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May 23, 2016Client Alert

Trade Secrets Decision

On Friday, May 20, 2016, the Texas Supreme Court issued its first-ever ruling involving the Texas Uniform Trade Secrets Act.

In 2013, Texas became the 47th state to adopt a version of the Uniform Trade Secrets Act.  Before then, Texas courts protected trade secrets under a patch-work of common law principles and the Texas Theft Liability Act which provided civil remedies for certain penal code violations such as theft of trade secrets. Now, for the first time since adoption of the new statute, the Texas Supreme Court has spoken on the topic. 

In the M-I case, the Court held the corporate representatives of a corporate party do not have an absolute right to attend hearings at which trade secrets will be disclosed. Instead, the trial court must balance the party’s due process right to participate in the hearing against the competing interest in protecting the confidentiality of trade secrets. Moreover, while the Court focused on whether a party has an absolute right to be present in court when confidential evidence is being presented, the most important takeaway from the decision may be the Texas Supreme Court’s implicit recognition of the inevitable disclosure doctrine.

The case in question arose when a business development manager left M-I, LLC and joined National Oilwell Varco, L.P. (known as NOV).  M-I and NOV are competitors in the oil-and-gas industry. The business development manager sued M-I seeking a declaratory judgment that he could work for NOV without violating his non-compete agreement with M-I. In response, M-I counterclaimed against the business development manager and NOV for breach of contract and theft of trade secrets, among other claims. 

M-I asked the trial court to bar NOV’s corporate representative from the courtroom during its presentation of trade secrets evidence at the preliminary injunction hearing. The court summarily refused, holding that such a bar would be a “total violation of due process.” The trial court stated, “You sued them. They stay, period.” At that point, M-I suspended the hearing rather than reveal its trade secrets evidence in front of its competitor and sought a writ of mandamus

The Supreme Court of Texas reversed the district court’s decision, holding that NOV had no absolute right to have its corporate representative present in the courtroom at all times notwithstanding the “open courts” provision in the Texas Constitution and the “Rule” that certain classes of witnesses are exempt from exclusion from the courtroom. Instead, the Court maintained that the district court should have held a hearing to balance the presumption in favor of a client’s participation in the hearing against the degree of competitive harm the other side would suffer from the dissemination of its alleged trade secrets.  At a minimum, the trial court was required to weigh the facts. The Court held that the “Rule” is not absolute; and the Texas Uniform Trade Secrets Act expressly authorizes in camera hearings.

Most importantly, the Court observed that the corporate representative witness, “even when acting in good faith,” would not be able to resist acting on what he may learn. That is, the Court embraced the inevitable disclosure doctrine at least under the facts of this case. While some Texas courts had applied the inevitable disclosure doctrine under Texas common law, the doctrine had not been universally accepted by Texas courts, much less the Supreme Court of Texas. This new decision is the first word on the topic from the Texas Supreme Court since adoption of the Texas Uniform Trade Secrets Act, and it sends a strong signal that inevitable disclosure is the law of the land in Texas.

For more information, please contact your Michael Best attorney; Arthur Gollwitzer, III at agollwitzer@michaelbest.com; or 512.640.3161; or Eric H. Rumbaugh at ehrumbaugh@michaelbest.com or 414.225.2742.

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