Sysco Iowa, Inc. v. University of Iowa ( 2016 )

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).
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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.
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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.
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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-
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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
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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
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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.”
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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
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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
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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,
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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,
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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–
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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
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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.