TEXAS SUPREME COURT PROVIDES GUIDANCE ON HOW BEST TO PROTECT TRADE SECRETS DURING AN INJUNCTION PROCEEDING

On May 20, 2016, the Texas Supreme Court issued an opinion providing guidance on how courts should handle injunction actions involving claims related to theft of trade secrets.

The case involves two competitors that provide solid-control equipment and services to the oil and gas industry, M-I L.L.C. d/b/a M-I Swaco (“M-I”) and National Oilwell Varco, L.P. (“NOV”). NOV hired, Jeff Russo (“Russo”), a former M-I employee. M-I claims that Russo entered into a non-compete agreement while employed with M-I in exchange for being provided with confidential information and trade secrets. Russo filed a declaratory judgment action seeking to invalidate the non-compete agreement. In turn, M-I filed suit against Russo and NOV and, among other things, sought a temporary injunction to prevent Russo from disclosing trade secrets he learned during his employment with M-I to NOV.

During the course of the temporary injunction hearing, M-I requested the trial court to exclude NOV’s corporate representative from the hearing so that M-I would not be forced to reveal its trade secrets to a competitor. M-I claimed that it would defeat the purpose of the hearing if NOV’s corporate representative was permitted to hear testimony regarding the alleged trade secrets, as he would gain firsthand, direct knowledge related to the trade secrets. M-I contended that NOV’s interests would be appropriately protected because its attorneys and experts would be present during the hearing.

NOV objected to M-I’s requested relief on the grounds that it violated NOV’s due process rights to hear the accusations asserted against it. In other words, NOV maintained it had a right to hear testimony regarding what trade secrets it allegedly stole from M-I. The trial court agreed with NOV. Rather than excluding NOV’s corporate representative from the hearing, the trial court allowed the corporate representative to participate in the hearing, but instructed him that he was not to use any information learned during the hearing for any purpose outside of the litigation. M-I adjourned the hearing and filed a writ of mandamus.

After several rounds of mandamus actions, this issue made its way to the Supreme Court. The Supreme Court was left to decide whether the trial court abused its discretion when holding that a corporate representative has an absolute right to participate in an injunction hearing even if the hearing involves confidential information and trade secrets. The Supreme Court ruled that there is no absolute right for a corporate representative to participate in the proceeding, and under appropriate circumstances, a corporate representative may be excluded from portions of the hearing where direct evidence of an opponent’s claimed trade secrets is presented.

The Supreme Court acknowledged there is a general presumption in favor of allowing a corporate representative to participate in the injunction hearing, but this presumption is not absolute. Rather, the Supreme Court held in determining whether a corporate representative should be excluded from a temporary injunction, the trial court must balance a number of competing factors, and based on this balancing test, determine whether there is a sufficient basis to warrant exclusion of a witness. The Supreme Court listed the following factors to be considered:

(1) The degree of competitive harm the movant would suffer from the dissemination of the alleged trade secrets at issue to the non-movant;
(2) The relative value of the movant’s claimed trade secrets;
(3) Whether the corporate representative of the non-movant who the movant seeks to exclude from the hearing is a competitive decision-maker. The Supreme Court noted, if the corporate representative is a competitive decision-maker, he/she almost assuredly could not resist acting on information learned during the temporary injunction hearing. Notably the Supreme Court did not define what constitutes a “competitive decision-maker;”
(4) The impairment and degree of harm to the non-movant’s defense resulting from the exclusion of the non-movant’s corporate representative; and
(5) Whether the non-movant’s corporate representative possesses specialized expertise that would not be available to the non-movant’s outside experts and, thus, seriously prejudice the non-movant’s defense.

The Supreme Court held that the trial court abused its discretion because it summarily ruled that NOV’s corporate representative was allowed to participate in the temporary injunction hearing without applying the above-referenced balancing test to the facts in dispute. The Supreme Court granted M-I’s writ of mandamus and instructed the trial court to conduct the required balancing of the relevant factors before making a determination of whether NOV’s corporate representative should be excluded from the temporary injunction hearing. Importantly, the Supreme Court did not rule that NOV’s corporate representative should be excluded; rather, it merely provided the trial court with direction on how it should go about making a decision on whether exclusion of the corporate representative is warranted under the facts involved in the case.

The takeaway from this decision is that corporate representatives do not have an absolute right to participate in the full scope of a temporary injunction proceeding regarding claims for theft of trade secrets. Instead, parties may (and should in appropriate circumstances) seek to exclude a competitor’s corporate representative from an injunction proceeding. The trial court then must apply the balancing factors referenced herein when determining whether the appropriate remedy is to exclude the non-movant’s corporate representative. Nonetheless, this is an extreme remedy. Often a less severe measure can and should be taken to preserve trade secrets.

The Supreme Court’s full opinion may be found here: http://www.txcourts.gov/media/1376256/141045.pdf