State Supreme Court Protects Trade Secrets from Disclosure in Litigation

HIGHLIGHTS:

• The Supreme Court of Texas ruled that a trial court erred in a hearing on a misappropriation of trade secrets claim. The lower court refused the plaintiff's request to exclude the defendant's corporate representative from the courtroom, even though alleged trade secrets were going to be disclosed and the defendant was a business competitor.
• The decision supports the proposition that a company enforcing its trade secrets need not necessarily expose those trade secrets to the defendant in the course of litigation.
• Although other trial courts throughout the country have limited access to alleged trade secrets during discovery, the Texas decision is among the few appellate decisions formally articulating the principles that govern in such cases.

The Supreme Court of Texas recently ruled that a trial court erred in a hearing on a misappropriation of trade secrets claim. The lower court had summarily refused the plaintiff's request to exclude the designated corporate representative of the defendant from the courtroom, notwithstanding that the alleged trade secrets were going to be disclosed and that the defendant was a business competitor. The decision, In re M-I L.L.C. d/b/a M-I Swaco, No. 14-1045 (Tex. May 20, 2016), is notable because such issues of procedure, while of great importance in trade secret cases, are not commonly the subject of published appellate authority. The Texas Supreme Court's decision supports the proposition that a company enforcing its trade secrets need not necessarily expose those trade secrets to the defendant in the course of litigation.

The parties to this case were competitors that both provide services and equipment to the oil and gas industry. Plaintiff M-I Swaco alleged that defendant National Oilwell Varco (NOV) misappropriated M-I Swaco's trade secrets through its hiring of one of M-I Swaco's managers. In the hearing on M-I Swaco's application for a temporary injunction, M-I Swaco's witness prepared to describe the details of the trade secrets at issue. At that point, M-I Swaco sought to exclude NOV's corporate representative from the courtroom so the company would not learn of the trade secrets if, as NOV contended, the former employee of M-I Swaco had not already revealed them. M-I Swaco then requested a recess to petition the court of appeals for a writ of mandamus to order the exclusion it sought. After the court of appeals denied the mandamus petition, the resulting appeal led to the Texas Supreme Court's decision.

Concluding that the trial court had not considered the exclusion request in sufficient detail, the Texas Supreme Court directed the trial court to reconsider the issue, balancing NOV's due-process interests against the degree of competitive harm to M-I Swaco if its trade secrets were exposed to a competitor. It explained that factors the trial court should consider include 1) the degree to which NOV's defense would be impaired by its representative's exclusion, 2) the ability of NOV's retained outside experts (whose exclusion was not sought) to substitute for the representative's expertise, 3) the relative value of the alleged trade secrets and 4) whether the NOV representative would be in a position, given his role at the company, to misuse any newly gained information concerning the trade secrets.

The Texas Supreme Court also found that the trial court erred by failing to determine what the trade secrets at issue were in the first place in order to assess the relative risks to each party, suggesting that this initial analysis could have been accomplished by submissions in camera or at least outside the presence of the disputed representative.

Takeaways for Companies

Although other trial courts throughout the country have excluded certain representatives from proceedings to protect trade secrets at issue or otherwise limited access to alleged trade secrets during discovery, the Texas decision is among the few appellate decisions formally articulating the principles that govern in such cases. It is potentially helpful to companies and employers seeking to prosecute trade secrets claims because it rejects a per se rule under which the defendant and its representatives cannot be excluded when the trade secrets are the subject of testimony in court. At the same time, the decision is important to companies defending these cases by holding that such exclusion should not be automatically applied and recognizing the need in certain circumstances for the defendant to be able to see and hear firsthand the evidence adduced against it.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.