Industry Needs Transparency and Trade Secrets in Order to Thrive

Transparency sells. Our legislatures and regulators champion it, and American voters apparently believe it levels the playing field.

While transparency is important to fair markets and consumer protection, trade secrets are essential to competition and innovation. When considering regulations where the purpose is to foster transparency, we have to ask what is being disclosed and at what cost? Are we forcing companies to disclose too much and in doing so undermining their financial incentive to innovate?

The real challenge will be for us to strike a balance where transparency builds the public trust without dismantling the private incentive to innovate.

Here is the tension: Proponents of disclosure say the public has a right to know, but what may be overlooked is that companies have long been entitled to protect proprietary information to give them a competitive edge in the marketplace. If they are forced to disclose what gives them a competitive edge, they have little financial incentive to invest in R&D and innovation which also benefit the public.

The latest example of these issues coming into play is the US Ninth Circuit Court of Appeals recently upheld Oregon’s prescription drug transparency law that requires drug companies to report detailed pricing and revenue data.

Our politicians and legislatures argue these and similar laws promote accountability–that without disclosure, markets are distorted, costs skyrocket, and consumers are left to stumble in the darkness. But when regulations strip away confidentiality of proprietary information, those regulations can also undermine the very financial incentives that drive private investment in research, development and innovation that is required to take risks on new technologies.

Drug development requires billions in R&D and if manufacturers’ costs and price structures must be disclosed, can competitors reverse engineer so that there is less incentive to invest in the R&D in the first place? Other industries that could similarly be affected by disclosure laws include aerospace, energy, and technology including AI.

Court Battle

Oregon’s HB 4005, signed into law in 2018, imposes disclosure requirements when drug costs exceed $100 per month or increase significantly in one year. The Pharmaceutical Research and Manufacturers of America, a trade group, sued, alleging the law compelled speech and destroyed trade secrets without fair compensation. A federal judge at the trial court level initially sided with the drug companies, but last month, the Ninth Circuit reversed and ruled in favor of the legislation.

Judge Lucy Koh wrote for the majority that the law properly regulates commercial speech, which enjoys less constitutional protection than political speech. The court found legitimate Oregon’s goals to reduce information asymmetry, give payers leverage, and promote informed policymaking. At least 15 other state attorneys general filed briefs supporting Oregon, underscoring a broader movement for cost control and transparency.

In his strongly worded dissent, Judge Carlos Bea warned that compelled narratives about pricing strategy are not “commercial speech” but core strategic disclosures that could chill innovation and competition. To him, the law looks more like a forced giveaway of intellectual property, and less like consumer protection.

Beyond Pharma

Consumers and regulators in Oregon are declaring the decision a victory that shines a light on industries where secrecy fuels suspicion and where costs directly affect lives. Other industries that could similarly be affected by disclosure laws include aerospace, energy, and technology, including AI.

Industry is concerned with this decision as negative precedent. If courts normalize disclosure of competitively sensitive data in one sector, others may follow. Today it’s drug pricing; tomorrow it could be something else. Any industry where pricing and strategy touch consumers directly, and where public frustration exists, could be targeted.

Both sides have points. Consumers and regulators will always demand more information in markets they distrust. On the other hand, for profit companies are equally right that trade secret protection creates financial incentive to innovate. Therefore, not all information should be public.

So what’s the path forward?

• Narrow tailored laws. Disclosure law must have laser-like focus on matters that consumer choice or public policy, not competitive details that constitute trade secrets.
• Judicial vigilance. Our courts need to scrutinize disclosure laws to ensure they are not disguised efforts to punish unpopular industries.
• Corporate vigilance. Businesses must remain alert and—if need be—take action to defeat legislation that may impact their fundamentals.

Although the law is to shed light where there is darkness, that light can’t be used to dismantle the incentive to innovate. We must strike a balance.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Monte L. Mann is a business litigator at Armstrong Teasdale, where he represents clients in trade-secret cases and other high-stakes business disputes.

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