California: Accounts Receivable Purchase of Liens at Reduced Value - Trade Secret or Not?

"AR companies have become a cottage industry that now fills the courts with significant and sometimes unnecessary lien litigation on issues, many as such are presented in the instant petition.” 

In Gonzalez v. Thang Vi Duong, Inc., 2014 Cal. Wrk. Comp. P.D. LEXIS --, a WCAB panel denied the lien claimants’ petition for removal and affirmed the WCJ’s discovery orders requiring the lien claimants, i.e., Med Rx Funding and Pharma Finance, compound pharmacies owned by the same individuals whose liens in questions were purchased by an accounts receivable company, Landmark Medical Management, to produce documents representing the contracts between the lien claimants and certain health care providers, which contracts the lien claimants had alleged were protected by the “trade secret” privilege.

The WCAB found that California law provides that the owner of a “trade secret,” as defined in the Uniform Trade Secrets Act, is protected from disclosing the “trade secret” if the protection would not conceal fraud or otherwise cause injustice. Furthermore, in order to determine the applicability of the “trade secret” privilege, the party claiming the privilege has the initial burden of establishing that the information being sought is a protected “trade secret” and must establish such by providing an affidavit or declaration that lists the declarant’s qualifications to give an opinion concerning the alleged trade secret at issue, identifies, without revealing, the alleged trade secret, plus any articles that disclose the alleged trade secret, and presents evidence that the secret qualifies as a “trade secret.” After the party claiming the privilege meets the initial burden, the party seeking disclosure must make a “particularized” prima facie showing that the information sought is relevant and necessary to the proof of, or defense against, a material element of the case, before the burden shifts back to the party claiming the privilege to demonstrate why a protective order would not suffice.

Here, the lien claimants essentially asserted that the purchase of accounts receivable was a "trade secret," but the WCAB found no basis in law or fact to support this contention. The lien claimants' petition for removal did not address the definition of “trade secret” in the Uniform Trade Secrets Act or present any evidence that the information the claimants sought to protect qualified as a “trade secret,” but rather made only vague allegations regarding the business relationships between them and health care providers with whom they conducted business and their ability to survive in a competitive marketplace. Therefore, the WCAB concluded that the lien claimants failed to meet even their initial burden to establish a “trade secret,” and the protective order they sought was not justified.

The WCAB adopted and incorporated the WCJ's Report, which stated in pertinent part:

The lien purchasers are attempting to obtain economic value that constitutes a "middleman markup" beyond the value of the service actually performed by the original provider. It is their intent to profit beyond which the lien claimant who originally held the Accounts Receivable could hope to otain based on facts and the law. The AR companies have become a cottage industry that now fills the courts with signfiicant and sometimes unnecessary lien litigation on issues, many as such are presented in the instant petition.

The AR companies have responsibilities to cooperate and comply with discovery just as the original provider would have been required to do, including submission to deposition and production of documents. There is no reason that the intervening purchase of the pharmacy AR suddenly relieves the purchaser/lien claimant of its discovery obligations.

The WCJ further noted:

Ordinarily copyright and patent laws are sufficient to protect trade secret information from disclosure none of which exists here. The assertion of this privilege may not be used to hinder the court in determining the truth. Sometimes secret information significant to the operation of a business may have some protection against unnecessary disclosure but it may not be used to conceal fraud. To date no California case has found holding evidence of a trade secret to be privileged. (citation omitted)

The WCJ concluded that the business of purchasing AR at reduced values and then pursuing the right to collection based on the face value claimed by the former pharmacy owner or physician is not a "trade secret", nor is it privileged so far as the instant petition failed to articulate. The WCJ did not find good cause "to permit the lien claimants to obtain orders for their claimed discovery rights while negating those of the defendant insurer."

Read the Gonzalez noteworthy panel decision.

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