Lawful but Awful: Red Cross Says Hurricane Sandy Distributions Are Trade Secrets

Sep 05, 2014

While the term “trade secret” generally makes people think of Coca-Cola’s secret formula, software source codes, or company client lists, trade secret law has evolved to include everything from proprietary formulae to abstract ideas.  It may not come as a surprise then, that the “trade secret” claim is now being used in a variety of different contexts to broadly shield companies, including non-profit organizations, from disclosing sensitive financial information.

American Red Cross Disaster Relief TruckAfter coming under fire for its purported lack of transparency with regard to the way it used Hurricane Sandy donations, the Red Cross fueled the flames by invoking the trade secret exemption under New York’s Freedom of Information Law to prevent disclosure of “confidential proprietary data” in response to a public records request.  Can the Red Cross, a self-described “nonprofit, tax-exempt, charitable institution” with the legal status of “a federal instrumentality,” use the trade secret exemption? And even if it can, should it?

Under expansive trade secret laws, non-profits may be able to invoke trade secret protections to prevent disclosure of certain sensitive information.  Although its primary objective is not to seek financial returns for its members, a non-profit competes with other organizations for funding and donations to support a cause.  In that sense, non-profits are competitive businesses just like for-profit companies or corporations.  Just as a for-profit company may refuse to disclose certain sensitive financial or other proprietary information that may put it at an economic disadvantage in relation to other companies involved in the same trade, a non-profit may also do so if disclosure of certain information would put it at a competitive disadvantage with other similar organizations by reducing the amount of donations it receives.

However, unlike a for-profit company, which generates revenue by providing some tangible good or service, a non-profit relies mostly on external funding sources for financial support (e.g. the government and donors) to achieve its goals.  This means that a non-profit is particularly dependent on its public image in ways that a for-profit company might not be.  Just because non-profits may claim broad trade secret protections over their financial information doesn’t mean they should.  Any indication that a non-profit is being less than forthright with the public (i.e. its donor base) may undercut the organization’s image – and its donations – and may ultimately negate any benefit of keeping certain information a secret.  This is especially true in the Red Cross’s case, which touts its special relationship with the federal government as a source of legitimacy, and therefore, may be held to a higher standard of public accountability, fairly or unfairly.

The Red Cross subsequently released additional information about its general spending allocations voluntarily, while keeping other, more-detailed information secret.   Arguably, if it had taken this more considered approach in the first place rather than stonewalling the public records request, the Red Cross could have avoided further criticism about its lack of transparency and whatever deleterious effect it might have on its future donations.

Just because something is legal doesn’t mean it makes business sense.  Like other businesses, non-profits should be able to invoke trade secret for confidential or sensitive proprietary information.  While it makes sense for a non-profit to keep its donor lists a secret to prevent other organizations from poaching and diverting donations, it makes less sense for an organization dedicated to disaster relief to refuse to disclose to its donors if and how their money was distributed in response to a natural disaster.  As businesses that exist for the public good and by virtue of public support, non-profit organizations in particular should remain mindful of public perception when invoking trade secret protections.