United States: Practical Tips: Keeping Trade Secrets Safe During Litigation – Texas Supreme Court Edition

Last Updated: June 9 2016
Article by Mark Mermelstein

Last week, the Texas Supreme Court provided its first opinion interpreting the Texas Uniform Trade Secrets Act in a case involving an issue that often causes discomfort to lawyers on both sides of the "v" in trade secret misappropriation cases: how much of their trade secrets do plaintiffs have to disclose to enable the defendant to adequately defend itself? The opinion in In re M-I L.L.C. d/b/a M-I Swaco, 2016 WL 2981342 (Tex., May 20, 2016) demonstrates this tension. In that case, the Texas Supreme Court, on a petition for a writ of mandamus, held that the trial court abused its discretion by (i) refusing to exclude the defendant's designated representative from the courtroom during a hearing where the plaintiff's trade secrets would be disclosed; and (ii) ordering the production of an affidavit containing the plaintiff's trade secrets without first conducting an in camera review.

The plaintiff in the case, M-I Swaco ("Swaco"), and the defendant, National Oilwell Varco ("NOV"), are competitors who provide equipment and services to the oil and gas industry. In the action, Swaco alleges that one of its former employees accepted a position at NOV in breach of a non-compete agreement, and that he knew, and would inevitably disclose, Swaco's trade secrets. At a hearing on Swaco's application for a temporary injunction, the trial court rejected, on due process grounds, Swaco's request for the exclusion from the courtroom of NOV's designated representative during Swaco's testimony concerning its trade secrets. While the trial court granted the request for a recess to permit Swaco to file a writ of mandamus challenging this decision, the trial court also ordered Swaco to submit an affidavit setting forth the alleged trade secrets as part of its offer of proof. Swaco complied, and while the appellate court rejected NOV's attempts to access the affidavit, the trial court was not so protective. Instead, the trial court granted NOV's motion to compel, ordering the affidavit disclosed without first reviewing it. Swaco petitioned for a writ of mandamus, challenging both the refusal to exclude NOV's designated representative and the disclosure of the affidavit. The Texas Supreme Court found that both were an abuse of the trial court's discretion, for which there was no adequate remedy at law.

The Texas Supreme Court first found that the trial court failed to conduct the balancing test required by the Due Process Clause, which pits the presumption in favor of allowing the defendant to participate in the proceedings against the degree of relative harm the plaintiff would face if its trade secrets were disclosed. The trial court incorrectly assumed that the due process right to be present at a civil trial was absolute, concluding that "[Swaco] sued them. They stay, period." Instead, the Texas Supreme Court reiterated that the right to be present is qualified.

The Texas Supreme Court also rejected the trial court's absolutist position in its analysis of NOV's remaining arguments. It found that (i) any right of public access under the Texas Constitution's "open courts" provision would be similarly qualified; and (ii) other Texas Rules of Civil Procedure must be interpreted in a way consistent with the Trade Secrets Act.

Finally, the Texas Supreme Court found that the trial court had an obligation to review the affidavit allegedly containing Swaco's trade secrets before ordering it disclosed, to determine what protective procedures, if any, were necessary to protect Swaco's interests.

For litigants, the opinion provides a useful framework for determining whether, and to what extent, trade secrets must be disclosed during court proceedings in cases where those trade secrets are central to the claims presented. As explained in Swaco, trial courts should consider the following:

  • The relative value of the trade secrets (though they need not determine whether the information is, in fact, a trade secret);
  • Whether the representative to be excluded from viewing a disclosure acts as a "competitive decision-maker" for the defendant;
  • The degree to which the defense would be impaired by restricting the defendant's representative from access to the disclosure; and
  • The stage of the proceedings (the function of a preliminary injunction is to maintain the status quo).

While the rejection of a per se rule may add a layer of complexity and expense to an already-costly trade secrets dispute, requiring the courts to conduct a balancing test could provide the parties with an early assessment of the strengths and weaknesses of their case, which ultimately may save them time and expense in the long run.

Twitter: @TS_Watch

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