Texas High Court Finds Texas Uniform Trade Secrets Act Can Exclude Opposing Party from Injunction Proceedings

Texas High Court Finds Texas Uniform Trade Secrets Act Can Exclude Opposing Party from Injunction Proceedings

On May 20, 2016, the Texas Supreme Court issued its first decision interpreting the Texas Uniform Trade Secrets Act. In In re M-I, LLC, an opinion with significant implications, the Supreme Court held that a trial court may exclude a party's corporate representative from preliminary injunction proceedings where the opposing party's trade secrets will be discussed. The Supreme Court also held that, where one party contends that a document contains its trade secrets, the trial court must examine the document in camera before ordering production to the opposing side.

The opinion arises from the rivalry between two business competitors, M-I, LLC ("M-I") and National Oilwell Varco, L.P. ("NOV"). Both companies provide solid control services and equipment to the oil and gas industry. One aspect of these businesses involved "mesh screens that filter solid matter … from drilling fluid." In 2014, the business development manager of M-I's screens division left M-I to join NOV. According to M-I, its former employee had "in-depth knowledge of M-I's solid-control business, including M-I's bidding strategies, pricing information, customer preferences, solid-control systems, and deployment strategies." M-I accused its former employee of breaching his noncompete agreement, asserted that he would inevitably disclose M-I's trade secrets, and demanded that he stop working for NOV. The former employee filed a declaratory judgment suit, and M-I counterclaimed for, among other things, breach of the noncompete agreement and misappropriation of trade secrets. M-I also asserted third-party claims against NOV, including one for a temporary injunction.

At the temporary injunction hearing, M-I sought to establish its trade secrets through the oral testimony of one of its current employees, the global business line manager of its screens division. But before it did so, M-I requested that everyone except the parties' counsel, their experts, and M-I's former employee be excluded from the courtroom. In particular, M-I sought to prohibit NOV's corporate representative from hearing this testimony. The trial court refused M-I's request on the ground that it would amount to a "total violation of due process." The trial court instead said that it would order NOV's representative "not to disclose or use any trade secrets he heard." Unsatisfied with this result, and unwilling to disclose its trade secrets to NOV's representative, M-I sought mandamus relief in the court of appeals.

As part of its mandamus petition, M-I submitted in camera to the court of appeals an affidavit from its global business line manager detailing the testimony she had been prepared to offer at the temporary injunction hearing. The court of appeals denied M-I's petition, after which proceedings resumed at the trial court. NOV then moved to compel M-I to produce the affidavit as a discoverable witness statement under Texas Rule of Civil Procedure 194.2. The trial court granted NOV's motion without reviewing the affidavit. M-I then filed a petition for writ of mandamus in the Texas Supreme Court, challenging two rulings by the trial court: (i) its denial of M-I's request to exclude NOV's representative from the temporary injunction hearing, and (ii) its order compelling production of the affidavit of M-I's global business line manager.

The Texas Supreme Court conditionally granted M-I's petition in a unanimous opinion. Addressing the exclusion of NOV's representative, the Court held that the trial court's due process analysis was flawed and not compelled by the Fourteenth Amendment to the U.S. Constitution. The Supreme Court stated that due process creates a presumption in favor of participation and generally prohibits the exclusion of parties or their representatives, but this presumption is not absolute and may be overcome by "countervailing interests" that include protecting trade secret information. The Supreme Court held that the trial court was required to balance the parties' interests, considering "the degree of competitive harm" M-I would have suffered if its trade secrets had been shared with NOV's representative. This determination should include examining "the relative value" of the alleged secrets, as well as whether the representative was a "competitive decision-maker." The trial court also should weigh the degree to which NOV's defense would be impaired if its representative were excluded from parts of the temporary injunction hearing. Having failed to conduct this balancing analysis and, instead, finding that NOV's representative had an absolute due process right to hear M-I's testimony about its trade secrets, the trial court abused its discretion.

The Supreme Court further stated that the exclusion of NOV's representative would not be inconsistent with Texas constitutional, statutory, and common law. In particular, the Supreme Court held that the Texas Uniform Trade Secrets Act "requires trial courts to take reasonable measures to protect trade secrets" including, among other things, "holding in camera hearings." Tex. Civ. Prac. & Rem. Code § 134A.006. Whereas NOV asserted that the phrase "in camera hearings" refers to "proceedings closed to the general public," M-I asserted that this phrase "also refers to proceedings in which a party or its representatives (but not its attorneys) are excluded." The Supreme Court agreed with M-I's interpretation, finding that "the Act granted the trial court discretion to exclude [NOV's representative] from portions of the temporary injunction hearing involving alleged trade secret information about which he was potentially unaware." The Supreme Court further held that this interpretation of the Act was not inconsistent with Texas Rule of Civil Procedure 267(a).

The Supreme Court also held that the trial court had abused its discretion by failing to perform an in camera review of M-I's affidavit before ordering that the affidavit be produced. The trial court believed that the affidavit was discoverable under Texas Rule of Evidence 507(a), even if it included M-I's trade secrets. But the Supreme Court held that the trial court could not have determined if the affidavit were discoverable without first performing an in camera review. This review was necessary to determine which protective measures "were required by the interests of the privilege holder and the parties." The trial court was required to perform the in camera review in order to assess how M-I's interests would be affected by disclosure of the affidavit to NOV's representative.

In re M-I is a significant decision by the Texas Supreme Court. The opinion reaffirms the importance of maintaining the confidentiality of trade secrets, even from competitors in litigation, by using the protections afforded by the Texas Uniform Trade Secrets Act. These protections include the ability to clear the courtroom of even a competitor's representative during proceedings, and to obtain in camera reviews of evidence, documents, and testimony before disclosing trade secret information in open court or to a competitor. Indeed, an opposing party's corporate representative will often be a key decision-maker, knowledgeable of the competitor's business unit, or otherwise able to make at least some use of the opposing party's trade secrets. The same qualities that make the defendant's representative well suited to represent that corporation may also warrant limiting or eliminating that person's additional or continued access to a plaintiff's trade secrets in litigation. The opinion also clarifies that due process and public access provisions of federal and state law must be balanced against protection from public disclosure and misappropriation of trade secret information, particularly to competitors.

The In re M-I opinion may have implications for federal court litigation under the recently passed Defend Trade Secrets Act of 2016. While the persuasive effect of the In re M-I opinion outside of Texas state courts remains to be seen, it seems plausible that federal courts may adopt a similar balancing approach to resolve disclosure and due process concerns under the federal statute.

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