Is The “Good Cause” Standard Inadequate to Protect Your Company’s Trade Secrets in Discovery Disputes?

As owners of trade secrets know, once a trade secret is disclosed, especially to a competitor, the value of this property right is destroyed and the competitive advantage it affords the owner is lost. Lawyers who sue energy companies often put those companies’ trade secrets at risk, even when the trade secret is not the subject of dispute, as leverage for a large early settlement. These lawyers do so by arguing that the secret motivated or caused the company to take the action on which the suit is based, thereby placing the trade secret at risk by making it “relevant” to the dispute. Energy company lawyers should know that standards (such as “good cause”) that are typically used to assess run-of-the-mill discovery disputes may not be adequate protection when trade secrets are at issue. Lawyers seeking to protect those secrets should remind the courts that, unlike ordering the disclosure of most discovery products, ordering the disclosure of trade secrets is akin to transferring property from one party to another. Therefore, in trade secret discovery disputes, energy lawyers should urge the courts to balance the constitutional rights of the parties to protect the trade secret owners’ fifth amendment right (to be free from governmental taking of property), rather than simply assessing whether “good cause” exists for disclosing trade secrets.[2]

Despite the fact that compelled disclosure of trade secrets implicates the fifth amendment, some courts and legislatures still presume that trade secrets must be disclosed, even to non-parties (such as in product defect litigation). This mind-set makes it more difficult for trade secret owners to protect their trade secrets in other types of litigation.[3] This presumption is based on arguments that the discovery process is open to the public and that ready disclosure of trade secrets helps lawyers and potential litigants learn about alleged product defects in a cost effective way.[4]

The presumption of disclosure falters when applied to the “leverage” situation described above because it ignores the United States Supreme Court’s ruling that: 1) trade secrets constitute property for fifth amendment purposes; and, 2) there is no absolute first amendment right of public access to pretrial discovery materials. Moreover, courts should not cavalierly order the disclosure of trade secrets because those secrets are particularly vulnerable during litigation.[5] As a result, the failure to adequately protect trade secrets may be more than an abuse of discretion---it may result in an unconstitutional taking of private property without just compensation.[6]

In Seattle Times Co. v. Rhinehart, the Supreme Court rejected the argument that the first amendment mandates complete access by all people to discovery materials, noting that discovery is a statutory right, not a constitutional one, and that, because courts enable litigants to gather information in the first place, they can also restrict the use of that information. Importantly, the Seattle Times Court rejected the idea that discovery is a presumptively public process, relying on the facts that: 1) trials are traditionally public, but discovery proceedings, are “conducted in private;” and, 2) much of the information uncovered during pretrial discovery is unrelated, or only tangentially related, to the underlying cause of action.[7]

The Court also recognized that protective orders are important tools in protecting parties’ privacy rights from the breadth of most pretrial discovery procedures, which allow parties to obtain information that, if publicly released, could be damaging to both reputation and privacy. The Court therefore concluded that the government has a “substantial interest” in preventing “abuse” of discovery processes, a concern that is especially significant when trade secret property rights are involved.[8]

Additionally, in Ruckelshaus v. Monsanto Co., the Court held that trade secrets constitute property for purposes of the fifth amendment's takings clause, which, of course, prohibits state actors from taking private property for public use without just compensation. The Supreme Court has also recognized that the takings clause applies to the courts as well as to other branches of government since government exercises coercive power when courts enforce discovery requests.[9] As a result, a court’s decision to allow access to private property can constitute a taking even though private actors subsequently control the property.[10]

In analyzing whether there has been an unconstitutional taking under the fifth amendment, a court must decide whether “property” was “taken” and whether the taking served a private purpose (which is entirely prohibited) or whether the taking served a public purpose (which requires just compensation to the owner).[11]

The first part of the analysis is easily met in trade secret cases because, as noted above, the Supreme Court held in Monsanto that trade secrets are property for purposes of the fifth amendment.[12]

As to the second part of the analysis, whether property has been “taken,” courts must determine whether the owner's deprivation rises to the level of a taking. In Monsanto, the Court recognized that compelled involuntary disclosure of trade secrets to third parties constitutes a taking because it deprives the owner of all or most of his property interest.[13]

Under that analysis, a court’s order requiring a litigant to disclose its trade secrets to a competitor should also constitute a taking since it eliminates the owner’s competitive advantage and abrogates the law's protection of the trade secret from unauthorized use.[14] This result is also logically compelled in cases where: 1) courts’ orders give people access to trade secrets discovered in prior cases to which they were not parties; and, 2) a party seeks its opponent’s trade secrets as a strategy to force, or increase the value of, a settlement. In both of these instances, the alleged need for the information is unlikely to outweigh the owner’s legitimate property interest in keeping the information secret and preserving the integrity of its property right.

While it is conceivable that a court may be able to craft an individualized protective order to preserve a significant portion of the owner's rights (and thereby prevent disclosure of the secret from rising to the level of a taking), if the order requires continuous monitoring to ensure compliance, it might still constitute a taking because monitoring usually falls outside a court’s ability.

On the other hand, it is possible that orders which give access to trade secret information to “attorneys and experts only” may effectively protect owners’ constitutional rights, especially where the litigation involves direct competitors. These types of orders allow only the seeking parties’ lawyers/experts limited and controlled access to trade secrets, but prevent the general revelation of the secrets to the seeking party, since broad disclosure would destroy the secret owner’s competitive advantage. This type of “attorneys and experts only” protective order was specifically authorized by the recent Texas Uniform Trade Secrets Act.[15]

In Marks, the Texas Supreme Court approved of a process similar to the “attorneys and experts only” process described above despite a due process objection to it.[16] Using the United States Supreme Court’s familiar three part “Matthews test,”[17] the Texas Supreme Court held that a civil litigant’s due process rights were not violated when a district court heard a government attorney’s oral statements about a related, secret, federal grand jury investigation in camera and ex parte.[18]

Application of Marks to most trade secret discovery cases will not violate the seeking parties’ due process rights because seeking parties will still be able to cross examine witnesses and to participate in hearings where trade secret evidence is presented through their lawyers and experts. This “attorneys and experts only” form of participation may be the only method that will adequately protect trade secrets and still allow the court to hear the full panoply of evidence. Such a hearing can be recorded and sealed for in camera appeal, as it was in Marks, so there is no concern over the ability to obtain review of the order.

Based on the foregoing, a court may be able to preserve a trade secret owner’s fifth amendment right through a carefully-crafted protective order, but it will require considerable judicial resources and attention. However, where an order is ineffective to protect the owner’s property rights, there is a taking for purposes of the fifth amendment.

Where a taking occurs, the final two steps of the analysis also become relevant. As mentioned, the taking of a trade secret for a private purpose is unconstitutional; by contrast, where the taking serves a public purpose, it may pass constitutional scrutiny if the owner is justly compensated.[19] The complication in discovery “takings” situations is the fact that courts do not have designated funds to compensate parties for takings, so most courts and legal writers believe that judicial takings must be invalidated because there is no mechanism for providing just compensation to the owners for the taking of their property.[20] Therefore, once a court determines that an order compelling pretrial disclosure of trade secrets would constitute a taking of property for a public purpose, the court should refrain from requiring the disclosure if it cannot provide the owner with just compensation for the taking.

CONCLUSION

At present, Texas cases focus only on the first amendment aspect of the trade secret discovery issue and do not fully recognize that the forced public disclosure of trade secrets has the potential to effectuate a taking in violation of the fifth amendment. In part, this is because Texas Rule of Procedure 76a contains a presumption of openness and simply does not address situations in which disclosure would constitute a taking.[21]

The extensive incursion into private matters that is permitted by pretrial discovery rules should not be allowed to destroy valuable trade secret property rights.[22] As one commentator has wryly observed, “ a foreigner watching the discovery proceedings in a[n] [American] civil suit would never suspect that this country has a highly-prized tradition of privacy enshrined in the fourth amendment.”[23]

While protective orders can raise prior restraint concerns and warrant scrutiny of their impact on first amendment expression, that first amendment concern is not the only constitutional inquiry that must be made in trade secret discovery disputes. Both the Supreme Court’s ruling that trade secrets constitute property and its refusal to recognize an unfettered first amendment right to access discovery materials show a willingness to engage in a balancing of constitutional rights in trade secret cases.[24]Thus, after Seattle Times and Monsanto, courts should engage in a balancing analysis as well as a good cause analysis when trade secrets are sought in discovery to ensure that an unconstitutional taking of trade secrets does not occur.

[1]Ms. Stephens is a partner and appellate specialist at King & Spalding LLP. She has represented energy companies in high-stakes appeals for almost 30 years. She is certified by the Texas Board of Legal Specialization in Civil Appellate Law and is one of the first four people to be nationally certified in appellate law by the AIAP and was the first woman and the first Texan to receive national certification.

[2]See Judanna Cooper, Beyond Judicial Discretion: Toward a Rights-Based Theory of Civil Discovery and Protective Orders, 36 RULJ 775 (2005); James R. McKown, Taking Property: Constitutional Ramifications of Litigation Involving Trade Secrets, 13 Rev. Litig. 253, 254 (1994); Note, Trade Secrets in Discovery: From First Amendment Disclosure to Fifth Amendment Protection, 104 Harv. L. Rev. 1330, 1331 (1991);

[3]Ruckleshaus v. Monsanto Co., 467 U.S. 986, 1011 (1984); Oryon Technologies, Inc. v. Marcus, 429 S.W.2d 762, 764 (Tex. App.—Dallas 2014, no pet.); see Note, Constitutional Limitations on Government Disclosure of Private Trade Secret Information, 56 IND. L.J. 347, 347, 367-68 (1981); see generally Coffee, Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 COLUM. L. REV. 669 (1986).

[4]SeeTrade Secrets in Discovery, 104 Harv. L. Rev. 1331.

[5]Oryon, 429 S.W.3d at 764; Timothy Durst & Cheryl Mann, Behind Closed Doors: Closing the Courtroom in Trade Secrets Cases, 8 Intel. Prop. L.J. 355, 356 (2000).

[6]U.S. CONST. amend. V (“[N]or shall private property be taken for public use without just compensation . . . .)”. The fifth amendment applies to the states through the fourteenth amendment. Chicago B. & O.R.R. v. City of Chicago, 166 U.S. 226, 239 (1897); Seattle Times Co. v. Rhinehart, 467 U.S. 20, 32 (1984); Monsanto, 467 U.S. at 1003-04 ; cf. Carpenter v. United States, 484 U.S. 19, 26 (1987) (finding a “property” interest in a newspaper's confidential information); accord, Leonard v. State, 767 S.W.2d 171, 175 (Tex. App.—Dallas 1988), aff’d sum nom., Schalk v. State, 823 S.W.2d 633 (Tex. Crim. App. 1991); Trade Secrets in Discovery, 104 Harv. L. Rev. 1337-1344; see generally Samuelson, Information as Property: Do Ruckelshaus and Carpenter Signal a Changing Direction in Intellectual Property Law?, 38 CATH. U.L. REV. 365 (1989).

[7]SeeSeattle Times, 467 U.S. at 22-37.

[8]Id.

[9]U.S. CONST. amend. V; Seattle Times, 467 U.S. 986, 1003-04 (1984); see, e.g., Shelley v. Kraemer, 334 U.S. 1, 18-23 (1948); Thompson, Judicial Takings, 76 VA. L. REV. 1449, 1457 (1990).

[10]See Gelfand, “Taking” Informational Property Through Discovery, 66 WASH. U.L.Q. 703, 705 n.9 (1988); United States v. General Motors Corp., 323 U.S. 373 (1945).

[11]SeeMonsanto, 467 U.S. at 1000-01.

[12]467 U.S. at 1001-04 .

[13]See Monsanto, 467 U.S. at 1011-12 & n. 15.

[14]See 104 Harv. L. Rev. at 1342; Note, Constitutional Limitations on Government Disclosure of Private Trade Secret Information, 56 IND. L. J. 347, 367-68 (1981.

[15]TEX. CIV. PRAC. & REM. CODE §§ 134A.001 et seq.

[16]United States Government v. Marks, 949 S.W.2d 320 (Tex. 1997).

[17]Under the Matthews test, the United States Supreme Court recognized that procedural due process must be balanced against other rights, such as a trade secret owner’s fifth amendment and property rights. The court must consider three factors: the private interests that will be affected by the official action; the risk of erroneous deprivation of such interest through procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and the government’s interest. Marks, 949 S.W.2d at 326; Matthews v. Eldridge, 424 U.S. 319, 334-35 (1976).

[18]Marks, 949 S.W.2d at 326; Matthews, 424 U.S. at 334-35; see Air Products & Chem., Inc., v. Johnson, 442 A.2d 114, 116-17 (Pa. Super. 1982).

19See 104 Harv. L. Rev. at 1343.

[20]See 104 Harv. L. J. at 1343; Thompson, 76 Va. L. Rev. at 1454.

[21]See TEX. R. CIV. P. ANN. r. 76a, 166b(5)(c) (Vernon Supp. 1990). Herring, Sealing Court Records: Unanswered Questions and Unsolved Problems, TEX. LAW., May 21, 1990, at 24.

[22]See 104 Harv. L. Rev. at 1348; Marcus, Myth and Reality in Protective Order Litigation, 69 Cornell L. Rev. 1, 23, 54-55

[23]Rifkind, Are We Asking Too Much of Our Courts?, 70 F.R.D. 96, 107 (1976).

[24]See generally 104 Harv. L. Rev. 1330