. Ct. 1705, 1709 (1979). Because a
person may obtain such information without any demonstration of need or interest, see
Wearlv v. Federal Trade Commission, 1978-2 Trade Cas. 4 62,358 at 76,149 (D.N.J.,
Oct. 18, 1978), a litigant may easily evade the requirement of showing necessity and
relevance under the Federal Rules of Civil Procedure to acquire sensitive data that is
neither necessary nor relevant to his case. Furthermore, even if the information is
pacestary and relevant, the FOIA permits the litigant to obtain discovery without the
constraint of a protective order.
Although the FOIA recognizes the policy against disclosure of trade secrets and
other confidential commercial information, see FOIA § 4, 5 U.S.C. § 552(b)(4), it does
not require an administrative agency to withhold such information. Chrysler Corp. v.
Brown, .9 S. Ct. 1705 (1979). Indeed, the FOIA mandates administrative procedures
that are inherently biased in favor of disclosure. Patten & Weinstein, Disclosure of
Business Secrets Under the Freedom of Information Act: Suggested Limitations, 29
40a
Ad. Law Rev. 193, 203 (1977); see, e.g., 5 U.S.C. §§ 552(a4)B) (agency bears burden
of justifying nondisclosure), (E) (agency may be liable for costs and attorney fees for
improper nondisclosure). Furthermore, because the administrative agency will usually
have no real interest in nondisclosure, it has little reason to protect the trade secret
holder's interests. Patten & Weinstein, Supra, at 202-03. As one pair of commentators
has observed:
Biasing the decisionmaker in favor of disclosure, where there is neither the
incentive, knowledge nor time needed to determine whether secrecy is
truly justified, practically insures that business data will not receive any
degree of protection at the administrative level.
Id. at 203.
Adequate and enforceable safeguards against unauthorized disclosure are there-
fore essential before an administrative agency may compel a party to disgorge trade
Secrets or other confidential commercial information. Failure to provide advance
assurances against improper disclosure destroys the qualified privilege against dis-
covery by permitting litigants easy access to material to which they would not
otherwise be entitled, at least without an adequate protective order. If the qualified
privilege against discovery of trade secrets and other confidential commercial
information is to mean anything, advance assurances against unauthorized disclosure
are vital.
CONCLUSION
For the foregoing reasons, this court should affirm the lower court's decision
that @ party need not disclose trade secrets or other confidential commercial
information to the Federal Trade Commission without prior assurance against im-
proper disclosure.
- FRYER, ge Moriarty,
Broz, Welis & Fryer,
Attorneys for Amicus Curiae
Wards Cove Packing Company, Inc.
4la
ADDENDUM
5 U.S.C. § 552(a)(4)(B):
On complaint, the district court of the United States in the district in
which the complainant resides, or has his principal place of business, or in which
the agency records are situated, or in the District of Columbia, has jurisdiction
to enjoin the agency from withholding agency records and to order the
production of any agency records improperly withheld from the complainant. In
such a case the court shall determine the matter de novo, and may examine the
contents of such agency records in camera to determine whether such records or
any part thereof shall be withheld under any of the exemptions set forth in
Subsection (b) of this section, and the burden is on the agency to sustain its
action.
5 U.S.C. § 552(a)(4XE):
The court may assess against the United States reasonable attorney fees
and other litigation costs reasonably incurred in any case under this section in
which the complainant has substantially prevailed.
5 U.S.C. § 552(b)(4):
This section does not apply to matters that are—
(4) trade secrets and commercial or financial information obtained from
& person and privileged or confidential; ....
™~
42a
Law OFFICES
MORIARTY, MIKKELBORG, BROZ, WELLS & FRYER
3300 SCATILE-FIRST NATIONAL BANK BUILOING Cmamcs C. vares
ae = Sees. DOUGLAS ™. DUNC
So | SEATTLE, WASHINGTON 98154 Pama & ORANG
@cKaeO Ff BFO7 ALCRANOL® Ww. we
a0eceT O WES UR (206) 623-8890
COUGLAS ™ Farce
accc w. BA NOLE
Paatnte® Ow Cav
December 15, 1978
Federal Trade Commission
2840 Federal Building
915 Second Ave.
Seattle, Wa. 98174
Re: FTC File No. 751 0024
Gentlemen:
We are counsel for Wards Cove Packing Company, Columbia
Wards Fisheries and Bumble Bee Seafoods division of
Castle & Cooke, Inc. in pending litigation, MDL 249
Western District of Washington. The case involves
claims by Bristol Bay fishermen against our clients re-
garding the antitrust laws.
During the course of recent discovery in this litigation
it was revealed by counsel for plaintiffs that they had
obtained copies of profit and loss statements and other
financial data together with approximately three thousand
documents from the Federal Trade Commission under the
Freedom of Information Act. All these documents are
records of our above named cliencs produced during the
1975 investigation. When the Federal Trade Commission
commenced its investigation of our clients certain doc-
uments were produced under subpoena with the expressed
understanding that they would not be further revealed.
In our opinion this financial information involves highly
sensitive data which should not have been available to
any third party. It is now being made available not only
to the fishermen from whom these companies must buy the
raw fish for processing but also to their competitors.
43a
Federal T:ade Commission
December 1:., 1978
Page two.
We demand an explanation as to why this confidential
data was made available. Further we would like to know
why we were not given notice prior to its release.
Velry trl Ourg,
A
Douglag/M. Frye
DMF /eb
cc: Wards Cove Packing Co.
J. Gilbert
44a
FEDERAL TRADE COMMISSION
2840 Federal Building
915 Second Avenue DEC 9 0 1978
Seattle, Washington 98174
(206) 442-4655
Seattle Regional Office IR [S GE J VE li
Monarty, Mikkelborg Groz, Wells & Fryer
December 19, 1978
. Douglas Fryer
Moriarty, Mikkelborg, Broz,
Wells & Fryer
3300 Seattle-First National Bank Bldg.
Seattle, WA 98154
Re: FTC File No. 751 0024
Your letter of December 15, 1978
CN #1475-78
Dear Mr. Fryer:
When this office completed its investigation of the salmon industry
all investigational files were forwarded to our headquarters
office. At that time we made a preliminary segregation of the
investigational files pursuant to the requirements of the Freedom
of Information Act. Although I did not personally handle the
segregation of your clients' files, to the best of my recollection
a_su antial rtion of the ents and transcri j
j igation we j to fall within exem i jal)
Categories. Prior to forwarding the files to headquarters, no docu-
ments were publicly released.
Subsequent to staff segregation of closed investigational files,
the receipt of a Freedom of Information Act request will cause our
FOIA Office to review the staff's segregation and release such docu-
mencs aS do not appear to fall within exempt categories. One
factor the FOIA Office will consider is the age of the d.. .ment.
For example, individual sales invcices which might be deemed
confidential when current are gene.ally deemed no longer exempt
from disclosure after several years have passed. Other documents
May retain their exempt status for considerably longer. Presumably
any documents released by the Commission were found not to fall
within applicable standards for confidentiality under FOIA.
To the best of my recollection, normal Commission procedure for
confidentiality of documents was maintained during and after the
investigation, subject only to the statutory mandate of the Freedom
of Information Act. If your clients wished to insure notice of
disclosure (particularly after the documents were out of the
Seattle Office), the proper procedure would have been to seek a
45a
Douglas Fryer -2- December 19, 1978
prior notice agreement from the Commission. Commission Rules
prohibit the staff from entering into such agreements. This could
have been done at any time during or after the close of the
investigation. Any Commission order would have gone to the FOIA
Office or any other office in possession of the documents. I am
not aware of any such request having been filed in the investiga-
tion.
If you wish any further information regarding release of the
documents, you may write to the Freedom of Information Office of
the Federal Trade Commission in Washington, D.C. If you do so,
please inform them of our prior correspondence regarding this
matter.
Yours truly,
(>, JY B®
Randall H. Brook
Attorney
46a
FEDERAL TRADE COMMISSION
WASHINGTON. D.C. 20580
berice OF THE SECRETARY
47 JAN 1979
Douglas M. Fryer, Esquire
Moriarty, Mikkelborg, Broz,
Wells and Fryer
3300 Seattle First National
Bank Building
Seattle, Washington 98154
Re: , Freedom of Information Act Request
Salmon Industry
File Number 751-0024
Dear Mr. Fryer:
This is in response to your letter of December 29, 1978
requesting information on the above-captioned files,
You are granted partial access to the material requested,
even though you are seeking material which was released previ-
ously. Due to clerical error some material which is exempt
from mandatory disclosure pursuant to 5 U.S.C. Section 552:
(b) (3) specifically exempted from disclosure by statute;
(b) (4) trade secrets and commercial or financial infor-
mation obtained from a person and privileged or confiden-
tial;
(b)(5) inter-agency or intra-agency memorandums or letter
which would not be available by law to a party other than
an agency in litigation with the agency,
was released. This error has been corrected and the eleven page:
have had the appropriate deletions made in order to prevent any
future release of this material. ,
You may petition the Commission for access to the material
which is being withheld within thirty days from the date all the
accessible material is made available to you. You may petition
either because you believe that the material is not exempt under
the law, or because you believe that the Commission should exer-
cise its discretion and release the information notwithstanding
its exempt status. If requesting discretionary release, you
47a
Douglas M. Fryer, Esquire -2-
should state your interest in the subject matter and the pur-
pose for which it would be used if access is granted. Plezse
include a copy of your original letter and this response with
your appeal. The request should be addressed Freedom of Infor-
mation Act Appeal, Office of the General Counsel, Sixth Street
and Pennsylvania Avenue, N.W,, Washington, D.C. 20580.
The accessible files in the investigation will be forwarded
to the Seattle office of the Federal Trade Commission. You
may inspect the documents by contacting Ivan C. Orton, Esquire,
of this office, at the 28th Floor, Federal Office Building,
2840 Second Avenue, Seattle, Washington 98174, (206) 442-4655.
Copies of these documents will be made available to you, if you
so desire, at a fee equivalent to the cost of duplication.
The undersigned is deemed the sole official responsible
for the denial of any portion of your request,
Sincerely,
Carol M. Thomas
Secretary
48a
Law orrices
MORIARTY, MIKKELBORG, BROZ, WELLS & FRYER
C™amcs © wom entry UA 3300 SCATILE-FIMST NATIONAL BANK BUILDING C™eOcs €. yates
p--tn iro ~ aga SEATTLE, WASHINGTON 96°54 ern pee
St tee (206) 623-8690 AACHONOLO ee WET
® THOwAS OLSON
aoees" 2 enemve January 24, 1979 ceanece On users
Ms. Carol M. Thomas
Secretary
Federal Trade Commission
Washington, D.C. 20580
Re: Freedom of Information Act
Regquest-Salmon Industry
File: 751-0024
Dear Ms. Thomas:
Reference is made to your letter of January 17, 1979,
regarding the above.
We hereby request that all documents obtained from Wards
Cove Packing Company, Inc., Bumble Bee Seafoods Division
of Castle & Cooke, Inc. and Columbia Wards Fisheries in
connection with FTC investigation No. 751-0024
be returned. The investigation has, as we understand it,
been closed and return would avoid any further “clerical
errors" by which confidential information was released.
We wish you to know that this information was very con-
fidential and has now.been made available to several of
a my clients' competitors.
Alternatively, we request that we be given a list of those
documents which were released. If this is not possible
we request that we at least be allowed to review the mat-
erials. Since the materials belong to our clients, and
since some of the information was released due to your error |
we do not believe any fee is appropriate. |
|
|
We request the foregoing since the release of the con-
fidential financial and other data has been made to our
competitors and also because it is in the possession
49a
C. Thomas
January 24, 1979
Page two
of attorneys for plaintiffs in a civil antitrust case
in which our clients are defendants.
We also request copies of all correspondence dealing with
your release of the materials.
A
( Very truly yours,
] f ‘ M4
en ay ‘
:~\ Wega ae
Uf As
Douglaq M. Fry
DMF/eb
ces: I.C. Orton
A. Brindle
enclosure
50a
FEDERAL TRADE COMMISSION
iF)
see ae RECEIVED)
15 Second Avenue
attle, Washington 98174 ym
206) 442-4655 FeB7 1979
February 6, 1979 Moriarty, Mikhelborg, Braz, Wets & Fryzé
Douglas M, Fryer
Moriarty, Mikkelborg, Broz,
Wells & Fryer
3300 Seattle First National Bank Bldg.
Seattle, Washington 98154
Re: FOIA Request
Salmon Industry
Dear Mr. Fryer:
As indicated in Mr. Thomas' letter to you of February 1, 1979,
the Seattle office is responding to your request that all
documents submitted by Castle § Cooke, Inc. be returned.
It is my understanding, from talking with the Office of the
Secretary, that it is Commission policy to not return
documents unless agreements to that effect were reached prior to
fas aaa being turned over. Therefore, your request is
enied,
Sincerely,
ny Ortr—
Ivan Orton
Attorney
5la
FEDERAL TRADE COMMISSION
WASHINGTON, D. C. 20580
nce OF THE SECRETARY
Douglas M. Fryer, Esquire R
Moriarty, Mikkelborg, Broz, FEB5 1979
Wells, & Fryer
3300 Seattle-Frist National stonarty, Minvetbort, BFS! Weis & Fryer
Bank Building
Seattle, Washington 98154
Re: Freedom of Information Act Request
Salmon Industry
File Number 751-0024
Dear Mr. Fryer:
This is in response to your letter of January 24, 1979
requesting information on the above.
For that portion of your letter which requests you be
provided with a copy of the information which was erroneously
released in response to a previous Freedom of Information Act
Request, your request is granted. This is being released to you
as counsel for Castle & Cooke, Inc., and will not be released
to any other party. The enclosed document is the only infor-
mation supplied by your client which was mistakenly released.
This is being provided to you without charge.
The Freedom of Information Branch has been in contact
with the Commission's Seattle Regional Office to discuss that
* portion of your request that all documents submitted by Castle &
Cooke, Inc., be returned. This office will not be addressing
itself to that portion of your request. The Seattle Regional
Office will be responding to this matter.
Sincerely,
Carol M. Thomas
Secretary
Enclosure
52a
W.L. WEARLY, Ingersoll-Rand Company, The Tor-
rington Company, Plaintiffs,
V.
FEDERAL TRADE COMMISSION, Michael Pertschuk,
Chairman, Calvin J, Collier, David A. Clanton, M. Eliza-
beth Hanford Dole, Paul Rand Dixon, Defendants.
Civ. No. 77-1860.
United States District Court, D. New Jersey.
October 18, 1978.
>
Christiansen, Jube & Keegan by Sam Radin, Newark,
N.J., for plaintiffs Ingersoll-Rand Co. and The Tor-
rington Co.; Burns, Van Kirk, Greene & Kafer, New
York City, by Joseph W. Burns, New York City, of
counsel.
Carpenter, Bennett & Morrissey, Newark, N.J., for plain-
tiff W.L. Wearly by David M. McCann, Newark, N.J.;
Morgan, Lewis & Bockius, Washington, D.C., by
Miles W. Kirkpatrick, Washington, D.C., of counsel.
Robert J. Del Tufo, U.S. Atty. by Donald J. Volkert, Jr.,
Asst. U.S. Atty., Newark, N.J. for defendants; Mark
W. Haase, Sp. Atty., Washington, D.C., Arthur W.
Adelberg, Washington, D.C., of counsel.
OPINION
BIUNNO, District Judge.
This litigation grows out of an administrative subpoena
issued to Wearly, who is chairman of Ingersoll-Rand (I-R),
which in turn owns all the stock of its subsidiary, Tor-
rington. The subpoena was issued in connection with a
53a
non-public investigation designed to look into the ques-
tion of antitrust aspects of activities or arrangements con-
ducted through joint ventures, stock acquisitons, and the
like. The specific subject matter deals with “needle roller
bearings” (NRB) and “loose needle rollers” (LNR).
As everyone knows, there are many kinds of bearings
for axles and shafts. The earliest form is the common
journal, going back to the wheelbarrow and the wagon.
The wheel is of immense value for the physical reason that
rolling friction is much lower than sliding friction under
most conditons, and since friction causes waste of energy,
its reduction increases the efficiency of machines to do
useful work.
Even with the development of Babbitt metal for
journals, however, sliding friction remained between the
shaft and the simple journals. The first important im-
provement, growing out of tec’:nological advances in me-
tallurgy, was the ballbearing. Set between two “races” of
hardened steel, the smooth, round and hard steel balls
made it possible to substitute rolling friction between
shaft and journal.
It will be recalled that at the start of World War II, the
nation’s railroads had just begun the process of replacing
the simple journal box on frieght cars with roller bearings,
to eliminate breakdowns from “hot boxes” and sharply
reduce maintenance.
After the ball bearing, there came roller bearings, ta-
pered and double tapered roller bearings, thrust bearings,
and eventually the needle roller bearing. Each of these
forms of bearing are variations of the basic concept of
substituting rolling friction for sliding friction. Each
form is designed to deal with the wide range of loads and
stresses encountered in all kind of machines that have
rotating axles or shafts. The list of applications is no
54a
doubt enormous, ranging from the bicycle, through the
many devices with shafts in automobiles, refrigerators,
washing machines, oil burners, attic fans, and other ap-
pliances, through manufacturing equipment such as tur-
ret latches and milling machines, to sophisticated gyros-
copes for space craft with rotational speeds of 10,000
r.p.m. or more.’
The defendants, who are the Federal Trade Commis-
sion and its members, issued the subpoena involved not to
I-R or Torrington, but to Mr. Wearly, chairman of I-R.
Since the non-public investigation is directed to corporate
activity, the reason for addressing Mr. Wearly is obscure.
Various responses at the hearings suggest that the reason
is “strategic”, whatever that may mean, but the only dif-
ference the court has been able to discern is that an indi-
vidual who is subpoenaed and who resists the command
after a judicial enforcement order is subject to the peril or
jeopardy of imprisonment, which the corporation is not.
Thus, the use of an individual subpoena is particularly
strange in a case like this, where the subpoena is “duces
tecum”, and the main object is to obtain specified catego-
ries of documents, and where the agency has made clear
that it will accept the documents by mail along with a
verifying affidavit, as compliance with the subpoena
without the personal appearance of the witness being re-
quired. This practice for non-public investigations is es-
1 This kind of history, background and descriptive information is the
subject of judicial notice under F. Ev. Rule 201, by reference to com-
monly available sources of information whose reliability is not open to
question. One reference is the article on BEARINGS, Antifriction, in
Vol. 3, Encyclopedia Americana (1957 ed). The volume WHEELS (Life
Science Library, 1967) observes at p.12 that the earliest known record
of a vehicular wheel is a sketch made by an accountant (!) in Sumer about
3500 B.C. A sketch on p.14 details a primitive roller bearing made of an
oak hub, wooden rollers and axle, found in Denmark along with other
parts of a 1st Century B.C. funeral wagon.
55a
sentially the same as‘the Grand Jury subpoena for cor-
porate records. Such subpoenas are routinely satisfied
through arrangements with the U.S. Attorney to turn
over to him the requested documents without any witness
appearing before the Grand Jury.’
After the subpoena was issued and served, conferences
followed. Such conferences are also commonplace and
routine. Their object is to arrive at a clearer and sharper
definition of the classes of documents called for. It is
fairly usual for the supoena duces tecum to have attached.
a list of categories of documents on a “boiler plate” format,
that either does not match the particular records of the
enterprise, or else calls for types of documents of such
massive bulk and number as to be essentially useless to the
agency and unreasonably burdensome on the supplier.
For most categories, these matters were resolved by
negotiations, and as to those the court understands that
the documents have been supplied.
The controversy here involves a number of categories
of documents which, for lack of a better term, the court
has chosen to describe as documents containing “pro-
prietary information”. This information includes not only
trade secrets, secret processes and secret devices, but also
a great mass of management data, evaluations, plans, pro-
duction and production results of a kind that traditionally
and historically is never disclosed outside the company,
except on protected and privileged conditions usually es-
tablished by contract, nor even within the company ex-
2 A very good narrative account of the common practices followed in
gathering documents by subpoena duces tecum for Grand Jury pur-
poses is found in Hawthorne v. Director of Internal Revenue, 406 F.
Supp. 1098 (D-Pa., 1976). In that report, Judge Edward R. Becker sets
ser the description (essentially the same as in this District), at pp. 1105-
7
56a
cept to those persons who have a “need to know” the infor-
mation in order to execute their functions.’
In respect to these, an irresolvable impasse was
reached. The position of plaintiffs was basically two-fold:
one claim was that the request was unreasonable, exces-
sive and beyond authority; the other was that defendants
were either unable or unwilling to provide adequate secu-
rity protection if the data were disclosed, or, if they did,
that such arrangements could not be relied on.
The controversy is real, and it is specific. It is plaintiffs’
position that this proprietary information is absolutely
vital and essential to its ability successfully to compete in
the marketplace with all competitors, domestic and for-
eign, the largest worldwide competitor probably being
SKF of Sweden. They assert that this is the kind of infor-
mation which, in the shrouded world of industrial es-
pionage, is precisely the kind that competitors would give
their eye teeth for. If they must give it to FTC for the
purposes of the non-public investigation, they will do so
with the utmost reluctance and with their “heels dug in”.
But, even then, they are unwilling to provide it unless
effective means are provided to assure that the integrity
and safety of the information will be fully protected
against disclosure to competitors, either directly or by
3 The property right, of course, is in the information set out by the
documents. To retain its quality as property, the information must be
kept “secret”, as discussed later. Distinguish this characteristic from a
copyright or a patent, where the information must be made public in
_ to obtain the different kind of property interest which resides in
them.
For a useful decision distinguishing between pieces of paper and the
information written on them, see Booth v. City of New York, 268 App.
Div. 502, 52 N.Y.S.2d 135 (1944). That case involved the professional
services of official court reporters and the typed transcripts of proceed-
ings they prepare, in the context of a sales tax law.
57a
public dissemination. It is on this aspect that the con-
troversy mainly centers.‘
Proprietary information, of course, is but one form of
intangible personalty, in the same general category as
stocks, bonds, mortgages, copyrights, letters patent, and
the like. The major characteristic that distinguishes pro-
prietary information from such other forms is that while
the disclosure of A’s ownership of a particular security in
no way affects his ownership thereof or his rights therein,
the disclosure of the tenor and content of proprietary in-
formation destroys its value as well as the property in-
terest in it. The value resides not in the pieces of paper on
which the information is recorded, but in the information
itself. Once that information becomes public, the property
aspect is gone.
The law in regard to proprietary information, although
well known and generally recognized, seems not to have
been treated in any comprehensive way, and the decisions
reflect indirect aspects depending on the context in which
4 If the agency were in a position to “use” the information to engage in
the manufacture and sale of NRBs or LNRs in competition, as in a
governmental manufacturing arsenal for military equipment, it might
be argued that the subpoena would amount to a “taking” for public use,
for which just compensation would be required. That is not this case.
Rather, as the court understands the issue, the agency wants to ex-
amine the information in its non-public investigation in order to con-
sider whether anti-trust laws have been violated. This does not amount
to putting the information to “use”. For that purpose, a “taking” is
avoided by making certain that the information is not disclosed to
competitors or to the public, whether under the FOIA or otherwise,
since such disclosure would destroy the property interest and would
amount to a “taking” for private use.
Plaintiffs’ point, then, amounts to saying that just as they would not
agree to disclose the information to a licensee without suitable provi-
sions to assure integrity and safety, they are entitled to equivalent
protection before turning it over to the agency. The same would be true
of confidential disclosures to an investment banker to support a private
loan, or to an interested buyer of the Torrington operation, under condi-
tions to protect and return the proprietary information if the transac-
tion is not consummated.
58a
disputes happen to arise. In part, this may be due to the
awareness of owners of proprietary information to adopt
and follow careful practices to prevent disclosures.
Some decisions arise out of the conduct of a former
employee who attempts to use the proprietary informa-
tion for the benefit of himself and a competitor. Others
involve conduct by competitors who manage to obtain the
information by unequitable, unfair, or improper means.
Decisions of these kinds are generally equity cases where,
if the showing for relief be made, the traditional remedy is
that of injunction. This is for the obvious reason that
money damages are usually incapable of ascertainment,
and so the damage is “irreparable” in that form.*
-
5 New Jersey has long recognized and given protection to trade secrets,
both by way of injunction and damages. Salomon v. Hertz, 40 N.J.Eq.
400, 2 A. 379 (Ch. 1885); Stone v. Grasselli Chem. Co., 65 N.J.Eq. 756,
55 A. 736(E & A 1903) (which is evidently the first ruling by the highest
court, and which reviews the state of the law throughout the country),
Sun Dial v. Rideout, 16 N.J. 252, 108 A.2d 442 (1954); Adolph Got- -
tscho, Inc. v. Amer. Marking, 35 N.J.Super. 333, 114 A.2d 19 (Ch.
1954), aff'd, 18N.J.467, 114 A.2d 438 (1955), damage award modified,
26 N.J.229, 139 A.2d 281 (1958); cover the bulk of the span, with many
other cases between.
In general, injunction to restrain employee disclosure is grounded
primarily on the property concept; but relief has been given where some
trust relation is violated, even though the plaintiff had pirated the trade
secret from another, Vulcan, etc. v. American Can, 67 N.J.Eq. 243, 58
A. 290 (Ch. 1894); 70 N.J. 588, 62 A. 881 (Ch. 1905), revd, 72 N.J.Eq.
387, 67 A. 339 (E & A 1906).
Sometimes the issue arises in connection with a covenant not to
compete, as in Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 274 A.2d 577
(1971), which recognizes that “the employer has a patently legitimate
interest in protecting his trade secrets as well as his confidential busi-
ness information and he has an equally legitimate interest in protecting
his customer relationships.”
Another kind of intangible property protected by New Jersey law is
categorized as “literary property”. A recent example of this protection is
found in Krahmer v. Luing, 127 N.J.Super. 270, 317 A.2d 96 (Ch.
1974), in which a contractor made use of house plans for one house, to
build another, and was sued by the architect for pirating his work.
Construction of the first house was held not to be such a general publica-
tion as would justify copying the plans, since the building was the result
of the plans, not a copy of them.
59a
A few cases deal with the question whether a secret
process is “property” within the meaning of corporation
laws requiring that capital stock of a corporation must be
paid for in money or “property”. See, e.g., Durand v.
Brown, 236 F. 609 (CA-6, 1916). For a comprehensive
discussion of the same question involving the issuance of
stock in exchange for patents, a closely related question,
see Atlas Trailers, etc. v. McCallum, 118 Tex. 173, 12
S.W.2d 957 (1929).
In practical experience, the question arises most fre-
quently, and quite frequently, in the context of the law of
evidence. The “trade secret” privilege is well-established
at common law and is regularly applied in the federal
courts. However, the matter arises at the trial level, as an
evidence issue collateral to almost any kind of case, and is
routinely dealt with at that level with relatively little re-
cording in the reports.
There can be no real doubt that the trade secret privi-
lege, as a rule of evidence, is grounded on the property
nature of the trade secret and that it recognizes the fact
that disclosure of the tenor and content destroys both the
value and the property. In balancing the eed for evidence
against the property right, the well-recognized concept is
that the privilege is a qualified one in the sense that disclo-
sure will be required (so that the evidence may be availa-
ble) but under the control of a protective order (to the end
that the proeprty not be “taken”).®
6 Since I-R (the target of the inquiry) is a New Jersey corporation and
owns all the stock of Torrington, the situs of this class of intangible
personalty is doubtless located here under the usual rule and is governed
by New Jersey property law. The only other State whose law might
apply is Connecticut, where Torrington is based. Connecticut is one of
the original states and also a common law state. Its law is usually the
same as New Jersey’s. Any difference in law has not been briefed or
researched. In any event, Mr. Wearly’s domicile is irrelevant as he is
merely an officer and has no ownership interest in the proprietary
60a
See, for example, F.R.Civ.P. 26(c), for one formulation.
The sense of this rule is so weil understood, and so regu-
larly applied, that competent counsel have no difficulty,
in most cases, in preparing a suitable protective order for
entry by consent.
When it adopted the Federal Rules of Evidence, by
Pub.L. 93-595, 88 Stat. 1926, the Congress was wholly
unable to come to agreement on any of the proposed privi-
lege rules. In the rules prescribed by the Supreme Court
on November 20, 1972, there were specific privilege rules,
among which was Rule 508 dealing with trade secrets.
The tenor of that rule follows the recognized characteris-
tics without noticeable change. The key sentence said:
“When disclosure is directed, the judge shall take
such protective measure as the interests of the holder
of the privilege and of the parties and the furtherance
of justice may require.”
information, although he is obliged, as an agent entrusted with it, to see
to its protection, and is the witness subpoenaed.
The earliest case discussing the subject in New Jersey appears to be
Salomon v. Hertz, 40 N.J.Eq. 400, 2 A. 379 (Ch. 1885). That case was
referred to Stone v. Grasselli Chem. Co., 65 N.J.Eq. 756, 55 A. 736 (E &
A 1903), which was followed in Taylor, etc. v. Nichols, 73 N.J.Eq. 684,
69 A. 186(E & A 1908). Taylor is mentioned in Herold v. Herold China,
etc., 257 F. 911 (CA-6, 1919) for the proposition that the practice of
making disclosures of trade secrets in camera and under seal “is well
established.” Of other New Jersey cases, two more worth reading are
Paper, etc. v. Newlin, 101 N.J.Eq. 115, 137 A. 314 (Ch. 1927) and Sun
Dial Corp. v. Rideout, 17 N.J. 517, 111 A.2d 881 (1955). Sun Dial is
especially of interest as it recognizes that while an injunction is ordinar-
ily required to specify what is prohibited, this cannot be done when the
resiraint is against use or disclosure of trade secrets, for such an injunc-
tion would be a public record and would itself destroy the property.
Instead, the practice is endorsed of recording the details in a transcript
made in camera and held under seal, as the ancient practice evidently
was.
More recently, and not in a trade secret context, the New Jersey court
has approved and encouraged the use of protective orders as a basis fur
securing testimonial responses. See Mahne v. Mahne, 66 N.J. 53, at 62,
328 A.2d 225 (1974); Gero v. Cutter, 66 N.J. 443, at 446, 332 A.2d 593
(1975) and Cashen v. Spann, 66 N.J. 541, at 545, 334 A.2d 8 (1975).
6la
The House and Senate and Conference Committee re-
ports disclose that this rule did not give rise to any prob-
lem. Rather, sharply differing views in regard to the inclu-
sion of a newsperson’s “shield” law, and the scope of the
privileges for “Secret of State” and “Official Information”
were not capable of resolution, and instead of adopting
any specific privilege rules, the Congress enacted a
general rule, Fed. Ev. Rule 501, which calls for application
of “the principles of the common law as they may be inter-
preted by the courts of the United States in the light of
reason and experience”.
For the purposes of the present controversy, the court
is satisfied, and finds, that the formulation of proposed
Rule 508 adequately reflects the principles of the common
law in the sense required by Fed. Ev. Rule 501.
The enactment of evidence rules by the Congress was
the federal culmination of an effort first reflected by the
adoption of the Model Code of Evidence by the American
Law Institute in 1942. That formulation was the result of
a prolonged study, for which Edmund M. Morgan was
Reporter, John M. Maguire was Assistant Reporter, and
John H. Wigmore was Chief.Consultant. In turn, the
Model Code was followed by the Uniform Rules of Evi-
dence drafted by a committee of the National Conference
of Commissioners on Uniform Laws, approved in 1953 by
the Conference and by the House of Delegates of the
American Bar Association, as well as by the American
Law Institute the following year.
The Uniform Rules draft formed the basis for a report
of May 25, 1955 by a committee of the Supreme Court of
New Jersey, headed by Mr. Justice Nathan L. Jacobs and
which included other distinguished members such as the
late Mr. Chief Justice Joseph Weintraub, former Mr. Jus-
tice Frederick W. Hall, former Superior Court Judge Al-
™ <
62a
fred C. Clapp, and Professor Lewis Tyree. With various
modifications, that committee proposed adoption of the
Uniform Rules for New Jersey.
For reasons arising under the New Jersey Constitution,
1947 which need not be detailed here, the New Jersey
Legislature established a Commission on the subject by
JR-15, 1955, headed by the late Superior Court Judge
John O. Bigelow. The report of that Commission, dated
November, 1956, concluded that the rules be adopted by
statute, rather than by the court. In 1960, the issue was
resolved by enactment of The Evidence Act, 1960, NJPL
1960, ch. 52. That law enacted the rules on definitions
(N.J.S. 2A:84A-1 through 15), a section on Scope of the
Rules (N.J.S. 2A:84A-16), and the rules on privilege
(N.J.S. 2A:84A-17 to 32). For the balance of the rules, a
mechanism was established, modelled on 28 U.S.C.
§ 2072, for promulgation by the Supreme Court of New
Jersey and filing with the Legislature and Governor, who
could act by joint resolution. The remaining rules took
effect September 11, 1967 as promulgated by the Su-
preme Court and pursuant to JR-5, 1967.’
The significance of this brief history in respect to the
present controversy is two-fold. One, the New Jersey Leg-
islature regarded rules of privilege to be so infused with
policy considerations wholly independent of the judicial
process of adducing evidence that it undertoook to enact
the privilege rules itself. Two, in establishing the scope of
the rules, it directed that:
“Rule 2(1). The provisions of Article II (Chapter V of
the Rules), Privileges, shall apply in all cases and to
7 While Congress undertook to enact all the federal Rules of Evidence,
instead of only the definitions, scope and privilege rules (as New Jersey
did), it took the same course as New Jersey by enacting a statutory
mechanism through which the Supreme Court may initiate changes in
the rules. See 28 U.S.C. § 2076 (1975).
63a
all proceedings, places and inquiries, whether formal,
informal, public or private, as well as to all branches
of government and by whomsoever the same may be
conducted, and none of said provisions shall be sub-
ject to being relaxed.” N.J.S. 2A:84A-16.
This scope rule, which derived from the Report of the
Bigelow Commission, made the privilege rules applicable
everywhere, including any kind of proceeding before ad-
ministrative agencies. As noted in the Comment to Rule 2
in that Report:
“* * * The Rules governing privileges, however, ap-
ply in all cases and all proceedings”.
The rationale for this view is obvious: if a communica-
tion or other kind of information is to be privileged from
disclosure for some policy reason unrelated to the taking
of evidence, it should be privileged everywhere, not
merely in court proceedings. Long established rules of
privilege, such as the attorney-client privilege, the mari-
tal privilege, or the trade secret privilege, would be mean-
ingless if protected in a lawsuit before a court, but re-
quired to be disclosed in a proceeding before a zoning
board of adjustment or any other administrative agency.
While the Congress took the same view as did the New
Jersey Legislature in respect to the source of authority to
adopt rules of evidence, regarding them as substantive
rather than procedural (See H.R. 93-650; S.R. 93-1277),
its own scope rule, Fed. Ev. Rule 1101, made the enact-
ment applicable to courts but failed to deal with adminis-
trative agencies.
Despite this,it is clear that recognized privileges pro-
tecting against disclosure must be aplied everywhere if
they are to have meaning. When a client communicates
64a
with his attorney, he cannot possibly forecast the setting
in which he or his attorney may be asked to disclose the
communication. The purpose of that privilege is to assure
the availability of counsel’s advice, the soundness of
which depends on full disclosure to counsel. Confidence is
essential to the relation. The privilege cannot be made to
depend on whether the question is asked in court, or by an
administrative agency, or by a Congressional committee.
This is even more emphatically true of the trade secret
privilege, grounded as it is on the property interest in the
content of the information. Here, constitutional consider-
ations are involved. The sovereign power of eminent do-
main to take property is inherent in sovereignty. But by
Amendment 5 of the Constitution, it may be exercised for
public use only upon just compensation. It may not be
exercised for private use at all.®
Thus, it is plain that any failure to recognize and honor
the privilege, and to furnish full and adequate protection
against the kind of disclosure that would destroy the prop-
erty interest in applying the balancing test in instances
when restricted disclosure is called for in order to conduct
a proceeding, would involve constitutional problems of
considerable magnitude. This is for the reason that disclo-
sure is required by act of the government, acting through
any of its branches. Amendment 5 applies to all the bran-
ches, and all agencies and officers of government.
In some cases, no doubt, the need for the information is
lacking in sufficient importance to warrant that the trade
4 Whether the use for which property is taken is a public use is for
courts to determine, Shoemaker v. U.S., 147 U.S. 282, 13 S.Ct. 361, 37
L.Ed. 170 (1893); State by McLean v. Lanza, 48 N.J.Super. 362, 137
A.2d 622 (Law, 1957), aff'd, 27 N.J. 516, 143 A.2d 571 (1958), appeal
dismissed, 358 U.S. 333, 79 S.Ct. 351, 3 L.Ed. 2d 350, rehearing den.
359 U.S. 932, 79 S.Ct. 606, 3 L.Ed. 2d 634; State v. Totowa, etc. Co., 96
N.J.Super. 115, 232 A.2d 655 (App. 1967).
65a
secret be disclosed at all. In those cases, the matter in- .
volved can be resolved fairly and adequately without dis-
closure. In other cases, whatever is involved cannot rea-
sonably be resolved without disclosure; in those cases, the
requirement to disclose is justified by strictly limiting
dissemination of the information. This serves the needs of
the proceedings and protects the property interest. It
amounts to a disclosure under conditions that are them-
selves privileged.
The concept is well recognized. A good illustration is
found in N.J. Ev. Rule 37 (N.J.S. 2A:84A-29), dealing
with waiver of a privilege. The second paragraph reads:
“A disclosure which is itself privileged or otherwise
protected by the common law, statutes or rules of
court of this State, or by lawful contract, shall not
constitute a waiver under this section.” °
Thus, the owner of a trade secret who discloses it in
confidence to his attorney does not waive his trade secret
privilege because the disclosure is itself a privileged com-
munication.
So also, the highly confidential data about plant effi-
ciency, production plans, estimates of customer needs,
and the like, are commonly disclosed to banks and other
financial institutions so that they may pass on loan pro-
grams, but only under express or implied obligations not
to disclose the information. The owner of a trade secret or
secret process may license another to use it, but, if well
advised, will require covenants against disclosure.
) The principle was recognized in the last sentence of Fed. Ev. Rule 511
(not expressly enacted), and the court finds it to be embraced by Fed. Ev.
Rule 501. And see, Gannet v. First Nat1, etc., 410 F. Supp. 585, at 589-
590 (D.N.J., 1976); rev'd on another issue, sub nom. U.S. v. First Nat’,
etc., 540 F.2d 619 (CA-3, 1976), aff'd on another issue, 546 F.2d 1072
(CA-3, 1976).
66a
This characteristic of making disclosure of proprietary
information under privileged conditions arising out of
contract has been recognized by the Supreme Court. In
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct.
1879, 40 L.Ed.2d 315 (1974), the Chief Justice said:
“This necessary element of secrecy is not lost, how-
ever, if the holder of the trade secret reveals the trade
J secret to another ‘in confidence, and under an implied
obligation not to use or disclose it.’ * * * These others
may include those of the holder’s ‘employees to whom
it is necessary to confide it, in order to apply it to the
uses for which it is intended.’ * * Often the recipient
of confidential knowledge of the subject of a trade
secret is a licensee of its holder. * * * The protection
accorded the trade secret holder is against the disclo-
sure or unauthorized use of the trade secret by those
to whom the secret has been confided under the ex-
press or implied restriction of nondisclosure or non-
use. The law also protects the holder of a trade secret
against disclosure or use where the knowledge is
gained, not by the owner’s volition, but by some ‘im-
proper means’, Restatement of Torts, § 757(a), which
may include theft, wiretapping, or even aerial recon-
naisance. A trade secret law, however, does not offer
protection against discovery by fair and honest
means, such as by independent invention, accidental
disclosure, or by so-called reverse engineering, that is
by starting with the known product and working
backward to divine the process which aided in its
development or manufacture.” 416 U.S., at 475-476,
94 S.Ct., at 1883 (citations and footnotes omitted).
The court sees no reason why these fundamental princi-
ples, which are hornbook law, should not be applied when
67a
the disclosure is not voluntary, but is by compulsion of a -
subpoena issued by any branch of government, and
usually enforced by the judiciary.’°
Failure to provide adequate protection to assure confi-
dentiality, when disclosure is compelled by the govern-
ment, amounts to an unconstitutional “taking” of prop-
erty by destroying it, or by exposing it to the risk of
destruction by public disclosure or by disclosure to com-
petitors. The constitutional limitation cannot be altered
by any branch of government.
The concept of protection for mandatory disclosure of
privileged matter finds expression in other laws. Thus,
the constitutional right not to be compelled to testify
when the testimony may tend to incriminate the witness,
has also been made the subject of a balancing test. Under
18 U.S.C. § 6001, et seq. if the government is of the view
that it is more important to have the testimony of a wit-
ness than it is to prosecute him for what that testimony
may reveal, directly or indirectly, it may decide to give up
any right to prosecute on the basis of the testimony or
information sought from the witness, and obtain a court
10 The point to be kept in mind here is that the subject of the dispute is
property, not evidence or subpoenas. The latter merely provide the
context in which the dispute arises.
Thus, in bank robbery cases where the culprit is caught with the loot,
the stolen money, including “bait bills,” is seized by the government as
contraband (so far as the robber is concerned) and as evidence. Once the
trial is completed, and any appeal of a conviction concluded by affirm-
ance, the money is returned to the bank. It is not kept by the govern-
ment or given away.
In a recent unreported case in this district, a defendant charged with
3 bank robberies pleaded guilty to one charge in exchange for an agree-
ment under Rule 11, F.R.Crim.P. to dismiss the cther two charges.
After sentence, he sued the United States to recover money taken from
him on his arrest. To resist the claim, the United States only needed to
show that the money had been stolen from one of the banks even though
the charge as to that bank had been dismissed under the Rule 11 agree-
ment. See, also, Ruth v. First Nat? Bank etc., 410 F. Supp. 1233 (D-N.J.
1976) for an even better example of “chutzpa”.
68a
order directing the witness to testify notwithstanding the
right not to self-incriminate.
Similarly, under the Jencks Act, 18 U.S.C. § 3500, if
the government elects not to comply with a court order to
provide the defense with a “statement”, as there defined,
for cross-examination, the court may strike the testimony
of the government witness or declare a mistrial. In cases
where the testimony is essential to make a case, the
government’s election not to disclose can result in dis-
missal of the indictment."
Under the laws governing patents and copyrights, Con-
gress requires disclosure of the invention, or a filing of the
copyright material as a consideration for “securing for
limited Times to Authors and Inventors the exclusive
Right in their respective Writings and Discoveries,” U.S.
Const.; Art. 1, § 8, par. 8.
In all these instances, which are merely illustrations
familiar to all, there is a quid pro quo of sufficient sub-
stance to balance the interests. So, also, compelled disclo-
sures of proprietary information require a balancing quid
pro quo. Because of the unique nature of the property,
which exists only so long as there is only a disclosure that
is itself privileged, the only suitable quid pro quo is an
arrangement, tailored to the particular case, that insures
against accidental, or unauthorized, or improper disclo-
sure.
11 Acurrent example was reported in the Miami Herald of October 25,
1978 (UPI), in connection with the perjury trial in U.S. v. Berrellez (D-
DC). The six felony counts involve allegations of lying under oath to
conceal efforts financed by the CIA and ITT to influence Chile’s 1970
elections. The U.S. Attorney had asked that the government not be
required, during trial, to disclose otherwise relevant evidence that
would involve national security secrets. Judge Aubrey Robinson denied
the application, with leave to appeal his ruling within 5 days, and it was
indicated that if the information could not be withheld, prosecution of
the case would have to be dropped, even though Judge Robinson said
that he would allow the testimony to be protected by “sealing the court-
room” while the sensitive data was adduced.
69a
It must be emphasized that, in the context of this case,
the issue does not involve the question of deprivation of
property “without due process of law”, nor the question of
taking private property for public use “without just com-
pensation”, these being the two explicit provisions of
Amendment 5 in respect to property. Rather, the question
relates to the “taking” of private property at all, when the
taking is not for public use but for private use. This prohi-
bition is implicit rather than express, since it would be an
insult to every notion that government may take property
for public use only with just compensation, and yet be
allowed to take private property for private use without
any protection or compensation at all.
Nearly a century ago, it was decided wthat when
private property is taken for public use without compen-
sation, the federal courts may take jurisdiction of an ac-
tion by the owners in ejectment against the agents of
government to establish their rightful title, even though
there be no statutory remedy, or an imperfect statutory
remedy, for obtaining just compensation. See U.S. v. Lee,
106 U.S. 196, 220, 1S.Ct. 240, 27 L.Ed. 171 (1882), which
ruled that the heirs of General Lee were the rightful
owners of what is now the Arlington National Cemetery,
and (more to the point here) that the provisions of Amend-
ment 5 were intended to be enforced by the judiciary.
U.S. v. Lynah, 188 U.S. 445, 23 S.Ct. 349, 47 L.Ed. 539
(1903), established the rule that the flooding of lands bor-
dering a system of dams and walls across a river was a
“taking” of property for which a judicial action and rem-
edy would be provided, even though the Congress did not
specifically direct that the property be taken, and even
though there had been no formal proceedings to condemn
the land.
70a
Jacobs v. U.S., 290 U.S. 18, 54 S.Ct. 26, 78 L.Ed. 142
(1933) ruled that even though condemnation proceedings
are not instituted, the owner of lands may assert his claim
for compensation in his own action. As Chief Justice
Hughes observed there:
“That right was guaranteed by the Constitution. The
fact that condemnation proceedings were not insti-
tuted and that the right was asserted in suits by the
owners did not change the essential nature of the
claim. The form of the remedy did not qualify the
right. It rested upon the Fifth Amendment. Statu-
tory recognition was not necessary. Such a promise
was implied because of the duty imposed by the
amendment. The suits were thus founded upon the
Constitution of the United States.” (290 U.S. at 16,
54 S.Ct. at 27) (Emphasis added).
The Lee case is among the precedents relied on to
support the action and the claim made in Bivens v.
Six Unknown Agents, 403 U.S. 388, at 394, 395, 91
S.Ct. 1999, 29 L.Ed.2d 619 (1971).
The present case differs only in the respect that
since there cannot be any “taking” for private use,
and since the “taking” of the kind of property here
involved, without authority in law, is “irreparable” in
the sense of money damages, the remedy sought is
different. The remedy sought is a declaration that the
threatened “taking” is wrongful, and if that point be
established, to prevent the unlawful taking."
It is well known that this kind of question is not
dealt with in the precedents, because traditionally
the trade secret privilege has been recognized and
12
Proprietary information, in the trade secret category, is not unlike
the status of virginity. Once taken without consent, whether by seduc-
tion or rape, it is gone forever.
T1la
honored, not only in the courts but also in the other
two branches of government. It is only since the
enactment of the Freedom of Information Act, 5
U.S.C. § 552, as amended, that the problem has
arisen. Through that law, anyone may ask for copies
of documents which are among the records of the
countless agencies in the Executive Branch, by
merely paying the rate for making copies and without
any showing of standing, legitimate interest or any
other threshold requirement. Documents (that is, the
information they contain) furnished under that law
are automatically in the public domain, and to the
extent that what is furnished amounts to proprietary
information, the supplying of it obviously amounts to
a “taking” by destruction of the privilege, and the
taking is for the use of the private requester, thus
making the process one of taking private property for
private use. This is the root of the threat and of the
risk in this case, for if the proprietary information be
turned over to defendants without appropriate pro-
tection and assurance of protection in advance, the
risk of loss by improper taking is necessarily a consid-
erable risk.’®
In their note to proposed Fed. Ev. Rule 508, the
distinguished Advisory Committee observed:
13
The legislative and public history of the FOIA discloses that the
primary consideration for its enactment was to allow public access to
internal government workings. The concern was mainly for “Big
Brother” risks, as well as for undisclosed, inconsisteut treatment of like
matters on an ad hoc basis rather than by the rule of law. Invasions of
privacy, a very broad concept that includes the accumulation in pre-
viously inaccessible government files of “raw data”, whether reliable or
not, was another facet of that concern. In the process, the Act also
reached proprietary information possessed by government by compul-
sion (or voluntarily on recognition of the compulsory power) incidental
to the performance of some governmental function. This kind of infor-
mation was excluded by the black letter of the statutory provisions that
72a
“While sometimes said not to be a true privilege, a
qualified right to protection against disclosure of
trade secrets has found ample recognition, and, in-
deed, a denial of it would be difficult to defend. * * *
Congressional policy is reflected in the Securities Ex-
change Act of 1934 * * * and the Public Utility Hold-
ing Company of 1933 * * *, which deny the Security
and Exchange Commnission authority to require dis-
closure of trade secrets and processes in applications
and reports.”
Despite the express provision in the Federal Trade
Commission Act, 15 U.S.C. § 46(f), denying the Commis-
sion the authority to make public “trade secrets and na-
mes of customers”, and despite the provision in the
Freedom of Information Act, 5 U.S.C. § 552(bX3) and
(bX4), that
“(b) This section [act] does not apply to matters that
are—
the “section” does not apply to specified categories of data, but a surpris-
ing number of courts have managed to read this language as discre-
tionary rather than mandatory.
When the information is in the possession of an agency in the Execu-
tive Branch, and is requested on behalf of the Congress from the agency,
the risk is considerably increased. Aside from the occasional and well-
known instances of improper “leaks”, the classic example of the risk
involved is that of the late Senator Joseph McCarthy, whose practice it
was to make public disclosures under protection of the “speech and
debate” clause, U.S. Const., Art. I, § 6, cl. 1.
While no improper motive is attributed to the Congress as an institu-
tional body, any group that large has a reasonable likelihood of contain-
ing one or two members with ulterior motives, and the problem of a
Senator McCarthy has not been solved. It takes only one member of
Congress, using the speech and debate clause, to destroy proprietary
information without remedy to the victim. The Tobin and AT&T cases
mentioned later, show this to be reality. ner
73a
“(3) specifially exempted from disclosure by statute:
“(4) trade secrets and commercial or financial infor-
mation obtained from a person and privileged or con-
fidential;“
there is still a live, active and sharply contested con-
troversy here. One reason, among others, is that 5 U.S.C.
§ 552(c) says that: “This section is not authority to
withold information from Congress.”
At least since Tobin v. U.S.,113 U.S.App.D.C. 110, 306
F.2d 270 (1961), cert. den. 371 U.S. 902, 83 S.Ct. 206, 9
L.Ed.2d 165 (1962), and through U.S. v. Fort, 143
U.S.App.D.C. 255, at 262-263, 443 F.2d 670, at 677-678
(1970), cert. den. 403 U.S. 932, 91 S.Ct. 2255, 29 L.Ed.2d
710 (1971), the courts have been urging the Congress to
deal with the problem of claims of privilege, particularly
in the extremely delicate setting of a Congressional sub-
poena. The problem is highlighted by U.S. v.A.T.&T., 179
U.S.App.D.C. 198, 551 F.2d 384 (1976), in which the De-
partment of Justice (in the Executive Branch) sought re-
lief from the courts to prevent disclosure by a witness
(AT&T) of information involving national security wire-
taps under a subpoena by a subcommittee of the House of
Representatives. The opinion is highly educational."
Congress is not unaware of the problem. In Senate Re-
port No. 95-170, to accompany S. 555 (95th Congress, 1st
Session) the need for some rational resolution of this as-
14 ___ Earlier this year, the press reported that Secretary Califano of
H.E.W. was subpoenaed by a Congressional committee to answer ques-
tions which the law forbids him to answer. If he declines to answer, he
may be prosecuted. under the same law involved in Tobin. If he answers,
he violates the law which forbids the answer. The authorized penalty
under each law is the same. Because the Congress has adjourned sine
die, the question and his peril may be moot, at least until the next
Congress convenes.
74a
pect of the problem is recognized, especially at pp. 16-21.
At this writing, whether any action was taken before the
sine die adjournment of October 14-15, 1978 is not yet
known.
There are other specific statutes involving regulatory
agencies, enacted after the Freedom of Information Act,
in which the Congress has explicitly stated that pro-
prietary ‘aformation is not to be disclosed, yet these, too,
are the subject of litigation in District Courts throughout
the country, one of them now pending here, in which the
ruling has been delayed so that the court may consider the
effect, or the applicability, of amendments enacted within
the last month.'®
15 Under existing New Jersey law, N.J.S. 2A:119-5.1 to 5.5, the theft,
embezzlement or copying of “trade secret” information is a criminal
offense. These provisions have been embodied in the new Penal Code,
N.J.S. 2C:20-1, et seq.
There are other statutory enactments which quite effectively express
the balance between the need of an agency to have access to proprietary
information, and the need of the owner to have that information pro-
tected against destruction by general disclosure.
One statute, N.J.S. 26:2C-9(d), dealing with inspections to locate
sources of air pollution, provides that:
“Any information relating to secret processes or methods of
manufacture or production obtained in the course of such inspection,
investigation or determination, shall be kept confidential and shall
not be admissible in evidence in any court or in any other proceeding
except before the department. .” (Emphasis added).
Another statute, the Mid-Atlantic States Air Pollution Control Com-
pact, N.J.S. 32:29-1, et seq., uses the following language in section 24:
“Any records or other information furnished to or obtained by the
commission . . . which records or information, as certified by the
owner or operator, relate to production or sales figures, or to secret
processes or production, or which if made known to others would
tend to affect adversely the competitive position of such owner or
operator, shall be retained solely for the use of the commission and
its employees, . . . and shall not be published or disclosed for any
other purpose by any officer or employee of the commission or any
other person without the written consent of such owner or operator.”
Still another statute, assigning powers to the Interstate Sanitation
Commission in respect to air pollution, provides, in N.J.S. 32:19A-5,
that:
(footnote continued on next page)
75a
Although this court does not claim to have searched all
the statutes comprehensively, it is informed that there are
at least 80 statutory sections, from Title 2 U.S.C. to Title
49 U.S.C., which employ the term “trade secrets”. There
are said to be more than 20 decisions of the Supreme
Court of the United States, alone, in the period from 1944
to 1977 that deal with the term in some fashion. This is a
massive literature in primary authority which reflects the
wide recognition of the term and the concept it repre-
sents.
“No trade secret or secret process shall be inquired into by the
Interstate Sanitation Commission under this act, whether with re-
spect to 1 or more of the substances or 1 or more of the processes,
operations, techniques or devices used in connection therewith, and
whenever a trade secret or secret process is involved, the activity
under this act shall be limited to the identification of the device or
facility from which the effluent discharged into the outer air derives,
and the nature, rate and period of emission of such effluent.
“All information obtained from any sampling, tracing or other
specific inquiry performed under this act shall be kept and main-
tained as a confidential disclosure and, except as may be essential for
the purpose of referring a complaint to an appropriate enforcement
agency and of any enforcement proceeding by or before any such
agency, shall not be disclosed or published in any way other than
such as will not identify a given substance, process, operation, tech-
nique or device with the physical location ur identity of the source
plant or facility, or with the product made or service performed, or
with the person or persons using the same.
“A printed copy of the provisions of this section shall be furnished
on request to any person furnishing information to the Interstate
Sanitation Commission and, in case of an inquiry at a plant or facil-
ity, to the person then in charge of the same.”
This legislative treatment of the subject reflects an obvious recogni-
tion of well established common law and constitutional principles
brought into play in circumstances involving proprietary information.
Through one formulation or another, they strike a balance between
agency needs for access to such information to carry out a regulatory
function without invading the property interest. It is of some signifi-
cance that there is no reported court decision on these statutes. The
absence of such litigation speaks well both for the expression of the
balance struck and for the honoring of the policies reflected in the
statutes without agency attempts to evade or avoid.
76a
With the foregoing as an analytical context, it is possi-
ble to turn to specific issues in this case. There is no need
to repeat here the jurisdictional basis set out at the time
the court ruled on the application for preliminary injunc-
tion. The determination there made is fortified by the
decisions in Lee, Jacobs and Bivens, mentioned above.
That declaratory judgment relief is proper can hardly
be disputed. The existence of a genuine controversey be-
tween specific parties, over issues that mainly involve
questions of law going to their respective rights, duties
and legal relations, and depending on the construction of
Constitution and statutes, is clear.’*®
It is also clear beyond argument that defendants lack
even a rule or regulation governing the subject at the non-
public investigation stage, and that the proposed regula-
tion, 43 Fed. Reg. 3571 (January 26, 1978) is woefully
inadequate for the protection of private property.
It will not do to say that the agency, under ordinary
principles, should first have the proprietary information
submitted pursuant to its subpoena, and that it will enter-
16 FTC has argued that there is no “imminent” threat of any disclosure
to competitors or to the public, of any of the proprietary information,
and thus that the suit is premature. The point is related to whether
injunction is warranted, but not to declaratory judgment relief. In Ortiz
v. Engelbrecht, 474 F.2d 977 (CA-3, 1973), the court reversed dismissal
of a suit brought to challenge the “tacking” provision for service of
process in dispossess actions. Judge Garth had dismissed because the
landlord had decided to abandon the dispossess suit, and thus there was
no basis for injunction. As the later proceedings show, 61 F.R.D. 381, at
395 (D-N.J. 1973), jurisdiction existed for processing to declaratory
judgment.
Some reported opinions do reflect the view that where injunction is
not warranted, then declaratory relief must also be denied. Such expres-
sions may he instances of an exercise of discretion to withhold the relief
if it be felt that a declaration would not resolve the controversy. They
cannot be taken to hold contrary to what was enacted by the Congress in
The Declaratory Judgments Act, 28 U.S.C. §§ 2201, 2202, which au-
thorizes a court to “declare the rights and other legal relations of any
interested party seeking such declaration, whether or not further relief
is or could be sought” (Emphasis added).
77a
tain a request for a letter for confidential treatment. This
will not do for several reasons. One is that the owner of
proprietary information should never make a disclosure
of its content, either voluntary or involuntary, without
enforceable restrictions against general disclosure, by
contract or court order first obtained. Another is that
allowing the agency to rule first furnishes an inadequate
procedure, because the standards for review are ex-
tremely limited, and an owner of proprietary information
runs the risk of loss of his property on procedural and
technical grounds. It is the courts, not the administrative
agencies in the Executive branch which are charged with
seeing that the Constitution is honored; it is the courts,
not the administrative agencies, that decide whether a
“taking”, even when authorized by statute, is in fact taken
for a public use. See, Shoemaker v. U.S., 147 U.S. 298, 13
S.Ct. 361 (1893).
No doubt the courts at one time were reluctant to ac-
cept the notion of a declaratory judgment as constituting
a judicial act. This reluctance was one of semantics, as
Professor Bouchard observed long ago, because courts of
law and equity have both engaged in making declarations
of rights, duties, status and legal relations for centuries.
The action in trespass with a feigned issue is nothing more
than a declaratory judgment to try title. Resolutions of
conflicting claims between heirs and devisees, long
known, are nothing more than declaratory judgments con-
struing wills and statutes. Deliberate violations of munici-
pal ordinances or statutes to invite charges defended by a
challenge to the validity of the ordinance or the statute,
are inherently proceedings whose object it is to obtain a
declaration on the question of validity. A simple scanning
78a
of the table of contents in Bouchard’s classic text will
display countless other examples."
The only difference between those well established ac-
tions and the declaratory judgment action lies in the mere
form of the action, and in the fact that in most cases a
declaration is all the remedy that is needed. Once adjudi-
cated, the dispute is resolved and the parties traditionally
honor the adjudication. Further remedies, as by way of
execution or enforcement of the adjudication, or by in-
junction “at the foot of the decree”, is rarely needed, but
can be provided in the same cause if necessary.
A modern recognition of the declaratory judgment ac-
tion, perhaps the most civilized form of litigation of dispu-
tes yet devised, is found in Super Tire etc. v. McCorkle,
416 U.S. 115, 94 S.Ct. 1694, 40 L.Ed.2d 1 (1974), from
this circuit, in which the Supreme Court sustained juris-
diction even against a claim of mootness, on the ground
that the controversy was real, genuine and continuing,
and the case was one capable of repetition, yet evading
review.
The declaratory judgment is an especially valuable tool
in a case like this one. Not only will the determination
(whatever it may be) resolve the existing controversy be-
tween the parties, but to the extent that its outcome is
sound it provides precedent to be considered in the resolu-
tion of countless other controversies involving essentially
the same underlying question all over the country. Even
though this case be massive and difficult, its correct deter-
mination promises far more in judicial economy than the
many emergency cases that would need to be filed with
17 _ Particularly applicable is the discussion in Bouchard, “Declaratory
Judgments” (2nd Ed) under the leads “Titles to Personal Property” (pp.
753-758); “Administrative Powers and Disabilities” (pp. 875-900); and
“Relief for Peril and Insecurity” (pp. 927-1019).
79a
requests for temporary restraining orders after receiving
a 10-day notice of intent to disclose proprietary informa-
tion, which defendants propose.
The controversy is real and genuine. It involves a pecu-
liar form of property that can vanish by evanescence, sub-
limation or osmosis. It is in that class of personalty, like
the heirloom, the original manuscript of “Look Home-
ward, Angel”, the Mona Lisa, the Venus de Milo, and other
like items for which equity historically has provided the
suitable remedy of specific reparation. By resolving the
controversy now, through the declaratory judgment, the
need for the extraordinary remedy of specific reparation
can be avoided, as can the incalculable risk that even that
remedy would be hollow if the res had meanwhile “gone
public”.
The court does not see this case as one of “judicial re-
view” of some administrative action. Nor is this a case of
conducting a hearing “de novo” after some administrative
hearing and determination. Rather, this is a case invoking
the original jurisdiction of the court, as a court of first
impression. It is a plenary action to resolve a clearcut
controversy. Plaintiffs assert their claims of rights, duties
and legal relations, and defendants contest them. There is
nothing in the law to suggest that a governmental official,
or a government agency, cannot be a party to a con-
troversy within the scope of a declaratory judgment ac-
tion. The books in jurisdictions throughout the nation,
state and federal, have many precedents of this nature in
which the controversy is between private parties on the
one hand and government on the other.
On the record before this court, it has been clearly es-
tablished that the disputed documents contain pro-
prietary information, that defendants have no right to
make any of it public or to provide.it to a requester under
80a
the Freedom of Information Act or any other act, and that
plaintiffs are entitled to a declaratory judgment to resolve
the controversy. The court so finds on both the facts and
the law.
Ordinarily, this is as far as a court would need to go.
Ordinarily, a court would refrain from granting other or
further relief beyond the declaratory judgment. This is
especially so in a case involving officials and agencies of
government because the court expects that the declara-
tion will be honored and adhered to so long as it remains in
force.
With due regard for recognition of the principles of
comity between the several branches, and with considera-
ble reluctance, the court concludes and finds that its judg-
ment in this case must provide a suitable remedy beyond
the declaration itself.
The reason for this conclusion and finding is that in the
course of the case, the defendants chose with awareness
and deliberation to decline to submit some 152 documents
sought for discovery, for in camera inspection so that the
court could rule on various claims of privilege raised by
them. The court’s orders in this regard were drafted with
great care, to assure defendants the same protection as is
claimed by plaintiffs for their privileged information.
The mechanism chosen called for delivery of all the
documents to the-U.S. Attorney, who is the attorney of
record for defendants under the General Rules of this
District. A list of the documents was to be furnished to the
court under seal, along with a designation of a few items
in each claim of privilege to be inspected in camera under
seal. Defendants were assured that no ruling adverse to
any claim of privilege on any document would be made
without first conducting an evidentiary hearing from
which plaintiffs and their counsel would be excluded.
8la
To the extent that defendants asserted that some docu- -
ments contained proprietary information owned by per-
sons not party to the action, the order directed that those
persons be given notice so that they might appear and be
heard on the question.
The court’s orders in this regard were not honored. It is
satisfied that this disregard of orders was not out of disre-
spect for the court, but rather to preserve some unknown
and unidentified legal issue never presented. The cases are
essentially uniform and clear that all the privileges
claimed by defendants, like the privilege claimed by plain-
tiffs, are qualified privileges for which in camera inspec-
tion, hearings under seal, necessary deletions of sensitive
matter, and the like, are part of the regular business of the
trial courts.
The posture taken on these orders is both distressing
and dismaying, because the clear inference is that a de-
claratory judgment, without more, will similarly be disre-
garded.
The process of balancing interests when dealing with
privileged information subject to qualifications is quite
simple. Given a colorable showing that the information is
proprietary, recognition of the property right takes the
form of ready (and not stingy) award of suitable protec-
tion against improper disclosure. The greater the degree
of protection, the more generous a court can be in ordering
disclosure. But when the indications are as strong as they
are here that orders of the court will not be honored, there
can be no confidence that its declaratory judgment, by
itself, will be honored... ,
What form that kind of additional relief ought to take is
reserved until such time as the court has heard both sides
on the issue. In the meantime, the protective order ori-
ginally entered herein and as later particularized and re-
™~
82a
fined, will remain in full force and effect. This will assure
that the subject of the controversy will remain in the juris-
diction of this court pending resolution of the question
now posed. This is seen as unavoidably necessary, for the
time being, even though under other circumstances the
court’s inclination would be to supplement the declaratory
judgment with a protective order to preserve the subject
matter, and otherwise allowing delivery of the documents
to defendants in Washington on suitable terms. The re-
calcitrance of defendants precludes that usual approach
in this case and at this time.
The heart of the controversy having been disposed of
above, it remains to treat a number of collateral issues.
The source of the claim is said to arise under Amend-
ments 4 and 5 of the U.S. Constitution, under the FTCA,
15 U.S.C. § 41 et seq., under the Adninistrative Proce-
dure Act, 5 U.S.C. § 551, et seq., 18 U.S.C. § 1905, The
Declaratory Judgments Act, 28 U.S.C. §§ 2201, 2202: the
Census Act, 13 U.S.C. § 9, and the Federal Reports Act,
44 U.S.C. § 3501, et seq.
In view of the analysis of the controversy, it is clear
that the claim arises under federal law, the primary
sources being Amendment 5 of the U.S. Constitution, the
FTCA, and The Declaratory Judgments Act. The other
references, to the extent pertinent, are corroborative of
these major sources whether they provide independent
grounds or not.
Jurisdiction is claimed under 28 U.S.C. §§ 1331, 1337,
1361, and 2201 and 2202. The last two sections authorize
the declaratory judgment remedy but are not jurisdic-
tional grants in themselves. Jurisdiction is also claimed
under 5 U.S.C. §§ 701-706, but in view of the footing
based on the Constitution, in the light of the Lee, Lynah,
Jacobs and Bivens cases, and because of the restricted
nature of the Administrative Procedure Act in compari-
83a
son with the full, plenary nature of the action on constitu- .
tional aspects, these souces add nothing to the jurisdic-
tional question.
Venue was also challenged. The court sees no arguable
issue in this regard. The non-public investigation was
aimed at I-R which is here in New Jersey. As the parent
company owning all the stock of its wholiy owned subsidi-
ary, Torrington. I-R is the “real party in interest.” Since
venue is clearly proper as to I-R, there is no reason why
proper parties like Mr. Wearly (to whom the subpoena was
addressed) and Torrington (which manufactures the
NRB’s and LNR’s) cannot join as plaintiffs in the same
action. Had I-R brought suit alone, both could have ap-
plied to intervene because of their related interests, which
are inextricably intertwined.
~ While this is probably not a “local” rather than “transi-
tory” action, the fact is that property rights and property
interests, in the context of a “taking” by government, are
traditionally defined by state law rather than federal law.
See, for example, the Annotation at 1 ALR Fed. 479. Local
law in the District of Columbia could not possibly have
any application.
Next is the qustion whether FTC’s summary proceed-
ing for a court order to enforce the subpoena was a “man-
datory counterclaim” under F.R.Civ.P. 13(a). The court is
satisfied that it was. The language and the sense of the
rule are clear: it requires, in mandatory form, that a plead-
ing “shall state as a counterclaim any claim which at the
time of serving the pleading the pleader has * * * ” (Em-
phasis added). The term “claim” is extremely broad and
more than adequate to embrace FTC’s claim for a sub-
poena enforcement order.
FTC protests, however, that under section 9 of the
FTCA, such proceedings can only be brought in the dis-
84a
trict where the agency inquiry is being carried on, namely
in Washington, D.C., and it so persuaded the learned Dis-
trict Judge there on the application of Mr. Wearly and I-R
to transfer venue of the subpoena enforcement proceed-
ing to this district (see Transcript of Hearing, Exh. D-1-C,
vol. III, pp. 820-821). With due regard to the view of that
trial court, the question there presented was different.
The question there was one involving a transfer of venue.
The question here, where the plenary action was already
pending, involves the applicability of the mandatory
counterclaim rule. Only this court could effectively rule
on the point, since a mandatory counterclaim could only
have been filed here, not in the District of Columbia. The
court is satisfied, and finds, that the suminary-enforce-
ment claim is a claim coming within F.R.Civ.P. 13(a), and
that it should have been stated as a counterclaim along
with the answer in this case.
The mandatory counterclaim requirement is the closest
that federal courts have come to the achievement of the
laudable “single controversy” doctrine, under which all
parties to a pending action in one court must assert in the
same proceeding any and all related and connected claims.
Nor is the “venue” argument persuasive, in terms of
where the “inquiry” was being conducted. The principle is
wellestablished that when the mandatory counterclaim
rule applies, venue requirements that would otherwise
control have no application. No other treatment could
possibly achieve the worthy purposes of the mandatory
counterclaim requirement."
18 Venue is controlled by where ie case is “brought”; since a suit was
brought here by plaintiffs, the venu requirements do not apply to the
compulsory counterclaim. See Lesnik v. Public etc., 144 F.2d 968 (CA-2,
1944); G&M Tire v. Dunlop, etc., 36 F.R.D. 440 (Miss.. 1964).
Nor is any independent jurisdictional ground needed for a com-
pulsory counterclaim, Moore v.N.Y. Cotton Exchange, 270 U.S. 593,46
85a
There is neither time nor space here to detail the inde-
pendent steps taken by FTC, well after this action was
underway, to initiate summary subpoena enforcement
proceedings in the District of Columbia, although the full
record there has been carefully reviewed. Suffice it to say
that their culmination in an enforcement order is not res
judicata of the issues here. In such proceedings, the party
haled into court cannot assert, as a matter of right, claims
and issues like those asserted here, and insist on having a
decision on the merits. Nothing decided in the District of
Columbia reached or decided the issues involved here. At
best, they were regarded as premature, presumably to be
considered after the claim of privilege had been asserted
before FTC, in connection with a proceeding for contempt
or a criminal prosecution. For the reasons discussed
above, the questions cannot be premature because pro-
prietary information should never be disclosed unless the
privileged conditions or protective order are first es-
tablished.
If anything is clear about the law of res judicata, it is
that the court in which that claim is advanced is the only
court authorized to decide the issue. That court is this
court. The record is clear that the summary proceedings in
the District of Columbia, although culminating in an en-
forcement order earlier in time than this ruling, neither
took up nor decided the issues decided here. Absent an
earlier decision, the defense of res judicata has no applica-
tion.
Finally, there is the matter of sanctions sought by
plaintiffs against defendants for their outright refusal,
S.Ct. 367, 70 L.Ed. 750 (1926); Scott v. Fancher, 369 F.2d 842 (CA-5,
1966).
For an excellent discussion of the “single controversy” doctrine as
such, see Bennun v. Board of Governors, etc., 413 F. Supp. 1274 (D-N.J.
1976).
86a
although respectful, to comply with the discovery orders
here. The court believes that this point should be reserved
for further deliberation and further hearing after the par-
ties have recovered from the “heat of battle”. Without
sanctions, the evidential record is extremely strong. The
testimony of plaintiffs’ witnesses fully supported their
claims, and were in no way depreciated by cross-
examination. The samples of the disputed documents
which the court inspected in camera fully corroborated
that testimony. Under this court’s discovery order,
granted at defendants’ request, all of the documents were
gathered in New Jersey, put under strict controls to as-
sure integrity and reliability, and made available to defen-
dants not only for the purposes of this case, but also so
that they could proceed with the non-public investigation
at the same time. Defendants chose deliberately not to
inspect the mass of documents so made available. The
court can only infer and conclude that they are well aware
that even with such inspection and further testimony,
they could not successfully controvert the showing made
that these sensitive documents contain proprietary infor-
mation entitled to an effective protective order.
The record also contains examples of a number of in-
stances where informal arrangements for confidential
treatment of proprietary information were not strictly
honored. One in particular, where proprietary informa-
tion was made public without notice to the provider, and
despite a supposed protective order by an administrative
judge, is énough proof of the reality of the threat and risk
in and of itself. Defendants argued that the disclosure did
not violate the literal terms of the order, but it strains
credulity to argue that this position is other than hyper-
technical and that both the FTC staff and the administra-
tive judge must have been fully aware that the disclosure
87a
was an evasion, and a violation of the spirit of the order.
This kind of behavior by government simply cannot be
countenanced.
So far as the 152 documents are concerned, the fact
that claims of privilege were raised allows no adverse in-
ferences to be drawn. However, the unexplained refusal of
defendants to submit these documents for in camera in-
spection and for hearings under seal without the presence
of any representative of plaintiffs does warrant the in-
ference that, if the privilege claims were found to be un-
warranted or subject to a balancing test, the facts dis-
closed thereby would have been adverse to defendants.
As noted above, the decision here is reached without
the benefit of these inferences. The utter inadequacy of a
suitable system of full protection against disclosure, es-
tablished before any proprietary information is turned
over, is sufficient to support the judgment.
Also, although some courts have regarded criminal
statutes such as 18 U.S.C. § 1905 as providing adequate
protection, this court cannot agree. This kind of statute is
at best precatory and unenforceable as of right by the
aggrieved person. The most the owner of proprietary in-
formation can do, if his property is destroyed by improper
disclosure by a government employee, is to file a com-
plaint charging violation of the criminal statute. Given
the vast number of government employees, and the
plethora of copy machines, the complaint would doubtless
have to be against “John Doe”. From that point on the
vindication of his claim through the criminal justice sys-
tem would be dependent entirely on the efficacy of the
investigative process and prosecutorial discretion
whether or not to press the charge. And a “reasonable
doubt,” by itself, would be enough to bar conviction. Even
if the culprit were found, charged, tried, convicted and
88a
sentenced, this would be no remedy at all for the loss of
property through improper disclosure. The damage would
have been done, and would be irreparable. Nothing short
of enforceable means establshed in advance of compulsory
disclosure will serve.
After review of this ruling, the parties are directed to
appear before the court on November 3, 1978, at 10 AM,
so that they may present their views in regard to the tenor
and phrasing of a final judgment in accordance herewith.
89a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
Civil 77-1860
ae
W.L. WEARLY, INGERSOLL-RAND COMPANY,
THE TORRINGTON COMPANY,
Plaintiffs,
VS.
FEDERAL TRADE COMMISSION, MICHAEL PERTS-
CHUK, CHAIRMAN, CALVIN J. COLLIER, DAVID A.
CLANTON, M. ELIZABETH HANFORD DOLE, PAUL
RAND DIXON,
Defendants.
—
FINAL JUDGMENT
This matter having come to trial by the court without a
jury on various dates, beginning October 17, 1977 and
continuing thereafter as criminal jury trial demands al-
lowed, and having concluded on July 13, 1978 for the
reasons set forth in the record of the case, and reflected in
the Opinion, dated October 18, 1978, it is on this 29th day
of November, 1978
ORDERED, ADJUDGED, AND DECREED that:
PART I
DECLARATORY JUDGMENT
1. This plenary action is an action in which declaratory
relief as well as other and further relief may properly be
90a
granted under the Constitution, statutes and law; juris-
diction exists and venue is proper.
2. The information contained in the documents placed in
the custody of this Court by its order of April 21, 1978 as
particularized in later ordei., in the five categories
particularized in the record, are the subject matter of this
action, and are determined to constitute and contain pro-
prietary trade secret and confidential financial and busi-
ness information (hereinafter referred to as “proprietary
information”) which is the property of plaintiffs Ingersoll-
‘ Rand and Torrington.
3. The documents and the proprietary information con-
tained therein are entitled, under the 5th Amendment to
the Constitution, the statutes and the law of New Jersey
to prote
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