When can a competitor use litigation to find out your company’s trade secret information?
Let me explain it this way …
What if it was your businesses’ valuable information?
Pause for a moment and imagine that your business is the industry leading innovator in its field because, through your effort and resources, you have developed secret tricks and techniques for how to do things that your customers love and that is what makes your business so successful. You keep these tricks and techniques so secret that only the most trusted people inside your company — those who have a need to know them — have access to and know these secrets.
These secrets are what the law calls trade secrets. They are what most real people (i.e., non-lawyers) call the “crown jewels”, “keys to the kingdom”, or the “secret sauce” — they are that important.
Now, imagine that your fiercest competitor, who is called FierceCo, knows you have secret ways for how you do things, but does not know what those secrets are. FierceCo has tried for years to find out what they are but has never succeeded. Now FierceCo has met an enterprising lawyer and has a new plan.
Would you want your competitor to get your valuable trade secret information simply by suing you?
FierceCo sues your business — for whatever made-up reason it can concoct — and demands that you disclose what your trade secrets are in the discovery in the lawsuit. Will it work? After all of these years of protecting your businesses’ trade secrets from FierceCo, will you now be required to turn over the “keys to the kingdom”?
Maybe, maybe not.
Your secret information that qualifies as trade secrets is privileged and, because of that privilege, the only way FierceCo can get it is if it can satisfy a specific test under the law. And then, even if FierceCo can get access to that information, the purposes for which it can use the information are severely restricted by court order and any violation of that order could land FierceCo in contempt of court. Contempt is not good — trust me on this.
The test under the Texas Common Law
The test that must be met was explained by the Dallas Court of Appeals in In re The Goodyear Tire & Rubber Co., 392 S.W.3d 687 (Tex. App.–Dallas 2010, orig. proceeding). In this case the court said that a party to a lawsuit can refuse to disclose their trade secrets, and prevent others from disclosing its trade secrets if
- Not disclosing the trade secrets will not tend to conceal fraud or otherwise work injustice;
- The party not wanting to disclose its trade secrets then shows that the information fits the definition of trade secrets; and
- The party requesting the information then establishs that the information is necessary for a fair adjudication of its claim or defense.
In our hypothetical case, this means that FierceCo must meet the burden of establishing that the information is necessary for a fair adjudication of its claim or defense or else the court cannot require it to be disclosed. This does not mean simply that it is relevant to the case. Instead, FierceCo “‘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 696. “This specificity showing must be made with regard to each category of information that” FierceCo requests and for which you assert the trade secret privilege. Id.
“A trial court abuses its discretion if it orders disclosure of trade secrets when the requesting party has not carried its burden to show the information is necessary for a fair adjudication of its claim.” Goodyear, 392 S.W.3d at 693.
The “new” test under the Texas Uniform Trade Secrets Act — substantively, it really is the same
While the 3 step test of Goodyear was under the common law of trade secrets, before Texas enacted the Texas Uniform Trade Secrets Act (TUTSA) (eff. 9/1/13), the test remains substantially the same under TUTSA. TUTSA specifically instructs the Texas courts to look to the cases from other jurisdictions that have adopted their version of the Uniform Trade Secrets Act, Tex. Civ. Prac. & Rem. Code § 134A.008, and the predominate test in those jurisdictions is substantially the same 3 step test.
In Bridgestone Americas Holding, Inc. v. Mayberry, 878 N.E.2d 189, 193 (Ind. 2007), the Supreme Court of Indiana explained the 3 step balancing test that is to be applied under the Uniform Trade Secrets Act when trade secret information is sought in discovery:
- The party opposing discovery must show that the information sought is a trade secret and that disclosure would be harmful.
- If trade secret status is established, the burden shifts to the party seeking discovery to show that the information is relevant and necessary to bring the matter to trial.
- If both parties satisfy their burden, the court must weigh the potential harm of disclosure against the need for the information in reaching a decision.
The focal point of the test should be on proof of real necessity
This 3 step balancing test has been adopted by other states and is the appropriate test for Texas courts to apply under TUTSA. The “necessity” prong is the one that should really be the focal point of the court’s analysis. To meet the burden of establishing the second step of the test, “the party seeking trade secret information cannot simply claim unfairness but must show ‘with specificity 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.’”
Meanwhile, it is clear from the case law that establishing necessity is the heart of this three-part analysis. When necessity is established, courts frequently hold that the trade secret must be disclosed, albeit with some protection.
“Necessity” means that without discovery of the particular trade secret, the discovering party would be unable to present its case “to the point that an unjust result is a real, rather than a merely possible, threat.” In re Bridgestone/Firestone, Inc., 106 S.W.3d 730, 733 (Tex.2003). Implicit in this is the notion that suitable substitutes must be completely lacking.
The requesting party must meet a very high burden to establish a true necessity, as required, in order to obtain the trade secret information. This requires their showing of a true necessity with no suitable substitutes available to provide the requested information.
About the author
Shawn Tuma is a lawyer who is experienced in advising clients on complex digital information law and intellectual property issues such as trade secrets litigation and misappropriation of trade secrets (under common law and the Texas Uniform Trade Secrets Act), unfair competition, and cyber crimes such as the Computer Fraud and Abuse Act. He is a partner at BrittonTuma, a boutique business law firm with offices near the border of Frisco and Plano, Texas which is located minutes from the District Courts of Collin County, Texas and the Plano Court of the United States District Court, Eastern District of Texas. He represents clients in lawsuits across the Dallas / Fort Worth Metroplex including state and federal courts in Collin County, Denton County, Dallas County, and Tarrant County, which are all courts in which he regularly handles cases (as well as across the nation pro hac vice ). Tuma regularly serves as a consultant to other lawyers on issues within his area of expertise and also serves as local counsel for attorneys with cases in the District Courts of Collin County, Texas, the United States District Court, Eastern District of Texas, and the United States District Court, Northern District of Texas.
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