In May of 2016, the Texas Supreme Court issued an important decision interpreting the Texas Uniform Trade Secrets Act when it 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 Court’s ruling came about due to two competing businesses, when a former employee of one company (“M-1”) left to join a competing entity (“NOV”). M-1 accused its former employee of breaching his non-compete agreement, asserted that he would inevitably disclose their trade secrets, and demanded that he stop working for NOV. The former employee filed a declaratory judgment suit, and the former employer counterclaimed for, among other things, breach of the non-compete agreement and misappropriation of trade secrets. 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 business 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 relief in the court of appeals and then the Texas Supreme Court.
The Texas 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 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.” The Supreme Court agreed with M-I’s position, 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 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.
This case is significant for businesses. 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. An opposing party’s corporate representative will often be a key player, knowledgeable of the competitor’s business, 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.
As a result of this decision, we always are well-prepared to protect our client’s trade secrets.
We are here to help.
Mark A. Alexander
5080 Spectrum Suite 850
Addison, Texas 75001
. A declaratory judgment lawsuit is a judgment of a court which determines the rights of parties without ordering anything be done or awarding damages.