Friday, June 3, 2016

Texas Supreme Court Addresses Trade-Secret Access

Within the trade-secrets community, the case of In re M-I, LLC has been percolating for some time. The case (the procedural nuances of which are immaterial to this post) addressed the question of whether a trial court may exclude a defendant's party representative from the courtroom when the plaintiff disclosed the details of the allegedly stolen trade secrets.

A few weeks back, the Supreme Court of Texas held that when confronted with such an issue a trial court must conduct a balancing analysis to determine whether exclusion would violate the Fourteenth Amendment's guarantee of due process. Those balancing considerations include the following:

  1. The degree of competitive harm that the plaintiff may incur from disclosure, which necessarily entails some analysis of the merits.
  2. The degree to which the defense would be impaired by the witness' exclusion.
  3. The witness' role in the organization and whether he would have "specialized expertise that would not have been available to" outside experts.

I am somewhat concerned that the In re M-I balancing "test" suggests that a defendant must retain an expert to evaluate the particular trade secrets at issue. That itself would appear to limit access to many defendants unable to pay for experts (paying for lawyers is bad enough). I doubt that the case can be read as setting forth a categorical rule in that regard, and in situations about court access the better approach is to let judges judge and make discretionary calls without being hemmed in by specific standards that may not fit each case. The basic problem in In re M-I is that the trial judge never considered any countervailing interests that the plaintiff had in protecting the secrets during the court proceeding.

It is a little curious that the Court in its Fourteenth Amendment analysis never cited E.I. duPont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917), when Justice Holmes addressed the exact same question as that presented in In re M-I. There, Holmes (citing no authority at all) noted that:

"the judge who tries the case will know the secrets, and if in his opinion and discretion it should be advisable and necessary to take in others, nothing will prevent his doing so. It will be understood that if, in the opinion of the trial judge, it is or should become necessary to reveal the secrets to others it will rest in the judge's discretion to determine whether, to whom, and under what precautions, the revelation should be made."

That simple formulation is much more sound and simple to understand that the Texas Supreme Court's analysis. But perhaps they ultimately reach the same destination.

As best illustrated by Masland, this is hardly the first time courts have addressed the particular question of access. The Ninth Circuit, and courts in California, previously have followed the same analysis as that in In re M-I. They focus, for instance, on whether the excluded witness has some involvement in competitive decision-making functions. So, for instance, an in-house patent attorney may be prevented from seeing particular secrets, because (as the Court in In re M-I put it) he "could not resist acting on what he may learn."

The Court's observation on this point, though, does not amount to a tacit endorsement of the "inevitable disclosure" doctrine, as at least one commentator has suggested. The inevitable-disclosure theory is used to demonstrate a required element of a claim - misappropriation - whereas the balancing test articulated in In re M-I simply follows a long-held rule of due process and a more recent rule under the Uniform Trade Secrets Act that courts should deploy measures in litigation to protect the actual secret being litigated. Shoehorning this common-law and statutory recognition about protective measures courts may take during litigation into a broad substantive rule that few courts endorse would be a profound mistake.

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