in Re Universal Coin & Bullion, Ltd. ( 2007 )

In The

Court of Appeals

Ninth District of Texas at Beaumont

______________________ NO. 09-06-519 CV ______________________

IN RE UNIVERSAL COIN & BULLION, LTD.

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Original Proceeding

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    OPINION

In this mandamus proceeding, Universal Coin & Bullion, Ltd. requests relief from a pretrial discovery order in UCB's underlying lawsuit against Jerry Jordan. The central issue is the appropriateness of the trial court's order compelling production of trade secrets.

Mandamus relief is appropriate when a trial court abuses its discretion, and there is no adequate remedy by appeal. Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992). The party resisting discovery has the burden to establish both requirements. In re CSX Corp., 124 S.W.3d 149, 151 (Tex. 2003). The trial court abuses its discretion when it orders discovery exceeding the scope permitted by the rules of procedure. Id. at 152. No adequate remedy by appeal is available when a trial court erroneously compels production of trade secrets without a showing of necessity. In re Bass, 113 S.W.3d 735, 745 (Tex. 2003). We conditionally grant the writ.

UCB sells coins to dealers and the general public, and it employs sales personnel for that purpose. The company sued attorney Bill Voss, newspaper reporter Jerry Jordan, and two former UCB employees. Allegedly, Voss and Jordan acted in concert with John Rollins and Shannon Smith, the former employees, to unlawfully use the company's confidential information regarding current and former UCB customers. The company alleged Voss and Jordan used the confidential and proprietary information to write letters to UCB customers. The pleadings asserted the following causes of action: conspiracy to misappropriate confidential information and trade secrets; conspiracy to violate the Texas Theft Liability Act; and conspiracy to commit tortious interference with contract. ⁽¹⁾

UCB filed written objections to the production requests filed by Rollins and Smith, a motion for protection from discovery, and a motion for protective order. In the fifty-seven responses at issue, UCB asserted the trade secret privilege and objected that many of the requests were overly broad and not reasonably calculated to lead to discoverable evidence. The trial court held an evidentiary hearing on UCB's protection motions. Jordan's attorney was present at the hearing. Subsequently, Jordan filed a notice of adoption of Rollins' and Smith's Requests for Production. UCB then filed a motion asserting that the discovery issues underlying the discovery hearing were moot, because after settlement the only party remaining in the lawsuit was Jordan.

The trial court nevertheless signed an order that granted UCB's claims of "trade secrets" to four of the requests for production "subject to being requested by Jordan, should that be necessary for his defense." The trial court denied UCB's trade-secret-privilege assertion as to the remaining fifty-three requests. Seven pages of the trial court's narrative are labeled "Findings of the Court From the [Discovery Hearing]." The order describes the parties' claims and makes findings related to them. In a separate section labeled "Orders of the Court[,]" the trial court concludes there is sufficient evidence that a trier of fact could believe the fraud allegations against UCB. ⁽²⁾ The order states, however, that UCB announced the claims by and against UCB involving the other parties had settled, "but UCB's claims against Jerry Jordan have not been settled."   

A requesting party must establish that a trade secret disclosure would be relevant to a claim or defense in the action. See generally In re Bridgestone/Firestone, Inc.,106 S.W.3d 730, 732-734 (Tex. 2003). Discovery requests that are overly broad and seek irrelevant information are not permissible. In re CSX Corp., 124 S.W.3d at 152. Jordan argues U.C.B.'s objections, other than the trade secret privilege, have not been presented to the trial court. Both parties acknowledged to the trial court that issues other than the trade secret matter were not before the trial court. ⁽³⁾ We have reviewed the record of the hearings and conclude the trial judge was not presented with UCB's previously-filed relevance or overbreadth objections. The trial court's order does not expressly address those separate objections. We do not consider those issues at this time, except to the extent a trade secret disclosure ruling requires a showing of relevance.

UCB argues the trial court abused its discretion when it ruled UCB must disclose confidential and trade secret information. ⁽⁴⁾ Jordan responds that the petition is premature because "[n]o production has been compelled." In addition to overruling most of the trade secret objections, however, the order provides in part:

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the Court grants a 30-day stay from the time of the entry of this order for the production of portions of UCB's customer list and UCB's complete customer list, but there is no stay in regard to the other production requests propounded on UCB. (emphasis added)

The trade secret issue is properly before this Court.

"A trade secret is any formula, pattern, device or compilation of information which is used in one's business and presents an opportunity to obtain an advantage over competitors who do not know or use it." Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996). Under Rule 507 of the Texas Rules of Evidence, the "party asserting a trade secret privilege has the burden of proving that the discovery information sought qualifies as a trade secret." In re Bass, 113 S.W.3d at 737; see also In re CI Host, Inc., 92 S.W.3d 514, 516 (Tex. 2002) (A party asserting a privilege or making an objection must present any evidence necessary to support the privilege or objection.) (citing Tex. R. Civ. P. 193.4(a)). If met, the burden shifts to the party seeking the trade secret disclosure to establish that the information is necessary for a fair adjudication of a claim or defense in the litigation. See In re Cont'l Gen. Tire, Inc., 979 S.W.2d 609, 612-13 (Tex. 1998).

At the hearing on UCB's motions, UCB proved its customer list and customer contact information are trade secrets that UCB protects. In his mandamus response, Jordan contends he stated on the record "UCB's Customer List is no longer being requested[,]" and under the written order he "is not entitled to the customer list unless he makes a further request and carries his burden to show that it is 'necessary to his defense.'" The trial court found Requests 7, 14, 62, and 63, which relate to UCB's customer list, qualify as trade secrets. As to the fifty-three other requests, however, the trial court denied UCB's assertion of the trade secret privilege. To the extent that any of the fifty-three requests involve customer list and identity information, they request the same information determined by the trial court to be trade secrets. While the trial court's order purports at one point to protect the trade secrets absent a showing of necessity by Jordan, the order nevertheless overrules most of the trade secret objections and grants only a 30-day stay "for the production of portions of UCB's customer list and UCB's complete customer list[.]"

UCB contends the trial court's legal conclusion -- that evidence of fraud prevents UCB's claim of trade secrets -- is a misstatement of the law, and the October 19, 2006, order must be set aside. Rule 507 protects trade secrets "if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice." Tex. R. Evid. 507. "Stated alternatively, disclosure is required only if necessary for a fair adjudication of the requesting party's claims or defenses." In re Cont'l Gen. Tire, Inc., 979 S.W.2d at 612. The Supreme Court explained in Continental General Tire that the trade secret privilege seeks to accommodate two competing interests. "First, it recognizes that trade secrets are an important property interest, worthy of protection. Second, it recognizes the importance we place on fair adjudication of lawsuits." Id. The Supreme Court's interpretation of Rule 507 requires that "[i]n each circumstance, the trial court must weigh the degree of the requesting party's need for the information with the potential harm of disclosure to the resisting party." Id. at 613. The rule is intended to prevent fraud or injustice to the requesting party that may be occasioned by the nondisclosure of a trade secret, and permits disclosure if necessary for a fair adjudication of the requesting party's claims or defenses.

As the Supreme Court explained in In re Bridgestone/Firestone, Inc., 106 S.W.3d at 733, "[A] party seeking [trade secret] information cannot merely assert unfairness but must demonstrate with specificity exactly how the lack of the information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat." Under the Supreme Court's interpretation of Rule 507, if the disclosure is not necessary for a fair adjudication of the claim in the litigation, the trial court should not order disclosure of the trade secret. Here, UCB established the trade secret privilege. The burden then shifted to Jordan to show the information is "necessary or essential" for a fair adjudication of his defense before the production is required. See In re Bridgestone/Firestone, Inc. 106 S.W.3d at 731; see also In re Cont'l Gen. Tire, Inc., 979 S.W.2d at 613. The trial court's order in this case acknowledges this "necessary" requirement, but compels production while deferring a determination of necessity.

For disclosure of a trade secret to be necessary in a case, the trade secret must be relevant, though relevance alone is insufficient. See In re Leviton Mfg. Co., 1 S.W.3d 898, 902 (Tex. App.--Waco 1999, no pet.). In its written order, the trial court found there was evidence of fraud; however, the allegation of fraud set out in the order relates to individual sales representatives' conduct toward customers, not to the effect of nondisclosure on any claim against Jordan or defense asserted by Jordan in this litigation. Furthermore, the fraud findings of the court apparently relate to allegations in pleadings in litigation previously announced as settled. ⁽⁵⁾

Jordan argues the petition is premature on the issue of fraud, "because there has been no finding that fraud overcomes the assertion of the alleged trade secrets as to Mr. Jordan or requires production of any trade secret to Mr. Jordan." Nevertheless, the order denies trade secret protection to the fifty-three requests and compels production of information relating to the customer list and other trade secrets. Jordan had the burden to demonstrate with specificity exactly how nondisclosure of the trade secret information would impair the presentation of his defense in the remaining litigation. See In re Bridgestone /Firestone, 106 S.W.3d at 733. He did not show why the trade secret information requested is necessary to defend the claim against him.

UCB contends the trial court's order allowing all litigants in other lawsuits involving UCB to share information obtained in formal discovery from UCB, "which UCB designates as 'Confidential,'" but "subject to the [trial court's] protection order . . . ," is overly broad. ⁽⁶⁾ In Garcia v. Peeples, 734 S.W.2d 343, 347 (Tex. 1987), the Supreme Court stated that "[s]hared discovery is an effective means to insure full and fair disclosure." The Court stated that the "public policies favoring shared information require that any protective order be carefully tailored to protect [a party's] proprietary interests while allowing an exchange of discovered documents." Id. at 348. Unlike Garcia, no protective order has been entered here, though the trial court's order clearly contemplated one and makes provision for UCB's designating those documents it produces as "confidential." Further, the Court in Garcia explained that "[p]arties subject to a number of suits concerning the same subject matter are forced to be consistent in their responses by the knowledge that their opponents can compare those responses." Id. at 347 (emphasis added). Here, the order does not narrowly tailor the "sharing" of discovery to protect trade secrets, and it does not restrict sharing to "similarly situated parties" or to suits involving the same subject matter. See id.; see also Steenbergen v. Ford Mtr. Co., 814 S.W.2d 755, 758 (Tex. App.--Dallas 1991, writ denied). The record does not show the contemplated protective order has been entered. ⁽⁷⁾

The trial court's rulings granting and overruling the trade secret objections are inconsistent. What is at least temporarily protected by the trade secret privilege in response to some requests is not protected by the order in response to others. We need not reach the issue of which discovery requests should be stricken at this time. The procedure the trial court used in addressing the trade secret issue was a clear abuse of discretion. The trial court erred in compelling production of trade secret information with no showing that trade secret disclosure is necessary in the remaining litigation. The order apparently is based in part on pleadings or discovery requests in claims announced settled. A trial court "must weigh the degree of the requesting party's need for the information with the potential harm of disclosure to the resisting party." In re Cont'l Gen. Tire, Inc., 979 S.W.2d at 613. The trial court did not make a "necessity" determination. Even if disclosure of some trade secrets is necessary, the trial court has not signed a protective order and has not employed other protective techniques sufficient to prevent disclosure beyond that which is necessary to a fair adjudication of the facts of this case.

The trial court is ordered to vacate its October 19, 2006, order, and to conduct further proceedings consistent with this Opinion. We are confident the trial court will comply. Mandamus will issue only if the trial court does not.

WRIT OF MANDAMUS CONDITIONALLY GRANTED.

PER CURIAM

Submitted on December 8, 2006

Opinion Delivered March 15, 2007

Before McKeithen, C.J., Gaultney and Kreger, J.J.

1. UCB also included in its petition an application for injunctive relief against Jordan.

2. The court also found UCB did not present any evidence on its trade secret assertion regarding production of the names of media used for advertising. The trial court decreed that "all current and/or former UCB customers who have ever made a complaint of any kind against UCB are not privileged." The order declared that all information obtained outside of the discovery process would not be protected by a protective order and "cannot be made confidential by any of the parties." The order also found waiver by virtue of UCB's alleged sharing of information with other companies. The real party in interest does not argue waiver as to the customer list in its response brief, and the upholding of the trade secret objection to the four requests seems inconsistent with a finding of waiver. In any event, we do not find the evidence presented at the hearing sufficient to establish a waiver of the trade secret privilege in this litigation.

3. At the August 31, 2006, hearing, UCB's attorney stated the hearing's focus was on the customer list and its disclosure.

4.

The trial court granted UCB's assertions of trade secret privilege in four of the fifty-seven requests.

5. The court's order states, "Since the hearing, UCB announced in open court that its claims against John Rollins, Shannon Smith, and Bill Voss have been settled, but UCB's claims against Jerry Jordan have not been settled. Also, UCB announced in open court that the claims of Roxanne Charnock have been settled."

6.

In its "Statement of Facts," UCB states "[T]his case is really about whether attorneys may entice former employees of a company to divulge stolen trade secrets (confidential customer list and contact information) to those attorneys and entice a reporter to steal trade secrets (customer lists) so they may solicit potential clients for a multi-party lawsuit or possible class action lawsuit." Jordan responds that "[t]his is illogical, because the only evidence cited for this bold accusation implicates only Mr. Voss . . . with whom UCB claims it settled." Jordan argues there is no evidence he is soliciting clients, and the "accusation is a transparent canard[.]"

7.

UCB also contends that the trial court's order stating that "all information . . . obtained outside of the discovery process is not protected by this protective order, and cannot be made confidential by any of the parties" is overly broad. Essentially, UCB's pleadings allege certain confidential information was obtained improperly and request an injunction against Jordan's use of the confidential information. Jordan argues an injunction would be unconstitutional. Because the order states broadly that information obtained outside of the discovery process is not protected, the discovery order essentially comments on the availability of injunctive relief against a party alleged to have misappropriated trade secret information. The merits of the litigation generally are not the proper subject of a discovery order, however, and to the extent it rules on the merits, the order exceeds its purpose. We do not reach the merits of the litigation in this mandamus proceeding.