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"You sued them. They stay, period." Not the Law, Says the Texas Supreme Court in Trade Secret Decision

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On May 20, 2016, the Texas Supreme Court weighed in on how trial courts handle access to evidence in trade secrets cases in a hotly-contested, years-long fight between Schlumberger subsidiary M-I Swaco and National Oilwell Varco (“NOV”). The Texas Supreme Court held that the due process clause and open court doctrine do not give a party or its designated representative automatic access to trade secrets evidence that may be presented in the case. Rather, the district court must balance the degree of competitive harm that one party may suffer from the dissemination of an alleged trade secret against the impairment to the other side’s interest by excluding or limiting access to that information.

Trial Court Decision

M-I Swaco and NOV are competitors in the energy service market. This lawsuit erupted in February 2014 when Jeff Russo left his position as business development manager of M-I Swaco’s screen division to become the global product line manager of NOV’s screen division.

Russo sued to have his non-compete agreement declared unenforceable and in response, M-I Swaco asserted, among other things, misappropriation of trade secrets claims against Russo and NOV. A hearing was held by the trial court on M-I Swaco’s application for temporary injunction, and M-I Swaco asked the trial court to close the courtroom―including exclusion of NOV’s corporate representative―when its trade secret witness was about to testify. The trial court denied the request, stating that the exclusion of NOV’s corporate representative would be a “total violation of due process.” In doing so, the trial court explained: “You sued them. They stay, period.” The trial court, however, did order NOV’s corporate representative not to disclose or use any trade secrets revealed during the hearing.

In response to this ruling, M-I Swaco recessed its temporary injunction hearing and sought appellate review of the trial court’s ruling.

The Texas Supreme Court Requires a Balancing Test

The Texas Supreme Court reversed the trial court’s ruling, finding that the trial court abused its discretion when it concluded that exclusion of NOV’s corporate representative would violate due process without first balancing the competing interests. As to M-I Swaco’s due process argument, the Court held that due process typically favors participation but that courts have “discretion to exclude parties and their representatives in certain circumstances when countervailing interests overcome this presumption.”

In the context of the pending temporary injunction hearing, the trial court must balance on the one hand the “degree of competitive harm” M-I Swaco would suffer from the dissemination of its alleged trade secrets before NOV’s corporate representative, and on the other hand, the degree to which NOV’s defense of M-I Swaco’s claims would be impaired by the corporate representative’s exclusion. In weighing these competing interests, the Court identified a number of factual issues that should be considered including: (i) the relative value of the alleged trade secrets at issue, (ii) whether the designated corporate representative is a competitive decision-maker, and (iii) whether the designated corporate representative possesses specialized expertise that would not be available to NOV’s outside experts or counsel. Because the trial court did not address any of these issues, the matter was remanded for further proceedings.

Lessons Learned

Parties and lawyers in complex litigation are no strangers to limiting access to information exchanged in litigation. “Confidential,” “Highly Confidential,” and “Attorneys’ Eyes Only” designations pursuant to protective orders are common in today’s discovery process. The Texas Supreme Court’s decision not only raises the importance in thoughtfully crafting such discovery agreements, but also in carefully identifying corporate representatives who can attend depositions, hearings, and trials. As the Court stated, the due-process right of a party to be present at a civil trial is “not absolute.” Every trial lawyer wants a corporate representative who makes a strong impression to the trier of fact, who can ably assist in-house and outside counsel, and who can withstand cross-examination when called to the stand. Now, counsel must also weigh whether that person is at risk for being removed from the hearing and how to mitigate against that risk.

Courts facing trade secrets cases―already burdened with learning the technical details of the case―must now effectively voir dire the designated corporate representative to assess whether he or she should be present in the courtroom during the substantive trade secrets testimony. As with most issues, courts will be relying on the party and counsel that most effectively and credibly educate the court about the trade secret at issue, the business at issue, and the designated corporate representative’s role and function.

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