Excluding parties in Texas trade secrets hearings - Norton Rose Fulbright

Excluding parties in Texas trade secrets hearings

New SCOTX rule – and inevitable misappropriation?

Publication June 2016

In a recent mandamus decision, the Texas Supreme Court has provided new guidance for courtroom procedures under the Texas Uniform Trade Secrets Act (TUTSA). In re M-I L.L.C. d/b/a M-I Swaco, Relator, No. 14-1045 (Tex. May 20, 2016). The suit involves a common fact pattern in trade secret cases: a management-level employee leaves to take on similar job duties with a competitor, and is alleged to have retained company trade secrets after leaving. The former employer, M-I L.L.C., brought TUTSA claims against both the former employee, and his new employer, competitor National Oilwell Varco (NOV). 

Background

At the temporary injunction hearing, M-I had to deal with a familiar complication in such proceedings: how to prove up its alleged trade secrets, without handing them over to a competitor. Taking a not-uncommon route, M-I sought to not only exclude the general public, but also NOV’s corporate representative. Interestingly, M-I apparently did not seek to exclude the former employee—more on this in a moment.

The trial court summarily refused to exclude NOV’s corporate representative, agreeing with NOV that doing so would be a “‘total violation of due process.’” Id. at 3. Instead, the court proposed issuing a “do-right” order, directing the representative not to disclose or use any trade secrets he heard during the hearing.

After an unsuccessful petition for mandamus to the court of appeals, M-I sought mandamus relief from the Texas Supreme Court. In a unanimous decision, the court granted mandamus, and directed the trial court to conduct a balancing test under the Due Process Clause. Id. at 7-8.

Balancing test to exclude party representatives

Without expressing any opinion on whether M-I should ultimately succeed in excluding NOV’s representative, the court explained the balancing test the trial courts must follow:

On one side of the scale, the court must consider the “degree of competitive harm” to the trade-secret holder, if the secrets are disclosed. Id. at 7. This includes considering the relative value of the trade secrets, and whether representative to be excluded “acts as a competitive decision-maker.” Id. at 8.

On the other side of the scale, courts must determine the degree to which the other party’s defense would be impaired by excluding its representative. Id. Interestingly, this determination again hinges on the role of the representative with his company, and whether this role would give him “specialized expertise” not available to outside experts assisting the defense. Id.

The supreme court also reiterated that trial courts in a preliminary injunction hearing should consider the early stage of proceedings, and that the purpose is to maintain the status quo, not to make a final decision on the merits. It also noted the trial court is not called to determine if the information is, in fact, a trade secret, but only “whether the information is entitled to trade secret protection until the trial.” Id. at 7 n.3. This confirms an approach already followed in the courts of appeals. See, e.g., T–N–T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 23 (Tex. App.—Houston [1st Dist.] 1998, no pet.).

Takeaways

The most obvious takeaway is that the supreme court has endorsed, at least in principle, excluding party representatives from the courtroom when trade secret testimony is presented. But there are several wrinkles here to keep in mind.

  • First, the court was not called on to decide whether the balancing test would operate differently—or apply at all—where the party to be excluded is an individual person. While there is nothing in the court’s opinion that suggests a different test would apply, we can expect that individual trade secret defendants will argue their due process interests are heighted, or warrant greater protection.

  • Second, the court’s focus on the employment role of the person to be excluded has several implications. If the defending representative is in-house counsel, or another person who is not “a competitive decision-maker,” the party asserting the trade secrets will have a hard time showing there is any potential harm on its side of the scale. On the other hand, it will be difficult for the defending party to show that its representative has “specialized expertise” necessary to help the defense, if the individual is not involved in the competitive market in question.

    On balance, designating in-house counsel as the corporate representative at trial should give the defending party a strong argument against exclusion. This is because he or she normally will not be a “competitive decision-maker,” and also because, as an attorney and officer of the court, in-house counsel is arguably more likely to comply with a “do right” order.

  • Third, this decision provides something else to think about when considering whether to bring trade secret claims in Texas under TUTSA, or under the newly enacted, federal Defense Against Trade Secrets Act. While In re M-I L.L.C. would no doubt be considered as persuasive authority by federal district courts, it is obviously only binding on state courts. Excluding a party representative in a trade secret action is never a sure thing, and there is now something to be said for proceeding in state court, where at least the threshold question of whether it is even proper to do so has now been resolved.

Inevitable misappropriation in Texas?

Last, but very far from least: this decision gives a fairly strong hint that the Texas Supreme Court is receptive to the inevitable misappropriation doctrine. This doctrine, which has a mixed record in other Uniform Trade Secret Act jurisdictions, allows a trade secret holder to prove misappropriation by showing the defendant’s new employment will inevitably lead him to rely on his knowledge of the plaintiff’s trade secrets. See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995)

Here, in explaining the importance of the representative’s role in assessing the potential harm to the trade secrete holder, the Texas Supreme Court noted: “If [the representative] does [act as a competitive decision-maker], disclosure of [the] alleged trade secrets to him would necessarily entail greater competitive harm because, even when acting in good faith, [the representative] could not resist acting on what he may learn.” In re M-I L.L.C. at 8.

Inevitable misappropriation may be only a short step away, and no doubt lower courts will cite this language in future decisions finding it applicable.

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