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US District Court :DISCOVERY - protective order regarding discovery of trade secrets

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Fair Isaac Corporation and
myFICO Consumer Services, Inc.,
Plaintiffs,
v. MEMORANDUM OPINION AND
ORDER
Civil No. 06-4112 ADM/JSM
Equifax Inc.; Equifax Information Services
LLC; Experian Information Solutions Inc.;
Trans Union, LLC; and VantageScore
Solutions, LLC,
Defendants.
______________________________________________________________________________
Ronald J. Schutz, Esq., Randall Tietjen, Esq. and Michael A. Collyard, Esq., Robins, Kaplan,
Miller & Ciresi, L.L.P., Minneapolis, MN, and Charles F. Rule, Esq., Ngoc Pham Hulbig, Esq.
and Joseph J. Bial, Esq., Cadwalader, Wickersham & Taft LLP, Washington, DC, on behalf of
Plaintiffs.
Jeffrey J. Keyes, Esq. and Jay W. Schlosser, Esq., Briggs and Morgan, P.A., Minneapolis, MN,
and Peter Kontio, Esq., Michael P. Kenny, Esq. and Teresa T. Bonder, Esq., Alston & Bird LLP,
Atlanta, GA, on behalf of Equifax Inc. and Equifax Information Services LLC; Mark A.
Jacobson, Esq. and Mark H. Zitzewitz, Esq., Lindquist & Vennum PLLP, Minneapolis, MN, and
M. Elaine Johnston, Esq., Robert A. Milne, Esq. and Christopher J. Glancy, Esq., White & Case
LLP, New York, NY, on behalf of Experian Information Solutions Inc.; Lewis A. Remele, Jr.,
Esq. and Christopher R. Morris, Esq., Bassford Remele, Minneapolis, MN, and James K.
Gardner, Esq. and Ralph T. Russell, Esq., Neal, Gerber, & Eisenberg LLP, Chicago, IL, on
behalf of Trans Union, LLC; Barbara Podlucky Berens, Esq. and John D. Bessler, Esq., Kelly &
Berens, Minneapolis, MN, on behalf of VantageScore Solutions, LLC.
______________________________________________________________________________
I. INTRODUCTION
This matter is before the undersigned United States District Judge on Defendants Equifax
Inc.; Equifax Information Services LLC (collectively Equifax); Experian Solutions Inc.
2
(Experian); Trans Union, LLC (Trans Union) (Equifax, Experian, and Trans Union
collectively are the Credit Bureau Defendants); and VantageScore Solutions, LLCs
(VantageScore) (Equifax, Experian, Trans Union, and VantageScore collectively are
Defendants) Consolidated Objections [Docket No. 179] to: (1) Magistrate Judge Judge Janie S.
Mayerons July 27, 2007, Order [Docket No. 151] denying Defendants Motion for a Protective
Order [Docket No. 82] and granting Plaintiff Fair Isaac Corporations (Fair Isaac) Motion to
Compel [Docket No. 93]; and (2) Judge Mayerons July 3, 2007, Amended Protective Order
[Docket No. 144]. For the reasons set forth herein, Defendants Objections are overruled.
II. BACKGROUND
The facts and procedural history relevant to this discovery dispute are set forth in Judge
Mayerons July 27, 2007, Order. Therefore, only a brief version of the relevant facts and
procedural history is presented here. Fair Isaac develops algorithms and software that generate
consumer credit scores from data collected by the Credit Bureau Defendants. 2d Am. Compl.
[Docket No. 81] 43-45. For a number of years, the Credit Bureau Defendants have licensed
Fair Isaacs credit-scoring algorithms and software to generate and provide Fair Isaacs credit
scores to lenders and consumers. Id. 44. In March 2006, the Credit Bureau Defendants
announced that through a joint venture, VantageScore, they had developed a joint algorithm and
software for generating credit scores that would compete with Fair Isaacs credit-scoring
products. Id. 63.
Plaintiffs Fair Isaac and myFico Consumer Services, Inc. (collectively Plaintiffs), a
wholly owned subsidiary of Fair Isaac, filed this litigation on October 11, 2006. In their Second
Amended Complaint, Plaintiffs assert fifteen counts, including claims against all Defendants for
3
unfair competition and false advertising in violation of the Lanham Act, 15 U.S.C. 1125(a), a
claim against Trans Union and VantageScore for misappropriation of trade secrets, a claim
against Trans Union for breach of contract, and a claim against VantageScore for interference
with contract. 2d Am. Compl. 197-203, 259-75.
On January 12, 2007, Fair Isaac served discovery requests seeking the algorithm and the
software and process used in conjunction with the algorithm to produce a credit score.
Schlosser Aff. [Docket No. 86] Ex. A. at 3. On April 25, 2007, Defendants moved for a
protective order precluding discovery regarding the actual model, design, algorithm, computer
program, portions or drafts thereof and numerous other materials that would reveal the actual
model, design or computer program (collectively, the Algorithm), used by Defendants in
calculating the VantageScore credit score. Mem. in Supp. of Defs. Mot. for Protective Order
[Docket No. 84] at 1-2. Simultaneously, Fair Isaac moved to compel production of
VantageScores algorithm and related documents.
Meanwhile, the parties requested a general protective order that would govern disclosure
of confidential and highly confidential information. The parties agreed on most of the provisions
of a proposed protective order, but disagreed regarding protections for any algorithm information
the parties might be required to disclose. Judge Mayeron issued a Protective Order [Docket No.
139] on June 19, 2007, and, pursuant to the parties stipulation, issued an Amended Protective
Order on July 3, 2007.
On July 27, 2007, Judge Mayeron issued an Order denying Defendants Motion for a
Protective Order precluding discovery of the VantageScore algorithm information, granting Fair
Isaacs Motion to compel disclosure of such information, and ordering that Defendants disclose
4
the information by August 24, 2007. On August 22, 2007, this Court issued an Order [Docket
No. 205] staying production of Defendants algorithm and related data so that Defendants
Objections would not be rendered moot.
III. DISCUSSION
A. Standard of Review
The standard of review applicable to an appeal of a magistrate judges order on a
nondispositive issue is extremely deferential. Reko v. Creative Promotions, Inc., 70 F. Supp. 2d
1005, 1007 (D. Minn. 1999). The district court must affirm an order by a magistrate judge
unless it is clearly erroneous or contrary to law. Fed. R. Civ. P. 72(a). A finding is clearly
erroneous when, although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been committed.
Chakales v. Commr of Internal Revenue, 79 F.3d 726, 728 (8th Cir.1996).
B. Objections to the July 27, 2007, Order
Defendants object to Judge Mayerons July 27, 2007, Order requiring disclosure of the
VantageScore algorithm information. The Federal Rules of Civil Procedure generally provide
for liberal discovery. Parties may obtain discovery regarding any matter, not privileged, that is
relevant to the claim or defense of any party . . . . Relevant information need not be admissible
at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible
evidence. Fed. R. Civ. P. 26(b)(1). However, Rule 26(c)(7) provides that for good cause
shown . . . the court . . . may make any order which justice requires to protect a party or person
from annoyance, embarrassment, oppression, or undue burden or expense, including . . . that a
1 Defendants have objected to Judge Mayerons conclusion that the algorithm
information is necessary for trial of Fair Isaacs false advertising claims. However, as explained
below, this Court agrees that the information is discoverable for Plaintiffs misappropriation and
contract claims. Therefore, it is unnecessary to determine whether the information is
5
trade secret or other confidential research, development, or commercial information not be
disclosed or be disclosed only in a designated way.
The Eighth Circuit analyzes trade secret discovery disputes under the burden-shifting
framework set forth in In re Remington Arms Co., 952 F.2d 1029, 1032 (8th Cir. 1991). Under
this framework, Defendants must show that the algorithm information is a trade secret under
Rule 26(c)(7) and that its disclosure would be harmful to Defendants interest in the algorithm
information. Remington Arms Co., 952 F.2d at 1032. The burden then shifts to Fair Isaac to
show that the algorithm information is relevant to the subject matter of the lawsuit and is
necessary to prepare the case for trial. Id. If Fair Isaac shows both relevance and need, the court
must weigh the injury that disclosure might cause Defendants against Fair Isaacs need for the
algorithm information. Id.
For the purposes of the instant discovery dispute, Fair Isaac does not dispute that
Defendants have met their burden of showing that the VantageScore algorithm information is a
trade secret under Rule 26(c)(7) and that disclosure of the algorithm information would be
harmful to Defendants. See Fair Isaacs Resp. [Docket No. 206] to Defs. Objections at 6.
Therefore, the Court proceeds to analyze whether Fair Isaac has met its burden under the second
prong of the Remington Arms test.
Judge Mayeron concluded that Fair Isaac showed that the algorithm information is
relevant and necessary to prepare this case for trial of Fair Isaacs misappropriation and contract
claims. Defendants have not directly challenged this conclusion.1 Instead, they rely on a district
discoverable for Plaintiffs false advertising claims.
6
court decision in Puritan-Bennett Corp. v. Pruitt, 142 F.R.D. 306, 308 (S.D. Iowa 1992) for the
proposition that Fair Isaac must also demonstrate a substantial factual basis for these claims
before obtaining discovery of the trade secret algorithm information. Puritan-Bennett sought
discovery of its competitors trade secrets in order to prove that Pruitt, a former Puritan-Bennett
employee, had provided the competitor with Puritan-Bennetts trade secrets. Id. at 307. Relying
on a decision of the District of Massachusetts, the court held that in addition to the relevance and
necessity requirements discussed in step two of Remington Arms, a plaintiff seeking discovery
of a competitors trade secrets must also establish a substantial factual basis for its claims
based on evidence gathered through discovery. Id. at 308-09, citing Microwave Research Corp.
v. Sanders Assocs., 110 F.R.D. 669, 674 (D. Mass. 1986).
Judge Mayeron rejected Puritan-Bennett Corp.s substantial factual basis requirement as
inconsistent with Remington Arms. In the alternative, Judge Mayeron concluded that Fair Isaac
has demonstrated a substantial factual basis for its misappropriation and contract claims.
Defendants argue that Judge Mayeron erred as a matter of law by not requiring the substantial
factual basis showing, and that Judge Mayeron committed clear error by concluding in the
alternative that Fair Isaac has demonstrated a substantial factual basis.
It is dubious whether Puritan-Bennett Corp.s substantial factual basis requirement is
necessary under Remington Arms. Regardless, this Court agrees with Judge Mayerons
conclusion that Fair Isaac has submitted the type of circumstantial evidence and inferences that
could support its claims against these defendants. July 27, 2007, Order at 14. In reaching this
conclusion, Judge Mayeron cited the following: (1) pursuant to contractual arrangements, Trans
7
Union had access to the specifications of Fair Isaacs scoring models; (2) Fair Isaacs and
VantageScores scoring systems appear to perform similar functions through similar processes;
(3) Trans Union admitted in its Answer that certain Trans Union employees who had access to
Fair Isaacs confidential information participated in the planning of VantageScore . . . . Trans
Unions Answer [Docket No. 123] 152; (4) a March 31, 2005, draft document produced by
Equifax stating that one of the worksteps for developing a new scoring system would be to
include team members from each credit bureau who had [f]amiliarity with FICO and similar
delinquency/default prediction. July 24, 2007, Tietjen Letter [Docket No. 148] Attach. 2 at 5;
and (5) the VantageScore scoring model was developed in four months, which is contrary to
evidence in the record that developing a new scoring model could easily take two years or
more. May 2, 2007, Tietjen Decl. [Docket No. 113] Ex. 8.
Defendants first argue that the Magistrate Judge improperly relied on [the above-quoted
language in] Trans Unions answer to the complaint, while ignoring the remaining statement that
Trans Union deliberately chose employees to build the VantageScore scoring model who did
not have access to any confidential information about Fair Isaacs scoring services. Objections
at 7. However, as Judge Mayeron concluded, the fact that Trans Union employees with
knowledge of Fair Isaacs confidential information helped in the planning of VantageScore
provides support for Fair Isaacs showing of a substantial factual basis for its misappropriation of
trade secrets and contract claims. Moreover, Judge Mayeron cited documents provided by Fair
Isaac that suggest that some members of Trans Unions VantageScore development team
previously had access to Fair Isaacs trade secret algorithm information. See Towne Decl.
[Docket No. 128] Exs. 5-6.
8
Defendants also argue that the July 27, 2007, Order erroneously relied on the language in
the March 31, 2005, draft document produced by Equifax. Defendants assert that the language
in the document, prepared by an outside consultant, was based on an incorrect understanding of
the project, and that Judge Mayeron should have relied on the final version of the document,
which replaces the references to FICO with generic language. Objections at 7-8. Defendants
further argue that Judge Mayeron erred in concluding that the[] generic descriptions in the final
version were referencing FICO. July 27, 2007, Order at 15 n.7. However, given the dominant
position of Fair Isaacs FICO, and the evidence that Trans Union employees who had access to
Fair Isaacs confidential information participated in the planning and development of
VantageScore, Judge Mayeron properly considered the draft and final versions of the proposal in
determining there is a substantial factual basis for Fair Isaacs claims.
Considering the record as a whole, this Court agrees with Judge Mayerons conclusion
that Fair Isaac demonstrated a substantial factual basis for its misappropriation and contract
claims. Because Defendants have not raised any other arguments regarding step two of the
Remington Arms analysis, the Court proceeds to step three.
Judge Mayeron concluded that Fair Isaacs need for the algorithm information outweighs
the alleged harm to Defendants from disclosure of such information under the terms of the
Amended Protective Order. In reaching this conclusion, Judge Mayeron noted that Defendants
have provided this Court with no evidence to conclude that Fair Isaacs outside counsel or its
independent experts would violate the protective order and disseminate this Algorithm
information to Fair Isaac or the public, or use it for any other purpose than this litigation. July
27, 2007, Order at 25. Defendants Objections do not specifically address the balancing test of
2 Sanctions are available and will be imposed should a party or individual fail to comply
with the terms of the Amended Protective Order.
9
step three of Remington Arms. Indeed, Defendantss Objections to the July 27, 2007, Order are
premised entirely on the substantial factual basis arguments discussed above.
Regardless, the Court agrees that Fair Isaacs need for the algorithm information to
litigate its misappropriation and contract claims outweighs the harm to Defendants under the
terms of an appropriate protective order. [O]rders forbidding any disclosure of trade secrets or
confidential information are rare. Fed Open Mkt. Comm. of Fed. Reserve Sys. v. Merrill, 443
U.S. 340, 363 n.24 (1979). Instead, where such information is relevant and necessary, it is
incumbent upon the district court to utilize its authority to issue an appropriate protective order
to safeguard the rights of the parties. Remington Arms. Co., 952 F.2d at 1033; see also 3M
Innovative Props. Co. v. Tomar Elecs., Civ. No. 05-756 MJD/AJB, 2006 WL 2670038 at *10 (D.
Minn. Sept. 18, 2006) (Where information is relevant and necessary to the presentation of a
case, the consequence of disclosure of a trade secret is not a bar to discovery.). The Court is
mindful that Defendants may suffer great harm if the protective order is violated and Fair Isaac
or other competitors gain access to the VantageScore algorithm information. However,
Defendants have not identified any likelihood that Fair Isaacs outside counsel or independent
experts would violate the Amended Protective Order.2 Accordingly, Defendants Objections to
Judge Mayerons July 27, 2007, Order are overruled.
C. Objections to Paragraph 21 of the July 3, 2007, Amended Protective Order
Paragraph 21 of the Amended Protective Order sets forth specific conditions regarding
disclosure of consumer credit scoring algorithms, related computer programs, source code, and
specifications, and documents reflecting any such information, including that only the receiving
10
partys outside expert consultants and outside counsel may access confidential algorithm
information. Am. Protective Order 21(a), (e). Defendants object to paragraph 21 to the extent
it fails to require the use of an escrow agent. In the alternative, Defendants assert that their
security concerns would be satisfied if paragraph 21 were modified to include terms: (1) limiting
disclosure of algorithm information to three experts per party, (2) requiring that recipients of
algorithm information be identified to the owner of the information, and (3) requiring encryption
of algorithm information. Objections at 15-16.
Defendants argue that Judge Mayeron clearly erred by rejecting Defendants proposal
that all Confidential Algorithm information shall be held at the offices of an independent
escrow agent, agreed to by the parties. The escrow agent must keep Confidential information in
a locked room that is accessible only to the identified expert consultants. Bonder May 18,
2007, Letter at Ex. A 21(e). In response to Defendants proposal, Fair Isaac submitted the
declarations of Daniel Sevush and Susan Blue Hitt, detailing the logistical difficulties caused by
use of an escrow agent. Hitt Decl. [Docket No. 135]; Sevush Decl. [Docket No. 136]. Based on
this record, Judge Mayeron determined that Defendants proposal would unduly hamper a
receiving partys analysis of algorithm information.
This Court agrees that the use of an escrow agent would present considerable logistical
difficulties, and therefore the absence of an escrow agent requirement in the Amended Protective
Order is not clearly erroneous. Defendants assert that given the extreme sensitivity of the
[algorithm] material, at a minimum this Court should remand the issue to consider possible
escrow arrangements that would ameliorate any perceived hardships created by the proposed
escrow arrangement. Objections at 14. As an example, Defendants suggest that the protective
11
order could allow for certain material to be brought back to the experts offices for further
analysis if necessary. Id. However, this proposal would likely result in significant discovery
disputes regarding the material that could be removed from the escrow facility. It is unnecessary
to remand the escrow issue for consideration of such measures.
Defendants alternative proposal is that the Amended Protected Order be modified to
include terms: (1) limiting disclosure of algorithm information to three experts per party, (2)
requiring that recipients of algorithm information be identified to the owner of the information,
and (3) requiring encryption of algorithm information. Objections at 15-16. However,
Defendants have not previously submitted the first two proposals to Judge Mayeron. See May
18, 2007, Bonder Letter [Docket No. 131] Ex. A. The Eighth Circuit has emphasized that the
purpose of referring cases to a magistrate judge for recommended disposition would be
contravened if parties were allowed to present only selected issues to the magistrate, reserving
their full panoply of contentions for the trial court. Roberts v. Apfel, 222 F.3d 466, 470 (8th
Cir. 2000). Likewise, the purpose of referring pretrial discovery matters would be defeated if
this Court modified the Amended Protective Order to include language in paragraph 21 that
neither party proposed before Judge Mayeron. See May 18, 2007, Bonder Letter Ex. A; April
30, 2007, Milne Letter [Docket No. 100] Ex. A.
The parties agree that Defendants raised the encryption issue before Judge Mayeron. See
Fair Isaacs Resp. to Defs. Objections at 18. Defendants argue that the proposed encryption is
necessary to protect consumer information, and that adequate encryption can be accomplished
through readily available software that costs less than 0. In response, Fair Isaac contends
that encryption would be pointless because paragraph 21 of the Amended Protective Order
12
provides adequate protections, such as requirements that any computer with algorithm
information: (1) must be password protected, (2) cannot be connected to the internet or be part of
a network connected to the internet, and (3) must be locked when not in use. See Am. Protective
Order 21(d). The record is silent regarding the discussion of the encryption issue before Judge
Mayeron. The version of paragraph 21 that Defendants proposed to Judge Mayeron does not
refer to encryption. See May 18, 2007, Bonder Letter [Docket No. 131] Ex. A. Given the
stringent protections in paragraph 21(d) of the Amended Protective Order, and the lack of a
record regarding the encryption arguments and proposals raised before Judge Mayeron, this
Court cannot conclude that the absence of an encryption requirement in paragraph 21 was clear
error. However, the parties are strongly encouraged to reach agreement on basic encryption
measures that provide additional protections for the sensitive electronic data that will be
produced.
Defendants have failed to show that Judge Mayeron committed clear error. Therefore,
Defendants Objections to paragraph 21 of the Amended Protective Order are overruled. In
reaching this conclusion, the Court notes that the Credit Bureau Defendants confidentiality
agreement regarding the development of VantageScore does not provide the protections that
Defendants now seek. See May 18, 2007, Tietjen Decl. [Docket No. 134] Exs. 1, 3. For
example, the confidentiality agreement does not require the use of an escrow agent, nor does the
agreement require advance disclosure of individuals receiving algorithm information.
13
IV. CONCLUSION
Based upon the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that Defendants Consolidated Objections [Docket No. 179] are
OVERRULED.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: September 25, 2007.
 

 
 
 

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