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Sioux Pharm, Inc. v. Eagle Labs., Inc.

Supreme Court of Iowa

June 26, 2015

SIOUX PHARM, INC. and SIOUX BIOCHEMICAL, INC., Appellants,
v.
EAGLE LABORATORIES, INC.; BIO-KINETICS CORPORATION; and DANA SUMMERS, Appellees

Page 529

Appeal from the Iowa District Court for Sioux County, Duane E. Hoffmeyer, Judge. Plaintiff appeals interlocutory ruling compelling disclosure of trade secrets to competitor.

REVERSED AND REMANDED WITH INSTRUCTIONS.

Anthony L. Osborn and Jeana L. Goosmann of Goosmann Law Firm, PLC, Sioux City, for appellants.

Matthew J. Connealy and Daniel L. Hartnett of Crary, Huff, Ringgenberg, Hartnett & Storm, P.C., Sioux City, for appellees.

WATERMAN, Justice. All justices concur except Appel and Wiggins, JJ., who concur specially, and Hecht, J., who takes no part.

OPINION

Page 530

WATERMAN, Justice.

In this case involving claims for misappropriation of trade secrets, we have before us an interlocutory appeal on a discovery issue. In particular, the plaintiffs ask us to review a district court order requiring the redesignation of the plaintiffs' standard operating procedures (SOPs) from " attorneys' eyes only" to " confidential." The underlying protective order allowed each party to designate highly sensitive proprietary or trade-secret information whose disclosure to another party in the case would cause severe competitive damage as " attorneys' eyes only." Under this designation, only court personnel, attorneys, and outside experts could review the material. The district court removed the " attorneys' eyes only" designation for any of plaintiffs' SOPs alleged to have been misappropriated, converted, or used without authorization by the defendants. With the modification, these materials would remain confidential and not disclosed to the public, but would be disclosed to the defendants themselves.

Plaintiffs urge that the district court abused its discretion in issuing the order. On appeal, we agree that the court abused its discretion. The defendants did not argue below that the plaintiffs improperly designated materials under the order and did not provide any basis for modifying the order other than conclusory assertions and a statement that they, unlike the plaintiffs, had elected not to hire an expert in order to save money. On this record, these grounds are not enough. We conclude that while the district court may have had other valid grounds for ordering redesignation, this is not apparent from the terms of the order, and therefore, we must reverse and remand. In short, removing the " attorneys' eyes only" designation may be appropriate, but the court's rationale for doing so is insufficient. Accordingly, we reverse the district court's ruling and remand for further consideration in light of a number of factors discussed in this opinion, including (1) the standards set forth in the stipulated protected order for designation of material as " attorneys' eyes only" ; (2) the need for defendants, in addition to their attorneys and experts, to have access to the materials to properly defend the plaintiffs' claims; and (3) the potential harm to the plaintiffs that would result from disclosure of the materials to the defendants.

I. Background Facts and Proceedings.

This litigation involves a battle between the two domestic producers of chondroitin sulfate, Sioux Pharm, Inc. and Eagle Laboratories, Inc., and other individuals and entities named in the litigation, hereinafter referred to collectively as Sioux Pharm and Eagle Labs, respectively.

Chondroitin sulfate is a component of dietary supplements for joint health. Sioux Pharm, located in Sioux Center, makes the product from bovine trachea and other ingredients. Its manufacturing

Page 531

processes utilize chemical and biological research, unique procedures, specialized tools, machinery, hardware, and software. Sioux Pharm restricts access to its manufacturing facilities and requires its employees to sign confidentiality agreements. Sioux Pharm's expert testified Sioux Pharm's processes differ substantially from the processes known in the public domain, its proprietary methods are worth approximately $4.4 million, and its processes have changed significantly since 2003 when two individuals at the center of this dispute resigned.

Robert Den Hoed and Dana Summers are former employees of Sioux Pharm. Den Hoed left his job with Sioux Pharm in 2001 and launched Eagle Labs in 2003. Den Hoed is the president, CEO, and majority owner of Eagle Labs. Summers left his position with Sioux Pharm in 2003 and became the secretary for Eagle Labs. Eagle Labs began producing chondroitin sulfate in 2005 and is Sioux Pharm's only domestic competitor.

Eagle Labs is a small business with no more than four employees, including Den Hoed and Summers, operating out of a small building behind Den Hoed's family home. By contrast, Sioux Pharm occupies a 40,000-square-foot facility and estimates that its operation is ten times larger than Eagle Labs'.

On March 1, 2012, Summers contacted Sioux Pharm and asked to visit the plant, but his request was refused. Two nights later, Sioux Center police received a call reporting a suspicious red truck parked by the Sioux Pharm facilities. Officers investigating the call found the truck outside and an exterior door propped open with a wrench. The officers caught Summers breaking into Sioux Pharm. Summers had a set of six keys to Sioux Pharm in his pocket, including a master key, and the officers found another master key in the parking lot near Summers's truck. The officers searched Summers's truck and found a white binder that turned out to be an SOP manual. After changing his story several times, Summers admitted that he had stolen the manual that night. He was charged with burglary in the third degree in violation of Iowa Code sections 713.1 and 713.6A (2011). Sioux Pharm alleges that the break-in was an act of deliberate corporate espionage, while Eagle Labs claims that Summers acted on his own, without its knowledge or authorization.[1]

On March 8, Sioux Pharm filed this civil action claiming trade-secrets violations against Eagle Labs, Bio-Kinetics Corporation, Summers, Den Hoed, and John Ymker, a partner in Eagle Labs. Sioux Pharm's petition alleged that Eagle Labs misappropriated trade secrets, intentionally interfered with contracts and prospective business advantage, and engaged in civil conspiracy. In later amendments to the petition, Sioux Pharm added claims of unfair competition.

With respect to its trade-secret claims, Sioux Farm broadly alleged in Count I that it

utilize[s] trade secrets in the form of secret chemical and biological research, secret systems, secret procedures, secret software programs, secret specialized hardware, and secret specialized tools, machinery and production processes,

Page 532

all of which allow Plaintiffs to produce a variety of unique, highly specialized products . . . with efficiency and precision.

Sioux Pharm further alleged that the above trade secrets were the result of significant efforts and expenditures by the plaintiffs, they provide substantial advantages over competitors, and plaintiffs own the trade secrets. According to the petition, Sioux Pharm undertook " very deliberate steps" to ensure that outsiders such as the defendants had no access to Sioux Pharm facilities and SOPs, including limiting access to the facilities and requiring plaintiffs' employees to sign confidentiality agreements. The petition alleged that the defendants obtained the trade secrets through physical intrusion into the plant and through theft/review of Sioux Pharm's SOP manual and trade secrets.

Upon the filing of the petition, Sioux Pharm obtained an ex parte order from the district court authorizing Sioux Pharm to seize the computer and telephone equipment of Eagle Labs and to engage in a walk-through of the Eagle Labs facility. Pursuant to the court order, Sioux Pharm seized the equipment, engaged in the " walk through," and took various photographs on March 13, 2012. In its answer, Eagle Labs specifically denied all of Sioux Pharm's allegations relating to trade secrets.

The parties also filed discovery motions. First, Eagle Labs sought a protective order on March 15 to protect any trade-secret information acquired during the walk-through. The district court ruled that all such information could only be reviewed by attorneys for the parties working together. Sioux Pharm, in turn, filed a motion on June 4 seeking greater access to the material, but agreeing that a protective order was necessary to protect the trade secrets of each party. The parties subsequently agreed to, and the district court entered, a stipulated protective order on August 6.

The stipulated protective order allows each party to designate materials as " confidential" or " attorneys' eyes only" (AEO):

The designation of 'CONFIDENTIAL' by the Producing Party constitutes the representation that it reasonably and in good faith believes the Discovery Material constitutes or discloses confidential, non-public, and/or protective information under Iowa law. The designation of 'ATTORNEYS' EYES ONLY' by the Producing Party constitutes the representation that it reasonably and in good faith believes the designated material constitutes or discloses confidential, non-public, and/or proprietary information containing highly sensitive proprietary, financial, or trade secret information, which would cause severe competitive damage if disclosed to another party to this action.

Under the terms of the order, confidential information may be disclosed only to attorneys, court personnel, parties, experts, and witnesses--with the latter three groups required to execute a prior agreement to be bound by the terms of the order. AEO material--unlike confidential material--may not be disclosed to the parties themselves. The order also restricts use of confidential and AEO " to the purposes of this litigation and . . . not . . . any other purpose."

The stipulated protective order defines AEO information as follows:

" Attorneys' Eyes Only" information means confidential, non-public, and/or proprietary information containing highly sensitive proprietary, financial, or trade secret information, which would cause severe competitive damage if disclosed to another party to this action,

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provided in any form whatsoever in this action . . . .

Additionally, the stipulated protective order allows any party to challenge an AEO or confidential designation and seek redesignation. The party must first ask the producing party in writing to redesignate. If that request is not granted within five days, the requesting party may seek redesignation from the court. The order states, " In connection with any such motion, the burden shall be [on] the Producing Party to defend the appropriateness of the designation as Confidential or Attorney's Eyes Only. Any such objections to such designations shall be made in good faith." The order further provides:

If the Court upon motion finds that the challenged document or deposition testimony is improperly designated and the Producing Party was not acting in good faith in refusing consent to disclosure, voluntary withdrawal of designation or voluntary re-designation, the Court may grant relief as appropriate under Iowa Rule of Civil Procedure 1.517.

The stipulated protective order also contains a general provision allowing amendments:

This Protective Order may be amended with respect to specific Discovery Materials without leave of Court by the agreement of counsel for the Producing Party and Receiving Party in the form of a Stipulation filed in this case. This Protective Order shall remain in full force and effect indefinitely until modified, superseded or terminated on the record by written agreement of the Parties or by order of this Court. This Court shall retain jurisdiction during the ...

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