Court Opinion

ID: 4025789
Source: CourtListenerOpinion
Date Created: 2016-08-17 15:05:59.90525+00
Date Added: 2024-06-11T12:17:04.758646
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                  No. 15-0999
                             Filed August 17, 2016

SYSCO IOWA, INC.,
    Plaintiff-Appellant,

vs.

UNIVERSITY OF IOWA,
     Defendant-Appellee.
________________________________________________________________

      Appeal from the Iowa District Court for Johnson County, Chad A. Kepros,

Judge.

      A food distribution company appeals the district court’s determination its

contract with the University of Iowa does not contain trade secrets and is

therefore subject to disclosure under Iowa’s Open Records Act. REVERSED

AND REMANDED.

      James R. Swanger, Michael R. Reck, Kelsey J. Knowles, and Emily M.

Schirmer of Belin McCormick, P.C., Des Moines, for appellant.

      Thomas J. Miller, Attorney General, and George A. Carroll, Assistant

Attorney General, for appellee.

      Considered by Vogel, P.J., Potterfield, J., and Blane, S.J.*

      *Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2015).
                                         2

POTTERFIELD, Judge.

      Sysco Iowa, Inc. appeals the district court’s determination that the Master

Distribution Agreement (contract) Sysco entered into with the University of Iowa

Hospitals and Clinics (the University) does not contain trade secrets and is

therefore subject to disclosure under Iowa’s Open Records Act. Sysco argues

the contract does contain trade secrets and those trade secrets should be

protected from disclosure. See Iowa Code § 22.7(3) (2015). Alternatively, Sysco

argues examination of the contract is not in the public interest and would cause

substantial and irreparable injury to the company. See id. § 22.8. We find the

relevant portions of the contract—information detailing, among other things,

Sysco’s pricing, financing, discount, and delivery terms—have independent

economic value and qualify as trade secrets. Therefore, those portions of the

contract are confidential records that are exempt from disclosure under the Open

Records Act. The district court erred in denying Sysco injunctive relief.

I. Background Facts and Proceedings

      The original contract between Sysco and the University is dated

September 1, 2008, and provided for Sysco to supply the University with food

distribution services for the time period beginning September 1, 2008, and

ending August 30, 2013. Subsequent amendments extended the term of the

contract twice, first to August 30, 2014, and then to June 30, 2015. The contract

was the result of a competitive process whereby companies provided sealed bids

to the University to provide the services needed by the University and included a

confidentiality provision. The full contract, including ten attached schedules and

three amendments, is thirty-four pages long.
                                         3

        A reporter from the Cedar Rapids Gazette filed a request with the

University, pursuant to Iowa’s Open Records Act, seeking information regarding

the contract. See id. § 22.2. The University believed the contract to be a public

record it was obligated to disclose and notified Sysco of its intent to do so unless

Sysco obtained injunctive relief. Sysco filed a petition seeking an injunction on

September 19, 2014, asserting the contract included trade secrets not subject to

disclosure and that disclosure would serve no public purpose but would cause

substantial and irreparable injury to Sysco and give its competitors an advantage.

See id. §§ 22.7(3), 22.8(1).

        The district court held a hearing on Sysco’s petition on April 13, 2015.

The reporter from the Cedar Rapids Gazette attended but did not intervene. The

University was represented but offered no evidence and took no position on the

issue of whether portions of the contract constituted trade secrets. Two days

later, on April 15, 2015, the district court issued an order denying Sysco’s petition

for injunctive relief. The order, later clarified following Sysco’s motion to enlarge

or amend under Iowa Rule of Civil Procedure 1.904, found the contract did not

qualify for a trade secret exemption under Iowa Code section 22.7(3) and Sysco

failed to establish the elements required to justify an injunction under section

22.8.   The district court ordered the University to produce the contract for

examination unless Sysco appealed the order and sought a stay, in which case

the University was to delay examination of the contract pending resolution of

Sysco’s request for a stay.
                                          4

         Sysco filed both a notice of appeal and a motion for stay on June 9, 2015.

The Iowa Supreme Court granted the motion for stay on July 20, 2015, ordering

disclosure of the contract be stayed pending resolution of this appeal.

II. Standard of Review

         Because cases brought under chapter 22 of the Iowa Code are ordinarily

triable in equity, we review the district court’s ruling on Sysco’s application for

injunctive relief de novo. See Iowa Film Prod. Servs. v. Iowa Dep’t of Econ.

Dev., 818 N.W.2d 207, 217 (Iowa 2012).             “We review the district court’s

interpretation of chapter 22 for correction of errors at law.” Id.

III. Discussion

         Iowa’s Open Records Act, codified in chapter 22 of the Iowa Code, grants

citizens the right to examine and copy records maintained by the State and other

local governmental bodies supported by citizens’ property tax revenue. See Iowa

Code §§ 22.1(1), (3)(a), 22.2(1) (“Every person shall have the right to examine

and copy a public record and to publish or otherwise disseminate a public record

or the information contained in a public record.”). The purpose of chapter 22 is

“to open the doors of government to public scrutiny—to prevent government from

secreting its decision-making activities from the public, on whose behalf it is its

duty to act.” Iowa Civil Rights Comm’n v. City of Des Moines, 313 N.W.2d 491,

495 (Iowa 1981).       “Accordingly, there is a presumption of openness and

disclosure under this chapter.” Gabrilson v. Flynn, 554 N.W.2d 267, 271 (Iowa

1996).

         Notwithstanding the presumption of openness, disclosure of public records

under chapter 22 has explicit limits; the Open Records Act enumerates sixty-
                                        5

seven categories of “confidential” records and exempts them from disclosure

“unless otherwise ordered by a court, by the lawful custodian of the records, or

by another person duly authorized to release such information.”        Iowa Code

§ 22.7. One such category covers “[t]rade secrets which are recognized and

protected as such by law.” Id. § 22.7(3). In applying section 22.7(3), we use the

definition for “trade secrets” found in Iowa’s Uniform Trade Secrets Act. Iowa

Film Prod. Servs., 818 N.W.2d at 219. The Uniform Trade Secrets Act defines a

“trade secret” as follows:

              4. “Trade secret” means information, including but not limited
       to a formula, pattern, compilation, program, device, method,
       technique, or process that is both of the following:
              a. Derives independent economic value, actual or potential,
       from not being generally known to, and not being readily
       ascertainable by proper means by a person able to obtain
       economic value from its disclosure or use.
              b. Is the subject of efforts that are reasonable under the
       circumstances to maintain its secrecy.

Iowa Code § 550.2(4).

       The definition of a trade secret under section 550.2(4) presents “a mixed

question of law and fact.”    Econ. Roofing & Insulating Co. v. Zumaris, 538
N.W.2d 641, 648 (Iowa 1995). The first portion of the definition is the legal

question, while the elements described in subsections (a) and (b) are questions

of fact. Id. at 648–49.

       Public records may also be protected from disclosure in other, narrowly-

drawn circumstances set forth in chapter 22:

             1. The district court may grant an injunction restraining the
       examination, including copying, of a specific public record or a
       narrowly drawn class of public records. A hearing shall be held on
       a request for injunction upon reasonable notice as determined by
       the court to persons requesting access to the record which is the
                                         6

      subject of the request for injunction. It shall be the duty of the
      lawful custodian and any other person seeking an injunction to
      ensure compliance with the notice requirement. Such an injunction
      may be issued only if the petition supported by affidavit shows and
      if the court finds both of the following:
              a. That the examination would clearly not be in the public
      interest.
              b. That the examination would substantially and irreparably
      injure any person or persons.
              ....
              3. In actions brought under this section the district court shall
      take into account the policy of this chapter that free and open
      examination of public records is generally in the public interest even
      though such examination may cause inconvenience or
      embarrassment to public officials or others. A court may issue an
      injunction restraining examination of a public record or a narrowly
      drawn class of such records, only if the person seeking the
      injunction demonstrates by clear and convincing evidence that this
      section authorizes its issuance.

Iowa Code § 22.8(1), (3).

      Here, the district court determined none of the relevant information in the

contract qualified for exemption from disclosure as a trade secret because Sysco

did not prove the information had independent economic value:

             The [contract] in this case includes information on (1) how
      Sysco defines its “cost”; (2) how Sysco calculates “costs”; (3) the
      University’s right to audit its account; (4) a margin schedule for
      categories of products sold to the University; (5) details of the
      marketing programs available to the University of Iowa; and (6)
      agreements to provide special services to the University. It is clear
      to the court that the portions of the [contract] Sysco seeks to protect
      from disclosure qualifies as “information” under Iowa Code section
      550.2(4).
             Having determined that the information in the [contract]
      which Sysco seeks to protect is “information” under Iowa Code
      section 550.2(4), the court must determine, as a factual matter,
      whether such information derives independent economic value and
      is the subject of efforts that are reasonable under the
      circumstances to maintain its secrecy. . . . By affidavit, Sysco
      states that, if the terms of its contract with the University of Iowa
      were made public, it would be significantly disadvantaged during
      the next bidding process because other competitors would know
      their cost, how they define cost, the margins charged to the
                                        7

      University of Iowa, and the special discounts that were provided.
      Sysco further claims that it would be at a disadvantage because it
      would not know similar information regarding its competitors. . . .
      Sysco claims that comparing contracts during the bidding process
      is difficult and that a competitor having Sysco’s contract could
      possibly undercut certain provisions while using other terms or
      provisions to charge a higher price or provide different services.
               ....
               The court finds that the information in the [contract] sought
      by Sysco to be protected from disclosure in this case does not
      qualify for a trade secret exemption under Iowa Code section
      22.7(3) because Sysco fails to prove the independent economic
      value element required by Iowa Code section 550.2(4)(a). The
      affidavit offered by Sysco makes a general claim that it would be
      disadvantaged during the next bidding process if Sysco’s
      competitors knew its cost, margins, and special discounts.
      However, Sysco does not provide any specifics on the food
      distribution industry, Sysco’s place in the industry, the other
      competitors in the industry, or how the release of the information
      contained in the [contract] would specifically advantage competitors
      or disadvantage Sysco beyond the bare assertion it would do
      so. . . .
               ....
               While the court understands that Sysco would prefer to
      keeps its contracts confidential, Sysco fails to provide facts at a
      level necessary to establish the trade secret exemption to
      overcome the strong presumption of disclosure. . . .
               The court does find that Sysco has satisfied the second
      prong of the trade secret test in Iowa Code section 550.2(4)(b)—
      that the information is the subject of efforts that are reasonable
      under the circumstances to maintain its secrecy. . . .
               ....
               Because the court finds that Sysco has not met its burden to
      establish the trade secrets exemption under Iowa Code section
      22.7(3), the court denies the petition for injunctive relief.

Following Sysco’s motion to enlarge or amend, the district court clarified its

finding Sysco also failed to prove it was entitled to injunctive relief through

alternative means under section 22.8, explaining Sysco “did not establish both

that the examination [of the contract] clearly would not be in the public interest

and that the examination would substantially and irreparably injur[e] any person

or persons.”
                                         8

       On appeal, Sysco challenges the district court’s conclusion regarding the

first of the two fact questions under section 550.2(4)—that the relevant portions

of the contract do not have independent economic value and, therefore, do not

constitute trade secrets exempt from disclosure under the Open Records Act.

Sysco does not dispute the district court’s findings on either the legal question—

the initial determination the portions of the contract Sysco seeks to protect qualify

as “information” within the meaning of section 550.2(4)—or the second of the two

factual questions—that Sysco took reasonable efforts to maintain the secrecy of

the contract. As was the case below, the University takes no position on whether

the contract contains trade secrets and only asks on appeal that we “rule

appropriately.”

       The district court relied primarily upon two Iowa Supreme Court cases in

reaching its conclusion the portions of the contract did not have independent

economic value: US West Communications, Inc. v. Office of Consumer

Advocate, 498 N.W.2d 711, 714–15 (Iowa 1993), and Iowa Film Production

Services, 818 N.W.2d at 219–25.        Specifically, the district court tracked the

weaknesses our supreme court found in the proof offered by the company

seeking injunctive relief in US West and found the same weaknesses applicable

to Sysco’s proof. We find both cases factually distinguishable.

       In US West, a series of investigative articles suggested a company and its

subsidiaries were engaged in a pattern of sales and leasebacks of commercial

real estate properties. 498 N.W.2d at 713. According to the articles, the scheme

involved the company and its subsidiaries paying each other inflated lease rates

to help drive up the costs of the buildings for sale and avoid losses to
                                         9

shareholders; the trumped-up lease payments were then passed along to

customers by increasing utility costs. Id. The Iowa Supreme Court considered

whether information related to the leases, sales, and purchases should be

classified as trade secrets but ultimately concluded it did not have independent

economic value, given the unique circumstances. Id. at 715. In an attempt to

prevent disclosure of the information, US West claimed if sales and lease data

were disclosed, competitor lessors would undercut its pricing and gain an unfair

bargaining advantage.      Id. at 714.    However, the affidavits and testimony

provided did not adequately explain why that was so. Id. at 715. Our supreme

court found the record insufficient to determine whether the company and its

subsidiaries were major players in the competitive real estate leasing market or if

most of the leases were between affiliates, noting, “If in fact the sales and leases

are in-house transactions between parent and subsidiary companies rather than

arm’s-length transactions, we believe the information would be of little use to

West’s competitors.” Id.

       In Iowa Film, “certain irregularities” aroused public interest in an Iowa tax

credit program designed to encourage filmmakers to bring projects into the state.
818 N.W.2d at 213.       The Iowa Supreme Court considered whether budget

expenditure summaries submitted by film production companies qualified for

protection from disclosure as trade secrets but concluded they did not have

independent economic value. Id. at 219–25. The production companies argued

they would not be able to sell their films for a profit if distributors knew the true

cost of making the film and that disclosure of the summaries could potentially

enable the public to deduce the compensation paid to directors and actors whose
                                        10

employment had been conditioned upon the confidentiality of their compensation

arrangements. Id. at 223. Our supreme court found these arguments “more

theoretical than real.” Id. at 223–24. As to the first argument, the court reasoned

the ability to sell a film was driven not by cost but by bidding within a highly

competitive distribution market based upon predictions of box-office success, the

stated cost would not reflect the true cost due to the tax credits involved, and

most importantly, it was already possible to determine the overall production cost

of the films by doubling the amount of the publicly-available fifty percent tax

credits awarded. Id. at 223. As to the second argument, the court could not find

a discernable way to determine confidential compensation amounts from the

budget expenditure summaries in the record. Id. at 224.

       The district court found US West and Iowa Film to be directly analogous

and controlling:

              While the court understands that Sysco would prefer to
       keeps its contracts confidential, Sysco fails to provide facts at a
       level necessary to establish the trade secret exemption to
       overcome the strong presumption of disclosure. As was the case in
       US West, the affidavit provided by Sysco merely provides opinions
       concerning the effects disclosure would have, but such evidence is
       self-serving and does not contain hard facts.          The court’s
       conclusion is likewise consistent with Iowa Film . . . in which the
       [Iowa Supreme] Court concluded that the evidence of independent
       economic value was more theoretical than real.

However, unlike in US West and Iowa Film, Sysco’s claim that disclosure of the

entire contract will provide an advantage to Sysco’s competitors is a legitimate

concern—not a theoretical one—and we therefore hold the relevant portions of

the contract have independent economic value within the meaning of the Uniform

Trade Secrets Act. The relevant portions of the contract would, if disclosed,
                                          11

effectively provide competitors with a blueprint of Sysco’s operating model not

otherwise available to them.     Among other things, competitors would know

precisely how Sysco defines cost for pricing purposes, precisely what margins it

is both willing and able to operate on, and what special discounts it provides.

Sysco derives independent economic value in keeping that knowledge away from

its competitors, who would be able to use the information to gain an unfair

advantage in bids for future contracts.

      Moreover, Sysco’s argument that disclosure of the entire contract would

provide its competitors with a clear advantage is not susceptible to concerns of

affiliates bargaining at less than arm’s length.      The sealed-bid competition

between Sysco and its competitors provides the context for Sysco’s claims. In

US West, where our supreme court suspected a telecommunications corporation

and its subsidiaries wanted to prevent disclosure of copies of lease and real

estate transactions between and among themselves, the court found the record

insufficient to establish disclosure would, in fact, cause any competitive

disadvantage. 498 N.W.2d at 714–15. Our supreme court explained:

             [US] West contends the data involved has economic value.
      It urges that if sale and lease data were disclosed, competitor
      lessors would undercut its pricing; their lessees would gain an
      unfair bargaining advantage; and when [US] West was a potential
      lessee, it would be disadvantaged if lessors knew what it paid
      elsewhere.
             The record made before the trial court is not as clear as
      these contentions. . . . While affidavits and testimony by [US] West
      and its subsidiary employees provide opinions concerning the
      deleterious effects disclosure will have on [US] West or its affiliates,
      such evidence is self-serving and does not contain hard facts.
             [US] West provided no evidence concerning the number of
      tenants in the buildings, the percentage of buildings rented to
      outsiders, the occupancy rates, or [US] West’s own needs
      concerning leasing space. While reference is made to competitors,
                                        12

      the record is vague concerning the extent of the advantage the
      lease information will provide competitors. We are uncertain
      whether [US] West or its subsidiaries are major players in the
      competitive real-estate leasing market or whether most of its
      leasing is between affiliates. . . . If in fact the sales and leases are
      in-house transactions between parent and subsidiary companies
      rather than arm’s-length transactions, we believe the information
      would be of little use to [US] West’s competitors. The burden was
      on [US] West and its subsidiaries to prove that a disclosure of the
      lease and sales information would put [US] West at an economic
      disadvantage. In our de novo review, we conclude [US] West has
      failed to meet this burden.

Id. In short, the US West court was unable to determine whether information

about the lease and real estate sales had independent economic value because

no concrete information was provided to establish the context in which the

information might be used by competitors; it was very possible the information

would have had no such value because it concerned leases and real estate

transactions between a parent corporation and its subsidiaries—transactions that

would not be vulnerable to competitors seeking to undercut prices.

      Here, in contrast, the potential harm to Sysco is straightforward. If the

entire contract is disclosed, information asymmetry will result. Sysco will stand a

very real risk of being undercut on future bids because Sysco’s competitors know

its bid strategy, but Sysco does not know theirs. Given the self-evident nature of

the advantage Sysco’s competitors would gain by having access to the

information, we find the affidavits supplied by Sysco in support of its motion for

injunctive relief provided sufficient proof for the relief requested. Although no

Iowa case appears to be directly on point, a number of other jurisdictions have

found this type of information has independent economic value and qualifies as a

trade secret. See, e.g., McDonnell Douglas Corp. v. NASA, 180 F.3d 303, 306–
                                         13

07 (D.C. Cir. 1999) (dismissing the argument that disclosure of line-item pricing

would not enable competitors to underbid company in future because price is

only one of the many factors used in awarding contracts, as “too silly to do other

than to state it, and pass on”); Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp.

Servs., Inc., 987 S.W.2d 642, 645–46 (Ark. 1999) (“[The company]’s chief

executive officer . . . here similarly testified how [the company]’s trade secrets

derived economic value by keeping confidential information bearing on price

modeling, customer profit margins, logistics, future plans, and specific market

strategies. Obviously, armed with such information, a competitor would have an

edge in capturing some significant part of [the company]’s customers and

business. In sum, we harbor no doubts [the company]’s confidential agreements

. . . cover secrets of the type that are protected by Arkansas’s Trade Secrets

Act.”); Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 287 (Cal. Ct. App.

2002) (finding information identifying a company’s pricing, profit margins, costs of

production, pricing concessions, promotional discounts, advertising allowances,

volume rebates, marketing concessions, payment terms and rebate incentives

“has independent economic value because [the company]’s pricing policies

would be valuable to a competitor to set prices which meet or undercut [the

company]’s”).

       We find the contract between Sysco and the University contains trade

secrets as defined in Iowa Code section 550.2(4).         Those trade secrets are

exempt from disclosure under Iowa’s Open Records Act because they qualify as

“confidential information” under section 22.7(3). The district court’s findings to

the contrary were in error. We therefore reverse the district court’s order and
                                       14

remand for further proceedings consistent with this opinion. Because we have

resolved this appeal on Sysco’s first argument, we need not address its second.

      REVERSED AND REMANDED.