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Litigation Update: The Texas Supreme Court establishes a test for excluding party representatives during trade secret proceedings.

In late May 2016, the Texas Supreme Court issued a decision potentially affecting any Texas trade secret litigation. In In re M-I L.L.C., 2016 WL 2981342 (Tex. May. 20, 2016) the Court held trial courts should use a balancing test to determine if a party's corporate representative is allowed to hear its opponent's trade secret evidence. This decision's key "takeaways" for business readers are (1) if you are offering trade secret evidence, there is now a Texas standard to use in asking the court to exclude your competitors' employees; and (2) in selecting a corporate representative, consider whether that employee may be subject to exclusion from hearings based on the In re M-I balancing test, discussed in more detail below.

The underlying lawsuit arose when an M-I employee left to take a position at M-I's competitor, National Oilwell Varco, L.P. ("NOV"). M-I and NOV provide similar highly R&D intensive services to the oil-and-gas industry. After M-I sent its departed employee a demand letter, he sued M-I for a declaratory judgment that his non-compete agreement was unenforceable. M-I counterclaimed for breach of a non-compete agreement and related claims, and sued NOV for tortious interference.

M-I sought a temporary injunction and, at the injunction hearing, offered testimony from a manager to establish its trade secrets. M-I asked the court to exclude everyone from the manager's testimony, except for counsel, outside experts, and the former employee. The trial court refused to exclude NOV's designated corporate representative, stating "you sued them. They stay, period." In its subsequent petition for mandamus relief, M-I submitted in camera an affidavit detailing the trade secret testimony it was prepared to offer. The appellate court denied the mandamus petition. NOV then sought to compel production of the in camera affidavit, which the trial court granted without reviewing the affidavit. M-I sought mandamus relief from the Texas Supreme Court on the trial court's refusal to exclude NOV's corporate representative and its order compelling production of the affidavit. The Court granted the writ, reversing the trial court on both grounds.

In reaching its decision, the Court first addressed NOV's argument that constitutional due process required its representative to be present during the trade secret testimony. The Court held that due process did not give NOV an absolute right to have a representative present, but required the trial court to balance several factors. The Court identified those factors as:

  1. The degree of competitive harm a party would suffer from the dissemination of its alleged trade secrets, which required consideration of:
    1. The relative value of the party's alleged trade secrets; and
    2. The role of the excluded person as a competitive decision-maker for the opposing party.
  2. The degree to which a party's defenses would be impaired by its representative's exclusion, which required consideration of the representative's role at the party and whether he had specialized expertise unavailable to the party's outside experts; and
  3. The nature of the proceeding, including whether it was preliminary temporary injunction hearing or a more substantive hearing on the merits.

The Court held the trial court abused its discretion by failing to consider any of the above factors in denying M-I's request to exclude NOV's representative.

The Court then briefly addressed and rejected several other arguments offered by NOV to support the trial court's decision, including the Texas Constitution's open courts provision, "the Rule," the Texas Uniform Trade Secret Act, Rule 76a, and the "offensive use" doctrine. Of note, the Court, in its first interpretation of the Trade Secret Act, Tex. Civ. Prac. & Rem. Code §§ 134A.001-.008, held it allowed trial courts to exclude parties' representatives from trade secret information of which they are potentially unaware.

As to the affidavit, the Court held the trial court should have first reviewed the affidavit to determine if it contained trade secrets and to assess appropriate protective measures before ordering the affidavit's disclosure. The trial court's failure to review the affidavit, the Court held, constituted an abuse of discretion and warranted mandamus relief.