Following oral arguments (which we reported on in February), on May 20, 2016, the Texas Supreme Court issued its first opinion involving the Texas Uniform Trade Secrets Act, which was enacted in 2013. 

In December 2014, Schlumberger subsidiary M-I LLC (d/b/a M-I SWACO) filed a writ of mandamus with the Texas Supreme Court over a trade secrets case decided in Harris County District Court.  In its writ, M-I SWACO alleged that the trial court erred by refusing to conduct portions of a temporary injunction hearing involving trade secrets outside the presence of the opposing party’s designated representative. 

At the end of May 2016, the Texas Supreme Court ruled in favor of M-I SWACO and found that the trial court abused its discretion when it concluded — without balancing the competing interests at stake — that exclusion of a designated representative would violate due process.

The Underlying Dispute

The underlying lawsuit arises out of National Oilwell Varco’s (NOV) hiring of Jeff Russo, a former M-I SWACO business development manager.  Mr. Russo sued his former employer, M-I SWACO, seeking a declaration that his noncompete was invalid and could not preclude him from working at NOV.  M-I SWACO in turn filed a counterclaim for breach of contract and misappropriation of trade secrets, naming NOV as a defendant.  Of particular relevance to the current Texas Supreme Court case, M-I SWACO alleged that Mr. Russo misappropriated company research and development, new product development, engineering, and marketing activity information for use with his new employer, NOV.

During a hearing on M-I SWACO’s application for a temporary injunction, M-I SWACO sought to exclude NOV’s corporate representative, Federico Mezzatesta, from the courtroom.  The trial court refused to do so, stating it would be “a total violation of due process” to exclude the designated representative from the courtroom and telling M-I SWACO, “You sued them. They stay, period.”  The trial court instead issued a gag order barring Mr. Mezzatesta from disclosing or using trade secret information.  M-I SWACO then suspended the injunction hearing and filed an appeal.  

Issue Under Review

The issue before the Texas Supreme Court was whether the trial court erred in not requiring NOV’s corporate representative to exit the courtroom during the evidentiary proceedings.  M-I SWACO argued that it was placed in the “impossible position” of having to either reveal its trade secrets to NOV, its competitor, in open court or forego legal action to protect its trade secrets. NOV argued, among other things, that forcing the exclusion of a corporate party representative  violates the Texas Constitution’s “open-courts” provision, which states that “[a]ll courts shall be open, and every person for an injury done him, in his lands, goods, person or reputation, shall have remedy by due course of law.”  Tex. Const. art. 1, § 13.

Court’s Ruling

On appeal, the Texas Supreme Court sided with M-I SWACO and held that “the due process right of a party to be present at a civil trial — much less the right of a party to have a designated representative present at a temporary-injunction hearing — is not absolute.”  Writing for the Court, Justice John P. Devine explained that the trial court should have balanced the competing interests at stake and thereby abused its discretion when it failed to do so.  

According to the Texas Supreme Court, although there is a “presumption in favor of participation” in the courtroom, the presumption may be overcome in “limited circumstances” when there are “countervailing interests.”  To make this determination, the Texas Supreme Court held that the trial court should have considered and balanced the following factors:

  1. The degree of competitive harm a party would suffer from dissemination of its trade secrets, a determination which is based on:
    • the relative value of the alleged trade secrets; and
    • the extent to which the person to be excluded had a role 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.
  3. The stage of the proceeding.

In addition, the Texas Supreme Court rejected NOV’s argument that the open-courts provision conferred an absolute right of public access.  The Court questioned whether the open-courts provision did, indeed, guarantee a right of public access but went on to say that, even if such a right did exist, it “clearly would not be absolute, but instead would be subject to reasonable limitations imposed to protect countervailing interests, such as the preservation of trade secrets.”   Put simply, there is no absolute right to having a designated representative in the courtroom under Texas law.

Impact in Texas and Beyond

This is a significant decision likely to be cited across the country as a framework for courts to follow in balancing the rights of all parties in trade secret cases.