United States Court of Appeals For the First Circuit
No. 19-1104
TLS MANAGEMENT AND MARKETING SERVICES, LLC,
Plaintiff, Appellee,
v.
RICKY RODRÍGUEZ-TOLEDO; ASG ACCOUNTING SOLUTIONS GROUP, INC.; GLOBAL OUTSOURCING SERVICES, LLC,
Defendants, Appellants,
LORRAINE RAMOS; CONJUGAL PARTNERSHIP RODGRIGUEZ-RAMOS; MIGUEL A. SANTO DOMINGO-ORTIZ; MARI LOURDES CARDONA-JIMENEZ, a/k/a Mari Santo-Domingo; CONJUGAL PARTNERSHIP SANTO-DOMINGO-CARDONA; SANDPIPER, LLC; DRRLC & ASSOCIATES, LLC; TRINITY PR, LLC; GLOBAL TAX STRATEGY; INSURANCE COMPANY A; INSURANCE COMPANY B; INSURANCE COMPANY C,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO
[Hon. Bruce J. McGiverin, U.S. Magistrate Judge]
Before
Barron, Lipez, and Dyk, Circuit Judges.
Lydia Margarita Ramos Cruz for appellants. Manuel A. Pietrantoni, with whom Valerie M. Blay-Soler and Marini Pietrantoni Muñiz LLC, were on brief, for appellee.
Of the Federal Circuit, sitting by designation. July 21, 2020
- 2 - DYK, Circuit Judge. TLS Management and Marketing
Services, LLC ("TLS"), sued Ricky Rodríguez-Toledo ("Rodríguez"),
ASG Accounting Solutions Group, Inc. ("ASG"), and Global
Outsourcing Services, LLC ("GOS") (collectively, "defendants") in
the United States District Court for the District of Puerto Rico,
alleging trade secret misappropriation (by Rodríguez and ASG) and
breach of nondisclosure agreements (by Rodríguez, ASG, and GOS).
The district court granted summary judgment to TLS on its breach
of contract claims, and after a non-jury trial, found that
Rodríguez and ASG were liable for misappropriation of trade
secrets.
We reverse because TLS failed to satisfy its burden to
prove the existence of trade secrets, and because the nondisclosure
agreements are so broad as to be unenforceable. We remand with
instructions to enter judgment in favor of the defendants.
I. Background
The facts are in large part undisputed. Plaintiff TLS
was a tax planning and consulting firm based in Puerto Rico. It
provided clients with advice to enable them to minimize United
States and Puerto Rico tax liabilities. TLS's business was divided
into a Consulting Division and Puerto Rico Division. TLS alleged
that it generated two trade secrets, the Capital Preservation
Report and the U.S. Possession Strategy.
The Consulting Division prepared a Capital Preservation
- 3 - Report ("CPR") for clients providing tax recommendations specific
to each client based on an analysis of applicable statutes and
regulations. The trade secret was alleged to be the portion of
the CPR not specific to the individual client.
The Puerto Rico Division provided services utilizing the
so-called U.S. Possession Strategy ("the Strategy"), which
involved the provision of tax advice and tax avoidance services.
In essence, the Strategy was a "tax arbitrage" strategy based on
the fact that Puerto Rico tax rates were lower than U.S. federal
tax rates. Under the Strategy, a participating client, a business
owner in the mainland U.S., became a member of a TLS "division,"
and purchased shares of TLS, signing a "buy-sell agreement" that
limited the client's rights to transfer its membership shares.
Through a "services agreement," the client's company on the
mainland outsourced some business activities (such as marketing)
to TLS. TLS and its affiliate had tax exemption grants under
Puerto Rico's Act 20 of 2012 (Export Services Act) and Act 73 of
2008 (Economic Incentives Act). A business that held a grant under
these Acts was generally subject to a fixed corporate tax rate of
4%, and dividend distributions to its stockholders were not subject
to a personal income tax if they were Puerto Rico residents. See
P.R. Laws Ann. tit. 13, §§ 10643, 10832, 10834.
Under the Acts, it appears that TLS paid a 4% Puerto
Rico tax rate on the outsourcing fees paid to TLS while the same
- 4 - fees were deductible to the mainland client's company as a business
expense and thus not subject to federal or state taxation. If TLS
distributed the earnings to the client as a dividend after the
client became a Puerto Rico resident, the dividend would be exempt
from taxation under the Acts. If the client wished to access the
earnings (dividends) before moving to Puerto Rico, the client and
TLS entered into a "promissory note" and "security agreement,"
effectively allowing the client to withdraw the earnings as a tax-
free loan. Thus, the effect of the Strategy was that the
activities of the client's company in the mainland U.S. would
effectively be subject only to a 4% rate on the outsourced services
instead of a higher U.S. corporate tax rate on the income from the
outsourced services, and that distributions to the client would
not be taxed. But a premature termination of the client's
"membership" with TLS could result in adverse tax consequences
because distributions would not be exempt from tax.
Defendant Rodríguez was the founder of defendant ASG, a
company that also offered services in tax planning and accounting.
In March 2012, ASG signed a Subcontractor Agreement ("the ASG
Agreement") with TLS that included a nondisclosure provision. On
September 1, 2012, Rodríguez began working for TLS as its Managing
Director and signed a Confidentiality and Non-Disclosure Agreement
("the Rodríguez Agreement"). The ASG and Rodríguez Agreements
contained similar nondisclosure provisions governed by Puerto Rico
- 5 - law.1 Rodríguez and ASG's relationship with TLS appears to have
concluded in early 2015.
After his departure from TLS, Rodríguez provided tax
services in competition with TLS through ASG and GOS (another
company in which Rodríguez purchased a majority interest after he
left TLS). Rodríguez was the majority owner of both companies.
TLS alleged that Rodríguez and ASG misappropriated trade secrets
by utilizing the Strategy trade secret in providing tax services
to two former clients of TLS. These clients sought advice on how
to exit their "membership" with TLS. The clients emailed documents
(which they received from TLS) to Rodríguez who then provided
comments. To minimize the tax impact of exiting the membership
with TLS, Rodríguez suggested transferring the interest in the TLS
division to a new Puerto Rico trust or limited liability company
("LLC") in order to delay tax liability until the clients became
Puerto Rico residents. ASG proceeded to create LLCs for the
clients.
On August 17, 2015, TLS sued Rodríguez, ASG, and GOS in
the United States District Court for the District of Puerto Rico.2
1 The contracts are governed by "the laws of the jurisdiction in which TLS [wa]s domiciled." 2 TLS also joined numerous other defendants that were later dismissed. TLS also asserted various other claims based on federal law that were abandoned or rejected by the district court. Those claims are not the subject of this appeal. The district court had federal question jurisdiction over the federal claims and
- 6 - TLS alleged that (1) Rodríguez and ASG misappropriated TLS's trade
secrets under P.R. Laws Ann. tit. 10, §§ 4131–41, and
(2) Rodríguez, ASG, and GOS breached their nondisclosure
agreements.
Rodríguez was alleged to have misappropriated the CPR
trade secret by downloading copies of particular CPRs without
authorization from TLS's Dropbox account before he left TLS.
Rodríguez and ASG were alleged also to have violated the
nondisclosure agreements by providing services to the two former
clients of TLS and other TLS clients using information protected
by the nondisclosure agreements. GOS was alleged to have violated
those agreements by using TLS's "loan application" form for its
business.
TLS and the defendants filed cross-motions for summary
judgment. The district court granted summary judgment to TLS on
the breach of contract claims. With respect to these claims, the
defendants' primary defense was that they were not liable because
the nondisclosure agreements were unenforceable. The district
court held that this argument was waived and did not address the
argument on the merits. It then concluded that ASG and Rodríguez
were liable for "disclosure of the U.S. Possession Strategy and
retention of TLS's Confidential Information." Later, in its non-
supplemental jurisdiction over the state-law claims.
- 7 - jury trial opinion, the district court characterized its order
granting summary judgment as finding "liability on the part of
Rodríguez and ASG for breaching the confidentiality clauses by
using TLS's loan agreement and operating agreement, for using and
disclosing the Strategy to clients, and for keeping files after
employment with TLS ended."
The district court held a non-jury trial on the trade
secret claims. TLS presented only two witnesses, Richard Colombik
and David Runge, who were principals of TLS. The defendants
presented only Rodríguez as a witness. The district court held
that TLS's CPR and the Strategy were trade secrets. It then
concluded that Rodríguez and ASG misappropriated the Strategy
trade secret when Rodríguez and ASG gave advice to two former TLS
clients to help them structure their exit from TLS's membership,
and that Rodríguez misappropriated the CPR trade secret by
downloading two CPRs from TLS's Dropbox account without
authorization.3
The district court awarded damages for TLS's trade
secret claims by trebling the service fees paid by the former
clients to ASG. It declined to award damages for breaching the
nondisclosure agreements, reasoning that an award would be
3The district court stated that Rodríguez "conceded that he acted without authority when he copied" contents in the Dropbox account and that "he did not have authority to refer to TLS information in the[] emails" to these clients.
- 8 - duplicative of the damages under the trade secrets claims.
However, the district court issued a permanent injunction order
enjoining the defendants "from using or disclosing any of TLS's
'confidential information' or its trade secrets in violation of,
as defined by, the [ASG and Rodríguez Agreements]."
The defendants appeal, arguing that the district court
erred in granting summary judgment to TLS as to the breach of
contract claims and in denying the defendants' motion for summary
judgment, and in holding that TLS proved its trade secret claims
at trial.
We have jurisdiction under 28 U.S.C. § 1291. "We review
de novo both the entry of summary judgment . . . and the
interpretation of the parties' contract[s]." Farthing v. Coco
Beach Resort Mgmt., LLC, 864 F.3d 39, 43 (1st Cir. 2017). As for
the trade secret claims that were adjudicated by a non-jury trial,
we review the district court's legal determination de novo, United
States v. 15 Bosworth St., 236 F.3d 50, 53 (1st Cir. 2001), and
its factual findings for clear error, Doe v. Harvard Pilgrim Health
Care, Inc., 904 F.3d 1, 10 (1st Cir. 2018). We may decide
sufficiency of the evidence on our own, even though the district
court did not have occasion to do so, when the evidence admits of
only one outcome under the correct legal standard. See, e.g.,
Donovan v. A. Amorello & Sons, Inc., 761 F.2d 61, 66 (1st Cir.
1985) ("[W]here findings are infirm because of an erroneous view
- 9 - of the law, a remand is the proper course unless the record permits
only one resolution of the factual issue." (alteration in original)
(quoting Pullman–Standard v. Swint, 456 U.S. 273, 292 (1982)));
see also Wright v. Lassiter, 921 F.3d 413, 418–19 (4th Cir.), cert.
denied, 140 S. Ct. 165 (2019) ("While we usually remand when the
district court has misapplied the relevant legal standard after a
bench trial, we may affirm when the evidence permits only one
conclusion.").
II. The Trade Secret Claims
We first address TLS's trade secret claims under Puerto
Rico law. The defendants argue that TLS failed to establish that
it had trade secrets.
Most forms of intellectual property have boundaries that
are defined before the commencement of litigation. In the case of
patents the claims define the scope of the patent right, see, e.g.,
Markman v. Westview Instruments, Inc., 517 U.S. 370, 372–73 (1996),
in the case of copyright the federal registration defines the scope
of the copyrighted material that can be enforced, Fourth Estate
Pub. Benefit Corp. v. Wall-Street.com, LLC, 139 S. Ct. 881, 887
(2019), and in the case of trademark the federal registration and
the public use of the mark define the boundaries, see, e.g.,
Converse, Inc. v. Int'l Trade Comm'n Skechers U.S.A., Inc., 909
F.3d 1110, 1115–16 (Fed. Cir. 2018). To be sure, there may be and
often are disputes as to scope, but the outer bounds are defined
- 10 - in advance so that competitors can tailor their conduct
accordingly. Trade secrets are different. There is no requirement
of registration and, by definition, there is no public knowledge
of the trade secret in advance of litigation. Even the defendant
is not necessarily on notice of the trade secret before litigation.
This raises the possibility that the trade secret owner will tailor
the scope of the trade secret in litigation to conform to the
litigation strategy. The present case illustrates these risks;
the alleged trade secrets were not identified by TLS until the eve
of trial.
Because of the potentially amorphous nature of trade
secrets, Puerto Rico's Industrial and Trade Secret Protection Act
("Trade Secret Act") requires that "[i]n any action filed whereby
misappropriation of an industrial or trade secret is alleged under
this chapter, the plaintiff, before discovery of proof, shall
describe the trade secret as specifically as possible, but without
disclosing the same." P.R. Laws Ann. tit. 10, § 4139(a).4 In
addition, the trade secret owner has the burden of proof to
establish the existence and scope of the alleged trade secret in
4 On appeal, the defendants argue that TLS's trade secret claims are barred because it failed to timely satisfy section 4139(a)'s requirement that the plaintiff describe the trade secret as specifically as possible before discovery begins. In light of our holding that TLS failed to prove its trade secret claims, we need not address the section 4139(a) requirement.
- 11 - the litigation. See, e.g., IDX Sys. Corp. v. Epic Sys. Corp., 285
F.3d 581, 583 (7th Cir. 2002); Composite Marine Propellers, Inc.
v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1992).
Puerto Rico's Trade Secret Act defines "trade secrets"
to be any information:
(a) That has a present or a potential independent financial value or that provides a business advantage, insofar as such information is not common knowledge or readily accessible through proper means by persons who could make a monetary profit from the use or disclosure of such information, and
(b) for which reasonable security measures have been taken, as circumstances dictate, to maintain its confidentiality.
P.R. Laws Ann. tit. 10, § 4132. This is similar to the definition
in the Uniform Trade Secrets Act ("UTSA") on which the Trade Secret
Act is based.5 The statutory definition requires proof that the
alleged trade secret (1) was distinct from general knowledge; (2)
was not readily ascertainable; (3) had independent value; and (4)
was subject to reasonable security measures.
The Puerto Rico Supreme Court has not further
illuminated the elements for proving trade secret
5 The UTSA defines "trade secret" to mean information that "(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Unif. Trade Secrets Act § 1(4) (amended 1985).
- 12 - misappropriation. However, the Puerto Rico Supreme Court
generally looks at the law of other jurisdictions that have adopted
a uniform act when interpreting Commonwealth law that was modeled
after the same uniform act. See, e.g., St. Paul Fire & Marine v.
Caguas Fed. Savs., 121 D.P.R. 761, 21 P.R. Offic. Trans. 743, 749,
1988 WL 580787 (P.R. 1988). TLS admits that "[t]he Supreme Court
of Puerto Rico does regularly look to other jurisdictions and how
they've interpreted other statutes that are similar . . . to the
particular statute in Puerto Rico [that] the Supreme Court is
interpreting." We thus consider court cases from other
jurisdictions that have adopted the UTSA in determining whether
TLS proved its trade secret claims.6 See In re Montreal, Maine &
Atl. Ry., Ltd., 799 F.3d 1, 10 (1st Cir. 2015) (holding that on an
undecided state-law issue federal courts predict "the course that
a state court likely would follow" by "begin[ning] with settled
principles of state law and then consider[ing] persuasive
authority from other jurisdictions and the teachings of learned
treatises").
A. The Alleged CPR Trade Secret
As to the alleged CPR trade secret, the question is
whether TLS established that the two CPRs that Rodríguez downloaded
6 The UTSA has been adopted by almost all states in the mainland U.S., the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. See 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.01 (2020).
- 13 - satisfied the statutory definition of a trade secret. The district
court held that TLS's "CPR itself qualifie[d] as a trade secret
. . . because the compilation of [TLS employees'] knowledge and
skill, applied to client information, provide[d] TLS with a
competitive advantage." However, the district court did not apply
the appropriate trade secret definition, and we conclude that,
using the correct standard, as a matter of law TLS did not
establish that the two CPRs constituted trade secrets.
A CPR is a report that TLS customized for the particular
client. It appears that the typical CPR is over a hundred pages
in length. It describes public and general information such as
the meaning of tax terms, the concept of corporate structures
(e.g., comparison between S- and C- corporations), case law, IRS
regulations and tax statutes, state tax laws, Puerto Rico tax laws,
generic taxation examples, and public trade articles. A CPR also
contains individual client information. The district court
correctly stated that "individual client information and public
information contained in the CPR [we]re not trade secrets," and
TLS does not contend otherwise. TLS was required to establish
that the CPRs contained information that was not public or client
information.
The Restatement (Third) of Unfair Competition (Am. Law
Inst. 1995) states the general requirement that "[a] person
claiming rights in a trade secret bears the burden of defining the
- 14 - information for which protection is sought with sufficient
definiteness to permit a court to apply the criteria for
protection . . . and to determine the fact of an appropriation."
Id. § 39 cmt. d; see also id. at cmt. f, reporters' notes at 443.
Courts interpreting the UTSA have uniformly followed this
requirement. See, e.g., IDX, 285 F.3d at 583 (Wisconsin law);
Composite Marine, 962 F.2d at 1266 (Illinois law); Wal-Mart Stores,
Inc. v. P.O. Mkt., Inc., 66 S.W.3d 620, 631–32 (Ark. 2002)
(collecting cases).
During oral argument, TLS was repeatedly asked what the
trade secrets were in the CPRs. It could not articulate what
aspects of the CPRs qualified as a trade secret but instead
generally referred this court to the record. We have carefully
examined the record, and find no evidence that could support a
holding that TLS established the existence of a trade secret in
the CPRs. TLS's principal, Mr. Colombik, testified that TLS had
"approximately 53 different methods or techniques" that it could
select for a particular client, but he did not describe what they
were. Mr. Colombik referenced only several at a high level--that
TLS would conduct a "salary analysis," consider "fringe benefits,"
look at the client's "retirement plan," and use "captive insurance
company" techniques, or decide "whether or not [the client] can
get a race car and modify how they use it to write it off as
advertising," and that its recommendations would result in tax
- 15 - savings. Such general description was insufficient to establish
a trade secret.
In short, any trade secrets in the CPR were not
identifiable because TLS did not "separate the [purported] trade
secrets from the other information . . . [that was] known to the
trade." IDX, 285 F.3d at 584 (holding that the plaintiff failed
to identify trade secrets with specificity because it failed to
distinguish what aspects in a 43-page description were known to
the trade); SL Montevideo Tech., Inc. v. Eaton Aerospace, LLC, 491
F.3d 350, 354 (8th Cir. 2007) ("[S]imply to assert [that] a trade
secret resides in some combination of otherwise known data is not
sufficient [to prove a claim], as the combination itself must be
delineated with some particularity in establishing its trade
secret status." (quoting Jostens, Inc. v. Nat'l Comput., 318 N.W.2d
691, 699 (Minn. 1982))). "[A] plaintiff must do more than just
identify a kind of technology and then invite the court to hunt
through the details in search of items meeting the statutory
definition [of a trade secret]." IDX, 285 F.3d at 584.7
7 See also Am. Can Co. v. Mansukhani, 742 F.2d 314, 331 & n.21 (7th Cir. 1984) (holding that a party cannot prevent others from using public information and general knowledge); Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 661–62 (4th Cir. 1993) (holding that the plaintiff's allegations were insufficient to show it had trade secrets because no reasonable jury could differentiate them from "matters of general knowledge in the trade" (quoting Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 253 (Ct. App. 1968)); MAI Sys. Corp. v. Peak Comput., Inc., 991 F.2d 511, 522 (9th Cir.
- 16 - It appears that TLS also claims that the process itself
to create the CPR was a trade secret. However, TLS also failed to
identify what process constituted a trade secret. Because TLS
failed to identify the process with specificity, let alone
establish what aspects were not readily ascertainable, no
reasonable fact finder could determine that TLS proved its claim
by merely asserting that the process for compiling the CPR's
content (which generally comprised public information) qualified
as a trade secret.
Here, TLS made no showing as to what aspects of the CPRs
were public knowledge and which were not. We conclude as a matter
of law that TLS did not establish that the CPRs contained a trade
secret.
B. The Alleged Strategy Trade Secret
We turn to the question whether the Strategy, described
above, was a trade secret. The district court held that the
1993); Composite Marine, 962 F.2d at 1266; Luigino's, Inc. v. Peterson, 317 F.3d 909, 912 (8th Cir. 2003); Givaudan Fragrances Corp. v. Krivda, 639 F. App'x 840, 845 (3d Cir. 2016); Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 552 F.3d 47, 61 (1st Cir. 2009), decision clarified on denial of reh'g, 559 F.3d 1 (1st Cir. 2009); AMP, Inc. v. Fleischhacker, 823 F.2d 1199, 1203 (7th Cir. 1987); Litton Sys., Inc. v. Sundstrand Corp., 750 F.2d 952, 960–61 (Fed. Cir. 1984); Quantum Sail Design Grp., LLC v. Jannie Reuvers Sails, Ltd., No. 1:13-CV-879, 2015 WL 404393, at *4 (W.D. Mich. Jan. 29, 2015) ("A party alleging trade secret misappropriation must particularize and identify the purported misappropriated trade secrets with specificity." (quoting Dura Global Techs., Inc. v. Magna Donnelly Corp., 662 F. Supp. 2d 855, 859 (E.D. Mich. 2009))).
- 17 - Strategy was a trade secret because "it [wa]s a process and method
building on the knowledge and experience of employees that [wa]s
used to give TLS a business advantage." Again, we conclude that
the district court applied an incorrect definition and that, under
the correct definition, TLS failed to show that the Strategy was
To a large extent, the Strategy, like the CPRs, consisted
of public knowledge. The general concept of "tax arbitrage" based
on Puerto Rico tax exemption laws was hardly secret. TLS's own
CPR stated that it "[wa]s well established in the Internal Revenue
Code and case law" that the combination of the federal and Puerto
Rico tax laws allowed "a business [to] reduce or eliminate
potential double taxation."
Despite generalized testimony by Mr. Runge that "all
. . . methods and procedures and processes [of the Strategy] didn't
exist before [TLS] designed them," it is undisputed that most of
the individual steps implemented in the Strategy--e.g., a Puerto
Rico company obtaining a tax exemption grant, a mainland company
outsourcing business activities to Puerto Rico, and a Puerto Rico
company issuing shares--were well known.
TLS's principals, Mr. Runge and Mr. Colombik, testified
that these components of the Strategy were "standard" and "common."
Rodríguez testified that outsourcing business to a "lower tax
jurisdiction[]" such as the U.S. Virgin Islands "[had] been done
- 18 - for a long time," for example, by "companies like Microsoft,
Apple," and that such methods were "highly publicized." Rodríguez
testified that several individuals in the U.S. Virgin Islands "used
the same structure[]" as the Strategy. TLS itself published an
article titled "The Puerto Rican Miracle" for prospective clients,
stating that "[o]utsourcing [wa]s common and accepted in today's
business environment" and many U.S. business owners could own a
company in Puerto Rico and outsource part of their business to
that company in order to retain profits from the outsourcing at a
4% tax rate. The district court correctly found that "[t]he
documents and templates underlying the Strategy [we]re all
commonly used in the tax-planning industry," and TLS does not
contend otherwise.8
However, TLS appears to claim that one aspect of the
Strategy--the use of promissory notes and security agreements to
enable clients to access distributed profits--was not publicly
known. TLS's witnesses--Mr. Colombik and Mr. Runge--testified
that the use of the promissory notes and security agreements were
8 The district court also found that "the documents and forms that TLS use[d] to implement the Strategy [we]re not by themselves protectable as trade secrets," "[t]he documents and client identities left exposed in the Dropbox account simply were not protected to a reasonable degree," and "TLS ha[d] not shown that the documents and information underlying the Strategy were the object of reasonable security measures, so those materials [were not] trade secret[s] . . . ."
- 19 - central to the Strategy, and Mr. Runge testified that TLS invented
the method of allowing clients to access their profits through the
Strategy and that the "combination of the[] aspects [of the
Strategy] [wa]s unique." Mr. Runge testified that he was unaware
that anyone else achieved the combination.
In contrast, Rodríguez testified that outsourcing and
then "[taking income as] loans . . . over to the [United States]"
had been done for a long time. He further testified that "most of
the [tax avoidance] models in Puerto Rico came from [the] Virgin
Islands, where they've been using these models before" and "using
loans[] . . . [wa]s well-covered in many areas[] . . . with the
IRS and publicly with multi-national[] [companies] as well." The
district court did not resolve the conflicting testimony as to the
industry practice. But this is of no consequence. TLS could not
claim a trade secret protection simply because its loan strategy
was not publicly known. TLS also had to establish that this aspect
of the Strategy was not readily ascertainable from public sources.
On this issue, TLS presented no evidence. We thus conclude that
TLS failed to show that the Strategy was not readily ascertainable.
The district court stated that "[t]he Strategy[] . . .
remain[ed] largely either unknown or inaccessible despite the
commonly known information underlying it" and that "the knowledge
of the Strategy originated with TLS and d[id] not appear to be
readily ascertainable by companies unaffiliated with TLS, so [the
- 20 - Strategy] me[t] the statutory requirement under § 4132(a)." These
statements appear to refer to TLS's documents describing the tax
scheme labeled as the "Strategy" as opposed to the substance of
the scheme. Mr. Runge testified that the "services agreement" for
outsourcing had been developed over years and was in its 60th
version by the time of trial. However, the proper inquiry is not
whether the documents describing TLS's tax scheme were readily
ascertainable but rather whether the "substance" of that tax scheme
was readily ascertainable. See Convolve, Inc. v. Compaq Comput.
Corp., 527 F. App'x 910, 918, 921–22 (Fed. Cir. 2013) (affirming
the district court's decision that the plaintiff failed to show
that the "substance of the trade secret" satisfied the elements of
a trade secret); Patriot Homes, Inc. v. Forest River Hous., Inc.,
512 F.3d 412, 415 (7th Cir. 2008) (holding that the plaintiff
failed to show the "substance of the 'trade secret'" and was not
entitled to a preliminary injunction because the plaintiff only
described it as a "'playbook' for constructing modular homes" and
failed to prove that the underlying information was not readily
available).
We conclude that TLS failed to establish that the
Strategy was a trade secret.9
9 The parties dispute whether a tax planning scheme can ever be a trade secret. Congress amended the patent statute in 2011 to limit the patentability of tax strategies. Leahy-Smith America
- 21 - III. The Breach of Contract Claims
A.
TLS's second claim is that the defendants breached their
nondisclosure agreements by using knowledge gained from TLS to
provide tax services to former clients of TLS. The defendants
argue that those agreements are unenforceable. The district court
held that the defendants waived this argument and did not address
the argument on the merits.
The district court's finding of waiver is unsupported.
The defendants explicitly argued before the district court that
the nondisclosure agreements are unenforceable under the Puerto
Rico Supreme Court's decision in Arthur Young & Co. v. Vega III,
136 D.P.R. 157, 1994 P.R.-Eng. 909,262, 1994 WL 909262 (P.R. 1994),
a decision we describe later in detail. For present purposes, it
is sufficient to note that the Puerto Rico Supreme Court held
certain noncompete clauses invalid as contrary to public policy.
Here, the defendants argued that the nondisclosure agreements'
"applied effect [wa]s the same as a non-competition clause" that
"infinitely precluded [them] from utilizing their skills and
knowledge to work in any such areas concerning the accounting
profession" and thus the agreements "amount[ed] to the equivalent
Invents Act, Pub. L. No. 112-29 § 14, 125 Stat. 284, 327–28 (2011). We need not reach this issue as to trade secrets because we conclude that TLS failed to prove that either the CPRs or the Strategy satisfied the elements of a trade secret.
- 22 - of a restrictive covenant not to compete[] [and] needed to comply
with Arthur Young." This is not a situation where the defendants
failed to adequately develop argumentation. The defendants
preserved the issue of enforceability.
The district court's decision involved a purely legal
question--whether the nondisclosure agreements here are
unenforceable as a matter of public policy--that was proper for
disposition on summary judgment. See Local Motion, Inc. v.
Niescher, 105 F.3d 1278, 1280 (9th Cir. 1997) ("Whether the . . .
Agreement constituted a valid enforceable contract is a matter of
law, and therefore it was proper for the court to determine this
issue on summary judgment."); Cameron v. Vancouver Plywood Corp.,
266 F.2d 535, 538-39 (9th Cir. 1959) ("Where the pleadings and
depositions show without genuine issue of fact that the contract
sued upon is contrary to public policy and void, entry of summary
judgment for the defendant is proper.").
B.
On appeal, the defendants argue that the nondisclosure
agreements are unenforceable, and TLS argues that the
nondisclosure agreements are enforceable. We agree with the
As the parties agree, the enforceability of the
contracts here is governed by Puerto Rico law. In Arthur Young,
the Puerto Rico Supreme Court addressed the enforceability of
- 23 - noncompete agreements. 1994 WL 909262. There a former employee
had signed an agreement that prohibited him from providing
accounting services to the employer's clients for two years. Id.
The court held that the validity of such a prohibition is to be
evaluated based on the employer's "legitimate interest" and the
restriction on "the employee's freedom of contract and the general
public's freedom of choice." Id. This is because an accounting
service concerns a client relationship where the "clients' right
to select custodians of their financial affairs is paramount, and
[that right] may not be unreasonably encumbered." Id. (quoting
Mailman, Ross, Toyes & Shapiro v. Edelson, 444 A.2d 75, 80 (N.J.
Ch. Div. 1982)). The court held that the noncompetition term
"should not [have] exceed[ed] twelve months" and that the employer
was not justified in barring the employee from offering services
for two years. Id. It reached its decision by relying on Puerto
Rico's civil code statutes, 10 other countries' civil laws, and
10 The court cited to Civil Code § 1207, which provides: The contracting parties may make the agreement and establish the clauses and conditions which they may deem advisable, provided they are not in contravention of law, morals, or public order. P.R. Laws Ann. tit. 31, § 3372 (emphasis added), and Civil Code § 1210, which provides: Contracts are perfected by mere consent, and from that time they are binding, not only with regard to the fulfilment of what has been
- 24 - common law doctrines. Notably, the court relied on authorities
from mainland U.S. jurisdictions in conducting its analysis.
TLS argues that a "confidentiality clause" is not a "non-
compete clause" and thus Arthur Young is inapplicable. But overly
broad nondisclosure agreements, while not specifically prohibiting
an employee from entering into competition with the former
employer, raise the same policy concerns about restraining
competition as noncompete clauses where, as here, they have the
effect of preventing the defendant from competing with the
plaintiff. See, e.g., Durham v. Stand-By Labor of Ga., Inc., 198
S.E.2d 145, 149 (Ga. 1973) ("Covenants not to disclose and utilize
confidential business information are related to general covenants
not to compete because of the similar employer interest in
maintaining competitive advantage."); AMP Inc. v. Fleischhacker,
823 F.2d 1199, 1202, 1205 (7th Cir. 1987); Revere Transducers,
Inc. v. Deere & Co., 595 N.W.2d 751, 760–62 (Iowa 1999); Nasco,
Inc. v. Gimbert, 238 S.E.2d 368, 369 (Ga. 1977).
In Arthur Young, the Puerto Rico Supreme Court held that
the noncompete clause was "null and void because it contravene[d]
public policy" that a contract's "prohibition cannot be extended
expressly stipulated, but also with regard to all the consequences which, according to their character, are in accordance with good faith, use, and law. Id. § 3375 (emphasis added).
- 25 - beyond what is necessary to protect the former employer's
legitimate interests" while "unjustifiably restricting the
employee's freedom of contract and the general public's freedom of
choice." 1994 WL 909262.
The Puerto Rico Supreme Court also cited with approval
mainland U.S. case law concerning noncompete clauses. Related
mainland U.S. cases concerning noncompete clauses hold that overly
broad "[c]onfidentiality agreements . . . constitute[] . . .
unreasonable restraints on trade which unduly restrict the free
flow of information necessary for business competition" and are
thus unenforceable. AMP, 823 F.2d at 1202; Nasco, 238 S.E.2d at
369 ("Covenants against disclosure, like covenants against
competition, affect the interests of this state, namely the flow
of information needed for competition among businesses, and hence
their validity is determined by the public policy of this state.");
see also State Med. Oxygen & Supply, Inc. v. Am. Med. Oxygen Co.,
782 P.2d 1272, 1274–76 (Mont. 1989). A nondisclosure agreement is
overly broad if the restriction is "[un]necessary for the
protection of the employer's business," "unreasonably restrictive
of the employee's rights," and "prejudicial to the public
interest." Revere Transducers, 595 N.W.2d at 762; see also State
Med., 782 P.2d at 1275; Nasco, 238 S.E.2d at 369–70.
Numerous courts have identified the types of agreements
in which restrictive clauses are overly broad. First, an
- 26 - employer's interest does not extend to prohibiting the employee
from using general knowledge acquired by the employee:
It has been uniformly held that general knowledge, skill, or facility acquired through training or experience while working for an employer appertain exclusively to the employee. The fact that they were acquired or developed during the employment does not, by itself, give the employer a sufficient interest to support a restraining covenant, even though the on-the-job training has been extensive and costly.
Follmer, Rudzewicz & Co. v. Kosco, 362 N.W.2d 676, 681 n.4 (Mich.
1984) (quoting Harlan M. Blake, Employment Agreements Not to
Compete, 73 Harv. L. Rev. 625, 652 (1960)); see also AMP, 823 F.2d
at 1202 ("[A]n employee is free to take with him general skills
and knowledge acquired during his tenure with his former
employer."); Junker v. Plummer, 67 N.E.2d 667, 669 (Mass. 1946)
("The law is well settled that an employee upon terminating his
employment may carry away and use the general skill or knowledge
acquired during the course of the employment.").
Second, a nondisclosure agreement is overly broad and
invalid when the agreement prohibits disclosure of information
that "is not in fact confidential," because it is public knowledge.
Nagler v. Garcia, 370 F. App'x 678, 681 (6th Cir. 2010) (quoting
Follmer, 362 N.W.2d at 683); AssuredPartners, Inc. v. Schmitt, 44
N.E.3d 463, 475–76 (Ill. Ct. App. 2015) (holding unenforceable a
nondisclosure provision that protected virtually every kind of
- 27 - information that the employee learned during his employment, even
if nonconfidential).
Third, a nondisclosure agreement is overly broad when it
extends to information properly provided to the defendant by third-
party sources. See Am. Software USA, Inc. v. Moore, 448 S.E.2d
206, 209 (Ga. 1994) (nondisclosure agreement was valid because it
did not apply to "any information properly obtained from a
completely independent source" (i.e., third parties)); Pederson v.
Arctic Slope Reg'l Corp., 421 P.3d 58, 70 (Alaska), cert. denied,
139 S. Ct. 427 (2018) (same); ACAS Acquisitions (Precitech) Inc.
v. Hobert, 923 A.2d 1076, 1090 (N.H. 2007) (same).
All of these factors exist here. The nondisclosure
agreement in the Rodríguez Agreement prohibited disclosure of
"Confidential Information" broadly defined as:
1.2.1. All information[] . . . regarding ("TLS") business methods and procedures, clients or prospective clients, agent lists, marketing channels and relationships, marketing methods, costs, prices, products, formulas, compositions, methods, systems, procedures, prospective and executed contracts and other business arrangements, proposals and project plans, and ("TLS") Affiliates;
1.2.2. . . . any other information provided to [Rodríguez] by ("TLS") or ("TLS") Affiliates by or in connection with proposing or delivering ("TLS Services") . . . ;
1.2.3. The identities of agents, contractors, consultants, sales representatives, sales associates, subsidiaries, strategic partners,
- 28 - licensors, licensees, customers, prospective customers, suppliers, or other service providers or sources of supply including firms in which a ("TLS") Principal may have an ownership interest . . . ;
1.2.4. . . . any other information that [Rodríguez] may obtain knowledge [sic] during his/her tenure while working at ("TLS")[.]
The definition excluded:
1.3. . . . (a) information disclosed by one Party with the prior written consent of the other Party, (b) information that has been previously disclosed by the other Party to the general public, or (c) information that is required to be disclosed pursuant to a valid judicial court order[] . . . .
The nondisclosure agreement's broad scope extended on
its face to public information and general knowledge not particular
to TLS's business. For example, the agreement covered "any other
information [Rodríguez] may obtain knowledge [sic] during his[]
tenure" (subclause 1.2.4), "[a]ll information, . . . regarding
[TLS's] business" (subclause 1.2.1), and "any other information
provided to [Rodríguez] by TLS . . . in connection with [its
services]" (subclause 1.2.2), without regard to its
confidentiality. The district court admitted that "it [wa]s
undisputable that the confidentiality clause is broad." Although
the nondisclosure agreement excluded protection of "information
that ha[d] been previously disclosed by [TLS] to the general
public," this narrow limitation did not exclude information that
was otherwise publicly available or that TLS disclosed to the
- 29 - public after Rodríguez obtained such knowledge or information.
TLS admits, for example, that the nondisclosure agreement
protected TLS's operating agreement, even though entire sections
of that agreement can be found on the internet. The agreement
also covered general knowledge that Rodríguez acquired as an
employee, and information that was received from third parties,
such as TLS's former clients.
The Rodríguez Agreement's astounding breadth and lack of
any meaningful limitation restricted Rodríguez's freedom to
compete. The nondisclosure agreement "exceed[ed] the real need to
protect [TLS] from . . . competition," essentially tied TLS's
clients to its services, and "excessively and unjustifiably
restrict[ed] . . . the general public's freedom of choice." Arthur
Young, 1994 WL 909262. Similar broad agreements have been
uniformly held invalid. See, e.g., Nasco, 238 S.E.2d at 369–70
(nondisclosure agreement prohibiting former employee from
disclosing "any information" relating to employer's business was
unenforceable); State Med., 782 P.2d at 1273–75 (same); AMP, 823
F.2d at 1202; (same); Nagler, 370 F. App'x at 681 (nondisclosure
agreement prohibiting business partner from disclosing
nonconfidential information was unenforceable). Based on Arthur
Young and case law from the mainland U.S., we conclude that the
Puerto Rico Supreme Court would apply the principles articulated
in Arthur Young to the nondisclosure agreement here and that it is
- 30 - so broad as to be unenforceable.
The ASG Agreement contained language similar to that in
the Rodríguez Agreement, and suffered from the same problems as
the Rodríguez Agreement.11 Although TLS suggests that Arthur Young
does not apply to the ASG Agreement because it was not an
employment contract, the Puerto Rico Supreme Court has found
noncompetition clauses in agreements other than employment
contracts. See Rojas-Buscaglia v. Taburno-Vasarhelyi, No. CV 13-
1766, 2015 WL 13547579, at *1 (D.P.R. July 8, 2015) (discussing
Puerto Rico cases, including Martin's BBQ v. Garcia De Gracia, 178
P.R. Dec. 978, 990 (P.R. 2010) (franchise contracts)).
While there was no separate agreement between TLS and
GOS, the district court assumed that GOS was bound by the ASG and
Rodríguez Agreements.12 Thus, the invalidity of any nondisclosure
agreement with GOS follows from the invalidity of the ASG and
Rodríguez agreements.
Here, we hold only that the nondisclosure provisions
concerning confidentiality in the Rodríguez and ASG Agreements are
11 TLS argues that Rodríguez was bound by the ASG Agreement. Even if Rodríguez had been initially bound by the ASG Agreement, the later Rodríguez Agreement superseded the ASG Agreement as to Rodríguez. Thus, he was not bound by the nondisclosure provision of the ASG Agreement. 12 The district court appears to have concluded that GOS was bound by the nondisclosure agreements because Rodríguez controlled GOS. We need not determine whether GOS was bound because we hold that the nondisclosure agreements are unenforceable in any event.
- 31 - unenforceable and do not reach the question whether other
provisions of the Agreements survive. We decline to rewrite the
nondisclosure agreements by narrowing their scope to be
reasonable. The Puerto Rico Supreme Court has held in the context
of noncompete agreements that courts may not "modify[] the will of
the parties to adjust [the agreements] to reasonable standards."
Arthur Young, 1994 WL 909262; see also PACIV, Inc. v. Perez Rivera,
159 D.P.R. 523, 2003 WL 21212748, P.R. Offic. Trans. (P.R. 2003)
(holding that an overly broad noncompete agreement "result[ed] in
the nullity of the agreement without any possibility of allowing
a modification" and "the severability clause [of the agreement
did] not save those clauses that d[id] comply with [the court's]
pronouncements . . . [and] the agreement [wa]s void in its
entirety").13
Here, the defendants argue that the same rule applies to
nondisclosure agreements and that the nondisclosure agreements
here are invalid in their entirety. TLS fails to argue that some
portion of the nondisclosure agreements could survive a
13We note that other mainland U.S. courts have reached the same conclusion as to nondisclosure agreements. See AMP, 823 F.2d at 1202 (voiding nondisclosure agreement in its entirety without severance); State Med., 782 P.2d at 1973–75 (same); Nasco, 238 S.E.2d at 369–70 (same); see also Broadley v. Mashpee Neck Marina, Inc., 471 F.3d 272, 274–76 (1st Cir. 2006) (holding that the district court's rewriting of an overly broad and unenforceable exculpatory clause under admiralty law was against sound public policy).
- 32 - determination that they were unreasonably broad and thus waived
such an argument. See Ortega Cabrera v. Municipality of Bayamon,
562 F.2d 91, 102 n.10 (1st Cir. 1977).
The district court erred by granting TLS's summary
judgment motion and denying the defendants' cross-motion as to the
claim for breach of nondisclosure agreements.
IV. Conclusion
We reverse the district court's decisions because TLS
failed to prove its trade secret claims, and because the
nondisclosure agreements are unenforceable. We remand with
Reversed and remanded.
- 33 -