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Patient lists can be trade secrets, need protection
By Leila Narvid, JD, Sideman & Bancroft, San Francisco
In today's competitive world of health care, lawsuits involving claims of misappropriation of trade secrets are becoming increasingly common among competitors. This trend can be seen in private medical practice, as health care practitioners are suing each other for what courts are now considering a valuable asset: patient lists.
What is a trade secret? The answer is largely the same in health care as in any other business. Courts analyze patient lists using the same legal standard applied to any other kind of customer list. Almost all states have adopted a portion of or modified version of the Uniform Trade Secrets Act (UTSA), which was drafted by the National Conference of Commissioners of Uniform State Laws in 1970 and amended in 1985. According to the UTSA, a trade secret has four characteristics: 1) information; 2) which derives independent economic value; 3) is not generally known or readily accessible by proper means or by other persons who can obtain economic benefit from its use; and 4) is the subject of efforts reasonable under the circumstances to maintain its secrecy.
As defined by the UTSA, "misappropriation" is the acquisition of a trade secret by "improper means" or disclosure of the trade secret without proper consent. Misappropriation can include "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means." Although an employee or independent contractor is free to leave a company and compete with his or her former company in the absence of a noncompete agreement, an employee or independent contractor is not permitted to misappropriate trade secrets.
Economic value is key
Trade secret law discourages employees and independent contractors from misappropriating confidential information. The laws are an effort to maintain and promote standards of business ethics and fair dealing in protecting those secrets.
Courts emphasize the economic value of patient lists in construing them as trade secrets. When disputes over patient lists arise, courts look to the conduct of each party and the particular information at issue. In Pollack v. Skinsmart Dermatology & Aesthetic Center, PC [68 Pa.D. & C.4th 417 (C.P. 2004)], the court of Common Pleas of Philadelphia held that a patient list taken by two physicians contained trade secrets protected under Pennsylvania law and that the defendants breached their duty of loyalty by using the list to solicit patients to their new practice. Defendants were independent contractors and were treating patients through the Philadelphia Institute of Dermatology (PID) owned by Andrew Pollack, MD. The patient list, containing 20,000 names, had been compiled by PID for over several years and was subjected to reasonable efforts to maintain its secrecy.
The case unfolded in October 2004, when Judge Gene Cohen of the Court of Common Pleas of Philadelphia ruled that Toby Shawe, MD, and Samy Badawy, MD, were liable to Pollack for misappropriation of trade secrets, breach of their duty of loyalty, and unjust enrichment. The court found that the defendants had improperly directed an employee to copy the patient list and then used the patient list to call to reschedule patients and to open their own practice. "The patient list was a trade secret, and defendants wrongfully acquired it," the judge said in his ruling. Shawe and Badawy settled with Pollack and agreed to pay more than $400,000 in damages.
Court records indicate that Shawe and Badawy worked for PID, but had no ownership interest in the practice. In June 2002, the three doctors reached a tentative agreement in which the majority of the practice would be sold to Shawe and Badawy. In early August 2002, Shawe and Badawy resigned from PID and on Sept. 3, 2002, opened their new practice, Skinsmart. The judge determined that prior to submitting their resignations, the doctors had directed PID staff members to make copies of the appointment books assigned to each of them and a printout of large portions of the patient list. The patient list was used to contact patients who had procedures scheduled at PID, to reschedule them to Skinsmart. Shawe and Badawy also contacted patients on the patient list as well as referring physicians via phone and mail to promote Skinsmart.
An important point is that neither defendant had access to the entire list. PID had taken significant steps to protect the list, such as investing in computers, software, and personnel to safeguard and maintain the list. The confidentiality of the patient list ensured that it remained unknown to those outside of PID. The patient list had tremendous economic value to the practice, which fulfilled the fourth major characteristic of trade secrets.
Efforts to keep confidential matter
In Hoppens v. Haugen (Nebraska Appeals Court, 1999) a Nebraska court used similar reasoning as the Pollack court in determining whether a list of dental patients could be considered a protected trade secret. Haugen shared a dental practice with Hoppens until they split up to practice separately. After the split, Haugen used patient lists and other records he obtained from Hoppens to contact Hoppens' former patients.
Hoppens sued for misappropriation of trade secrets. The court ruled in favor of Hoppens and held that the patient list, patient schedules, and office procedure documents Haugen used to set up his solo practice had significant economic value. While the court considered the security of the patient list and Hoppens' efforts to keep it confidential, the court's ruling focused on the economic value of the list.
Employers that fail to take adequate steps to protect the trade secret status of patient lists, patient schedules, and other office procedure documents may not be afforded the protection of the law. Health care employers should take precautions to make sure that they have met the requirements to protect the secrecy of patient lists:
By addressing the issues early on, companies may deter misconduct and avoid disclosure problems while the employee is employed and, more importantly, when the employee leaves. At the very least, such safeguards allow companies to arm themselves with the necessary tools to protect trade secrets and confidential information in the court system.
For more information on protecting health care trade secrets, contact: