- Edward Clough
The Astros scandal as theft of Intellectual Property.
On November 1, 2019, the New York Mets announced that Carlos Beltran would be the team’s new manager. Ten weeks later, Beltran stepped down after an MLB report alleged that while he was with the Houston Astros (the 2017 World Series Champions), he participated in a scheme to illicitly steal opposing teams’ signs. MLB’s punishment for the Astros was severe: a $5 million fine and loss of draft picks in 2020 and 2021. The scandal is a hot topic among the sports-pundits: what are the ramifications—for teams, players, bettors, and fans?
For me, however, as an attorney, the scandal raised a distinct question: namely, does stealing another baseball team’s signs constitute theft of a trade secret? What is a “trade secret”? A “trade secret” is a form of intellectual property, and is generally defined as information that its owner endeavors to keep secret, and the owner derives an independent economic value by keeping that information secret. The law of trade secrets is governed on the federal level by the Economic Espionage Act of 1996 (which prohibits the theft of trade secrets) and the Defend Trade Secrets Act of 2016 (which permits victims of such theft to sue in federal court). What kind of information is protectable? The scope of information protectable as a trade secret is virtually unlimited and includes financial-, scientific-, and technical information as well as devices, methods, techniques, and processes. A trade secret could be a complex algorithm or a simple sour-dough waffle recipe. The crucial element of the definition relates to the value derived from the information being kept secret. The owner must use “reasonable measures” to keep the information secret, and maintaining that secrecy must convey an economic benefit to its owner. A trade secret owner need not be the only person to know the information, but the information cannot be generally known, and courts will deny trade secret status if the information is readily ascertainable. Do baseball signs have the elements of a trade secret? The information must be secret. Baseball signs are essentially coded signals used by the players to communicate strategy—most commonly used between (i) the catcher and pitcher, and (ii) the third-base coach and the batter. The specific signs and their meanings are known only among the team’s players and coaches, and not outside of the team. (Contrast this to the sign-language systems once used on stock and commodity trading floors, where the signs were shared universally and known to all traders.) The owner must use reasonable measures to maintain the secrecy of the information. The nature of the game dictates that the signs are publicly displayed and visible to the opposing team. In order to prevent their opponents from deciphering their signs, teams use a number of techniques: they may use meaningless decoy signs to mask the true sign, or they may use a sequence of signs when only one (say, the first or last sign) is the true signal. In addition, teams will frequently change their signs—when a player is traded away, for example, or if there is reason to suspect the secrecy has been compromised. In fact, Chicago Cubs players carry a laminated reference card detailing the signs and their meanings, in case a player calls for a change of signs mid-game. In my judgement, the efforts and means teams use to keep their signs secret are, in general, reasonable measures under the circumstances. Do teams derive independent economic value from the signs being kept secret? Put another way, does a team derive economic value from winning? And if so, do the signs—and keeping them secret—contribute to the team winning? Do teams derive economic value from winning? Intuitively, it makes sense that winning makes a team more valuable: winning teams generally draw more fans, which translates into more ticket sales and, ultimately (due to greater demand) higher ticket prices—all of which contributes to greater income from gate receipts. Research tends to support this notion. (See economist Michael Davis's analysis on the subject.) In fact, one statistician estimates that each win during the season has a marginal value of $1.2 million. The winningest teams (i.e. those that advance to post-season play) reap even more economic benefit. For example, the World Series champions receive 36% of a pool of all post-season gate receipts, which for the 2018 Boston Red Sox amounted to $31.7 million. We can confidently say, then, that winning games provides an economic benefit to the team. Does the use of signs, and maintaining their secrecy, contribute to a team winning? Like most sports, baseball entails certain strategic elements (e.g. intentionally walking a batter, base-stealing, sacrificing an out to advance a runner, etc.). It logically follows, then, that a team would gain an advantage by preventing its opponent from learning its strategy or tactics. Therefore, I would argue that, all else being equal, a team’s use of signs to secretly communicate and implement its strategy increases that team’s likelihood of winning the game. Conclusion Putting the pieces together, I believe that there is a solid argument that baseball signs could be considered a trade secret. The signs are a form of information (i.e. coded signals) which the teams endeavor to keep secret (i.e. via decoy signs, etc.), and maintaining that secrecy conveys an economic benefit to the team (i.e. the monetary value of winning games). Accordingly, since a baseball team’s signs constitute a trade secret, misappropriation of those signs amounts to the theft of a trade secret. (Shame on those naughty Astros!) While this analysis is illustrative, the reality is that MLB teams are subject to arbitration rules that would prohibit one team from suing another in court. And we leave unaddressed, for now, the measure of damages which a successful plaintiff may be entitled to recover from a purported trade secret thief—but these can be substantial and can include lost profits, unjust enrichment, and punitive damages. Take-away No matter what line of business your company is in, it pays to identify and protect the company’s trade secrets. Safeguard valuable proprietary know-how—physically and/or electronically. In addition, employing legal protections (such as requiring employees sign a non-disclosure agreement) can mitigate the risk that your information is revealed, and, since you tried to keep the information secret, support a claim that the information is a “trade secret”.