Practical Tips: Keeping Trade Secrets Safe During Litigation – Texas Supreme Court Edition

Posted on June 3, 2016
by Mark Mermelstein and T. Wayne Harman

Last week, the Texas Supreme Court provided its first opinion interpreting the Texas Uniform Trade Secrets Act in a case involving an issue that often causes discomfort to lawyers on both sides of the “v” in trade secret misappropriation cases: how much of their trade secrets do plaintiffs have to disclose to enable the defendant to adequately defend itself? The opinion inIn re M-I L.L.C. d/b/a M-I Swaco, 2016 WL 2981342 (Tex., May 20, 2016) demonstrates this tension. In that case, the Texas Supreme Court, on a petition for a writ of mandamus, held that the trial court abused its discretion by (i) refusing to exclude the defendant’s designated representative from the courtroom during a hearing where the plaintiff’s trade secrets would be disclosed; and (ii) ordering the production of an affidavit containing the plaintiff’s trade secrets without first conducting an in camera review.

The plaintiff in the case, M-I Swaco (“Swaco”), and the defendant, National Oilwell Varco (“NOV”), are competitors who provide equipment and services to the oil and gas industry. In the action, Swaco alleges that one of its former employees accepted a position at NOV in breach of a non-compete agreement, and that he knew, and would inevitably disclose, Swaco’s trade secrets. At a hearing on Swaco’s application for a temporary injunction, the trial court rejected, on due process grounds, Swaco’s request for the exclusion from the courtroom of NOV’s designated representative during Swaco’s testimony concerning its trade secrets. 

While the trial court granted the request for a recess to permit Swaco to file a writ of mandamus challenging this decision, the trial court also ordered Swaco to submit an affidavit setting forth the alleged trade secrets as part of its offer of proof. Swaco complied, and while the appellate court rejected NOV’s attempts to access the affidavit, the trial court was not so protective.  Instead, the trial court granted NOV’s motion to compel, ordering the affidavit disclosed without first reviewing it.  Swaco petitioned for a writ of mandamus, challenging both the refusal to exclude NOV’s designated representative and the disclosure of the affidavit. The Texas Supreme Court found that both were an abuse of the trial court’s discretion, for which there was no adequate remedy at law court litigation.

The Texas Supreme Court first found that the trial court failed to conduct the balancing test required by the Due Process Clause, which pits the presumption in favor of allowing the defendant to participate in the proceedings against the degree of relative harm the plaintiff would face if its trade secrets were disclosed. The trial court incorrectly assumed that the due process right to be present at a civil trial was absolute, concluding that “[Swaco] sued them. They stay, period.” Instead, the Texas Supreme Court reiterated that the right to be present is qualified.

The Texas Supreme Court also rejected the trial court’s absolutist position in its analysis of NOV’s remaining arguments. It found that (i) any right of public access under the Texas Constitution’s “open courts” provision would be similarly qualified; and (ii) other Texas Rules of Civil Procedure must be interpreted in a way consistent with the Trade Secrets Act.

Finally, the Texas Supreme Court found that the trial court had an obligation to review the affidavit allegedly containing Swaco’s trade secrets before ordering it disclosed, to determine what protective procedures, if any, were necessary to protect Swaco’s interests.

For litigants, the opinion provides a useful framework for determining whether, and to what extent, trade secrets must be disclosed during court proceedings in cases where those trade secrets are central to the claims presented. As explained in Swaco, trial courts should consider the following:

While the rejection of a per se rule may add a layer of complexity and expense to an already-costly trade secrets dispute, requiring the courts to conduct a balancing test could provide the parties with an early assessment of the strengths and weaknesses of their case, which ultimately may save them time and expense in the long run.

In 2012 the California Legislature amended the judicial remedies aspect of the Brown Act “Opening Meetings” Law. That amendment added section 54960.2 to the Government Code to require that a party seeking a judicial remedy for a past action of a legislative body alleged to be in violation of the Brown Act must first submit to that body a cease and desist letter. If the legislative body responds with an unconditional commitment to cease and desist from, and not repeat, the alleged violation, then a judicial remedy is foreclosed. In other words, the cease and desist letter is a pre-requisite to initiating a judicial action to stop or prevent past violations of the Act.

The City Council of San Diego regularly meets on Mondays and Tuesdays in a two-day regular meeting, which the City considered to be a single meeting. Pursuant to a city ordinance, only one non-agenda public comment period, required by the Brown Act, was afforded — on Tuesday mornings. Without providing a cease and desist letter, the Center for Local Government Accountability brought suit against the City asserting its single, non-agenda public comment practice violated the Brown Act. After the action was filed, the City changed course and adopted an ordinance providing for non-agenda public comment periods on both Mondays and Tuesdays.

The City demurred to the complaint, first asserting that the Center had failed to satisfy the cease and desist letter requirement of section 54960.2, and second that the complaint was moot, as the City had changed its ordinance to provide for two public comment periods — one each day. The trial court sustained the demurrer, dismissed the action and the Center appealed.

The Court of Appeal, in a decision issued in Center for Local Government Accountability v. City of San Diego on May 31, reversed the trial court order. First, the appellate court found that the cease and desist letter requirement applied only to actions seeking a remedy solely for a past action of a legislative body. (The trial court had concluded that it applied to both past actions and future threatened actions.) The appellate court found that the Center’s complaint was focused on the one non-agenda comment period ordinance and practice, which extended to all council meetings, including those in the future. Therefore, the complaint sought a remedy for future threatened actions and the cease and desist letter requirement did not apply.

Finally, the court rejected the City’s contention that the enactment of the new ordinance providing for a non-agenda public comment period on both days of the Council’s meetings rendered the lawsuit moot. The court noted that the City continued to insist that its two-day meeting regime was in fact one continuous meeting, rather than two separate meetings, and refused to concede that its prior practice of a single non-agenda public comment period violated the Brown Act. (One of the conditions of the “unconditional commitment” to cease and desist is a confession that the Act had been violated.) Reasoning that the City could easily resurrect its prior ordinance, the court allowed the Center to return to the trial court, amend its complaint, and seek a judicial determination that the one non-agenda comment period practice violated the Brown Act.

This case illustrates the risks of Brown Act litigation for legislative bodies. Indeed, the City here appears to have lost the battle and lost the war, and will most likely be tagged with the Center’s attorney’s fees, as well as costs, which the appellate court ordered it to pay.

Bankruptcy Petition Costs Litigant Right to Appeal State Court

6/7/2016

by

Nicholas Agnello  

| Burr & Forman

Learning the interplay between state rules of judicial procedure and federal bankruptcy law can be a daunting undertaking, but the pitfalls of failing to do so can be severe.  A recent example of the importance of being mindful of these issues is Hewett v. Wells Fargo Bank, N.A. as Trustee, No. 2D15–1074, 2016 WL 3065014 (Fla. 2d DCA June 1, 2016) where the filing of a bankruptcy petition ultimately cost a foreclosure defendant his right to appeal a final judgment of foreclosure.

The Second DCA summarized the procedural posture of the case as follows:

“The circuit court’s final judgment of foreclosure of Mr. Hewett’s home was rendered on February 27, 2015, when the order denying Mr. Hewett’s motion for rehearing and new trial was filed with the clerk of the circuit court. See Fla. R. App. P.9.020(i)(1). On March 2, 2015, Mr. Hewett filed a petition for bankruptcy in the United States Bankruptcy Court for the Middle District of Florida. Then on March 9 Mr. Hewett filed with the clerk of the Lee County circuit court a notice of appeal challenging the foreclosure judgment. Without argument, were it not for the filing of his bankruptcy petition, Mr. Hewett’s notice would have been timely filed to invoke our jurisdiction. SeeFla. R. App. P. 9.110(b).”

The Second DCA examined a similar, but distinguishable fact pattern in AmMed Surgical Equipment, LLC v. Professional Medical Billing Specialists, LLC, 162 So. 3d 209, 211 (Fla. 2d DCA 2015) where the Second DCA concluded that “the filing of a notice of appeal instate court should be considered the ‘continuation . . . of a judicial . . . proceeding against’ the appellant” that would be prohibited by the automatic stay.” However, in AmMed the Court accepted the filing of the appeal as timely because a second notice of appeal was filed within the Bankruptcy Code’s extended deadlines for “commencing or continuing a civil action” which expire during the application of the automatic stay.See 11 U.S.C. § 108(c)(2) (extending deadlines to commence or continue a civil acton which expire during the period of the automatic stay by thirty days from the expiration of the automatic stay court litigation.

In Hewett, however, no notice of appeal was filed within the period described in Section 108(c)(2) of the Bankruptcy Code.

Citing to AmMed, Wells Fargo moved to dismiss the appeal on the basis that the notice of appeal was filed in violation of the automatic stay, rendering the notice of appeal void, and that in the absence of some other valid method of invoking the appellate court’s jurisdiction, the appeal ought to be dismissed for lack of jurisdiction. In ruling in favor of Wells Fargo and dismissing the appeal, the Second DCA held:

“These two principles we announced in AmMed—that a notice of appeal is a continuation of a judicial proceeding, and that the Bankruptcy Code prohibits the filing of such a notice during an automatic stay—comport with the broader (and broadly held) view that the filing of a notice of appeal during the pendency of a bankruptcy stay should be deemed void as a violation of the automatic stay. Consistent with AmMed, we agree with these holdings.  Therefore, since the only notice of appeal Mr. Hewett ever filed was a nullity, we are without jurisdiction to consider his appeal.” (citations omitted).

Perhaps more interesting than the holding of Hewett is the dicta concerning constitutional concerns regarding the validity of Section 108(c) of the Bankruptcy Code:

“To be sure, the Bankruptcy Code provides extended, substitute deadlines for ‘continuing a civil action’ after an automatic stay has expired or been terminated. See 11 U.S.C. § 108(c). Were we in a position to simply engraft that section of the federal Bankruptcy Code into our State’s rules of appellate procedure, then the dismissal of Mr. Hewett’s appeal, and what appellants in Mr. Hewett’s circumstance ought to do to invoke our court’s jurisdiction after their bankruptcy cases have concluded, could be easily resolved. But we do not have that power. And it is not entirely clear whether Congress has that power either.

Although Congress may exercise plenary power under the Constitution to ‘establish . . . uniform Laws on the subject of Bankruptcies throughout the United States,’ art. I, § 8, cl. 4, U.S. Const., the reach of that power might not extend so far as to alter state judicial procedures within state court proceedings:

‘Without any doubt it rests with each state to prescribe the jurisdiction of its appellate courts, the mode and time of invoking that jurisdiction, and the rules of practice to be applied in its exercise; and the state law and practice in this regard are no less applicable when Federal rights are in controversy than when the case turns entirely upon questions of local or general law.’ John v. Paullin, 231 U.S. 583, 585 (1913).

Thus, the kind of pragmatic question our dismissal of this appeal could raise—whether or to what extent 11 U.S.C. § 108(c) may, of its own force, affect the procedural filing deadline of rule 9.110(b) following the expiration or termination of an automatic stay— appears to be one that has never been squarely decided by any federal court.

So we are left with an appellate rule that does not speak about bankruptcy and a bankruptcy statute that may not be able to speak to our appellate rules. While we recognize this potential conundrum, we cannot attempt to resolve it. In light of these concerns, though, we would commend this issue for the Appellate Court Rules Committee’s consideration of whether a new or amended rule of appellate procedure would be appropriate to incorporate the tolling provisions of 11 U.S.C. § 108(c) or another period that explicitly addresses the effect of an automatic stay in bankruptcy on the filing of a notice of appeal.” (citations omitted).

Hewett’s failure to raise any constitutional concerns in his response to the motion to dismiss ensured that this question will not be resolved any time soon. However, given the frequency with which such fact patterns arise, it would not be surprising if this issue does reach the Second DCA at some point (even in an en banc setting given the appearance of a conflict with between the dicta inHewett and outcome of AmMed) or the Florida Supreme Court at some stage. It also certainly appears to merit revision to the Florida Rules of Appellate Procedure unless the Florida Supreme Court disagrees with the Second DCA’s dicta regarding the possible constitutional issues with Section 108(c). Certainly those who seek to employ Section 108(c) tolling in Florida’s appellate courts in the future are likely to be met with motions to dismiss predicated on the dicta in Hewett the future.

That being said, diligent practitioners can avoid this conundrum altogether quite easily. If Hewett had filed his appeal first and then stayed his own appeal by petitioning for bankruptcy, his right to appeal would have been preserved as opposed to destroyed by the application of the automatic stay.  This sequencing is certainly recommended for anyone facing this issue in the near future.  Additionally, if Hewett secured stay relief, even nunc pro tunc, within the thirty period within which to appeal under Fla. R. App. P. 9.110(b), the issue likely would have been resolved differently. Nonetheless, by the time the issue reached the Second DCA, Hewett had irrevocably lost his right to appeal by filing his appeal in violation of the automatic stay and failing to remediate the issue before the applicable deadlines (be it Fla. R. App. P. 9.110(b) or Section 108(c) of the Bankruptcy Code) had expired.

This case should certainly serve as  a cautionary tale to others about the need to examine the interplay between bankruptcy and state court proceedings before initiating action in either setting.