Mark It Confidential: Allowing Customers To Share Price Quotes Eviscerates Trade Secret Status
By Jason Stiehl
Often one of the most confidential aspects of a business is its pricing mechanism and the quotes that it provides its customers. It is for this reason that the general rule governing trade secret law is that a company’s non-published pricing is a trade secret. See generally PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir. 1995). What happens, however, when a company does not prohibit its customer from sharing that pricing with others in the industry?
This precise question was addressed in Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10th Cir. 2009), and we touched on it in an earlier posting. However, as the issue comes up fairly frequently, we thought it might warrant deeper discussion.
In Southwest Stainless, the U.S. Court of Appeals for the Tenth Circuit held that although pricing generally may be protectable, a court needs look at the specific pricing at issue in the case to determine whether the company protected that pricing. Ultimately, the Court in Southwest Stainless held that sharing pricing with a customer, without restriction, removes any claim of confidentiality that may have existed.
John Sappington and William Emmer worked for over ten years supplying metals to customers in the Tulsa-area on behalf of Southwest Stainless. Within a month of each other (and shortly after the departure of another Southwest employee), Sappington and Emmer left Southwest to work for a local competitor, Rolled Alloys. After their departure, Southwest identified two Southwest customer (previously serviced by Sappington and Emmer) who transferred business to Rolled Alloys. At trial, it was adduced that the former employees had assisted in preparing pricing quotes to these customers, including re-quoting Rolled Alloys’ prices at a price lower than the Southwest quote known to the former employees. The trial court entered judgment on behalf of Southwest, relying upon the steps undertaken by Southwest to keep its pricing confidential, such as: (1) confidentiality agreements, (2) password protection, (3) expenditure of hundreds of thousands of dollars to keep the information confidential, and, notably (4) the admission of the former employees that they understood price quotes to be confidential. Southwest Stainless, 582 F.3d at 1189.
On appeal, the Tenth Circuit reversed this holding,[1] drawing a distinction between “general measures” used to protect trade secrets and the “particular” pricing at issue in this case. Id. at 1190. It cited record evidence that Southwest had provided customers with “posted pricing,” that customers revealed competitors’ pricing, and that Southwest did not prevent customers from sharing its information. Id. The Tenth Circuit relied upon the United States Supreme Court decision of Rucklehaus v. Monsanto Co., 467 U.S. 986, which held:
If an individual discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his property right is extinguished.
Here, because Stainless had “disclosed the quote” and the customer was “under no obligation to keep the information confidential,” the Court held the district court erred in holding such a price quote confidential and reversed the judgment in favor of the Plaintiff.
This holding implies, however, that a company still may be able to assert trade secret protection for information necessarily shared with customers so long as the company requires its customers to treat the information as confidential as well.
[1] Notably, the opinion affirmed the remaining counts, including a breach of non-competition agreements, which ultimately awarded the same damages sought through the trade secret claim.
