Sioux Pharm, Inc. and Sioux Biochemical, Inc. v. Eagle Laboratories, Inc.

In this case involving claims for misappropriation of trade secrets,

we have before us an interlocutory appeal on a discovery issue. In

particular, the plaintiffs ask us to review a district court order requiring

the redesignation of the plaintiffs' standard operating procedures (SOPs)

from "attorneys' eyes only” to "confidential.” The underlying protective

order allowed each party to designate highly sensitive proprietary or

trade-secret information whose disclosure to another party in the case

would cause severe competitive damage as "attorneys' eyes only.” Under

this designation, only court personnel, attorneys, and outside experts

could review the material. The district court removed the "attorneys'

eyes only” designation for any of plaintiffs' SOPs alleged to have been

misappropriated, converted, or used without authorization by the

defendants. With the modification, these materials would remain

confidential and not disclosed to the public, but would be disclosed to

the defendants themselves.

Plaintiffs urge that the district court abused its discretion in

issuing the order. On appeal, we agree that the court abused its

discretion. The defendants did not argue below that the plaintiffs

improperly designated materials under the order and did not provide any

basis for modifying the order other than conclusory assertions and a

statement that they, unlike the plaintiffs, had elected not to hire an

expert in order to save money. On this record, these grounds are not

enough. We conclude that while the district court may have had other

valid grounds for ordering redesignation, this is not apparent from the

terms of the order, and therefore, we must reverse and remand. In short,

removing the "attorneys' eyes only” designation may be appropriate, but

the court's rationale for doing so is insufficient. Accordingly, we reverse

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the district court's ruling and remand for further consideration in light of

a number of factors discussed in this opinion, including (1) the

standards set forth in the stipulated protected order for designation of

material as "attorneys' eyes only”; (2) the need for defendants, in addition

to their attorneys and experts, to have access to the materials to properly

defend the plaintiffs' claims; and (3) the potential harm to the plaintiffs

that would result from disclosure of the materials to the defendants.

I. Background Facts and Proceedings.

This litigation involves a battle between the two domestic

producers of chondroitin sulfate, Sioux Pharm, Inc. and

Eagle Laboratories, Inc., and other individuals and entities named in the

litigation, hereinafter referred to collectively as Sioux Pharm and

Eagle Labs, respectively.

Chondroitin sulfate is a component of dietary supplements for joint

health. Sioux Pharm, located in Sioux Center, makes the product from

bovine trachea and other ingredients. Its manufacturing processes

utilize chemical and biological research, unique procedures, specialized

tools, machinery, hardware, and software. Sioux Pharm restricts access

to its manufacturing facilities and requires its employees to sign

confidentiality agreements. Sioux Pharm's expert testified Sioux Pharm's

processes differ substantially from the processes known in the public

domain, its proprietary methods are worth approximately $4.4 million,

and its processes have changed significantly since 2003 when two

individuals at the center of this dispute resigned.

Robert Den Hoed and Dana Summers are former employees of

Sioux Pharm. Den Hoed left his job with Sioux Pharm in 2001 and

launched Eagle Labs in 2003. Den Hoed is the president, CEO, and

majority owner of Eagle Labs. Summers left his position with

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Sioux Pharm in 2003 and became the secretary for Eagle Labs.

Eagle Labs began producing chondroitin sulfate in 2005 and is

Sioux Pharm's only domestic competitor.

Eagle Labs is a small business with no more than four employees,

including Den Hoed and Summers, operating out of a small building

behind Den Hoed's family home. By contrast, Sioux Pharm occupies a

40,000-square-foot facility and estimates that its operation is ten times

larger than Eagle Labs'.

On March 1, 2012, Summers contacted Sioux Pharm and asked to

visit the plant, but his request was refused. Two nights later,

Sioux Center police received a call reporting a suspicious red truck

parked by the Sioux Pharm facilities. Officers investigating the call

found the truck outside and an exterior door propped open with a

wrench. The officers caught Summers breaking into Sioux Pharm.

Summers had a set of six keys to Sioux Pharm in his pocket, including a

master key, and the officers found another master key in the parking lot

near Summers's truck. The officers searched Summers's truck and

found a white binder that turned out to be an SOP manual. After

changing his story several times, Summers admitted that he had stolen

the manual that night. He was charged with burglary in the third degree

in violation of Iowa Code sections 713.1 and 713.6A (2011).

Sioux Pharm alleges that the break-in was an act of deliberate corporate

espionage, while Eagle Labs claims that Summers acted on his own,

without its knowledge or authorization.1

1Evidence regarding the break-in, including a police report and the judgment

entry in Summers's criminal case, was submitted in the course of the subsequent

litigation between Sioux Pharm and Eagle Labs and relied upon by the district court in

various pretrial rulings. As the district court found,



5

On March 8, Sioux Pharm filed this civil action claiming tradesecrets

violations against Eagle Labs, Bio-Kinetics Corporation,

Summers, Den Hoed, and John Ymker, a partner in Eagle Labs.

Sioux Pharm's petition alleged that Eagle Labs misappropriated trade

secrets, intentionally interfered with contracts and prospective business

advantage, and engaged in civil conspiracy. In later amendments to the

petition, Sioux Pharm added claims of unfair competition.

With respect to its trade-secret claims, Sioux Farm broadly alleged

in Count I that it

utilize[s] trade secrets in the form of secret chemical and

biological research, secret systems, secret procedures, secret

software programs, secret specialized hardware, and secret

specialized tools, machinery and production processes, all of

which allow Plaintiffs to produce a variety of unique, highly

specialized products . . . with efficiency and precision.

Sioux Pharm further alleged that the above trade secrets were the result

of significant efforts and expenditures by the plaintiffs, they provide

substantial advantages over competitors, and plaintiffs own the trade

secrets. According to the petition, Sioux Pharm undertook "very

deliberate steps” to ensure that outsiders such as the defendants had no

access to Sioux Pharm facilities and SOPs, including limiting access to

the facilities and requiring plaintiffs' employees to sign confidentiality

agreements. The petition alleged that the defendants obtained the trade

secrets through physical intrusion into the plant and through

theft/review of Sioux Pharm's SOP manual and trade secrets.

Upon the filing of the petition, Sioux Pharm obtained an ex parte

order from the district court authorizing Sioux Pharm to seize the

Defendant Summers is an officer and employee of the defendant Eagle

Laboratories and was . . . caught [burglarizing] the plaintiff's place of

business and had a notebook of the plaintiffs' SOPs in his pickup truck.

_________________________

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computer and telephone equipment of Eagle Labs and to engage in a

walk-through of the Eagle Labs facility. Pursuant to the court order,

Sioux Pharm seized the equipment, engaged in the "walk through,” and

took various photographs on March 13, 2012. In its answer, Eagle Labs

specifically denied all of Sioux Pharm's allegations relating to trade

secrets.

The parties also filed discovery motions. First, Eagle Labs sought a

protective order on March 15 to protect any trade-secret information

acquired during the walk-through. The district court ruled that all such

information could only be reviewed by attorneys for the parties working

together. Sioux Pharm, in turn, filed a motion on June 4 seeking greater

access to the material, but agreeing that a protective order was necessary

to protect the trade secrets of each party. The parties subsequently

agreed to, and the district court entered, a stipulated protective order on

August 6.

The stipulated protective order allows each party to designate

materials as "confidential” or "attorneys' eyes only” (AEO):

The designation of 'CONFIDENTIAL' by the Producing Party

constitutes the representation that it reasonably and in good

faith believes the Discovery Material constitutes or discloses

confidential, non-public, and/or protective information

under Iowa law. The designation of 'ATTORNEYS' EYES

ONLY' by the Producing Party constitutes the representation

that it reasonably and in good faith believes the designated

material constitutes or discloses confidential, non-public,

and/or proprietary information containing highly sensitive

proprietary, financial, or trade secret information, which

would cause severe competitive damage if disclosed to

another party to this action.

Under the terms of the order, confidential information may be disclosed

only to attorneys, court personnel, parties, experts, and witnesses—with

the latter three groups required to execute a prior agreement to be bound

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by the terms of the order. AEO material—unlike confidential material—

may not be disclosed to the parties themselves. The order also restricts

use of confidential and AEO "to the purposes of this litigation and . . .

not . . . any other purpose.”

The stipulated protective order defines AEO information as follows:

"Attorneys' Eyes Only” information means confidential,

non-public, and/or proprietary information containing highly

sensitive proprietary, financial, or trade secret information,

which would cause severe competitive damage if disclosed to

another party to this action, provided in any form

whatsoever in this action . . . .

Additionally, the stipulated protective order allows any party to

challenge an AEO or confidential designation and seek redesignation.

The party must first ask the producing party in writing to redesignate. If

that request is not granted within five days, the requesting party may

seek redesignation from the court. The order states, "In connection with

any such motion, the burden shall be [on] the Producing Party to defend

the appropriateness of the designation as Confidential or Attorney's Eyes

Only. Any such objections to such designations shall be made in good

faith.” The order further provides:

If the Court upon motion finds that the challenged

document or deposition testimony is improperly designated

and the Producing Party was not acting in good faith in

refusing consent to disclosure, voluntary withdrawal of

designation or voluntary re-designation, the Court may grant

relief as appropriate under Iowa Rule of Civil Procedure

1.517.

The stipulated protective order also contains a general provision

allowing amendments:

This Protective Order may be amended with respect to

specific Discovery Materials without leave of Court by the

agreement of counsel for the Producing Party and Receiving

Party in the form of a Stipulation filed in this case. This

Protective Order shall remain in full force and effect

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indefinitely until modified, superseded or terminated on the

record by written agreement of the Parties or by order of this

Court. This Court shall retain jurisdiction during the

pendency of this action and thereafter to enforce this

Protective Order and to grant relief for any violation thereof.

Nothing contained in this Protective Order shall be

construed to affect or govern the scope of discovery in this

action, or to preclude any Party from moving this Court for

further order or relief.

The district court entered a scheduling order that required

Sioux Pharm to designate experts no later than 210 days before trial or

by March 15, 2013, and Eagle Labs to designate experts no later than

150 days before trial or by May 17, 2013. Trial was scheduled for

October 15, 2013.

Sioux Pharm's petition initially alleged that Eagle Labs

misappropriated trade secrets solely in the break-in of March 3, 2012.

Eagle Labs chose not to designate any experts, concluding that Den Hoed

and Summers could adequately explain the origin of their SOPs and no

experts were necessary to defend the allegations based on the break-in.

Both parties produced their SOPs under the AEO designation, and

Sioux Pharm heavily redacted portions of its SOPs.2 In a second

amended petition filed April 23, 2013, Sioux Pharm added claims against

Summit Nutritionals International, Inc. and Federal Laboratories

Corporation for unfair competition and related claims.

On May 10, 2013, Eagle Labs moved for leave to file counterclaims

against Sioux Pharm. Eagle Labs asserted that Sioux Pharm trespassed

on its property when its representatives entered the property of

Eagle Labs pursuant to an ex parte temporary restraining order issued in

the case. According to Eagle Labs, while the court authorized a "short

walk-through,” the Sioux Pharm representatives, including its principal

2Eagle Labs also made redactions to its SOPs.



9

officers, trespassed on the property by engaging in an examination of

property and facilities that far exceeded the scope of the district court's

order. Eagle Labs also claimed that if trade secrets were in fact involved

in the process of the manufacture of chondroitin sulfate, as Sioux Pharm

alleged, then Sioux Pharm misappropriated Eagle Labs' trade secrets

through its inspection of Eagle Labs' facilities that exceeded the scope of

the district court's order.

On June 7, the district court ordered two separate trials—one for

Sioux Pharm's trade-secrets claim and one for its unfair competition

claim. The unfair competition component of the case is not at issue in

this appeal.3 The court also denied Eagle Labs' motion for leave to file a

counterclaim. Subsequently, the district court denied Sioux Pharm's

August 7 motion to file another amended complaint, adding allegations

that Eagle Labs had copied Sioux Pharm's SOPs before the March 3,

2012 break-in. On October 4, the district court granted summary

judgment dismissing trade-secret claims against Den Hoed and Ymker

individually.

Although both sides produced SOPs under the AEO designation,

Eagle Labs contests the trade-secret status of Sioux Pharm's SOPs. In

particular, Eagle Labs contends at least some of Sioux Pharm's SOPs

lack trade-secret status based on disclosures made and positions taken

by plaintiff Sioux Biochemical, Inc. in prior litigation against Cargill, Inc.4

3In a separate appeal, we affirmed the district court's ruling that Summit is

subject to personal jurisdiction in Iowa. Sioux Pharm v. Summit Int'l, 859 N.W.2d 182,

197 (Iowa 2015).

4Approximately, a decade before, plaintiff Sioux Biochemical, Inc. had sued

Cargill for misappropriation of trade secrets. See Sioux Biochem., Inc. v. Cargill, Inc.,

410 F. Supp. 2d 785 (N.D. Iowa 2005). In the lawsuit, Sioux Pharm's president and coowner,

Dr. Allen Kramer, attested that Cargill had converted and disclosed "step-bystep

details” of his company's manufacturing method. Sioux Pharm responds that its

SOPs evolved after that and were not the same in 2012 as the SOPs in the earlier Cargill



10

Sioux Pharm, through affidavit, asserts the SOPs at issue in this case

remain protected trade secrets. The district court, after it entered the

stipulated protective order, has made no findings that the specific SOPs

sought by Eagle Labs either contain trade secrets or do not.

On September 3, Eagle Labs filed a motion to have Sioux Pharm's

SOPs redesignated from AEO to confidential. In its motion, Eagle Labs

said it would be "impossible for Defendants to adequately prepare their

case for trial unless the above-referenced information [i.e., the SOPs] is

redesignated from AEO to 'confidential.' ” Eagle Labs added that

redesignation "would permit Defendants' counsel the opportunity to

share this information with their clients so that evidence can be

developed to address the allegations being made by Plaintiffs.” In the

same motion, Eagle Labs also offered to redesignate its own SOPs (which

it had previously designated AEO) from AEO to confidential. Eagle Labs

did not submit any affidavit or other evidence in support of its motion.

Sioux Pharm filed a resistance to Eagle Labs' motion for

redesignation. Sioux Pharm's resistance also was not supported by any

affidavit or other evidence specific to the motion. The resistance made

the point that Eagle Labs was not contesting the AEO designation under

the protective order. According to Sioux Pharm, since the materials had

been properly designated, and the defendants had stolen from

Sioux Pharm, the protective order should not be modified to drop the

AEO designation. Eagle Labs also filed a motion to compel Sioux Pharm

to produce unredacted SOPs.

Following hearings, the district court granted both motions by an

order entered September 23. The order required Sioux Pharm to identify

litigation. The district court denied Eagle Labs' request that it grant summary

judgment on the ground that the asserted trade secrets were in the public domain.

_________________________

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which specific SOPs have been misappropriated and produce unredacted

copies of those SOPs designated "confidential” rather than AEO. The

court's order stated:

The court has determined the plaintiff must identify

which specific SOPs have been misappropriated, converted

or used without authorization. These must be disclosed by

October 1, 2013 after a series of discovery disputes. The

court finds these identified SOP classifications should be

changed to that of "confidential” for purposes of this case

only.

The court in conducting its balancing of the various

priorities, finds that this action is necessary to do justice

and to allow the defendants to appropriately understand and

prepare their trial defense strategy.

Sioux Pharm filed an application for interlocutory appeal and request for

immediate stay as well as a motion for reconsideration on September 27.

On September 30, the district court denied Sioux Pharm's motions for a

stay and for reconsideration, pointing out that Sioux Pharm "made

several recent efforts to clarify and (in the court's opinion) efforts to

expand the scope of discovery beyond the pleadings that would add

issues and result in trial being continued.” The district court ordered

Sioux Pharm to produce unredacted copies of every SOP it claimed

Eagle Labs misappropriated, without the AEO designation. This would

allow Den Hoad and Summers to review them. The district court

explained:

Conceivably, if Plaintiffs are making their disclosure in good

faith, there would be few, if any, surprises because Plaintiffs

have had the opportunity to see and compare the SOPs of

both parties prior to its disclosure. This eliminates a generic

allegation of theft or misappropriation and helps the court in

defining what is admissible evidence at trial . . . not a

scattergun approach that may lead to efforts to admit

inadmissible or irrelevant evidence that would result in any

jury verdict being set aside.

This disclosure then allows the defendants to view and

ultimately understand what it is that they have allegedly

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misappropriated, converted or used without authorization.

This method allows them to assist their attorneys in their

defense. Absent disclosures, the defendants do not know

which SOP the plaintiffs will present evidence on as

misappropriated, converted or used without authorization

and essentially would result in "trial by ambush.”

On October 31, we granted Sioux Pharm's application for

interlocutory appeal, which placed its disclosure obligations on hold. We

retained the appeal.

II. Standard of Review.

As a general proposition, we review a district court's discovery

ruling for abuse of discretion. Mediacom Iowa L.L.C. v. Inc. City of

Spencer, 682 N.W.2d 62, 66 (Iowa 2004). A district court abuses its

discretion "when the grounds underlying a district court order are clearly

untenable or unreasonable.” Id. " ' "A ground or reason is untenable . . .

when it is based on an erroneous application of the law.” ' ” Office of

Citizens' Aide/Ombudsman v. Edwards, 825 N.W.2d 8, 14 (Iowa 2012)

(quoting In re Gianforte, 773 N.W.2d 540, 544 (Iowa 2009)).

In the context of trade-secret litigation, from the beginning, the

cases have stressed the role of the district court judge in balancing the

interests of the parties when determining the circumstances of

disclosure. Justice Oliver Wendell Holmes in one of the leading early

trade-secret cases emphasized that "it will rest in the judge's discretion

to determine whether, to whom, and under what precautions, the

revelation should be made.” E.I. du Pont de Nemours Powder Co. v.

Masland, 244 U.S. 100, 103, 37 S. Ct. 575, 576, 61 L. Ed. 1016, 1019

(1917); see also Centurion Indus., Inc. v. Warren Steurer & Assocs., 665

F.2d 323, 326 (10th Cir. 1981). More recently, it has been said that the

nature of disclosure in a trade-secret case " 'is singularly within the

discretion of the district court,' ” Dove v. Atl. Capital Corp., 963 F.2d 15,

13

19 (2d Cir. 1992) (quoting Galella v. Onassis, 487 F.2d 986, 997 (2d Cir.

1973)), and that "[t]he unique character of the discovery process requires

that the trial court have substantial latitude to fashion protective

orders,” Seattle Times Co. v. Rhinehart, 467 U.S. 20, 36, 104 S. Ct. 2199,

2209, 81 L. Ed. 2d 17, 29 (1984). According to authorities, the balancing

of competing rights of the parties poses "a very difficult decision,” see

Peter F. Daniel, Protecting Trade Secrets from Discovery, 30 Tort & Ins.

L.J. 1033, 1042 (1995), that requires "liberal discretion” in the hands of

the trial judge, see Robert A. Matthews Jr., 6 Annotated Patent Digest

§ 41:120, at 41-258 (2008).

III. Analysis.

A. Production of Unredacted SOPs. We begin by addressing a

preliminary matter. The order that Sioux Pharm has appealed requires

Sioux Pharm to produce unredacted SOPs. Sioux Pharm has appealed

this issue, but just barely. Its total briefing on this issue consists of the

following paragraph:

Believing it had no other option, and in a desperate

attempt to avoid the full disclosure of its SOPs to

Defendants, Sioux Pharm reluctantly offered during oral

argument to produce unredacted SOPs (which could not be

viewed by Defendants themselves, because they would

remain AEO). However, Sioux Pharm only offered to do so if

absolutely necessary to avoid producing redesignated

"Confidential” SOPs (which Defendants could view). To be

clear, Sioux Pharm does not want to be forced to unredact

its SOPs, either, even if such redactions might hinder

Sioux Pharm's prosecution of this lawsuit.

To the extent this is an argument against producing unredacted SOPs,

we are not persuaded. Sioux Pharm must produce complete, unabridged

versions of the SOPs to allow the defendants to defend the case fairly.

Because Sioux Pharm contends its case turns at least in part on

similarities between each party's SOPs in content, font, margins, and

14

formatting, counsel for Eagle Labs cannot fairly prepare a defense

without seeing the SOPs allegedly misappropriated. When claims hinge

on a close textual comparison of each side's SOPs containing detailed

technical information and alleged trade secrets, there is simply no

alternative to the production of unredacted SOPs. Although both sides

apparently made redactions, the stipulated protective order makes no

provision for redaction of documents produced with the AEO designation.

Redactions under these circumstances violate the basic principle that

"our discovery rules are to be liberally construed to effectuate the

disclosure of relevant information.” Farnum v. G.D. Searle & Co., 339

N.W.2d 384, 389 (Iowa 1983).

We now turn to the fighting issue on appeal: whether the district

court abused its discretion in ordering the SOPs (which would be

unredacted) reclassified from AEO to confidential.

B. AEO Designations in Protective Orders—Some Relevant

Principles. "[T]here is no true privilege against discovery of trade secrets

or other confidential information.” Mediacom Iowa, 682 N.W.2d at 66.

Yet, once a trade secret is disclosed to a competitor and litigation

adversary, it may be too late to grant an adequate remedy to the holder

of the secret—the disclosure destroys the value of the secret data. See

Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011, 104 S. Ct. 2862,

2877, 81 L. Ed. 2d 815, 838 (1984) ("Once the data that constitute a

trade secret are disclosed to others, or others are allowed to use those

data, the holder of the trade secret has lost his property interest in the

data.”); Air Prods. & Chems., Inc. v. Johnson, 442 A.2d 1114, 1129 (Pa.

Super. Ct. 1982) (noting that disclosure of trade secrets in open court

would "defeat the entire purpose of the action”). The Iowa legislature in

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the Uniform Trade Secrets Act has directed courts to preserve trade

secrets in litigation by reasonable means:

In an action brought under this chapter, a court shall

preserve the secrecy of an alleged trade secret by reasonable

means, including but not limited to granting protective

orders in connection with discovery proceedings, holding

in-camera hearings, sealing the records of the action, and

ordering a person involved in the litigation not to disclose an

alleged trade secret without prior court approval.

Iowa Code § 550.7. Nevertheless, "a trade secret must and should be

disclosed if the disclosure is relevant and necessary to the proper

presentation of a plaintiff's or defendant's case.” Mediacom Iowa, 682

N.W.2d at 66.

Once a district court has found information sought in discovery is

a trade secret, it must determine whether good cause exists for a

protective order. Id. at 67. The court should employ three criteria:

" '[T]he harm posed by dissemination must be substantial

and serious; the restraining order must be narrowly drawn

and precise; and there must be no alternative means of

protecting the public interest which intrudes less directly on

expression.' ”

Id. at 68 (quoting Farnum, 339 N.W.2d at 389–90). The district court is

to "strike a balance between the policy favoring discovery and free

expression on one side and a party's interest in avoiding commercial

damage and preventing an abuse of discovery on the other.” Farnum,

339 N.W.2d at 390. After the court has weighed the harm from

disclosure against the need for the information, the court "must issue an

appropriate protective order to safeguard the rights of the parties.”

Highway Equip. Co. v. Cives Corp., No. C04–0147, 2007 WL 1612225, at

*3 (N.D. Iowa 2007). A court has broad discretion to craft the terms of

the protective order under rule 1.504. Iowa R. Civ. P. 1.504(1)(a)(7)

("[The court] [m]ay make any order which justice requires to protect a

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party or person from annoyance, embarrassment, oppression, or undue

burden or expense, including . . . [t]hat a trade secret . . . not be

disclosed or be disclosed only in a designated way.”).

Litigation over protective orders arises in various contexts.

Sometimes the issue is whether a protective order should be modified so

that third parties may gain access to the material. In Comes v. Microsoft

Corp, we considered a request by plaintiffs in a Canadian antitrust

litigation against Microsoft to gain access to confidential materials from

the Iowa litigation. See Comes v. Microsoft Corp., 775 N.W.2d 302, 304–

05 (Iowa 2009). After reviewing caselaw from federal appellate courts

and elsewhere regarding modification of protective orders to allow thirdparty

access to litigation discovery designated as confidential, we said:

After considering the various approaches other courts

have taken to address requests to modify protective orders,

we conclude the soundest approach is to balance the

interests at stake, taking into account the reasons for the

issuance of the protective order in the first place and

whether the legitimate interests of the parties can still be

protected with the suggested modification. The court should

also consider to what extent the party opposing modification

has reasonably relied on the terms of the protective order

and whether the party would have relied on the protective

order had the suggested modification initially been included

in it. In a case such as this one, the court should consider

the value of the interests of the party seeking modification,

as well as any public interest in judicial economy and public

disclosure, if appropriate. The court should consider

whether the party seeking modification is attempting to

circumvent discovery or evidentiary restrictions in some

other jurisdiction. Because each situation in which a party

or third party seeks modification will be different, we will not

try to list all the considerations the district court may take

into account when making its decision, but the court should

fully and fairly consider all the circumstances supporting the

modification, as well as the circumstances mitigating against

it, and not employ any presumption for or against

modification.

17

Id. at 309–10. We concluded by expressly disavowing any presumption

against the modification of protective orders. Id. at 310.

Although the principles of Comes apply here, this case involves a

different issue than the Comes case. Here, the question is whether

materials that have been designated AEO under a stipulated protective

order that permits this redesignation should be reclassified as

confidential. We recognize that in trade-secret litigation, "courts often

issue protective orders limiting access to the most sensitive information

to counsel and their experts.” Tailored Lighting, Inc. v. Osram Sylvania

Prods., Inc., 236 F.R.D. 146, 148 (W.D.N.Y. 2006); see also Safe Flight

Instrument Corp. v. Sundstrand Data Control, Inc., 682 F. Supp. 20, 22

(D. Del. 1988) (collecting cases). The United States Court of Appeals for

the Tenth Circuit recently stated:

"The disclosure of confidential information on an 'attorneys'

eyes only' basis is a routine feature of civil litigation involving

trade secrets. The purpose of this form of limited disclosure

is to prevent a party from viewing the sensitive information

while nevertheless allowing the party's lawyers to litigate on

the basis of that information.”

Paycom Payroll, LLC v. Richison, 758 F.3d 1198, 1202–03 (10th Cir.

2014) (quoting In re City of New York, 607 F.3d 923, 935–36 (2d Cir.

2010) (emphasis omitted) (citing Fed. R. Civ. P. 26(c)(1)(G))).

The main concern of parties seeking to impose AEO restrictions is

fear that dissemination of sensitive information, particularly to

decision-makers of its competitors, would threaten serious competitive

harm. Even when the decision-makers of the opposing party act in

complete good faith, courts assert that they will simply not be able to

compartmentalize what they learn. See BASF Corp. v. United States, 321

F. Supp. 2d 1373, 1380 (Ct. Int'l Trade 2004); see also F.T.C. v. Exxon

Corp., 636 F.2d 1336, 1350 (D.C. Cir. 1980) ("[I]t is very difficult for the

18

human mind to compartmentalize and selectively suppress information

once learned, no matter how well-intentioned the effort may be to do

so.”); McAirlaids, Inc. v. Kimberly-Clark Corp., 299 F.R.D. 498, 501 (W.D.

Va. 2014) (noting that proposed protective order allowing "technical

advisors” to examine documents was insufficient because "they would be

required to separate their own thoughts and ideas from their competitors'

thoughts and ideas in all future endeavors,” which would be difficult, if

not impossible). As a result, even though it may be completely innocent,

competitive decision-makers could subconsciously use sensitive

information against the disclosing party's interest. See, e.g., McAirlaids,

299 F.R.D. at 501 (holding that "proposed protective order creates an

unacceptable risk of inadvertent disclosure”). The caselaw uniformly and

sensibly holds, all other things being equal, that the risk of harm from

disclosure to a competitor is generally greater than the risk of harm

related to disclosure to a noncompetitor. See Am. Standard Inc. v. Pfizer

Inc., 828 F.2d 734, 741 (Fed. Cir. 1987) (noting "[c]ourts have presumed

that disclosure to a competitor is more harmful than disclosure to a

noncompetitor”); see, e.g., BASF, 321 F. Supp. 2d at 1381; Medtronic

Sofamor Danek, Inc. v. Michelson, No. 01–2373–GV, 2002 WL 33003691,

at *3–4 (W.D. Tenn. Jan. 30, 2002).

On the other hand, the opposing party seeking disclosure, even if a

competitor, may claim that disclosure of documents to its

decision-makers is necessary to allow it to litigate effectively. For

example, in In re Wilson, 149 F.3d 249, 252–53 (4th Cir. 1998), the

Fourth Circuit upheld a bankruptcy court decision to allow at least some

disclosure of protected trade secrets to high-level employees of the

corporation's competitor, reasoning that though the plaintiff may suffer

inevitable harm from disclosure, the defendant's need to understand the

19

claim charged against him outweighed the potential harm of disclosing

trade secrets to the competitor. In some contexts, the opposing party

may assert, for instance, that its decision-makers have unusual expertise

in the subject matter of the litigation that might not be available to

outside experts. See 2 Hounds Design Inc. v. Brezinski, No. 3:13–CV–

101–RJC–DCK, 2013 WL 5938073, at *3–4 (W.D.N.C. Nov. 5, 2013);

Frees, Inc. v. McMillian, No. 05–1979, 2007 WL 184889, at *5 (W.D. La.

Jan. 22, 2007); MGP Ingredients, Inc. v. Mars, Inc., 245 F.R.D. 497, 499

(D. Kan. 2007); Medtronic, 2002 WL 33003691, at *3–4; THK Am., Inc. v.

Nippon Seiko K.K., 141 F.R.D. 461, 462 (N.D. Ill. 1991); Bee Chem. Co. v.

Serv. Coatings, Inc., 253 N.E.2d 512, 516–17 (Ill. App. Ct. 1969). A

naked contention, however, that access will affect the ability of the

defendant to defend its case, without more, is not sufficient. See

McAirlaids, 299 F.R.D. at 500–02 (court refused to modify existing

protective order based on party's assertion that it needed its decisionmakers

to have access to documents to make an "educated business

decision with regard to the litigation”). In order to evaluate the asserted

need for further disclosure, the court must have a thorough

understanding of the contested issues in the case, how the documents

relate to the contested issues, and how the fact-finding process would be

aided by disclosure of the documents to the persons seeking to view the

documents.

There appears to be a prevailing view among courts addressing the

issue that competitive decision-makers of direct competitors should be

denied access to trade secrets in litigation. See Paycom Payroll, LLC, 758

F.3d at 1202–03 (noting AEO restriction is a "routine feature”); In re City

of New York, 607 F.3d at 935 (same); Brown Bag Software v. Symantec

Corp., 960 F.2d 1465, 1470–71 (9th Cir. 1992) (denying in-house counsel

20

access to trade secrets because they were involved in decision-making);

U.S. Steel Corp. v. United States, 730 F.2d 1465, 1468 (Fed. Cir. 1984)

("In a particular case, e.g., where in-house counsel are involved in

competitive decisionmaking, it may well be that a party seeking access

should be forced to retain outside counsel or be denied the access

recognized as needed.”); Northbrook Digital, LLC v. Vendio Servs., Inc.,

625 F. Supp. 2d 728, 735–36 (D. Minn. 2008) (observing that protective

orders may be directed at a party's outside patent-prosecution lawyers);

Highway Equip. Co., 2007 WL 1612225, at *4 (ruling that in-house

counsel could not view designated materials); Safe Flight, 682 F. Supp. at

22 (collecting cases in which trade secrets were revealed only to opposing

party's trial attorneys and independent experts).

In Safe Flight, plaintiff's president, Leonard Greene, asked to act as

his own expert because of his position as a "preeminent aeronautic

engineer, having received more than sixty aeronautic patents.” 682

F. Supp. at 21. Greene argued that he was uniquely qualified and that

without his review his attorneys would be unable to make the right

decisions. Id. The court disagreed, noting that Greene would inevitably

retain some of what he learned from the disclosures that would guide his

future research, and he had not investigated using outside experts. Id.

at 22. In a similar case, the plaintiff's president and inventor of the

patent at issue, sought access to "highly confidential” material

designated for attorneys' eyes only so he could testify as an expert.

Tailored Lighting, 236 F.R.D. at 147. The court found the "substantial

risk of competitive injury that attends disclosure of such trade secret

information to the opposing party's president” outweighed the plaintiff's

inconvenience and expense in hiring outside expert. Id. at 149.

21

The court in Safe Flight, however, did allow defendant to use

in-house counsel to review confidential materials because those

attorneys were "segregated” from competitive decision-making. 682

F. Supp. at 23. The court noted that lawyers are officers of the court and

bound by obligations of professional responsibility preventing any misuse

of the confidential information. Id. We, too, have recognized that

"[a]lthough a strong tradition of loyalty exists between a lawyer and

client, a lawyer is also an officer of the court who is bound by a code of

professional conduct.” Wemark v. State, 602 N.W.2d 810, 816 (Iowa

1999); see also State v. Walker, 804 N.W.2d 284, 294 (Iowa 2011)

(quoting Wemark to uphold right of an inmate to private conference with

attorney notwithstanding jail rules restricting access to prevent

smuggling of contraband). Even when courts explicitly credit a party or

in-house counsel with integrity and good faith, they recognize that

human nature makes misuse of trade secrets by a competitor too

tempting to risk. See Brown Bag, 960 F.2d at 1471 ("The magistrate had

to consider, however, not only whether the documents could be locked

up . . . , but also whether Brown Bag's counsel could lock-up trade

secrets in his mind, safe from inadvertent disclosure . . . .”); U.S. Steel

Corp., 730 F.2d at 1467 (claiming that trade-secret information is so

potent that "its nature and volume place it beyond the capacity of anyone

to retain in a consciously separate category” (internal quotation marks

omitted)); Safe Flight, 682 F. Supp. at 22 (explicitly crediting Greene as a

man of "great moral fiber”).

The cases cited by Eagle Labs compelling disclosure arise in

different factual contexts. In Bee Chemical, the issue was whether the

trial judge properly entered an initial order granting the plaintiff access

in discovery to defendants' formulas; the alternatives were access or no

22

access. 253 N.E.2d at 514. By contrast, this case involves the question

of redesignation of documents from AEO to confidential under a

stipulated order that had been previously entered. There were no tiers of

protection involved or available in Bee Chemical.

THK America, Inc. likewise involved what the terms would be for an

initial protective order, not the implementation or modification of a

stipulated protected order that had previously been entered. 141 F.R.D.

at 462. An American company and its Japanese parent company were

suing the defendant for patent infringement. Id. There was no dispute

that only persons employed by the American company could review the

defendant's materials in question. Id. The issue was whether persons

with a past or present affiliation with the Japanese parent company also

could review the materials. Id. The court responded by fashioning a

protective order that allowed certain key employees of the Japanese

parent company also to view the materials because otherwise the

litigation would become "one-sided.” Id.

In two additional cases Eagle Labs cites, the parties were not direct

competitors. See MGP Ingredients, Inc., 245 F.R.D. at 502 ("Thus, the

risk of anyone abusing his or her knowledge of confidential information

appears to be small.”); Medtronic, 2002 WL 33003691, at *3 ("Finally,

unlike many of the cases relied upon by Medtronic, including Safe Flight,

[defendants] are not directly in competition with Medtronic.”).

C. Did the District Court Abuse Its Discretion? We now turn to

the question of whether the district court abused its discretion in

ordering the redesignation of the SOPs from AEO to confidential.

Redesignation should not be required merely because Sioux Pharm

alleges the SOPs were purloined by Eagle Labs. Sioux Pharm argues it is

unsure which specific SOPs were stolen. Sioux Pharm may allege

23

misappropriation of a collection of trade secrets if it has a good-faith

basis for that allegation without 100% certainty as to which specific ones

were taken. See Nike, Inc. v. Enter Play Sports, Inc., ___ F.R.D. ___, ___,

2015 WL 1319241, *3–4 (D. Or. March 24, 2015) (declining to require

plaintiff to more specifically identify trade secrets allegedly

misappropriated by defendant, noting to do so would place plaintiff in a

"catch-22” in light of the uncertainty over what defendant actually had

taken). A party uncertain whether its trade secret was stolen should not

have to reveal the secret to the thief to find out.

Redesignation also should not be ordered merely because

Eagle Labs chose not to retain an expert. See Tailored Lighting, Inc., 236

F.R.D. at 149 ("[T]he burden of that cost [of hiring an outside expert]

simply does not outweigh the substantial risk of competitive injury that

attends disclosure of such trade secret information to the opposing

part[ies] . . . .”). At a September 17 hearing, one of the defense counsel

said:

Plaintiffs' position essentially forces us to go out and hire our

own expert because only our own expert who is a nonparty

under the terms of the protective order can look at AEO

materials produced by the Plaintiffs.

At the September 23 hearing, one of the defendants' counsel

stated, "Our clients specifically chose not to retain an expert to limit

costs in this litigation.” Eagle Labs did not argue that experts were

unavailable;5 it simply maintained that for economic reasons as a small

company it chose not to hire one. Eagle Labs offered no evidence of what

its cost of hiring an expert would be in the context of its overall litigation

costs, nor did it disclose anything about its actual financial resources. If

5Sioux Pharm used an expert who prepared a report following a comparison of

both sides' SOPs. This report is part of the record on appeal.



24

a mere assertion of economic hardship were by itself a sufficient ground

for requiring the other side's AEO materials to be reclassified as

confidential, AEO status would have little security.

So, the question becomes, what would be a good reason for

redesignation. One obvious answer would be when the material does not

qualify for AEO treatment under the existing stipulated order because it

is not "confidential, non-public, and/or proprietary information

containing highly sensitive proprietary, financial, or trade secret

information, which would cause severe competitive damage if disclosed to

another party to this action.”

The parties' stipulated protective order expressly authorizes parties

to make an objection to confidential or AEO designation and authorizes

the court to resolve the objection, with the burden resting on the party

claiming protected status "to defend the appropriateness of the

designation.”6 This placement of the burden coincides with the approach

courts have generally taken when confronted with blanket protective

orders that allow parties unilaterally to designate materials as

confidential or AEO. In re Parmalat Sec. Litig., 258 F.R.D. 236, 245–46

(S.D.N.Y. 2009) (granting motion to strike confidential designation when

party made only minimal showing of economic value and the harm that

would result from disclosure and thus failed to meet its burden of

showing good cause to keep the documents sealed); In re Zyprexa

Injunction, 474 F. Supp. 2d 385, 416 (E.D.N.Y. 2007) (noting that in

challenges to designations under umbrella protective orders, "the burden

of establishing that there is good cause to protect the designated

materials rests at all times with the party seeking protection”); In re

6Further, the order provides that if the court determines a designation was not

made in good faith, it may award sanctions.



25

Providian Credit Card Cases, 116 Cal. Rptr. 2d 833, 840 (Ct. App. 2002)

(explaining that party proposing sealing or continuing protective order

has the burden of proving the matter is a trade secret in order to

overcome the presumption in favor of disclosure).

However, in this case, Eagle Labs did not dispute below that the

materials had been properly designated as AEO, and there was evidence

in the record (such as the affidavit of Sioux Pharm's president and

co-owner) supporting such a designation. Nor does the district court's

order indicate that the court found the materials had been misclassified.

As we have already discussed here, and at more length in Comes,

courts also have the authority to modify stipulated protective orders. In

Comes, we explained that in deciding whether to modify an order "the

court should fully and fairly consider all the circumstances supporting

the modification, as well as the circumstances mitigating against it.” 775

N.W.2d at 310. Obviously, two salient factors are the need for the

defendants personally to have access to the materials to defend properly

the plaintiffs' claims and the harm to the plaintiffs that would result from

disclosure of the materials to the defendants. Another legitimate

consideration, which may have entered into the district court's calculus,

was whether the defendants were going to see the plaintiffs' full SOPs

anyway when the case went to trial in a few weeks.7

7The stipulated order provides,

This Protective Order does not limit the right of a Party to offer

Confidential or Attorneys' Eyes Only information into evidence at

hearings or at trial, or to use it for any other lawful hearing or trial

purpose including but not limited to impeachment. Any party may move

the Court for an Order that the evidence be received in camera or under

other conditions to prevent unnecessary disclosure.

As we have said, " 'There can be no blinking the fact that there is a strong societal

interest in public trials.' ” Iowa Freedom of Info. Council v. Wifvat, 328 N.W.2d 920,

922–23 (Iowa 1983) (quoting Gannett Co., Inc. v. DePasquale, 443 U.S. 368, 383, 99

S. Ct. 2898, 2907, 61 L. Ed. 2d 608, 623 (1979)). Yet, our courts are required to



26

The problem here is that the party seeking reclassification made

only a conclusory argument for doing so, and the court did not set forth

its reasoning for ordering reclassification in any detail. The district court

cited its own "balancing of the various priorities” and found

reclassification "necessary to do justice and to allow the defendants to

appropriately understand and prepare their trial defense strategy.” This

language leaves it unclear whether the court ordered reclassification

because it found the SOPs did not meet the protective order's standards

for AEO treatment or because it was deciding to modify the protective

order. Assuming the latter to be the case, this language also leaves

unanswered whether the district court simply agreed with Eagle Labs'

ipse dixit argument about the unfairness of requiring it to hire an outside

expert or whether the court had other, more persuasive grounds for

modifying the order.

"preserve the secrecy of an alleged trade secret by reasonable means, including but not

limited to . . . holding in-camera hearings.” Iowa Code § 550.7. Protection of trade

secrets at trial is entitled to great weight in this balancing approach. See Richmond

Newspapers, Inc. v. Virginia, 448 U.S. 555, 600 n.5, 100 S. Ct. 2814, 2840 n.5, 65

L. Ed. 2d 973, 1005 n.5 (1980) (Stewart, J., concurring in judgment).

We have limited access to judicial proceedings in appropriate cases. For

example, juvenile court proceedings may be closed to the public upon the motion of any

party or on the court's own motion. See In re A.M., 856 N.W.2d 365, 380 (Iowa 2014)

(citing Iowa Code § 232.92). Witnesses are routinely sequestered during the testimony

of other witnesses under Iowa Rule of Evidence 5.615. In trade-secret litigation, the

parties can be excluded from the courtroom when the trade secrets are presented. See,

e.g., Stamicarbon, N.V. v. Am. Cyanamid Co., 506 F.2d 532, 542 (2d Cir. 1974) (allowing

trade-secrets portion of a trial to be held in camera); Air Prods. & Chems., 442 A.2d at

1129 (allowing counsel and an expert to participate in hearing without the party); State

ex rel. Ampco Metal, Inc. v. O'Neill, 78 N.W.2d 921, 926–27 (Wis. 1956) (allowing the

trade-secrets portion of the trial to proceed in camera). As a commentator observed, "It

would be of little practical value to file a lawsuit to protect the confidentiality of a trade

secret if the secret became part of the publicly available court record and was thereby

lost.” 1 Michael D. Scott, Scott on Computer Information Technology Law § 6.17, at 6-45

to 6-47 (3d ed. 2015) (also noting court can restrict attendance at trial and seal

transcript to protect trade secrets upon a proper showing).

_________________________

27

A district court abuses its discretion when it exercises its

discretion for reasons that are clearly untenable. See Mediacom Iowa,

682 N.W.2d at 66. Here, the party advanced only insufficient grounds

for a course of action. Although the record may contain sufficient

grounds, the district court did not specify its reasons for acting. In this

situation, we are constrained to hold the court abused its discretion. For

this reason, we must reverse and remand for further proceedings

consistent with this opinion. On remand, the district court should first

determine whether the SOPs qualify for AEO status under the protective

order (unless Eagle Labs concedes this point). If so, the court should

then consider modification. This consideration should be based on the

factors outlined in Comes. Particular weight should be given to

Eagle Labs' need for its own personnel personally to have access to

Sioux Pharm's SOPs, while recognizing that it is not enough for

Eagle Labs simply to argue that its employees need access because it

elected not to designate an expert for economic reasons.8 Weight also

must be given to the harm that would befall Sioux Pharm if its SOPs

were disclosed to a direct competitor.

In this case, the district court stated that it engaged in a

balancing, but did not expressly engage in the analysis of the risk of

harm that might be caused by further disclosure or the impact that the

failure to allow more disclosure would have on Eagle Labs' ability to

litigate. The lack of a more detailed order makes it difficult for this court

to engage in meaningful appellate review. Cf. Pansy v. Borough of

Stroudsburg, 23 F.3d 772, 789 (3d Cir. 1994) (emphasizing that in order

"[t]o facilitate effective appellate review of a district court decision of

8The court can reopen the deadline for expert disclosure if need be.



28

whether to grant or modify an order of protection or confidentiality, a

district court should articulate on the record findings supporting its

judgment”); Mediacom Iowa, 682 N.W.2d at 68 (finding trial court abused

its discretion when it made no factual findings regarding whether

information sought constituted trade secrets). On remand, the district

court should give due regard to the two competing considerations in this

case that drive in the opposite direction.

Our ruling should not be construed as criticism of the district

court. From our review of the record, we are impressed by the court's

careful, even-handed, hands-on management of the case. At the same

time, both in seeking and in opposing the redesignation of Sioux Pharm's

SOPs, the parties made generally conclusory arguments. As often

happens, the arguments became more focused when the parties got to

our court. Nevertheless, in trade-secret litigation between two direct

competitors, the stakes are high, and any order regarding the

confidentiality status of alleged trade secrets must be carefully drawn.

That order should give due account to the terms of the protective order

and the considerations set forth in Comes.

IV. Disposition.

For these reasons, we reverse the district court's orders of

September 23 and 30, 2013. We remand the case for further

proceedings consistent with this opinion.

REVERSED AND REMANDED WITH INSTRUCTIONS.

All justices concur except Appel and Wiggins, JJ., who concur

specially, and Hecht, J., who takes no part.

29

#13–1525, Sioux Pharm, Inc. v. Eagle Labs., Inc.

APPEL, Justice (concurring specially).

I concur with the court's opinion.

On remand, the district court should give due regard to the two

competing considerations in this case which drive in opposite directions:

the risk of harm to Sioux Pharm that might be caused by additional

disclosures and Eagle Labs' need for further disclosure to effectively

defend its interests in the litigation.

As pointed out by the court, the district court and the parties on

remand should avoid generalizations in favor of specific evidentiary

showings and articulated reasoning. To some extent, the shortcomings

in the district court's order may have been a result of sequencing. At

this stage of the litigation, the trade secrets of the parties should be

identified with particularity first, with consideration of further disclosure

occurring after such identification has been made. Without identification

of the underlying trade secrets, the district court is not in the best

position to do the necessary balancing on a particularized basis. See

Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1131 (9th Cir.

2003) (stating the party asserting confidentiality bears the burden of

showing that specific prejudice or harm will result for each particular

document it seeks to protect); Baxter Int'l, Inc. v. Abbott Labs., 297 F.3d

544, 547–48 (7th Cir. 2002) (denying confidentiality where parties failed

to show what specifically was confidential and give reasons why

confidential treatment should be accorded).

The district court in this case, however, ordered Sioux Pharm to

identify with particularity its Standard Operating Procedures (SOPs) that

Eagle Labs allegedly misappropriated. If Sioux Pharm complies with this

order first, the district court will then be in a better position to examine

30

each identified SOP that is allegedly a trade secret misappropriated by

Eagle Labs (and any other documents for which disclosure is sought) and

make the necessary particularized findings with respect to the balancing

of the parties' competing interests.

REVERSED AND REMANDED WITH

INSTRUCTIONS.