It is said that when the debtor files bankruptcy the debtor is in a fish bowl.  The reason is simple:  the debtor in bankruptcy is required to make honest and sworn disclosure of all manner of financial and operational information on request and at regular intervals per the bankruptcy code.  Often, new and exciting liabilities and obligations are discovered by the lenders when their borrower files bankruptcy.  The policy behind this is obvious.  Moreover, rarely does a debtor find itself in bankruptcy because it was too honest.  However, sometimes this statutory preference for sharing collides with the real need to keep trade secrets, secret.

Apple Fish Bowl

Many of you probably heard of the Apple, Inc. vendor who filed bankruptcy.  The vendor, who is GT Advanced Technologies, Inc. and affiliates, made the screens for Apple phones.  The bankruptcy filing made the news because of the stunning possibility that anything related to Apple could be in financial peril.

The screens are technically difficult to make, but Apple sold over 10 million IPhone 6 phones in the first week.  Compare that to reports of Amazon Fire Phone sales of 34 thousand after two weeks.

As it turned out, the sheer scale of endeavor was too much for GT.  Also, it turned out that Apple requires, what some may call, significantly one sided contract provisions.

Two of the many things the contracts between Apple and GT required were:

i.            Attempt to make a bankruptcy remote entity, and

ii.            Keep Apple’s secrets, secret.

As it turns out, it only kind of worked.

For confidentiality, Apple’s terms provided that GT would be liable for $50 million in liquidated damages for each occurrence of disclosure by GT of protected information.  The information protected from disclosure was extremely broad and included disclosing “the nature of their business relationship” and the terms of the contract itself.

For the bankruptcy remote entity, it filed bankruptcy also.  It was faced with the specter of the enormous burden of the liquidated damages, among other things.

In a typical bankruptcy, GT would be required by law to disclose many parts of the business relationship with Apple on a regular basis, typically monthly as well as the terms of the agreements.  The potential for liquidated is therefore large.

However, the wayward debtor is not without salvation.  The bankruptcy code also allows the Court to “protect an entity with respect to a trade secret or confidential research, development, or commercial information;…” upon request.

Piece of cake, right?

Nope. The Bankruptcy Judge in GT didn’t feel that the information provided to him under seal was worthy of protection – notwithstanding the $50MM liquidated damages – and ordered the majority of it to be made public.  So – the information that was provided to the Court to justify the secrecy was in turn simply filed on the docket for all to see after the Judge made the ruling.

If you were interested in the business relationship between Apple and GT and their sapphire screens, unprecedented attempt to meet demand and ultimate downfall – it’s on the docket.  I should note, though, when I checked there was nothing of a purely technical nature.  Thus, the ruling is more a bench mark for expectation of what may actually be confidential in bankruptcy.

For borrowers, this is clearly a difficult path to thread.  For investors, this is a cautionary tale of how to protect your value.  For lenders, this provides some backstop to the idea that all trade secrets will be secret in bankruptcy.  Of course, if the borrower’s income exists because of a trade secret and it becomes public, you might not be getting paid back.

In re GT Advanced Technologies, Inc., et al., case no. 14-11916, pending in the United States Bankruptcy Court for the District of Delaware