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Current Developments in the Commercial Divisions of the
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Posted: July 11, 2014

Trade Secrets Discoverable From Non-Party Only When Relevant, Indispensable and Not Otherwise Acquirable

On July 9, 2014, the Second Department issued a decision in Ferolito v. Arizona Beverages USA, LLC, 2014 NY Slip Op. 05153, quashing those parts of a non-party that sought the production of trade secrets. In Ferolito, the plaintiff moved to compel compliance with a subpoena it served on non-party Morgan Stanley & Co., LLC. The trial court ordered full compliance. The Second Department affirmed with respect to most of the demands, but reversed with respect to the demands that sought trade secrets, explaining:

CPLR 3101(a) is to be liberally construed to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity. Pursuant to CPLR 3101(a)(4), a party may obtain discovery from a nonparty in possession of material and necessary evidence, so long as the nonparty is apprised of the circumstances or reasons requiring disclosure. Pursuant to the Court of Appeals’ recent decision in Matter of Kapon v Koch, disclosure from a nonparty requires no more than a showing that the requested information is material and necessary, i.e. relevant to the prosecution or defense of an action. However, the subpoenaing party must first sufficiently state the circumstances or reasons underlying the subpoena (either on the face of the subpoena itself or in a notice accompanying it), and the witness, in moving to quash, must establish either that the discovery sought is utterly irrelevant to the action or that the futility of the process to uncover anything legitimate is inevitable or obvious. Should the nonparty witness meet this burden, the subpoenaing party must then establish that the discovery sought is material and necessary to the prosecution or defense of an action, i.e., that it is relevant. In the instant case, the subpoena duces tecum served upon nonparty Morgan Stanley plainly satisfied the notice requirement. Once [the plaintiff] met that minimal obligation, the burden shifted to Morgan Stanley to establish that the requested documents were either utterly irrelevant to the action, or that the futility of the process to uncover anything legitimate is inevitable or obvious. Here, Morgan Stanley failed to meet that burden. The record reveals that the requested documents were highly relevant to the valuation of the subject corporation, the central issue in the underlying proceedings, and Morgan Stanley did not dispute that it possessed those documents. Accordingly, [the plaintiff] met his burden of establishing that the information sought was material and necessary. However, Morgan Stanley demonstrated that the discovery demands set forth in paragraphs 11 through 19 in the section of the subpoena entitled Requests for Production sought documents that contained one or more trade secrets. Notwithstanding New York’s policy of liberal discovery, a party seeking disclosure of trade secrets must show that such information is indispensable to the ascertainment of truth and cannot be acquired in any other way. A witness who objects to disclosure on the ground that the requested information constitutes a trade secret bears only a minimal initial burden of demonstrating the existence of a trade secret. . . . Morgan Stanley met its minimal initial burden of showing that the documents requested in paragraphs 11 through 19 in the section of the subpoena duces tecum . . . contained trade secrets. Thus, the burden shifted to [the plaintiff] to demonstrate that the information contained in those documents was indispensable to the ascertainment of truth, and could not be acquired in any other way. [The plaintiff] failed to meet that burden. Accordingly, the Supreme Court should have denied those branches of [the plaintiff’s] cross motion which were to compel Morgan Stanley to disclose the documents requested in paragraphs 11 through 19 in the section of the subpoena deuces . . . as those documents contained one or more trade secrets.

(Internal quotations and citations omitted) (emphasis added). This decision illustrates both the minimal burden a party bears in seeking discovery from a non-party after Matter of Kapon v Koch (see our discussion here), as well as the heightened standard applied to discovery seeking trade secrets.

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