This matter is before the Court on a motion and memorandum for a protective order for trade secrets filed by Defendant/Counterclaimant Rayonier Performance Fibers, LLC’s (“Rayonier”) on January 14, 2013. Plaintiff MeadWestvaco Corporation (“MWV”) filed an opposition memorandum on February 19, 2013, to which Rayonier replied on March 25, 2013. The parties’ filings are detailed with references to exhibits and deposition testimony, as well as an expert affidavit in the case of Rayonier. In addition to reviewing the parties’ filings, the Court heard oral arguments on the motion at a hearing on March 27, 2013.

The issue before the Court is whether MWV can require Rayonier to disclose in discovery confidential details of its production processes at Rayonier’s chemical cellulose mill at Fernandina Beach, Florida. Rayonier contends such details constitute trade secret information that qualifies for protection from discovery.

MWV’s counsel have inquired in several depositions of Rayonier’s employees for specifics of the Fernandina mill’s pulp production formulas.  MWV’s questions sought detailed information about the Fernandina mill’s manufacturing processes including, inter alia, (i) details of chip aging and treatment, (ii) cooking temperatures, times, pressures and (iii) pH readings during digestion, i.e., the “recipe” information for its mill processes.  Rayonier’s witnesses have responded to detailed questions regarding non-confidential mill processes at both the Fernandina and Jesup mills. On advice of counsel, Rayonier’s witnesses have refused to testify to what the company protects as trade secret information, thus giving rise to Rayonier’s motion for protective order pursuant to SCRCP 26(c)(7) and the Trade Secrets Act at S.C. Code Ann. §39-8-10, et seq.

The parties are sophisticated commercial entities.  On July 1, 2006, they executed a Product Sale and Purchase Agreement (“Purchase Agreement” or “contract”) for MWV to purchase all of Rayonier’s “chemical cellulose ‘black liquor soap skimming’ product (“BLS”) and Crude Tall Oil (“CTO”) produced at its manufacturing facility located in Jesup, Georgia (the “Facility”), consistent with specifications set forth [in the contract].”  The Purchase Agreement was a byproducts output contract for the sale of goods. After performing under the contract for approximately four years, MWV declared a breach by Rayonier and terminated the Purchase Agreement on September 30, 2010, with some six years remaining on the term of the contract.

Like two of its Jesup facility’s three mill lines, Rayonier’s Fernandina single mill produces chemical cellulose specialty pulp products.  MWV has complained that the Jesup mill improperly augmented its Jesup soap sold under the contract with soap from its Fernandina mill.  Rayonier has answered and counterclaimed that the Fernandina mill soap was mixed and processed with the soap originating from the lines at the Jesup mill as a matter of company routine since well-before MWV first asked to purchase the Jesup soap product in late 2005. Rayonier also contends that the augmented soap product was what MWV tested and approved during contract negotiations in 2006 and what it sold to MWV under the contract.

MWV has presented no evidence that, prior to contracting, it required any recipe information such as it now seeks to discover from the Fernandina mill. The contract does not specify how the soap to be purchased from the Jesup mill was to be chemically or physically formulated, except as set forth in the contract’s specifications.

South Carolina Rule of Civil Procedure 26(c)(7) addresses protective orders and provides, in pertinent part, as follows:

Upon motion by a party or by the person from whom discovery is sought, and for good cause shown, the court … may make any order which justice requires to protect a party of person from annoyance, embarrassment, oppression or undue burden by expense, including one or more of the following: … (7) that a trade secret or other confidential research, development, or commercial information not be disclosed or be disclosed only in a designated way ….

The Notes to the rule point out that Rule 26(c) is the same language as Federal Rule 26(c).

The Court has broad discretion to control the scope of discovery. Palmetto Alliance Inc. v. South Carolina Pub. Serv. Comm’n, 282 S.C. 430, 319 S.E.2d 695 (1984). When the discovery process threatens to become abusive or to create a particularized harm to a litigant … the Rules allow the trial judge broad latitude in limiting the scope of discovery. Hamm v. SCPSC, 312 S.C 238, 439 S.E.2d 852 (1994).
In determining whether trade secret information is subject to a protective order under Rule 26(c)(7), federal and state courts typically apply a balancing test that incorporates a “relevant and necessary” standard for the party seeking to discover the trade secret information. The test is a three-part inquiry:

1. The party opposing discovery must show that the information sought is a trade secret and that disclosure would be harmful.

2. If trade secret status is established, the burden shifts to the party seeking discovery to show that the information is relevant and necessary to bring the matter to trial.

3. If both parties satisfy their burden, the court must weigh the potential harm of disclosure against the need for the information in reaching a decision.

Laffitte v. Bridgestone Corp. 381 S.C. 460, 474-75, 674 S.E.2d 154, 162-3 (2009).

This state’s supreme court explained in Laffitte that the state’s Trade Secrets Act, at S.C. Code Ann. §39-8-10, et seq., does not supplant, but rather complements S.C.R.C.P. 26(c). Id.  Under the Trade Secrets Act, a trade secret is defined as information, including a formula or process, that:

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by  proper means by the public or any other person 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.

S.C. Code Ann. §39-8-20 (5)(a)(2011).Additionally, the Trade Secrets Act defines its “substantial need” requirement to mean:

(1) the allegations in the initial pleading setting forth the factual predicate for or against liability have been plead with particularity;

(2) the information sought is directly relevant to the allegations plead with particularity in the initial pleading;

(3) the information in such that the proponent of the discovery will be substantially prejudiced if not permitted access to the information; and

(4) a good faith basis exists for the belief that testimony based on or evidence deriving from the trade secret information will be admissible at trial.

S.C. Code Ann. § 39-8-60 (2011).

Regarding the requirement that the trade secret information must be “relevant,” the Laffitte court held that the information must be relevant, not only to the general subject matter of the litigation, but also specifically to the issues involved in the litigation. Id. at 475-76, 674 S.E.2d at 163.  For the trade secret information to be deemed “necessary,” the party seeking the information “cannot merely assert unfairness but must demonstrate with specificity how the lack of the information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat.” Id. (internal citations omitted)  The Laffitte court cited favorably to Bridgestone/Firestone, Inc. v. Superior Court, 7 Cal. App. 4th 1384, 9 Cal. Rptr.2d 709, 713 (Cal. Ct. App. 1992) for its holding that a party seeking discovery must make a “particularized showing” that “the information sought is essential to a fair resolution of the lawsuit.”  “Implicit in this is the notion that suitable substitutes must be completely lacking.” Id. (citing to Bridgestone Americas Holding, Inc. v. Mayberry, 878 N.E.2d 189, 192 (Ind. 2007).  “In other words, the trial court must evaluate whether there are reasonable alternatives available to the party seeking the discovery of the information, and ultimately, the trial court must require the discovery of a trade secret only when the issues cannot be fairly adjudicated unless the information is available.” Id.

MWV’s opposition memorandum does not challenge Rayonier’s showing that the information MWV seeks constitutes sensitive trade secret information as set forth in the Affidavit of Robert Sistko at Exhibit W to Rayonier’s motion and memorandum. The Court finds that Rayonier has demonstrated that the information sought by MWV is, in fact, trade secret information as defined under the applicable law.

Once it is established that the disputed discovery constitutes trade secret information, the burden shifts to the party seeking discovery to demonstrate both its “relevance” and “necessity” under the Laffitte standards.  The central issue in this case is the interpretation and application of the Purchase Agreement. If MWV proves that Rayonier breached the contract by adding Fernandina soap to the Jesup mill soap process, MWV must then prove that the augmentation proximately caused its damages.

The terms of the Purchase Agreement do not address the mill process recipe from which the byproducts are derived or the chemical components of the products to be purchased.  Rather, the contract is explicitly concerned with how closely the soap and CTO products from the Jesup mill meet the contract’s specifications.  The specifications address acid number, moisture content and sulfate black liquor impurities, none of which implicate mill process recipe trade secrets.

MWV argues that Fernandina’s different pulping process, with its presumably different cooking recipe, generates a soap that is a “contaminant” when added to the Jesup mill’s soap.  Thus, MWV seeks the recipe details on the assumption that variations in cooking times, temperatures, pressures, chip treatments and/or pH levels could alter the chemical and/or physical structure of the Fernandina soap such that it becomes an “adulteration” when combined with soap originating in the Jesup mill. MWV has presented no expert testimony, however, for its assumption; neither has MWV defined its allegations of “contamination” with any precision.  The affidavit of Dr. Sistko, on the other hand, explains that the properties of black liquor soap can be tested and determined without knowing the pulping recipes and formulas. This point is not refuted by MWV.

Moreover, MWV has not shown that Rayonier made representations or gave warranties as to its Jesup mill process recipe(s) or any other confidential aspect of its production processes.  The Court has seen no proof that MWV was interested in the Jesup mill’s recipe information during its pre-contract investigation and testing.  Now it seems obvious that, if MWV were to obtain the Fernandina mill recipe information, it would then declare the need for the Jesup mill’s recipe information for purposes of comparing and contrasting the two. MWV has simply not demonstrated how Fernandina’s recipe information is relevant to the issues for proof.

The second criterion of “necessity” presents a high bar under the Laffitte analysis.  The plaintiff in the Laffitte case submitted three expert affidavits in its unsuccessful effort to demonstrate the relevance and necessity of trade secret disclosures. MWV has submitted no affidavits or otherwise persuaded the Court that the Fernandina process recipe fundamentally alters that mill’s soap such that it could become a causative “contaminant” when mixed with the Jesup soap. Thus, MWV has made no particularized showing that Rayonier’s trade secrets are essential to a fair resolution of the lawsuit, nor has it established that discovery of Rayonier’s trade secret information is necessary to its ability to get a fair trial. Moreover, there is no specific showing how the lack of the Fernandina mill recipe information will impair the presentation of its case on the merits to the point that an unjust result is a real threat.

MWV has failed to meet its burden of demonstrating the relevance or necessity of the trade secrets discovery. It has not met the specificity requirement of Laffitte or the other established requirements for such discovery. While the Court is not required, therefore, under Laffitte to balance interests, it chooses to address this consideration.

The numerous soap and CTO samples provided to MWV by Rayonier should have yielded sufficient information to MWV as to the commercial properties of the byproducts.  Indeed, the Court is aware that Rayonier has recently provided additional samples to MWV from both Rayonier mills. The Court find that these samples are a reasonable alternative to the trade secret information sought by MWV.  See  Sistko Aff. ¶ 15 (“If there are defects or adulterations as MWV alleges, that information could be determined from the soap itself . . .[t]he physical properties of soap can be tested without knowing the specific pulping recipes and formulas.”)  MWV had in its power the ability to request recipe information in the negotiation stage before contracting. MWV’s discovery demands now seek considerably more technical information from Rayonier than MWV ever requested or could likely have obtained from Rayonier pre-contract. Moreover, it is apparent that disclosure of the trade secret recipe information holds the risk of the most serious kind of financial and business hardship to Rayonier. Under these circumstances, it seems obvious that Rayonier would not have contracted in the first place had MWV demanded trade secret recipe information as a pre-condition. Accordingly, a balancing of the interests weighs in favor of Rayonier and protection of the trade secrets from discovery.

The discovery sought by MWV is trade secret information that is both irrelevant and unnecessary to the fair adjudication of the issues pled. Discovery of such information cannot be reconciled with the controlling precedent of Laffitte. To the extent competing considerations require a balancing analysis, which the Court questions, there is a high likelihood of serious and permanent harm to Rayonier and a low likelihood that non-disclosure will undermine MWV’s ability to offer its proof and get a fair resolution of the issues. Thus, balancing of the interests mandates against the discovery. Rayonier has demonstrated the good cause required to justify an order protecting it from disclosure of its process recipe information. Accordingly, Rayonier’s trade secrets are hereby protected from discovery.

AND IT IS SO ORDERED.

July 15, 2013
Charleston, South Carolina