Court Opinion

ID: 4550019
Source: CourtListenerOpinion
Date Created: 2020-07-21 21:00:10.889318+00
Date Added: 2024-06-11T13:02:54.677339
License: Public Domain

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 P.R. Dec. 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

a trade secret.

             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 P.R. Dec. 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

defendants.

              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 P.R. Dec. 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

instructions to enter judgment in favor of the defendants.

              Reversed and remanded.

                                       - 33 -