Texas Supreme Court Rules Competitors Can be Excluded from the Courtroom

cartoonUntil recently, companies suing for trade secret theft ran a risk of having to disclose to their competitors in open court certain aspects of their trade secrets in order to prove their claim. The companies often argued that they shouldn’t have to give up their trade secrets in order to pursue their legal rights.  On the other hand, defendants argued that they cannot defend against a claim when they don’t know what they are accused of taking. Last month, the Texas Supreme Court clarified how such dilemma is to be resolved. 

The Court ruled that a company suing for trade secret misappropriation may exclude its competitor’s representatives from the courtroom when their trade secrets are discussed, leaving only the lawyers and independent outside experts of the competitor to hear such testimony. This way, a defendant can learn the information it needs to defend against the claims brought against it, but the information cannot be used outside of the lawsuit. 

Under TUTSA, trial courts are required to take “reasonable measures” to protect trade secrets during litigation, including, among other things, “holding in camera hearings” i.e. hearings that are closed to the public because they will involve discussion of trade secrets.  TUTSA does not specifically define the term or explain exactly who may or may not be present during in camera hearings.  Recently, NOV and M-I Swaco battled in court over whether NOV’s corporate representative could be present at a hearing where M-I Swaco offered testimony about what trade secrets its former employee took from it and gave to NOV.

In In Re M-I, LLC d/b/a M-I Swaco, NOV argued that as a party to the lawsuit where it was accused of stealing trade secrets from M-I Swaco, it had a right to be present at a temporary injunction hearing and hear what trade secrets M-I Swaco claimed NOV misappropriated.  The Texas Supreme Court did not buy into this argument finding that in camera hearings could include hearings where a party or its representatives (but not its attorneys) could be excluded.

The Supreme Court explained that when a trial judge is faced with the decision on whether to exclude a corporate representative from the courtroom during testimony about trade secrets, which he might not already know by virtue of misappropriation, the judge must balance (1) the “degree of competitive harm” the party would have suffered from the disclosure of its trade secrets to the other party’s corporate representative and (2)  the degree to which a party’s defense of a trade secrets case might be impaired if its corporate representative is excluded from the courtroom.

To make this determination regarding the degree of competitive harm, the court must consider the relative value of the party’s trade secrets to its competitor as well as whether the corporate representative acts as a competitive decision-maker at his company.  If he does, disclosure of alleged trade secrets would “necessarily entail greater competitive harm” because, even when acting in good faith, the corporate representative would not be able to resist acting on what he or she may learn during the hearing. To determine whether a party’s defense might be impaired, the court should consider whether a corporate representative possess unique expertise that a party may not find in outside experts.

Takeway:  The Texas Supreme Court has made it clear that a company wishing to prosecute theft of trade secrets can do so without having to disclose its trade secrets to a competitor in an open court.  If the disclosure of such information in open court will harm the company, it may ask the judge to remove its competitor’s representatives from the courtroom when critical proprietary information is discussed, leaving it up to the other sides’ lawyers and experts to analyze the testimony or evidence.  While this will certainly increase the cost of trade secrets litigation, it will also ensure that a competitor cannot use the courtroom to get to the “secret sauce.”

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

Anti-Raiding Provisions with Clients, Vendors and Subcontractors – Why It’s a Good Idea

imagesMany companies have basic non-compete provisions that prevent employees from working for a competitor for a certain period of time, but they often fail to address a situation where an employee goes to work in-house for a client of the company or jumps ship to work for a vendor, supplier, or a subcontractor of the company. While, technically, such move by an employee may not constitute “competition” with his/her former employer, a lot of times it eliminates a client’s need for the company’s services in the area that is now being covered by the new employee or it otherwise affects the company’s relationship with a vendor or a sub resulting in a reduction of revenue to the company.

One solution to this problem is including an anti-raiding provision in the vendor and client agreements, which states that the vendor/client/sub will not recruit, hire, or solicit the company’s employees.  Of course, a company is always free to waive such restraint for a particularly large client or after it receives assurances that there will be no reduction in business from the employee’s departure, but it will protect the company in all the other situations.

However, just as with other employment covenants, the anti-raiding clause must be clear and reasonable. Just last week, the Fourteenth Court of Appeals in Houston held that a sub-contractor’s anti-raiding clause did not prevent it’s contractor from indirectly employing sub-contractor’s employees.[1]

In this case, LyondellBasell hired Modis (contractor) to provide technical personnel for computer-related projects. Modis, in its turn, hired NetMatrix as a subcontractor. The sub agreement, among other provisions, stated that Modis “shall not recruit, hire or otherwise solicit” NetMatrix’s personnel assigned to the project.

Two years into the sub agreement, one of NetMatrix’s technicians quit and went to work for Millenium – another subcontractor employed by Modis. The technician proceeded to work on the same project for LyondellBassell to which he was assigned while at NetMatrix.

NetMatrix argued that Modis breached the sub agreement’s anti-raiding clause because it allowed NetMatrix’s employee to work for Modis’ other subcontractor and, therefore, it “indirectly hired” the technician in violation of the above clause.

The Court of Appeals disagreed, finding that other employment covenants in the sub agreement prohibited both “direct” and “indirect” activities, but the anti-raiding clause did not address “indirect” hiring. Therefore, it was clear that the parties meant to prohibit only direct hiring, and, consequently, Modis did not violate that clause when it allowed its sub to employ NetMatrix’s employee.

TAKEAWAYS: First, make sure that your vendor, sub, and client agreements have anti-raiding clauses. Second, make sure that the clauses are precise, reasonable, and are consistent with other restraints contained in such agreements. Finally, if you are considering waiving such a clause for a particular employee, make sure that you don’t create a permanent waiver that would render the anti-raiding clause unenforceable in the future.

[1] Although the Court applied Florida law per the parties’ agreement, similar analysis would follow under Texas law as well.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.