When faced with a subpoena or other formal request for information, operators have no choice but to comply, even if the information constitutes a trade secret or has otherwise been deemed confidential. However, it may be possible to limit the scope of disclosure to those who “need to know” while providing regulators and other pertinent people with the information they need. Here’s what all cannabis operators should know about this issue, called compelled disclosure, before they enter into a new agreement.
What is compelled disclosure?
Compelled disclosure is when someone is legally required to disclose information that is otherwise considered a trade secret. Compelled disclosure may be enforced by subpoena, regulatory mandate, or court order.
The notion of compelled disclosure must be considered when determining the appropriateness and scope of any agreement regarding confidentiality. Most confidentiality obligations take the form of non-disclosure agreements (NDA).
Compelled disclosures may appear in a variety of circumstances, including:
- Product mix disclosures in cannabis license applications
- As a tool in furtherance of lawsuits, including, in particular, actions involving product liability and intellectual property infringement
- Research partnership agreements in hemp programs or other state and federally regulated research programs
The relationship between compelled disclosure and confidentiality agreements
On its surface, compelled disclosure seems contradictory to the idea of a confidentiality agreement that requires no divulging of any protected information. However, when compelled by the court, confidentiality agreements do not hold the same weight. In that light, it’s important for confidentiality agreements to ensure that compelled disclosure is covered.
Confidentiality agreements, in all forms, should contain a series of carve-outs, which are exceptions to confidentiality. These carve-outs typically allow the recipient to disclose the information without breaching the agreement, if the information becomes general public knowledge from authorized sources (other than the discloser).
Confidentiality agreements should also specifically address what happens in the event that the recipient is served with a subpoena or other legal document compelling the disclosure of confidential information. It is appropriate to allow the recipient to disclose the confidential information, but contractually require the recipient to:
- Disclose only the minimum amount necessary to satisfy the subpoena or other demand
- Notify the discloser as soon as reasonably practical following receipt of a subpoena or other demand
- Provide the discloser with a copy of the subpoena or other demand, so that the discloser can evaluate its rights
- Use commercially reasonable efforts to provide the discloser with sufficient time to seek protective relief, limiting or precluding disclosure
- Refrain from challenging or objecting to any such discloser’s protective efforts
- Use commercially reasonable efforts to ensure ongoing confidential treatment to any information ultimately disclosed
What to know about compelled disclosure in cannabis business contracts
Imposing disclosure obligations upon the recipient of confidential information means little without meaningful enforcement. When served with a subpoena or other legal document, recipients of confidential information may only have a few weeks to respond before risking contempt or other penalty. With the clock ticking, recipients may feel torn between complying with the subpoena or other legal document, or breaching the NDA
Smart disclosers should anticipate this time pressure and should include a provision in their confidentiality agreements that creates an easy pathway for “equitable relief.” This would be distinct from monetary damages. It may consist of an emergency order preventing or limiting disclosure, such as a restraining order or injunction.
Litigators will generally advise that “equitable relief” may be difficult to obtain in court, therefore subjecting litigants to heightened pleading requirements, monetary bonds and other procedural hurdles. This would make such an action more costly than traditional litigation. But it is possible to avoid these hurdles by requiring recipients of confidential information to acknowledge the discloser’s advance entitlement to such relief and to waive any bond requirement.
Previously executed confidentiality agreements devoid of these precautions should be revisited in light of the current regulatory environment. If precautions are taken, it may be possible to maintain trade secrets and other confidential business information, while still satisfying governmental calls for transparency. Turn to knowledgeable legal counsel with cannabis industry expertise to best navigate this tricky area.
Notable examples of compelled disclosure in the cannabis industry
The 2019 lung injury outbreak traced back to THC vapes is a great example of compelled disclosure and confidentiality agreements in action in the cannabis industry.
As state regulators took measures to protect residents against vape-related illnesses, governmental authorities called upon cannabis operators to disclose the “secret sauce” in their products intended for vaporization. Such transparency served to inform consumers and enabled authorities to track the ingredients and additives included in vape products, so they could respond appropriately to public health concerns.
In Massachusetts, for example, the Cannabis Control Commission instituted a requirement that forced concentrate manufacturers to disclose every additive used in their products, including thickening agents, diluents and specific terpenes. That ingredient list would be considered confidential information, but the law in Massachusetts required its disclosure in the name of public health.
A similar measure is in effect in Canada, where vape product manufacturers, pursuant to the Tobacco and Vaping Products Act of 2018, are required to disclose all ingredients in any vape e-liquid. In Ohio and Pennsylvania, some medical marijuana manufacturers volunteered to publicly disclose all vape ingredients, in an effort to build patient confidence and as a matter of self-regulation.
Review your contracts for strong confidentiality agreements
As the cannabis and hemp-derived cannabinoid industries grow, it’s likely that more regulatory enforcement may require compelled disclosure down the line. Protect yourself, your business, your clients, and the information you share. A trustworthy team of advisors like the attorneys at Rudick Law Group can review your contracts and make recommendations for provisions that strengthen NDAs and confidentiality provisions in the event that compelled disclosure is required.
A version of this article originally appeared in Marijuana Venture: https://www.marijuanaventure.com/maintaining-secrecy-in-an-era-of-compelled-disclosure/
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