Your local government has just awarded a contract for digital imaging software to Super Secret Software, Inc., after considering several proposals submitted in response to your request for proposals. Sour Grapes Software, LLC, one of the vendors who submitted a proposal but was not awarded the contract, calls to ask you for a copy of Super Secret Software’s proposal. When you pull Super Secret Software’s proposal from your file, you see that every page of the proposal is stamped “CONFIDENTIAL.” What do you do?

Before we discuss what your options are, let’s get a few preliminary questions out of the way: Is the Proposal a Public Record? Yes, Super Secret Software’s proposal is a public record—actually, all of the proposals you received are public records. As I mentioned in an earlier post, all documents, papers, photographs, and electronic records that you have made or received while transacting public business are considered public records under North Carolina law. G.S. 132-1. North Carolina law gives “any person” the right to examine and have a copy of public records, and the North Carolina Supreme Court has held that “in the absence of clear statutory exemption or exception, documents falling within the definition of ‘public records’ in the Public Records Law must be made available for public inspection.” News & Observer Publ’g Co. v. Poole, 330 N.C. 465, 486, 412 S.E.2d 7, 19 (1992). In other words, all public records are subject to public inspection unless a statute specifically excludes or exempts the records from public inspection. So this leads to our next preliminary question: Is the Proposal Excluded Or Exempted From Public Inspection? Some parts of Super Secret Software’s proposal may be exempted from public inspection, but not the entire proposal. We’re going to assume that Super Secret Software has marked their proposal as “CONFIDENTIAL” because they want to protect their trade secrets. Trade secret information received in any bidding or proposal process is not subject to public inspection if the information meets all of the following four requirements:

1. The information is “business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that (a) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
2. The information is the property of “an individual, corporation, government, governmental subdivision or agency, business trust, estate, trust, partnership, association, joint venture, or any other legal or commercial entity.”
3. The information is disclosed or furnished to the local government in connection with the owner’s performance of a public contract; in connection with a bid, application, proposal, or industrial development project; or in compliance with laws, regulations, rules, or ordinances of the United States, the state, or political subdivisions of the state.
4. The information is designated or indicated as “confidential” or a “trade secret” at the time of its initial disclosure to the local government.

G.S. 132-1.2, G.S. 66-152. In this case, we know that the last three requirements have been met: the information is Super Secret Software’s property (requirement 2), it’s been disclosed to you as part of a proposal process (requirement 3), and it’s been designated as “confidential” by stamp placed on each page (requirement 4). In fact, it’s usually very easy to determine if these requirements have been met by a bid or proposal; the trick is with the first requirement. A lot of the information contained in any bid or proposal will obviously not meet the first requirement—for example, information about whether the bid or proposal meets the specifications, terms and conditions, and basic information about the vendor. But some information in the bids and proposals you receive—including the proposal from Super Secret Software—may meet the first requirement. So this leads to our third preliminary question: How do you know if something is a “trade secret”? Well, there’s information that’s clearly not a trade secret (anything that’s common knowledge or easy to find using public sources), information that clearly is a trade secret (such as industrial formulas, marketing plans, customer lists—as long as reasonable steps have been taken to preserve their secrecy), and information that might be a trade secret (such as audited financial statements of privately held companies). But you shouldn't have to determine which parts of Super Secret Software’s proposal may contain trade secrets and which parts may not. Only Super Secret Software knows if some of its information might be the type of information that can be considered a trade secret, and only Super Secret Software knows if it’s taken reasonable efforts to maintain the secrecy of that information. What are you supposed to do? OK, so now let’s turn to our original question: how do you respond to Sour Grapes Software’s request for a copy of Super Secret Software’s proposal? The North Carolina Trade Secrets Act gives the owner of trade secrets the right to sue someone—and recover monetary damages—for disclosing those secrets. G.S. 66-153, 66-152, 66-154. This means that you’ve been placed in a very difficult position: you can either refuse to disclose Super Secret Software’s proposal to Sour Grapes Software, and face penalties for refusing to disclose public records, or you can disclose Super Secret Software’s proposal and risk a lawsuit brought by Super Secret Software. Those don’t sound like great options, do they? Actually, you have three better alternatives:

1. You can require Super Secret Software to provide you with a written explanation of its basis for claiming trade secret protection under G.S. 66-152 and G.S. 132-1.2. If you and your attorney are satisfied with Super Secret Software’s explanation, you may then provide the explanation to Sour Grapes Software, along with any parts of Super Secret Software’s proposal that Super Secret Software agrees are not trade secrets. (You will need to be very careful to redact any information that Super Secret Software claims is a trade secret.)
2. Although it’s too late for this procurement, you could have required each proposer to indemnify your local government for costs arising out of a public records request for documents the company claims contain protected trade secrets. (This approach has been used by the City of Charlotte for several years)
3. You can refuse to disclose Super Secret Software’s proposal (explaining the situation to Sour Grapes Software), and wait for Sour Grapes Software to sue you. You can then file a third-party action against—or join as a defendant—Super Secret Software. This option guarantees a final determination of what information, if any, merits trade secret protection and allows Super Secret Software and Sour Grapes Software—the parties who have the most at stake in this situation—to fight this out in court. This option might be expensive for your local government, but if you’ve taken advantage of suggestion 2 above, you can pass on the cost to Super Secret Software.

Bottom line: if you receive a bid or proposal with “CONFIDENTIAL” or “TRADE SECRET” stamped on it, assume that there may be some trade secrets in the bid or proposal, consult with your attorney, and proceed with caution, keeping the alternatives above in mind. And, if you’re about to send out a request for proposals or bid solicitation for something that may involve trade secrets, consider including an indemnification provision like the one described in alternative 2 above. The information in this post is drawn from a 2009 Local Government Law Bulletin, When Are Bids and Proposals Subject to Public Inspection?, which is available for free here.