Protecting Or Obtaining Trade Secrets During Discovery In Texas State Court

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

Rule 507 of the Texas Rules of Evidence provides for the protection of trade secrets:

A person has a privilege, which may be claimed by the person or the person’s agent or employee, to refuse to disclose and to prevent other persons from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the judge shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.

TEX. R. EVID. 507.

The trade secret privilege seeks to accommodate two competing interests. In re Continental Gen. Tire, Inc., 979 S.W.2d 609, 612 (Tex. 1998) (orig. proceeding). First, it recognizes that trade secrets are an important property interest, worthy of protection. Id. Second, it recognizes the importance placed on fair adjudication of lawsuits. Id. Rule 507 accommodates both interests by requiring a party to disclose a trade secret only if necessary to prevent “fraud” or “injustice.” Id. Disclosure is required only if necessary for a fair adjudication of the requesting party’s claims or defenses. Id.

The party asserting the trade secret privilege has the burden of proving that the discovery information sought qualifies as a trade secret. In re Bass, 113 S.W.3d 735, 737 (Tex. 2003) (orig. proceeding). If the resisting party meets its burden, the burden shifts to the party seeking the trade secret discovery to establish that the information is necessary for a fair adjudication of its claim. Id. It is an abuse of discretion for the trial court to order production once trade secret status is proven if the party seeking production has not shown necessity for the requested materials. Id. at 738.

As mentioned above, to determine whether a trade secret exists, the following six factors are weighed in the context of the surrounding circumstances: (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to guard the secrecy of the information; (4) the value of the information to the business and to its competitors; (5) the amount of effort or money expended in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. In re Union Pac. R.R. Co., 294 S.W.3d 589, 592 (Tex. 2009) (orig. proceeding) (per curiam). The party claiming a trade secret is not required to satisfy all six factors because trade secrets do not fit neatly into each factor every time. In re Bass, 113 S.W.3d at 740.

The Texas Supreme Court has not stated conclusively what would or would not be considered necessary for a fair adjudication; instead, the application depends on the circumstances presented. In re Bridgestone/Firestone, Inc., 106 S.W.3d 730, 732 (Tex. 2003) (orig. proceeding). The degree to which information is necessary depends on the nature of the information and the context of the case. Id. However, “the test cannot be satisfied merely by general assertions of unfairness.” Id. “Just as a party who claims the trade secret privilege cannot do so generally but must provide detailed information in support of the claim, so a party seeking such information cannot merely assert unfairness but must demonstrate with specificity exactly how the lack of the information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat.” Id. at 732-33. An appellate remedy does not exist if a trial court orders a party to produce privileged trade secrets absent a showing of necessity. In re Bass, 113 S.W.3d at 745. Hence mandamus is an appropriate vehicle to challenge such an order. Id.

In 2010, the Houston First Court of Appeals decided In re Cooper Tire & Rubber Co., 313 S.W.3d 910 (Tex. App.–Houston [14th Dist.] 2010, no pet.). The plaintiffs were involved in a head-on collision when the tread came off a Cooper Weather Master S/T tire on Dustin Langstaff’s vehicle, causing him to lose control. They sued Cooper in the Harris County 127th District Court for strict liability, negligence, and defects in design, manufacturing and marketing. The suit alleged specifically that Cooper failed to use belt edge gumstrips, or BEGs, in the Weather Master, which purportedly would have made the tire safer.

The plaintiffs sought documents on a different model Cooper tire in order to show that the company had added and removed BEGs from that tire. They claimed the data could establish that Cooper knew of the Weather Master defect, and that BEGs would rectify the problem, but continued to produce the defective tires. Cooper countered that the information was not relevant and that the documents contained trade secrets. The trial court ordered Cooper to disclose the documents under a protective order but did not rule on the trade secret issue. The tire maker then filed a petition for writ of mandamus, asking the appeals court to set aside the trial judge’s order. Granting the petition, the court found that five of the six factors that determine whether trade secrets exist all weighed in favor of Cooper’s argument. The factors involved the extent to which people inside and outside Cooper’s business already know the information, what measures Cooper took to guard the data, the information’s value to Cooper, and the ease or difficulty with which other parties could properly obtain or duplicate the data. The court concluded that the plaintiffs did not establish that they needed the trade secret information for a fair hearing on their claim. Accordingly, the panel concluded that the trial court abused its discretion in ordering Cooper to produce the documents. Id. at 919.

Also in 2010, the Dallas Court of Appeals issued a very similar decision. See In re Goodyear Tire & Rubber Co., NO. 05-10-00485-CV, 2010 WL 2510371 (Tex. App.–Dallas June 23, 2010, no pet.) (also finding that the trial court abused its discretion in ordering the production of trade secrets).

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