Robin Feldman on the Role of Trade Secrets in Shielding Pharmaceutical Pricing

Published on: Author: Jaime King

In “Naked Price and Trade Secret Overreach,” 22 Yale Journal of Law & Technology 61 (2020), Professor Robin Feldman and her co-author, Charles Tait Graves, draw critical attention to the ever-broadening assertion of trade secret protection as a device to obscure the price of healthcare goods and services. The article explores the danger of trade secret overreach through the lens of the especially egregious, albeit increasingly common, example of the pharmaceutical industry’s manipulation of trade secret law to obscure drug prices and prevent regulatory disclosure. The question, in short, is whether a mere price, in and of itself, qualifies for trade secret protection at all, especially in a context in which information surrounding the transaction is already publicly available.

After a thorough and searching review of trade secret legislation, jurisprudence, and academic literature, Professor Feldman and her coauthor conclude that modern trade secret law under the Defend Trade Secrets Act of 2016 and similar statutes does not provide monolithic protection to every invocation of secrecy over pricing-related information. In some cases, such as pricing in the Pharmacy Benefit Manager (PBM) context, the case for trade secrecy is especially weak. Separately, and as a tool to test claims of trade secrecy in edge cases where the public interest is strong, the article proposes a concept of “thin” trade secret rights. This concept builds upon precedent and lessons from copyright and patent law to suggest the creation of thin trade secret protection—which offers marginal protection against disclosure but diminishes in the face of contravening public concerns, like disclosure of pharmaceutical and broader healthcare prices. Finally, the article offers practical techniques seen in ordinary civil trade secret litigation—such as requiring a specific and precise identification of claimed trade secrets—as devices regulators can borrow in courtroom challenges.

The article’s critique of trade-secret practices provides the right argument at just the right time. As healthcare prices continue to rise, federal and state governments have sought to increase price transparency in an effort to guide consumer spending and inform health-reform initiatives aimed at reducing costs. The article begins by elucidating the price manipulations of pharmacy benefit managers (“PBMs”) through rebates, administrative fees, and patient discounts that often keep the “naked price,” or the actual negotiated price paid to a pharmaceutical manufacturer, hidden from public view. As regulators became more aware of these manipulations, potentially through Professor Feldman’s previous groundbreaking work in this area, they have found their efforts to expose these prices through legislation and regulation challenged in court on trade secret grounds. Often, the assertion that the naked price constitutes a trade secret has proven sufficient to stop legislators, regulators, academics, journalists, and others from trying to obtain access to negotiated healthcare and pharmaceutical prices, leaving those prices obscured from public view. Yet, as Naked Price points out, “[w]hether an item meets the objective elements required to demonstrate that a trade secret exists is not the same thing as whether the company labeled something as a trade secret.”

Part of this analysis is a recognition that trade secret law is a still-maturing area of intellectual property law, in which observations about the theoretical underpinnings of trade secret claims and ideas long-recognized in other areas of IP law are necessary to work through the problems of claiming IP rights in mere prices. The article carefully details the history of and theory underpinning trade secret law and its relationship to other IP rights, like patents and copyrights. This analysis brings to light both the value of trade secret protections for maintaining innovative business information, as well as the immense potential for doctrinal overreach when trade secret claims are asserted outside traditional contexts. To establish trade secret protection, a claimant need only prove secrecy, reasonable efforts to maintain secrecy, economic value derived from the secrecy, and inability to ascertain the information with minimal time and effort. The simplicity of proving these elements has led to broad attempts to protect information to garner a competitive advantage in ways that do not align with traditional justifications for protecting intellectual property.

The article is quick to point out the inherent dissonance in the idea that price information could constitute a trade secret. Free-flowing information on price and quality are necessary for markets to function efficiently. Indeed, obscuring prices has allowed PBMs and other healthcare entities to distort market prices in ways that increase healthcare spending and hinder market corrections. A significant gulf exists between the naked price resulting from an adversarial negotiation by two parties and the innovations and ideas intellectual property is designed to protect. IP laws aim to encourage investment of time and resources to develop useful commercial information, but “[n]o incentive is needed to encourage companies to buy low and sell high, for that is the ordinary function of the market.” The prices in a PBM agreement are a “mere deal point” between two negotiators. Furthermore, the use of trade secret law to avoid disclosure, regulation, and responsibility for public harm deviates sharply from allowing businesses to protect their ideas and innovations from those that would seek to use them for competitive advantage.

Nevertheless, the article uncovered no case in which the court squarely addressed the question of whether pricing information can or should receive trade-secret protection. My own research on the issue came to the same conclusion. Despite voluminous claims from pharmaceutical companies, PBMs, hospitals, health systems, insurers, and other healthcare entities that negotiated healthcare price information constitutes a trade secret, no court has ever thoroughly considered the issue and declared it so. Instead, courts have largely skirted the issue altogether.

Naked Price fills this void by providing a careful and nuanced framework for determining when negotiated pricing information is a trade secret worthy of protection. The article rejects the relational approach to trade secrets, which would focus on relationships between parties sharing information rather than whether the information objectively is protectable. The relational approach, the article argues, makes it easier to avoid scrutiny of trade secret protections for “overbroad, conclusory claims.” The article also warns strongly against the creation of a separate category of “confidential business information” that runs parallel to but is distinct from a trade secret. Such a distinction simply opens the door to more manipulation and obfuscation.

Instead, the article presses for a property theory of trade secrecy, which requires the claimant to identify the particular item of information asserted as secret so that it can be tested for protectability. Mere price, the article argues, does not meet that standard, at least in the PMB context. The article also offers a theory of “thin” trade secret protection, based on similar protections offered in copyright, which in the alternative would balance weaker claims of secrecy against public-policy concerns. The property approach focuses on whether any discrete piece of information—single, ephemeral, or not—qualifies for protection. But the commercial interests of protecting information as a trade secret must then be balanced against the public and governmental interest in disclosure. Indeed, regulators should have a significant role to play in balancing the relative importance of maintaining secrecy around commercial pricing manipulations and the interests of the general public in knowing the prices actually being paid for the drugs they purchase. Given the choices facing many Americans regarding whether to keep taking their medications or pay for other necessities like food and housing, having a clear understanding of the pricing model for their drugs and what other payment options exist would seem entirely paramount to any intellectual-property interest in retaining the secrecy of the prices.

The article’s analysis allows judges, legislatures, and regulators to see many of these overbroad trade secret claims for what they truly are—efforts to suppress unwanted regulation, transparency, and competition—and address them as such. In this light, the IP right should yield to the significant public and governmental interest in disclosure.

Overall, this article is a “must-read” for any judge, legislator, or regulator concerned with a growing lack of transparency surrounding high pharmaceutical and healthcare prices. Its message is clear and essential: just because a commercial entity claims trade secret protections to garner a competitive advantage or hide its “unsavory business practices” does not mean that trade secret protections apply. “No intellectual property right can be boundless.”