Trade secrets derive their commercial value from being secret. When trade secrets are misappropriated, litigation may be necessary to stop a competitor from exploiting them in the marketplace. Yet litigating misappropriation of trade secrets could involve disclosing those secrets to that same competitor, perhaps in greater detail than it had acquired through misappropriation. Such a risk could arise at the pleadings stage, during discovery, in pre-trial hearings or at trial. Since various state and federal laws are available to choose from when asserting a trade secret claim, it is worth considering how these laws may impact the disclosure of trade secrets in litigation.
Changes in Texas Trade Secret Law
Texas recently amended the Texas Uniform Trade Secrets Act to make it easier for a party accused of trade secret misappropriation to access the alleged trade secret. More specifically, Texas law now includes a presumption that the protective order governing discovery allows the party accused of misappropriation to access the allegedly misappropriated trade secret to allow the accused party “to participate and assist counsel in the presentation of the party’s case.” The owner of a trade secret may overcome this presumption by satisfying a seven-factor balancing test. The amendment leaves unchanged a previously existing presumption in favor of granting protective orders to preserve the secrecy of trade secrets. Although somewhat at odds, these presumptions are reconcilable if understood to mean that, while trade secrets are generally protected from disclosure in litigating misappropriation, the party who allegedly misappropriated the trade secret may presumably access it in order to mount a defense.
This new presumption in Texas law is a limited one, but it imposes an important consideration for trade secret owners given that the party whom they accuse of misappropriation is most likely a direct competitor. While trade secrets may be in the form of technology akin to a patent, they are often comprised of information such as customer lists, market data or business plans. Regardless of form, the defendant may have misappropriated less than the full extent of the trade secret. Hence disclosing the trade secret in litigation may provide a competitor with more complete information than it already had.
Trade Secrets & Protective Orders Under Federal Law
The amendment to the Texas statue raises the question of whether analogous statues under federal law, and in other states, treat the confidentiality of trade secrets similarly. First, let’s consider federal law. Congress created a federal cause of action for misappropriation of trade secrets in its Defend Trade Secrets Act of 2016 (“DTSA”). The DTSA does not specifically address the disclosure of trade secrets in discovery the way that the Texas statute does, at least in the civil context. Instead, the federal rules of civil procedure provide a mechanism for protecting trade secrets. A district “court may, for good cause, issue an order . . . requiring that a trade secret . . . not be revealed or be revealed only in a specified way.” It may also quash or modify a subpoena if it requires disclosing a trade secret.
Of course, these pre-DTSA rules were not designed for trade secret cases in particular, such as where a party is both asserting misappropriation of a trade secret and seeking to prevent the opposing party’s access to that trade secret. Even so, Rule 26 requires “good cause” to protect trade secrets in district court litigation. The party opposing disclosure of a trade secret bears the burden of proving good cause with a showing of specific harm or prejudice. Courts may apply multi-factor tests to assess whether information warrants protection from discovery as a trade secret.
Despite the procedural mechanism directed to protecting trade secrets, owners of trade secrets may find that the protection afforded in a typical protective order is sufficient. Discovery is often governed by a protective order wherein the highest level of confidentiality, e.g., “highly confidential—attorneys’ eyes only,” allows only outside counsel to access materials designated as such. Cases involving the DTSA are no different.
This framework contrasts starkly with the new presumption in Texas trade secret law that the adverse party may access trade secrets to assist counsel in the litigation. When litigating trade secret misappropriation under the DTSA, a trade secret owner may be able to avoid disclosing the trade secret to the opposing party (but not opposing outside counsel) merely by designating materials with the highest confidentiality level available under the protective order. The party accused of misappropriation may seek access to the trade secret pursuant to Rule 26(c) in which case the trade secret owner would need to show “good cause” to prevent such access. “Good cause” is a relatively high bar, and it remains to be seen whether the “presumption” under Texas law will be higher.
Whether due to litigating under the revised Texas statute or other trade secret law, an adverse party’s access to a trade secret presents a significant dilemma to trade secret owners. Giving access to outside counsel, who are bound by ethical rules, who routinely handle valuable confidential information, and to whom professional reputation is paramount, is unlikely to result in a trade secret being misused. An adverse party, likely to be a competitor to the trade secret owner, has a greater commercial incentive to misuse access to the trade secret, and may do so inadvertently due to the inability to “unlearn” the trade secret. What measures could minimize the potential for misuse by an adverse party’s access to a trade secret? How should parties deal with “residual knowledge” that results from this exposure?
The parties should consider tailoring the protective order to identify by name what individuals may access the trade secret. Ideally, these individuals would not be involved in marketing or developing a product that competes with the trade secret owner’s embodiment of the trade secret. Such persons are ideally in-house counsel. However, given that the purpose of the Texas amendment is to allow the party to participate in its own defense, there is at least a facially justifiable reason to allow the individuals identified in plaintiff’s complaint to also see the trade secret matter. And many companies don’t even have in-house lawyers. With that content, it may be unavoidable to have a non-lawyer entity at the opposing party view the plaintiffs’ trade secrets.
The protective order could also specify when, where and how the trade secret may be accessed by the adverse party. This may make particular sense when the trade secret is extensive or technical, such as with software code. A protective order could specify that the adverse party may access the trade secret only on a certain date and/or for a specific amount of time. It could also require the access to occur on the trade secret owner’s premises, or from a certain secure computer, or under specific security measures. Furthermore, the protective order could limit the substantive scope of access. If the reason for allowing access is, as contemplated by the Texas statute, to allow the party to participate in defending the case, it may be reasonable to restrict access to only that portion of the trade secret to which the adverse party’s defense pertains. Other possible measures include requiring the party accessing the trade secret to post a bond, and designating an attorney to serve as custodian for sensitive documents.
Trade Secrets & Protective Orders Under Other State Law
Every state has laws that protect trade secrets, and nearly all the states have enacted the Uniform Trade Secrets Act (“UTSA”). The UTSA does not presumptively give parties access to trade secrets during discovery in the way that Texas law now does. Instead, it merely states that courts “shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders.” Although the UTSA is modified to some degree in many states, state trade secret laws typically include this provision empowering courts with the “reasonable means” to preserve the secrecy of trade secrets in litigation.
If preventing early disclosure of a trade secret in any way is an important factor for a trade secret owner, they should consider that courts often require disclosure of trade secrets with particularity before allowing discovery. Notably, California law explicitly requires that the party alleging misappropriation shall identify the trade secret “with reasonable particularity.” Although this does not mean that the trade secret will be disclosed publicly, it will likely be disclosed to opposing counsel (outside counsel, or both outside and in-house counsel) in relatively particular terms early in the case.
Interplay of Trade Secret Claims with Other Causes of Action
Trade secret misappropriation is often asserted alongside other causes of action such as patent infringement or unfair competition. Such claims can impact discovery regarding trade secrets. For example, in Space Data Corp. v. X, the plaintiff asserted trade secret misappropriation under both federal and California law, as well as patent infringement. The court stayed discovery regarding the trade secret claim pending the plaintiff’s disclosure of the trade secret with particularity as required by the California statute. After the plaintiff pursued discovery regarding its patent claim per the local patent rules, the defendant argued that discovery regarding its core technology should not proceed since this would render the court’s stay of trade secret discovery ineffectual. Finding that “the patent infringement claims asserted in this case are substantive and separate from the trade secret claims,” the court ordered the defendant to produce its core technical documents. Arguably, this decision gave more weight to the local patent rules than the state trade secret statute. Although the court ruled favorably for the trade secret owner in this instance, the scenario illustrates how the statutory “particularity” requirement for the trade secret claim could have hindered discovery regarding a patent claim.
Litigating the misappropriation of trade secrets may involve the risk of further disclosing a trade secret to a competitor. The strategy for bringing such a case should include an assessment of how different trade secret laws may impact whether secrecy is preserved. In some cases, it could make sense to forgo a state claim for a federal one. Finally, one should consider how a trade secret claim may affect other potential causes of action.