Court Opinion

ID: 6472481
Source: CourtListenerOpinion
Date Created: 2022-06-26 14:23:41.866113+00
Date Added: 2024-06-11T09:11:37.231665
License: Public Domain

VIGIL, Judge (dissenting). {74} I dissent from the majority opinion for two reasons: (1) it fails to recognize the contingent nature of a trade secret privilege under our Rules of Evidence; and (2) it mistakenly construes Rule 11-508 of the Rules of Evidence to eliminate the good cause requirement of Rule 1-026(C)(7) of the Rules of Civil Procedure for imposing a protective order in the discovery of trade secrets. Rule 11-508 of the Rules of Evidence and Rule 1-026(0(7) of the Rules of Civil Procedure are not mutually exclusive as suggested by the majority; they are compatible and complementary. {75} I agree with the majority that the person asserting a trade secret privilege not to provide discovery has the burden of establishing the privilege. Majority Opinion ¶¶ 39, 41. However, I reject the suggestion made by the majority that it makes any difference whether the burden arises in the context of a motion for protective order or a motion to compel. Majority Opinion ¶37. The elements of a trade secret privilege are the same whether within the context of a motion to compel discovery under Rule 1-037(A) or a motion for a protective order under Rule 1-026(C)(7). It happens that in this case the issue arises in the context of Plaintiffs’ motion to compel discovery. It was therefore Defendant’s burden to establish that it had a trade secret privilege not to disclose the McKinsey documents in response to Plaintiffs’ Request for Production No. 5. The Trade Secret Privilege {76} Rule 11-508 of the Rules of Evidence is entitled “Trade Secrets” and provides: A person has a privilege, which may be claimed by the person or the person’s agent or employee, to refuse to disclose and to prevent others from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the court shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require. {77} The Rule does not define what constitutes a privileged trade secret. Two broad formulas have emerged for determining what constitutes a trade secret. The first was originally promulgated in 1939 by the Restatement (First) of Torts § 757, which addressed general principles of liability for disclosing or using another’s trade secret. In adopting the Restatement, the American Law Institute acknowledged, “an exact definition of a trade secret is not possible.” Restatement § 757, cmt. b. Instead of attempting to provide a comprehensive definition, it identified factors to be considered in determining the existence of a trade secret: Some factors to be considered in determining whether given information is one’s trade secret are: (1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. Id. {78} Section 757 of the Restatement (First) of Torts was omitted from the Restatement (Second) of Torts and incorporated into the Restatement (Third) of Unfair Competition. See generally In re Bass, 113 S.W.3d at 739. However, the six factors from Section 757 are still considered. See Restatement (Third) of Unfair Competition § 39 reporter’s n. cmt. d (1995) (“In determining the existence of a trade secret, many cases rely on the factors identified in Restatement of Torts § 757 cmt. b”). {79} Under the Restatement formulation, the six factors are not to be considered in a systematic or mechanical manner for determining whether a trade secret exists because by their very nature, the factors are imprecise. See In re Bass, 113 S.W.3d at 739 (stating that the factors are to be treated as relevant, but not dispositive, criteria because it is not possible to state precise criteria for determining the existence of a trade secret and that the status of information claimed as a trade secret must be ascertained through a comparative evaluation of all the relevant factors); Crum v. Bridgestone/Firestone N. Am. Tire, 2006 PA Super. 230, ¶ 19, 907 A.2d 578 (stating that in weighing the six factors, the crucial indicia for determining whether certain information constitutes a trade secret are substantial secrecy and competitive value to the owner). {80} The second broad formula for determining the existence of a trade secret is contained in the Uniform Trade Secrets Act which was approved and recommended for enactment by the National Conference of Commissioners on Uniform State Laws in 1979. This Act was adopted in New Mexico in 1989, and is codified at Sections 57-3A-1 to -7. Under the Act, a “trade secret”: [M]eans information, including a formula, pattern, compilation, program, device, method, technique or process, that: (1) derives independent and economic value, actual or potential, from not being generally known to and not be readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Section 57-3A-2(D). {81} This statutory definition also requires its various elements to be considered and weighed. See Mediacom Iowa, L.L.C. v. Inc. City of Spencer, 682 N.W.2d 62, 67 (Iowa 2004) (stating that whether the definition of a trade secret is satisfied under the Uniform Trade Secrets Act is a mixed question of law and fact; that the legal determination is whether the material sought is “information”; and the factual determination is whether the factors described in subsections (1) and (2) are satisfied); Ed Nowogroski Ins., Inc. v. Rucker, 137 Wash.2d 427, 971 P.2d 936, 941 (1999) (en bane) (stating that while the definition of a trade secret is a matter of law under the Uniform Trade Secrets Act, whether specific information in a given case is a trade secret is a factual question). See also Star Scientific, Inc. v. Carter, 204 F.R.D. 410, 414 (S.D.Ind.2001) (noting that the Indiana Uniform Trade Secret Act is identical to the Uniform Trade Secrets Act and that in Indiana a trade secret has four characteristics: “(1) information; (2) which derives independent economic value; (3) is not generally known or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (4) the subject of efforts reasonable under the circumstances to maintain its secrecy.”) (quoting Ackerman v. Kimball Int’l, Inc., 634 N.E.2d 778, 783 (Ind.Ct.App.1994), vacated in part, adopted in part, 652 N.E.2d 507 (Ind.1995)). {82} The quintessential elements of a trade secret under either formulation are: (1) that the owner undertakes to keep the information secret; (2) that the information has a competitive or financial value to its owner; and (3) that its unauthorized disclosure will result in damage or harm to its owner. See Crum, 2006 Pa.Super. 230, ¶ 19, 907 A.2d 578. {83} However, even if a person establishes ownership of a trade secret, the trade secret may not be recognized as a privileged trade secret under Rule 11-508. “[Tjhere is no absolute privilege for trade secrets and similar confidential information.” Fed. Open Market Comm. v. Merrill, 443 U.S. 340, 362, 99 S.Ct. 2800, 61 L.Ed.2d 587 (1979) (internal quotation marks and citation omitted). Rule 11-508 gives textual recognition to this principle. Unlike other privileges, a trade secret is accorded privileged status under Rule 11-508 only “if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice.” Id. When non-disclosure of a trade secret will result in injustice, there is no privilege. Thus, Rule 11-508 only grants a conditional privilege to trade secrets. See Mediacom Iowa, L.L.C., 682 N.W.2d at 66 (stating there is “no true privilege against discovery of trade secrets”); Medical Arts Clinic, P.C. v. Franciscan Initiatives, Inc., 531 N.W.2d 289, 299 (N.D.1995) (construing similarly worded North Dakota rule and stating that the trade secret rule provides for a “limited privilege”; that the instances in which invocation of the privilege is justified are few; and that the rule provides for only a conditional privilege). {84} The foregoing analysis is applicable to determine in the first instance whether the person asserting a trade secret has established ownership of a privileged trade secret under Rule 11-508. The person making the claim must come forward with evidence relating to the six Restatement factors and the statutory factors of Section 57-3A-2(D) to substantiate his assertion that he owns a trade secret. The trial court must then evaluate and weigh the evidence in context to determine whether a prima facie showing has been made to ownership of a trade secret. Of necessity, this determination must be left to the discretion of the trial court. If the trial court concludes that the claimant has failed to establish that the information is a trade secret, the inquiry ends. However, if the trial court concludes that a trade secret has been established, the trial court must still determine whether allowing a privilege to attach to the information will result in injustice. Again, this evaluation of all the relevant factors presented requires the trial court to exercise its discretion. Only if the trial court also concludes that allowing a privilege to attach to the information will not result in an injustice, is the information afforded privileged trade secret status under Rule 11-508. {85} Finally, even when the trial court determines in its discretion that a privileged trade secret exists, the trial court may still order that it be disclosed. The final sentence of Rule 11-508 provides, “When disclosure is directed, the court shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.” I understand this provision of the rule to allow the trial court in its discretion to order disclosure of a trade secret notwithstanding its determination that the holder has a bona fide trade secret. The exercise of that discretion is guided by three factors: (1) the interests of the holder of the privilege; (2) the interests of the parties to the litigation before the court; and (3) the furtherance of justice. Thus, the trade secret privilege may, in appropriate circumstances, yield to other competing public policy values, such as requiring the courts to operate in the open and not behind a shroud of secrecy, and the right of litigants to full discovery and the subsequent full use of that discovery at trial. See Estate of Romero, 2006-NMSC-028, ¶ 7, 139 N.M. 671, 137 P.3d 611 (stating that a person is generally required to disclose any information he may possess that is relevant to a case pending before a court); Westmoreland v. Columbia Broad. Sys., Inc., 752 F.2d 16, 23 (2d Cir.1984) (“[P]ublie access to civil trials enhances the quality and safeguards the integrity of the factfinding process, fosters an appearance of fairness, and heightens public respect for the judicial process[.]”) (internal quotation marks and citations omitted); Bryan v. Eichenwald, 191 F.R.D. 650, 652 (D.Kan.2000) (“[T]he public has an interest in everything that occurs in [a] case, whether at trial or during the discovery stage of litigation.”). {86} To support its assertion that the McKinsey documents contain privileged trade secret information, Defendant submitted the affidavit of Christine Sullivan. Because of its importance to the issues in this case, a copy of the affidavit is attached as an appendix to this dissent. The trial court did not deny Defendant’s motion for a protective order because the documents did not contain trade secret information; it denied the motion on the basis that Defendant failed to establish good cause. I therefore assume that the Christine Sullivan affidavit established the necessary requisites to satisfy the trial court that the McKinsey documents contain privileged trade secret information, and consider whether Defendant demonstrated good cause for a protective order. Good Cause to Justify a Protective Order {87} Plaintiffs filed a motion to compel production of the McKinsey documents, and argued in part: “[I]n order to sustain its trade secrecy objection, Allstate has the burden to show that disclosure of the pertinent documents would cause a specific, significant harm to its competitive and financial position.” (citing Deford v. Schmid Prod. Co., 120 F.R.D. 648 (D.Md.1987)). Deford states: Where a business is the party seeking protection, it will have to show that disclosure would cause significant harm to its competitive and financial position. That showing requires specific demonstrations of fact, supported where possible by affidavits and concrete examples, rather than broad, conclusory allegations of potential harm. Id. at 653. In making the foregoing statement, Deford specifically relies upon the “good cause” requirement of Rule 26(e) of the Federal Rules of Civil Procedure to impose a protective order for “a trade secret or other confidential research, development, or commercial information” under Rule 26(c)(7) of the Federal Rules of Civil Procedure. Deford, 120 F.R.D. at 652-53. In response to Plaintiffs’ motion, Defendant argued, “Because [the McKinsey documents] are trade secrets, the requested documents should not be required to be produced. If this Court does require their production, they should be produced only subject to a confidentiality order, requiring that the documents be kept confidential, be used only for this litigation, and returned at the conclusion of this case.” Defendant then specifically referred to Rule 1 — 026(C)(7) in support of its argument. Rule 1-026(C)(7) states that “for good cause shown,” the trial court may make an order “that a trade secret ... not be revealed or be revealed only in a designated way.” Thus, whether by reference to Plaintiffs’ arguments or its own response, Defendant knew and understood that “good cause” was required to justify imposition of a protective order. {88} The structure of the New Mexico Rules of Civil Procedure require a finding of “good cause.” Rule 1-037 NMRA provides that a party may apply to the trial court for an order compelling discovery. This is what Plaintiffs did by asking the trial court to order Defendant to produce the McKinsey documents. Defendant responded that the motion should be denied because the McKinsey documents contain trade secrets, but if production was ordered, it should be under a protective order. Defendant therefore invoked Rule 1-037(A)(2) and Rule 1-026(C)(7). Rule 1-037(A)(2) provides that when the trial court denies a motion for an order compelling discovery in whole or in part, as requested by Defendant, “it may make such protective order as it would have been empowered to make on a motion made pursuant to Rule 1-026.” Rule 1-026(C)(7) in turn provides, “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 ... including ... that a trade secret or other confidential research, development or commercial information not be revealed or be revealed only in a designated way.” (Emphasis added.) {89} Existing precedent defines the meaning of “good cause” in this context. In Krahling, the trial court ordered Honeywell to provide discovery but granted its request that the information be kept confidential. 1998-NMCA-071, ¶ 4, 125 N.M. 228, 959 P.2d 562. Honeywell was allowed to designate all of the documents it produced in discovery as “confidential” without any showing of a basis for the designation. Id. ¶ 5. After summary judgment was granted in favor of the party receiving the discovery, it filed a motion to lift the confidentiality order, arguing that because Honeywell did not make a prima facie showing of good cause in support of the confidentiality order, the burden of proof remained upon Honeywell to support continuation of the protective order. Id. ¶ 14. We agreed. Id. Referring to Rule 1-026(C), we said, “An order prohibiting the disclosure of information obtained during discovery proceedings must be supported by a finding of good cause.” Krahling, 1998-NMCA-071, ¶ 15, 125 N.M. 228, 959 P.2d 562. We then stated: Good cause is established [by] showing that disclosure will work a clearly defined and serious injury to the party seeking closure. The injury must be shown with specificity.... In determining whether a party has made a showing of good cause for the issuance of a protective order, courts have generally applied a balancing process. Id. (internal quotation marks and citations omitted). {90} In the hearing before the trial court, Plaintiffs argued that the Christine Sullivan affidavit filed by Defendant failed to demonstrate just cause to justify a protective order because it failed to show how a clearly defined serious injury would result if the McKinsey documents were disclosed without a protective order as required by Krahling. In response, Defendant argued, “The burden is to establish a trade secret as that is defined under New Mexico law and if that trade secret is established, then this Court must take such appropriate measures as will protect that trade secret because it is privileged under New Mexico law.” Defendant asserted that just cause to impose a protective order is satisfied by simply demonstrating that the McKinsey documents contain trade secrets, and that the Christine Sullivan affidavit satisfied this burden: “We are not saying that burden isn’t upon us, we believe that is a burden we have of establishing good cause to believe this information is [a] trade secret. And that is what we have done with the Christine Sullivan affidavit.” In response to Defendant’s additional argument that Plaintiffs were asserting a standard of good cause which had not been previously recognized under New Mexico law, the trial court said: I am looking at Krahling. [G]ood cause is established by showing the disclosure will work a clearly defined and serious injury to the parties seeking closure. The injury must be shown with specificity. That looks pretty clear cut to me. It’s not like a new standard which I would be adopting. Defendant then asserted that the Christine Sullivan affidavit satisfied Krahling because it demonstrated that the information was created at a significant expense, competitors wanted the information, and if it were made publicly available, Defendant would suffer a competitive disadvantage. At the conclusion of the hearing, the trial court announced: “I rely upon the Krahling case which I believe sets forth the appropriate standard for defending disclosure in the face of challenges based on claims of confidentiality____[S]o I find that the declaration of [Christine] Sullivan which is the basis for [Defendant’s] claim is simply too general and conclusory to support [its] request for [a] protective] order or protection from disclosure.” {91} The formal order compelling production of the MeKinsey documents without a protective order incorporates the trial court’s reasoning. In pertinent part the order states: [Defendant] has resisted production of these documents upon the grounds of trade secret confidentiality and has requested that a protective order be entered based on the Affidavit of Christine Sullivan filed in support of [Defendant’s] assertion of trade secret confidentiality; that the Affidavit of Christine Sullivan is too general and conclusory to support a protective order restricting production or dissemination of the [MeKinsey documents] under the good cause standard for protective orders established in Krahling. Defendant was therefore ordered to produce the MeKinsey documents, and Defendant’s “request for a protective order restricting disclosure of the documents ordered produced herein be, and the same is hereby, denied.” {92} Defendant’s response and Rule 1-026(C)(7) required the trial court to consider whether Defendant demonstrated “good cause” to justify imposing a protective order relating to its production of the MeKinsey documents. However, the majority states that Defendant was not required to demonstrate “good cause” because Rule 11-508 has no “good cause” requirement. Majority Opinion ¶ 44. This conclusion requires the words “good cause shown” to be deleted from Rule 1-026(C)(7) as it relates to trade secrets. I do not believe this is permissible or necessary. We are required to apply the Rules of Civil Procedure and the Rules of Evidence as adopted by the Supreme Court. Alexander v. Delgado, 84 N.M. 717, 718, 507 P.2d 778, 779 (1973). In applying these rules which cover the same subject matter of trade secrets, we are to avoid conflict or inconsistency, and apply them in a harmonious and complementary manner. See State v. Smith, 2004-NMSC-032, ¶ 10, 136 N.M. 372, 98 P.3d 1022 (stating that we are to read different legislative enactments as harmonious instead of contradicting each other); State ex rel. Quintana v. Schnedar, 115 N.M. 573, 575-76, 855 P.2d 562, 564-65 (1993) (directing that two statutes covering the same subject matter should be harmonized and construed together, when possible, in a way that facilitates their operation and the achievement of their goals). {93} I also disagree with the majority’s conclusion that requiring the holder of the privilege to establish just cause for a protective order renders the language of Rule 11-508 and the privilege itself “meaningless.” Majority Opinion ¶¶ 45-49. As already discussed, before a trial court directs that a trade secret is to be disclosed under Rule 11-508, it must take into account (1) the interests of the holder of the privilege; (2) the interests of the parties; and (3) the furtherance of justice in fashioning an appropriate protective measure. This obviously requires the sound exercise of discretion in light of the specific circumstances that are before the court. Requiring the holder of the privilege to show “good cause” as required by Rule 1-026(C)(7) is not inconsistent with balancing these interests. In light of the nature of a trade secret, and the almost infinite variety of permutations that a trade secret can assume, it is essential that a trial court be presented with the necessary information so it can determine whether to order disclosure of a trade secret with or without a protective order. See Crum, 2006 Pa.Super. 230, ¶ 20, 907 A.2d 578 (construing the Pennsylvania counterpart to Rule 1-026(C)(7): “The questions of whether disclosure is to be allowed, if protection is to be afforded, and the form of such protection, are matters to be determined according to the discretion of the [trial] court.”). {94} The majority itself recognizes that even if the existence of a trade secret is established, the information may be so minimal that there is no danger it could be used by another to obtain economic value in competition with the owner. Majority Opinion ¶ 38. Since a trade secret is by its nature secret, only the holder can show the trial court whether, and to what extent, disclosure will cause the holder damage. Further, the holder of the privilege appropriately shoulders the burden of demonstrating what specific damage may result, so that a protective order that shields the holder against that damage can be fashioned, if one is appropriate. See Mediacom Iowa, L.L.C., 682 N.W.2d at 68 (stating that to determine whether there is good cause to impose a protective order for trade secrets, there must be a showing that the harm posed by dissemination of the information is substantial and serious); In re Cont’l Gen. Tire, 979 S.W.2d at 612 (noting that federal courts and the courts in California and Florida require the party resisting discovery to establish that disclosure of the trade secret would be harmful). When these elements are satisfied, the trial court can fashion an appropriate manner in which the information is to be disclosed, while advancing the interests of justice and protecting the rights of the litigants before it to have information they require. This is what I understand the burden of showing “good cause” means in Krahling. The same approach has been required by our Supreme Court when privileges not set forth in the Rules of Evidence have been invoked. See Estate of Romero, 2006-NMSC-028, ¶¶ 19, 21, 139 N.M. 671, 137 P.3d 611 (directing that in order to determine if the Inspection of Public Records Act precludes discovery of law enforcement investigation documents, the party seeking to preclude disclosure has the burden of proving the information is confidential; and if disclosure is ordered, a protective order under Rule 1-026(C) may be considered); Sw. Cmty. Health Servs. v. Smith, 107 N.M. 196, 200-01, 755 P.2d 40, 44-45 (1988) (concluding that the party objecting to discovery of peer review organization records has the burden of establishing that it is confidential under NMSA 1978, § 41-9-5 (1979), and thereafter entrusting the trial court with balancing the need to ensure the confidentiality of peer review against the need of litigants to discover evidence essential to their case, which may nevertheless compel production of the evidence); State ex rel. Attorney Gen. v. First Jud. Dist. Ct., 96 N.M. 254, 258, 629 P.2d 330, 334 (1981) (concluding that when the claim of executive privilege is made as to information requested in discovery, the trial court must first determine whether it has been properly invoked, and then it must balance the public interest in preserving confidentiality to promote intra-govemmental candor with the individual’s need for disclosure of the particular information sought). {95} On the merits, the affidavit of Christine Sullivan tendered by Defendant at best only established that the McKinsey documents contain trade secret information. However, Defendant failed to establish that the documents contain privileged trade secret information, because the affidavit failed to establish that allowing the privilege would not result in an injustice in this ease. Furthermore, even if the affidavit can be construed as satisfying all the elements of a privileged trade secret, Defendant failed to satisfy its burden of showing “good cause” as required by Krahling to require the trial court to exercise its discretion to determine whether a protective order was necessary in the first place, and if so, what protective measures might be appropriate. Specifically, Defendant failed to show what the “serious” and “clearly defined” injury would be if the McKinsey documents were disclosed without a properly tailored protective order. The trial court has broad discretion in determining whether good cause exists to issue a protective order. John Does I through III, 1996-NMCA-094, ¶ 13, 122 N.M. 307, 924 P.2d 273. Furthermore, “we do not tell the trial court when it is appropriate to issue protective orders under [Rule 1-026] to protect a party or person from annoyance, embarrassment, oppression or undue burden or expense.” Estate of Romero, 2006-NMSC-028, ¶ 21, 139 N.M. 671, 137 P.3d 611 (quoting State ex rel. Attorney Gen., 96 N.M. at 261, 629 P.2d at 337). I therefore conclude that no abuse of discretion was committed in ordering that the McKinsey documents be produced in discovery without a protective order. The Default Judgment Sanction {96} Defendant recognized it had an obligation to demonstrate good cause before it was entitled to produce the McKinsey documents under a protective order. Furthermore, well settled, existing New Mexico precedent defined what was required to demonstrate good cause. Notwithstanding its clear understanding and what was plainly required, Defendant failed to establish the requisite good cause. {97} Since November 13, 2001, Defendant has been ordered to produce the documents without protection. The documents still have not been produced without protection. On June 4, 2004, Defendant was told that if it refused to produce an unprotected set of the McKinsey documents, a default judgment, on liability would be entered. Defendant refused, and the default judgment was filed. In the default judgment, the trial court found that by knowingly refusing to produce the McKinsey documents as ordered, Defendant “has intentionally disobeyed this Court’s Order of June 4, 2004, as well as this Court’s Orders of November 13, 2001, December 18, 2001, and January 7, 2002[.]” Defendant does not challenge this finding, and it is undisputed that Defendant willfully violated the trial court order compelling discovery. {98} We review sanctions for discovery violations under an abuse of discretion standard, and while a default judgment is, to be sure, a severe sanction, when a discovery obligation is wilfully violated, a default judgment is within the proper parameters of discretion. Allred v. Bd. of Regents of Univ. of N.M., 1997-NMCA-070, ¶¶ 17, 20-28, 123 N.M. 545, 943 P.2d 579 (collecting and analyzing cases). When the discovery violation is conscious or intentional, it is a willful violation, and no wrongful intent needs to be shown. Id. ¶20. Thus, Defendant’s assertion that it consciously, intentionally, and thereby willfully violated the trial court order in order to challenge the discovery order in this appeal does not insulate Defendant from a default judgment. Id. ¶¶ 31-32. {99} I do not agree with the majority that Defendant is entitled to yet another chance to demonstrate good cause to produce the McKinsey documents under a protective order. I am also not persuaded that the trial court abused its discretion by granting a default judgment when Defendant willfully refused to comply with its discovery obligations in this ease. {100} For all the foregoing reasons, I dissent. Appendix 1 FIRST JUDICIAL DISTRICT COURT COUNTY OF SANTA FE STATE OF NEW MEXICO No. D-0101-CV-2000-2894 JOSE PINCHEIRA, OLIVIA PINCHEIRA, RUDY VIGIL, MARIA ELISA VIGIL, and AMY MARQUEZ, Plaintiffs, v. ALLSTATE INSURANCE COMPANY, TOM YOUNT, DAVE YOUNT, and SYLVIA ENCINTAS, Defendants. AFFIDAVIT OF CHRISTINE SULLIVAN I, CHRISTINE SULLIVAN, of lawful age and being first duly sworn upon my oath, depose and state the following: 1. My name is Christine Sullivan. I am an employee of Allstate Insurance Company. My position is Assistant Vice President in the Property-Casualty Claim Service Organization at Místate Insurance Company’s home office in Northbrook, Illinois. I have been an Místate employee for 28 years and have personal knowledge regarding the statements in this Affidavit. 2. Místate retained McKinsey & Company to work with Místate personnel to conduct a top to bottom review of its claim handling practices and procedures. As part of that review, closed claim files were reviewed in many markets, surveys were conducted and other investigation was performed in an effort to improve and bring uniformity to Ail-state’s claim handling processes and procedures, and address historical overpayment of claims. Once the review was completed, Ml-state and McKinsey redesigned certain claim handling processes and procedures that were then implemented and tested in certain markets. Beginning in 1995, these redesigned claims handling processes and procedures were implemented nationwide in a program called Claim Core Process Redesign (“CCPR”), and Allstate’s employees responsible for handling claims and the management and supervision of claims received training in those processes and procedures. 3. The CCPR program and materials, including the documents created by McKinsey & Company personnel during their review of Allstate’s claims handling processes, and the resulting claims practices and procedures were developed at a considerable investment of time, manpower and financial resources on the part of Allstate. 4. Allstate’s CCPR implementation manual, as well as Allstate’s claim manuals, guidelines, management reports, and other records relating to McKinsey & Company’s work for Allstate are confidential, proprietary, and trade secrets and are treated as such by Allstate. 5. Allowing access to Allstate’s confidential training materials, management reports, statistics, and McKinsey & Company documents will give Allstate’s competitors the unfair advantage of obtaining, at no cost, Allstate’s valuable business techniques, programs, processes and information that were developed as a result of Allstate’s significant investment of time, manpower and financial resources, thereby diluting the effectiveness of Allstate’s investment and causing irreparable harm to Allstate’s competitive position. 6. Allstate believes its procedures for investigating, handling, adjusting, and evaluating casualty claims give Allstate an advantage in attracting and keeping policyholders which competitors do not share. 7. Allstate has taken reasonable and appropriate precautions to maintain the confidentiality of these records and protect its trade secrets. 8. Allstate has made significant efforts to preserve the secrecy of its claim manuals and related materials. For example, Allstate maintains its claim manuals and related materials as confidential and limits access to these materials to employees and other persons who are under an obligation to keep these materials confidential. The employees and others who have access to these materials are specifically advised that these are confidential materials provided to them with the express or implied understanding that these confidential materials will not be revealed to any third parties. Access to management reports, statistical information and the like is limited to certain management personnel. 9. Notices are printed on the claim manuals referring to the confidential nature of the materials and the prohibition against disclosure to third parties. In many instances, a statement is included in large type on the title page indicating that the materials are “Confidential” and are the property of Allstate and are not intended for distribution to third parties. 10. Allstate keeps these materials in secured locations. Allstate’s offices, in general, are locked when they are not open for business and access into Allstate’s offices is controlled during business hours. Allstate’s Real Estate and Construction Department maintains a set of standard construction specifications for company offices that requires security controls to protect against unauthorized persons entering nonpublic areas of Allstate’s premises. Allstate’s claim manuals and related materials are physically located in interior offices that require electrical, mechanical, or some other form of controlled access. 11. Allstate management reports, statistical information and the like are kept on computer and all authorized code is required to access the data. Access to the data is recorded on the computer. Print outs of this data are kept in the secured offices referenced above. 12. Allstate has not authorized or given permission to anyone to make copies of or distribute any of the claim manuals, management reports, and McKinsey & Company documents, and related materials. Allstate has not offered any of this information for sale, nor has Allstate made any of it available for public use. Any distribution of this information has been undertaken in disregard of Allstate’s rights to control distribution, of its materials and Allstate is pursuing efforts to curtail the disclosure and/or distribution of these documents. 13. Allstate has resisted the unfettered production and distribution of these materials in other litigation and has always requested, and generally received, confidentiality orders for any such records produced. 14. Allstate’s employees expressly agree and/or are expressly required to keep such materials confidential and to not produce such materials to third parties. 15. Allstate’s Special Investigation Unit (“Sill”) policies and procedures are designed to prevent, or at least deter, suspected fraud. Revelation of Allstate’s Sill practices and procedures will harm this effort, perhaps significantly. 16. Allstate’s Claim Core Process Redesign is a program of internal policies, methods, and procedures developed by Allstate for handling claims. 17. Allstate does not disseminate information about the Claim Core Process Redesign to the general public or competitors in the insurance industry. 18. Allstate employees are required to maintain confidentiality about the Claim Core Process Redesign. Only a limited number of high-level Allstate employees have access to McKinsey & Company documents, on a need-to-know basis. 19. The Claim Core Process Redesign is valuable, in part, because it is information that is not generally known. 20. The CCPR claims manual contains information considered confidential and proprietary to Allstate concerning the process of adjusting claims. Allstate believes these procedures give it a competitive edge with respect to procedures used by other insurance companies with which it competes, and provides a significant benefit to its shareholders and policyholders. This benefit, and the investment that created it, would be lost if these materials were obtained or disclosed to its competitors. 21. Allstate does not maintain information compiled in defending litigation in one location. Specifically, Allstate maintains no central repository, in which it places information pertaining to expert witnesses hired by opposing parties, like, for example, Gary T. Fye and Linda Brown. In order to obtain prior testimony provided by Mr. Fye and Ms. Brown in litigation against Allstate, it would be necessary to canvass outside counsel retained by Allstate throughout the country, to determine where such materials could be found. This would be a time-consuming and burdensome process. FURTHER AFFIANT SAYETH NOT. [[Image here]] STATE OF ILLINOIS) COUNTY OF COOK) The foregoing instrument was subscribed, sworn to and acknowledged before me this/'%1& day of September 2001, by CHRISTINE SULLIVAN. [[Image here]] My commission expires: [[Image here]] W018S756.DOC [[Image here]]