in Re PrairieSmarts LLC and Casey Rockwell , 421 S.W.3d 296 ( 2014 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-13-00338-CV
IN RE PRAIRIESMARTS LLC AND RELATORS
CASEY ROCKWELL
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ORIGINAL PROCEEDING
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OPINION
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I. INTRODUCTION
Relators PrairieSmarts LLC and Casey Rockwell seek a writ of mandamus
directing Respondent to vacate a September 18, 2013 order granting Real Party
in Interest TD Ameritrade, Inc.‘s rule 202 petition. See Tex. R. Civ. P. 202.
Because we hold that Respondent abused his discretion by granting the rule 202
petition and because Relators possess no adequate remedy at law, we will
conditionally grant the writ.
II. FACTUAL AND PROCEDURAL BACKGROUND
Four former employees of TD Ameritrade subsequently became employed
by PrairieSmarts.1 Those four individuals are Dr. Renaud Piccinini, Michael
Chochon, Chris Nagy, and Casey Rockwell. Dr. Piccinini obtained a Ph.D. in
finance in 2004 and wrote his dissertation on risk and volatility in financial
markets or so-called ―Black Swan Events.‖ Prior to working for TD Ameritrade,
Dr. Piccinini helped develop risk models for the holdings of First National Bank of
Omaha. Dr. Piccinini began working for TD Ameritrade in February 2010, and
TD Ameritrade terminated Dr. Piccinini on May 2, 2012, after the Portfolio Margin
model that he had helped to design received approval from the federal regulators
at the Financial Industry Regulatory Authority (FINRA). 2 Chochon began working
for TD Ameritrade in 2003, and he was the person who had hired Dr. Piccinini to
perform the above-described work at TD Ameritrade. TD Ameritrade terminated
Chochon on March 31, 2011. Nagy joined TD Ameritrade in August 1999 and
served as Managing Director of Order Routing, Sales, and Strategy. TD
Ameritrade terminated Nagy on May 26, 2012. Rockwell, a software developer
and computer programmer, began working for TD Ameritrade in March 2004 and
voluntarily left in October 2012 to work for PrairieSmarts.
1
PrairieSmarts is a Nebraska start-up company.
2
TD Ameritrade‘s counsel explained that ―the [Portfolio Margin application]
is something that the government requires of organizations like TD Ameritrade to
demonstrate how we‘re managing risk in our clients‘ portfolios. And the
government allows us to develop proprietary means to do that.‖
2
In January 2013, PrairieSmarts filed a patent application3 for a program
that PrairieSmarts calls PortfolioDefenseTM and began beta testing the program.
TD Ameritrade thereafter filed a rule 202 petition asserting that it appeared likely
that PrairieSmarts‘s employees Dr. Piccinini, Chochon, Nagy, and Rockwell
had—in designing PortfolioDefenseTM—misappropriated confidential and
proprietary assets of TD Ameritrade in violation of the nondisclosure provisions in
their respective employment contracts. By its rule 202 petition, TD Ameritrade
sought to depose PrairieSmarts and Rockwell and to have PrairieSmarts and
Rockwell produce various documents at their depositions. PrairieSmarts and
Rockwell filed answers to the rule 202 petition, denying all allegations in the
petition and objecting to the depositions and production of the documents sought
by TD Ameritrade on the ground that both sought privileged trade secret
information belonging to PrairieSmarts. PrairieSmarts‘s answer also objected to
venue in Tarrant County.4
Respondent set a hearing on TD Ameritrade‘s rule 202 petition; a week
before the hearing, PrairieSmarts filed affidavits from Dr. Piccinini, Chochon,
3
Patent applications are maintained by the United States Patent and
Trademark Office as confidential for eighteen months after the application is filed
or until issuance of the patent, whichever comes first, and the information
regarding patent applications may not be released before that time without the
permission of the applicant. See 35 U.S.C.A. § 122 (West 2001).
4
Because the arguments of Relator PrairieSmarts and Relator Rockwell
are identical in this original proceeding, except as to the venue issue, we
sometimes refer to both Relators collectively as PrairieSmarts.
3
Nagy, and Rockwell, asserting that no confidential information belonging to TD
Ameritrade was utilized in creating the code for PortfolioDefenseTM and claiming
that the information sought by TD Ameritrade constituted trade secret information
belonging to PrairieSmarts.
At the hearing on TD Ameritrade‘s rule 202 petition, TD Ameritrade argued
that the facts as set forth below constituted ―smoke,‖ ―red flags[,]‖ or ―the indicia
of a potential appropriation of trade secrets case‖ sufficient to justify the
requested discovery. TD Ameritrade provided Respondent with three
demonstrative exhibits that it had created utilizing information from the four
affidavits filed by PrairieSmarts. The three exhibits are one-page typed sheets
titled, ―Facts About PrairieSmarts‘s Principals,‖ ―Timeline,‖ and ―Facts Justifying
Investigation.‖ The documents show the dates the four former TD Ameritrade
employees left TD Ameritrade and began employment with PrairieSmarts,
provided a comparison of the time it took to create the Profit Margin model at TD
Ameritrade versus the time it took to create PortfolioDefenseTM at PrairieSmarts,
and stated that the following facts justified TD Ameritrade‘s investigation via the
discovery it had requested from PrairieSmarts: the fact that three of the four
PrairieSmarts principals were directly responsible for TD Ameritrade‘s
confidential risk analysis; the fact that PrairieSmarts‘s principals have thirty-one
combined years of TD Ameritrade tenure; the fact that five days after Dr. Piccinini
left TD Ameritrade, he co-founded PrairieSmarts; the fact that three months after
Rockwell started working at PrairieSmarts, a patent application was filed for
4
PortfolioDefenseTM, while it took fourteen months after Dr. Piccinini‘s hire at TD
Ameritrade until the Profit Margin application was submitted to FINRA; the fact
that similarities exist between the two products—TD Ameritrade contends four
matching components are observable by comparing PrairieSmarts‘s website and
the FINRA application for Portfolio Margin;5 and the fact that the products have
nearly identical outcomes, which TD Ameritrade explained was
PortfolioDefenseTM‘s having nearly the same predictive capability as TD
Ameritrade‘s Portfolio Margin. TD Ameritrade argued that these ―red flags‖
concerned TD Ameritrade and established ―that there is a significant advantage
to be gained for [TD Ameritrade] to do some investigation, some discovery to see
how these concepts that line up on both sides are actually performed and
whether they are performed using confidential information [from] TD Ameritrade.‖
At the hearing, PrairieSmarts argued that the circumstances TD
Ameritrade had characterized as smoke or red flags were nothing more than
legal activities. PrairieSmarts asserted that some of its managing members—
three of whom had been terminated by TD Ameritrade—had gone on to other
employers before joining PrairieSmarts and had continued to work in the same
area of expertise. PrairieSmarts contended that it was a mischaracterization to
say that it took Dr. Piccinini and the team at TD Ameritrade fourteen months to
create Portfolio Margin because twelve of the months were ―simply TD
5
TD Ameritrade also admitted into evidence screen shots from
PrairieSmarts‘s website and the FINRA application for Portfolio Margin.
5
Ameritrade[‗s] using their Portfolio Margin to then get to the one-year audit that
FINRA would do.‖ PrairieSmarts denied that PortfolioDefenseTM was based on
any intellectual property of TD Ameritrade and asserted that TD Ameritrade‘s
Portfolio Margin is different from PortfolioDefenseTM because Portfolio Margin
was designed for use by brokers—not individual investors; was created to satisfy
a government-mandated risk analysis requiring brokers to evaluate volatility and
risk of only 3,000 to 4,000 specifically identified stocks; and is a calculation that
computes for brokers certain margin requirements for highly leveraged portfolios
so that brokers can determine when a customer‘s position becomes too risky and
threatens the broker‘s margin loan. PrairieSmarts contended that, conversely,
PortfolioDefenseTM was designed for use by individual investors, is not limited in
its analysis to 3,000 or 4,000 specifically identified stocks, is not required to be
submitted to FINRA, and that its design constitutes trade secrets of
PrairieSmarts. PrairieSmarts concluded that Portfolio Margin and
PortfolioDefenseTM are ―importantly different‖ and that TD Ameritrade should not
be allowed to take a look ―under the hood‖ at PortfolioDefenseTM only to
determine that it is not based on TD Ameritrade‘s confidential or proprietary
assets. PrairieSmarts also claimed that beta testing of PortfolioDefenseTM is
available through PrairieSmarts‘s website and that TD Ameritrade has the ability
to participate in the beta testing6 and to determine that way whether
PortfolioDefenseTM performs the same functions as the Profit Margin model.
6
In his affidavit, Dr. Piccinini likens the beta testing to ―a free trial of
6
During the hearing, Respondent decided that he would not rely exclusively
on PrairieSmarts‘s affidavits in ruling on the asserted trade secret privilege but,
per Texas Rule of Civil Procedure 193.4, would also conduct an in camera
inspection of the documents sought by TD Ameritrade; Respondent ordered the
documents‘ ―production within one week in a Bates stamped fashion.‖ Following
the hearing, PrairieSmarts complied with Respondent‘s instructions and
submitted documents under seal for an in camera inspection. Those documents
have been filed with this court under seal.
Respondent subsequently issued a September 18, 2013 order finding that
―the likely benefit of allowing TD Ameritrade to take the requested discovery to
investigate one or more potential claims outweighs the burden or expense of the
procedures set out herein.‖ The order granted TD Ameritrade‘s rule 202 petition
in toto, ordering that the requested depositions be taken within forty-five days
and that ―each deponent must produce . . . all of the documents requested by TD
Ameritrade, Inc. as described in its Verified Petition for Rule 202 Deposition.‖
TD Ameritrade‘s rule 202 petition requested—and Respondent‘s order
authorized—TD Ameritrade to depose Rockwell and PrairieSmarts and to elicit
testimony on at least the following topics:
Microsoft Word[—the user can try the product] without being able to access the
underlying programming and source code that allows Microsoft Word to operate
and that is the confidential, proprietary, and trade secret information of
Microsoft.‖
7
a. Any and all patent applications related to any
PrairieSmarts tool, software, or system (including but not limited to
PortfolioDefenseTM) filed by or caused to be filed by PrairieSmarts or
any one or more of its managing members, including any and all
patent applications that form the basis of PrairieSmarts‘[s] claims
that PortfolioDefenseTM is patent pending.
b. The time horizon, statistical distribution, and confidence
interval used in any PrairieSmarts tool, software, or system
(including but not limited to PortfolioDefenseTM) and whether any
one or more of the time horizon, statistical distribution, and
confidence interval support what PrairieSmarts refers to as the
―Range of Motion (History).‖
c. The approach used in the implied volatility-based model
of any PrairieSmarts tool, software, or system (including but not
limited to PortfolioDefenseTM), including how PrairieSmarts converts
option pricing to what it refers to as the ―Range of Motion (Implied).‖
d. Identification of methods, concepts, or ideas imported
from the dissertation of Renaud ―Ron‖ Piccinini into any
PrairieSmarts tool, software, or system (including but not limited to
PortfolioDefenseTM).
e. How PortfolioDefense performs calculations in 3/10 of a
second, as PrairieSmarts claims.
f. Whether PrairieSmarts purchased, generated, or
otherwise acquired historical market, financial, and/or securities data
for use in designing, developing, and testing PortfolioDefenseTM,
and, if so, from what source such data was purchased or otherwise
acquired.
g. Whether PrairieSmarts used TD Ameritrade‘s
Confidential and Proprietary Assets, including historical market,
financial, and/or securities data, in designing, developing, and
testing PortfolioDefenseTM.
h. The disposition, from October 2012 up to and including
the present, of any privately purchased external storage device and
other similar hardware that Mr. Rockwell used while employed by TD
Ameritrade to access TD Ameritrade resources (including TD
8
Ameritrade‘s systems and data, including TD Ameritrade‘s
Confidential and Proprietary Assets).
i. The design, development, and testing of
PortfolioDefenseTM, including the identity of contributors and the
history of development.
TD Ameritrade‘s rule 202 petition requested Relators to produce—and
Respondent‘s order required Relators to produce—for inspection and copying at
their depositions the following categories of documents:
a. Any and all patent applications related to any
PrairieSmarts tool, software, or system (including but not limited to
PortfolioDefenseTM) filed by or caused to be filed in any patent office
by PrairieSmarts or any one or more of its managing members,
including any and all patent applications that form the basis of
PrairieSmarts‘[s] claims that PortfolioDefenseTM is patent pending.
b. Documents sufficient to show the identity of contributors
and the history of development of any PrairieSmarts tool, software,
or system (including but not limited to PortfolioDefenseTM), including
information from a code repository, project tracking software, version
control systems, and vendor contracts.
c. Documents sufficient to show any and all source(s) from
which PrairieSmarts purchased, generated, or otherwise obtained
historical market, financial, and/or securities data for use in
designing, developing, and testing PortfolioDefenseTM.
d. Documents sufficient to show the identification of
methods, concepts, or ideas imported from the dissertation of
Renaud ―Ron‖ Piccinini into any PrairieSmarts tool, software, or
system (including but not limited to PortfolioDefenseTM).
e. Documents sufficient to show the time horizon,
statistical distribution, and confidence interval used in any
PrairieSmarts tool, software, or system (including but not limited to
PortfolioDefenseTM).
9
f. Documents sufficient to show the approach used in the
implied volatility-based model of any PrairieSmarts tool, software, or
system (including but not limited to PortfolioDefenseTM).
g. Documents sufficient to show the manner in which
PortfolioDefense performs calculations in 3/10 of a second, as
PrairieSmarts claims.
The order also contained an ―Attorney‘s Eyes Only‖ provision, limiting
access of the above information but permitting disclosure to TD Ameritrade of
―the general nature of the Attorney‘s Eyes Only Information, without disclosing
the specifics of any such information, and to the extent such general disclosure is
necessary for advising [TD Ameritrade].‖
PrairieSmarts filed this petition for writ of mandamus, and we granted
temporary emergency relief, staying the depositions and associated document
production granted by Respondent‘s order. TD Ameritrade timely filed a
response; PrairieSmarts timely filed a reply.
III. THE ISSUES PRESENTED
In three issues, PrairieSmarts contends in its petition for writ of mandamus
that TD Ameritrade failed to meet its burden under Texas Rule of Civil Procedure
202 to show that the benefit of possibly avoiding the expense of a lawsuit
outweighs the burden on PrairieSmarts of disclosing trade secrets, that TD
Ameritrade failed to meet its burden under Texas Rule of Evidence 507 to show
how lack of presuit access to PrairieSmarts‘s trade secrets would so impair the
presentation of TD Ameritrade‘s case on the merits that there is a real threat of
an unjust result, and that venue for TD Ameritrade‘s rule 202 petition is not
10
proper in Tarrant County to obtain the deposition of PrairieSmarts‘s corporate
representative.
IV. STANDARD OF REVIEW
Mandamus relief is proper to correct a clear abuse of discretion when there
is no adequate remedy by appeal. In re Frank Motor Co., 361 S.W.3d 628, 630–
31 (Tex.) (orig. proceeding), cert. denied, 133 S. Ct. 167 (2012); In re Prudential
Ins. Co. of Am., 148 S.W.3d 124, 135–36 (Tex. 2004) (orig. proceeding). A party
to a rule 202 petition against whom suit is anticipated may seek review of an
allegedly improper rule 202 order via mandamus. In re Wolfe, 341 S.W.3d 932,
933 (Tex. 2011) (orig. proceeding); In re Jorden, 249 S.W.3d 416, 420 (Tex.
2008) (orig. proceeding); In re Emergency Consultants, Inc., 292 S.W.3d 78, 80
(Tex. App.—Houston [14th Dist.] 2007, orig. proceeding [mand. denied]); In re
Hewlett-Packard, 212 S.W.3d 356, 360 (Tex. App.—Austin 2006, orig.
proceeding). A party to a rule 202 proceeding has no adequate remedy by
appeal if the trial court abused its discretion by ordering discovery that would
compromise procedural or substantive rights. In re Chernov, 399 S.W.3d 234,
235 (Tex. App.—San Antonio 2012, orig. proceeding). As in other original
proceedings, we review a trial court‘s order granting a verified petition to take
depositions before suit under an abuse of discretion standard. Patton Boggs LLP
v. Moseley, 394 S.W.3d 565, 568–69 (Tex. App.—Dallas 2011, orig. proceeding).
V. APPLICABLE LAW
11
A. Trade Secrets
A trade secret ―is one of the most elusive and difficult concepts in the law
to define.‖ Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir.
1978). Generally, a trade secret is any formula, pattern, device, or compilation of
information used in a business, which gives the owner an opportunity to obtain
an advantage over his competitors who do not know or use it. Taco Cabana Int’l,
Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991), aff’d, 505 U.S. 763
(1992); In re Bass, 113 S.W.3d 735, 739 (Tex. 2003) (orig. proceeding) (quoting
Computer Assocs. Int’l v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1994)).
Combinations of disclosed technologies may constitute a trade secret. See, e.g.,
Ventura Mfg. Co. v. Locke, 454 S.W.2d 431, 432–34 (Tex. Civ. App.—San
Antonio 1970, no writ).
Texas courts consider the following factors in determining whether the
material at issue qualifies for the trade secret privilege: (1) the extent to which
the information is known outside of his business; (2) the extent to which it is
known by employees and others involved in his business; (3) the extent of the
measures taken by him to guard the secrecy of the information; (4) the value of
the information to him and to his competitors; (5) the amount of effort or money
expended by him in developing the information; and (6) the ease or difficulty with
which the information could be properly acquired or duplicated by others. In re
Union Pac. R.R. Co., 294 S.W.3d 589, 592 (Tex. 2009) (orig. proceeding); Bass,
12
113 S.W.3d at 739. All six factors need not exist to establish a trade secret
because trade secrets do not fit neatly into each factor every time and because
other factors may also be relevant depending on the circumstances of a
particular case. Bass, 113 S.W.3d at 740.
A litigant may claim a privilege to refuse to disclose a trade secret so long
as the allowance of the privilege will not tend to conceal fraud or otherwise work
injustice. Tex. R. Evid. 507. Thus, in determining whether a trade secret must
be disclosed, a trial court utilizes a two-step, burden-shifting procedure. In re
Cont’l Gen. Tire, Inc., 979 S.W.2d 609, 613 (Tex. 1998) (orig. proceeding). First,
the party resisting discovery by asserting a trade secret privilege must establish
that the information sought is, in fact, a trade secret. Id. Once the party resisting
discovery meets this burden, the burden then shifts to the party seeking to obtain
discovery concerning the trade secret to establish that the information sought is
necessary for a fair adjudication of its claims. Id.
The burden on the party seeking discovery of trade secrets requires a
demonstration with specificity of exactly how the lack of the trade secret
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. In re
Bridgestone/Firestone, Inc., 106 S.W.3d 730, 733 (Tex. 2003) (orig. proceeding).
The test cannot be satisfied merely by general assertions of unfairness. Id. Nor
is necessity established by a claim that the information would be useful rather
than necessary. See In re XTO Res. I, LP, 248 S.W.3d 898, 905 (Tex. App.—
13
Fort Worth 2008, orig. proceeding). If an alternative means of proof is available
that would not significantly impair the presentation of the case‘s merits, then the
information is not necessary. See Union Pac. R.R. Co., 294 S.W.3d at 592–93.
Finally, this specificity showing must be made with regard to each category of
trade secret information that is sought. In re Goodyear Tire & Rubber Co., 392
S.W.3d 687, 696 (Tex. App.—Dallas 2010, orig. proceeding). Only if the
requesting party meets this burden of establishing that the trade secret
information is necessary for a fair adjudication of its claims should the trial court
compel disclosure of the trade secret information, subject to an appropriate
protective order. Cont’l Gen. Tire, Inc., 979 S.W.2d at 613.
B. Rule 202 of the Texas Rules of Civil Procedure
Texas Rule of Civil Procedure 202 permits a person to petition a trial court
for authorization to take a deposition before suit is filed in two circumstances: (1)
to perpetuate or obtain the person‘s own testimony or that of any other person for
use in an anticipated suit; or (2) to investigate a potential claim or suit. Tex. R.
Civ. P. 202.1(a), (b). The trial court may order that the requested deposition be
taken only if it expressly finds either (1) that allowing the petitioner to take the
requested deposition may prevent a failure or delay of justice in an anticipated
suit or (2) that the likely benefit of allowing the petitioner to take the requested
deposition to investigate a potential claim outweighs the burden or expense of
the procedure. In re Does, 337 S.W.3d 862, 865 (Tex. 2011) (orig. proceeding);
Jorden, 249 S.W.3d at 423.
14
Rule 202 depositions are not now and never have been intended for
routine use. Jorden, 249 S.W.3d at 423. There are practical as well as due
process problems with demanding discovery from someone before telling them
what the issues are. Id. To prevent an end-run around discovery limitations that
would govern the anticipated suit, a rule 202 petitioner cannot obtain by rule 202
what it would be denied in the anticipated action. Wolfe, 341 S.W.3d at 933.
Accordingly, courts must strictly limit and carefully supervise presuit discovery to
prevent abuse of the rule. Id.
C. To Obtain Presuit Discovery of Information that Qualifies as Trade
Secret Information, the Burdens Imposed Under Rule of Evidence 507 and
Rule of Civil Procedure 202 Must Both Be Satisfied
Rule 202.5 provides, ―The scope of discovery in depositions authorized by
this rule is the same as if the anticipated suit or potential claim had been filed.‖
Tex. R. Civ. P. 202.5. Thus, the burden-shifting procedure utilized when a party
to a lawsuit resists discovery by asserting the trade secret privilege set forth in
rule 507 of the rules of evidence is equally applicable when a party resists
discovery sought by a rule 202 petition by claiming trade secret privilege. 7
Accord Wolfe, 341 S.W.3d at 933 (recognizing presuit discovery under rule 202
is the same as if the anticipated suit or potential claim had been filed).
7
This is the position taken by TD Ameritrade; it argues that ―the Rule 507
analysis applicable here should be exactly the same as it would be had TD
Ameritrade actually filed its trade secret misappropriation claim first and then
sought the same discovery.‖
15
A rule 202 petitioner must also establish either that allowing the requested
deposition may prevent a failure or delay of justice in an anticipated suit or that
the likely benefit of allowing the requested deposition to investigate a potential
claim outweighs the burden or expense of the procedure. Tex. R. Civ. P.
202.4(a)(1), (2); Does, 337 S.W.3d at 865. This is a totally separate burden than
the burden shifted to a party seeking discovery of information proved by the party
resisting discovery to constitute trade secret information. Compare Does, 337
S.W.3d at 865, with Bridgestone/Firestone, Inc., 106 S.W.3d at 733.
So, a rule 202 petitioner seeking presuit discovery of information that has
been proven to be trade secret information must first satisfy the burden under
rule 507 of the rules of evidence of demonstrating the necessity for its discovery
of the trade secret information by showing with specificity exactly how denial of
the discovery will impair the presentation of its case on the merits to the extent
that an unjust result is likely. See Bridgestone/Firestone, Inc., 106 S.W.3d at
733; Cont’l Gen. Tire, Inc., 979 S.W.2d at 613. If a rule 202 petitioner satisfies
this burden of showing the necessity for discovery of the trade secret information,
the rule 202 petitioner must next show that it is entitled to obtain such trade
secret information presuit because allowing the requested deposition and
associated document production may prevent a failure or delay of justice in an
anticipated suit or that the likely benefit of allowing the requested deposition and
associated document production to investigate a potential claim outweighs the
burden or expense of the procedure. Tex. R. Civ. P. 202.4(a)(1), (2); Does, 337
16
S.W.3d at 865. In summary, a rule 202 petitioner seeking presuit discovery of
information that has been proven to be trade secret information must satisfy both
of the two distinct and separate burdens imposed under rule 507 of the rules of
evidence and under rule 202 of the rules of civil procedure. See Hewlett-
Packard, 212 S.W.3d at 363–64 (addressing both burdens); In re Rockafellow,
No. 07-11-00066-CV, 2011 WL 2848638, at *3 (Tex. App.––Amarillo 2011, orig.
proceeding) (mem. op.) (same).
D. Analysis
1. PrairieSmarts Established that the Information Sought by TD Ameritrade
Concerning PortfolioDefenseTM Constitutes Privileged Trade Secret
Information
Dr. Piccinini explained in his affidavit that PortfolioDefenseTM is ―based on
my life[‘s] work in this area and put into functional computer code using Mr.
Rockwell‘s computer programing expertise.‖ He stated that the details of how
PortfolioDefenseTM works and how it was developed are not known outside of
PrairieSmarts and that it cannot be duplicated by others without access to
PortfolioDefenseTM‘s underlying programming code and its models. Dr. Piccinini
and Rockwell are the only PrairieSmarts employees with access to the
PortfolioDefenseTM computer code and to the details of the methods and models
used in PortfolioDefenseTM; Nagy and Chochon do not have access. The
secrecy of PortfolioDefenseTM is guarded by restricted access to its programming
code and models through multiple layers of authorization by limiting access to Dr.
Piccinini and Rockwell, by storing the PortfolioDefenseTM information on secured
17
servers protected by a commercial grade firewall, and by refusing to disclose or
share the PortfolioDefenseTM software or its underlying models with any third
parties. PortfolioDefenseTM is the only asset of PrairieSmarts and is extremely
valuable to PrairieSmarts. According to PrairieSmarts, PortfolioDefenseTM is the
only product of its kind that provides individual investors with information on all
types of investments so that the value of PortfolioDefenseTM is significant not only
to PrairieSmarts but also to its competitors. At the time Dr. Piccinini signed his
affidavit, PrairieSmarts had expended $300,000 to $850,000 and had spent
months to develop PortfolioDefenseTM. Dr. Piccinini further stated in his affidavit
that ―PortfolioDefense cannot be duplicated by others without access to
PortfolioDefense‘s underlying programming and its models. Others may try to
develop a similar product, . . . but while any such product may perform similar to
PortfolioDefense, it could not result in the same output assessment of risk even
with identical input parameters.‖ The documents produced by PrairieSmarts for
in camera review by Respondent likewise support the trade secrets privilege
asserted by PrairieSmarts.8
8
TD Ameritrade contends that PrairieSmarts does not rely on the
documents themselves to meet the burden of establishing trade secret status.
But Relators‘ unopposed motion to file documents under seal that was filed in
this court explained that PrairieSmarts submitted for in camera review by
Respondent the documents that it contends are protected and requests that
those documents be filed under seal in our court as part of the mandamus
proceeding so that we may examine all of the evidence considered by
Respondent. Thus, the documents were before Respondent and are before us in
addressing the issue of trade secret status.
18
Applying the trade secret factors enunciated by the Texas Supreme Court,
each of the factors weighs in favor of Relators; the record establishes and we
hold that Relators met their burden of showing that all but one category of the
information sought by TD Ameritrade—both by asking deposition questions on
the topics listed above9 with the exception of deposition topic (h) and by
production of documents in the categories listed above—constitutes trade secret
information.10 See, e.g., Union Pac. R.R. Co., 294 S.W.3d at 591–92 (applying
factors and holding ―Union Pacific‘s affidavits establish trade secret protection
under the Restatement factors‖); Bass, 113 S.W.3d at 739–42 (applying factors
and holding that relator‘s evidence, including affidavits, established that ―seismic
data and its interpretations are trade secrets‖ although the fifth factor did not
weigh in favor of trade secrets protection); Rockafellow, 2011 WL 2848638, at *3
(applying factors and holding that relator‘s affidavit established that relator‘s
supplier list and information related to the identities of suppliers were trade
secrets).
9
See In re Lowe’s Cos., 134 S.W.3d 876, 879–80 (Tex. App.—Houston
[14th Dist.] 2004, orig. proceeding) (addressing assertion of trade secret privilege
to information sought in a deposition).
10
Respondent‘s order, although containing the ―Attorney‘s Eyes Only‖
provision, did not make an express finding that PrairieSmarts had established
that information sought by TD Ameritrade constituted trade secrets; TD
Ameritrade asserts in its response to PrairieSmarts petition for writ of mandamus
that the information is not subject to a trade secret privilege. As set forth above,
the record conclusively establishes that PrairieSmarts proved its trade secret
privilege, except with regard to deposition topic (h).
19
2. TD Ameritrade’s Burden Under Rule of Evidence 507 Not Satisfied
Once PrairieSmarts met its burden to establish that the information sought
by TD Ameritrade constituted privileged trade secret information under rule 507
of the Texas Rules of Evidence, the burden then shifted to TD Ameritrade to
show that the trade secret information sought is necessary for a fair adjudication
of TD Ameritrade‘s claims. See Cont’l Gen. Tire, Inc., 979 S.W.2d at 613. In its
second issue, PrairieSmarts argues that TD Ameritrade did not satisfy this
burden because TD Ameritrade did not produce any evidence or expert
testimony to support its contention that the trade secret information sought by TD
Ameritrade from PrairieSmarts is necessary to support any claim against
PrairieSmarts.11 According to PrairieSmarts, TD Ameritrade has not identified
any injustice that will ensue if it is not granted pre-suit access to the
11
PrairieSmarts also argues that TD Ameritrade cannot meet its burden of
establishing that the trade secret information sought by TD Ameritrade is
necessary for the fair adjudication of the merits of an existing claim because
there is no existing claim. See, e.g., Bass, 113 S.W.3d at 743 (explaining in a
non-rule 202 case that ―in order for trade secret production to be material to a
litigated claim or defense, a claim or defense must first exist‖ and holding as a
matter of law the claim did not exist); Hewlett-Packard, 212 S.W.3d at 363 (citing
Bass in a rule 202 proceeding for the proposition that ―[i]n order for a trial court to
determine whether the trade secret production is necessary for a fair adjudication
of a claim or defense, a claim or defense must first exist‖ and holding that,
because no claims existed, the required showing of a specific, real threat of an
unjust result as opposed to a theoretical, possible threat of an unjust result was
not possible). In light of rule 202.5‘s provision that ―[t]he scope of discovery in
depositions authorized by this rule is the same as if the anticipated suit or
potential claim had been filed,‖ we decline to hold that a rule 202 petitioner can
never obtain presuit discovery of trade secret information simply because a suit
has not been filed.
20
PortfolioDefense programming but has demonstrated only that it would be
convenient, possibly less expensive, and a source of ―comfort‖ to it regarding the
alleged misuse of its property.
TD Ameritrade contends that it met its burden of establishing necessity
under the rule 507 burden-shifting analysis. It references the facts that it
presented at the hearing in the trial court on its rule 202 petition—these are the
same facts contained in the three demonstrative exhibits titled, ―Facts About
PrairieSmarts‘s Principals,‖ ―Timeline,‖ and ―Facts Justifying Investigation.‖
These facts, TD Ameritrade contends, indicate ―the highly suspect circumstances
at play here.‖ TD Ameritrade asserts that it established necessity because ―the
[trade secret] information at issue is the very subject of TD Ameritrade‘s claim of
misuse or misappropriation.‖
The facts relied upon by TD Ameritrade to justify investigation into a claim
against PrairieSmarts are facts relevant to the rule 202 burden, not to the burden
shifted to TD Ameritrade under rule 507. That is, the facts contained in the three
demonstrative exhibits titled, ―Facts About PrairieSmarts‘s Principals,‖ ―Timeline,‖
and ―Facts Justifying Investigation‖ are relevant to establishing whether TD
Ameritrade met its rule 202 burden to show that the benefit of allowing TD
Ameritrade to take the requested depositions to investigate a potential claim for
misuse or misappropriation of proprietary information outweighs the burden and
expense of the procedure. But these facts do not rise to the level of a
particularized showing that PrairieSmarts‘s trade secret information is necessary
21
to enable TD Ameritrade to prove of one or more material elements of its claims
against PrairieSmarts and that it is reasonable to conclude that the information
sought is essential to a fair resolution of a misuse or misappropriation lawsuit
against PrairieSmarts—facts required by the rule 507 burden.12 See
Bridgestone/Firestone, Inc., 106 S.W.3d at 732; Cont’l Gen. Tire, Inc., 979
S.W.2d at 613. The facts justifying an investigation alleged by TD Ameritrade
and asserted at the hearing on its rule 202 petition concerning the ―highly
suspect circumstances at play here‖ certainly establish that PrairieSmarts‘s trade
secret information might be useful to TD Ameritrade in prosecuting a lawsuit. But
merely proving that trade secret information might be useful—even useful in
preparing an expert report with the least amount of uncertainty—does not prove
that disclosure of the trade secret information is necessary or essential to a fair
resolution of TD Ameritrade‘s claims. See Cont’l Gen. Tire, Inc., 979 S.W.2d at
611; XTO Res. I, LP, 248 S.W.3d at 905. Although the facts justifying an
investigation by TD Ameritrade demonstrate the possible threat of an unjust
result in a misuse or misappropriation of trade secrets claim, they do not,
standing alone, satisfy the required higher standard of demonstrating a real
threat of an unjust result. See Bridgestone/Firestone, 106 S.W.3d at 734
(explaining that ―[t]he mere possibility of unfairness is not enough to warrant
disclosure‖ of trade secret information). The facts justifying an investigation by
12
TD Ameritrade does not link the requested trade secret discovery to
proof of any element of any cause of action.
22
TD Ameritrade likewise do not establish that the only means available to TD
Ameritrade to discover whether Dr. Piccinini, Chochon, Nagy, and Rockwell
misused or misappropriated TD Ameritrade‘s confidential, proprietary information
is by the production of the trade secret documents and information listed in TD
Ameritrade‘s rule 202 petition and ordered produced by Respondent. See Union
Pac. R.R. Co., 294 S.W.3d at 593.13 In summary, the facts presented by TD
Ameritrade as justifying an investigation are relevant to a determination of rule
202.4(a)(2)‘s requirement that ―the likely benefit of allowing the [rule 202]
petitioner to take the requested deposition to investigate a potential claim
outweighs the burden or expense of the procedure,‖14 but they do not satisfy TD
Ameritrade‘s burden under rule 507 to establish ―with specificity exactly how the
lack of the [trade secret] 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.‖ Bridgestone/Firestone, Inc., 106 S.W.3d at 733.
13
While evidence that trade secret information is not available through any
other means is not a required showing, it is evidence supporting a finding of
necessity for disclosure. See Union Pac. R.R. Co., 294 S.W.3d at 593.
14
TD Ameritrade also argues that Respondent ―would have been within its
discretion to include consideration of the protective order‘s terms and conditions
in its weighing of the ultimate likely benefit and the burden.‖ That a trial court has
ordered the parties to enter into a protective order with respect to trade secret
information, however, does not dispense with the requesting party‘s burden to
establish the necessity for the discovery of the trade secret information. See
Hewlett-Packard, 212 S.W.3d at 364 (citing Cont’l Gen. Tire, Inc., 979 S.W.2d at
610).
23
Because PrairieSmarts established that all of the information sought by TD
Ameritrade in its verified rule 202 petition, with the exception of deposition topic
(h), constitutes trade secret information, and because TD Ameritrade failed to
satisfy the burden under rule 507 of the rules of evidence of establishing
necessity, we hold that Respondent abused his discretion by ordering the presuit
depositions and the document production. See Bass, 113 S.W.3d at 738 (―If a
trial court orders production once trade secret status is proven, but the party
seeking production has not shown a necessity for the requested materials, the
trial court‘s action is an abuse of discretion.‖). We sustain Relators‘ second
issue.15
VI. CONCLUSION
Having determined that Respondent abused his discretion by issuing an
order permitting presuit discovery of information and documents that were proven
to be subject to a trade secrets privilege in the absence of proof of necessity by
TD Ameritrade, we conditionally grant the writ. Respondent is directed to vacate
his September 18, 2013 order authorizing the presuit depositions of Rockwell
and PrairieSmarts and compelling the production of documents concerning
PortfolioDefenseTM.16 Because we are confident that Respondent will comply
15
Because PrairieSmarts‘s second issue is dispositive, we need not
address its other issues.
16
Although deposition topic (h) in TD Ameritrade‘s rule 202 petition does
not seek trade secret information, because rule 202‘s benefit-burden analysis will
be different given the viability of only one topic on which only Rockwell may be
24
with this directive, the writ will issue only if Respondent fails to do so. Our
disposition of this original proceeding serves to lift the stay previously imposed by
this Court. See Tex. R. App. P. 52.10(b).
/s/ Sue Walker
SUE WALKER
JUSTICE
PANEL: GARDNER, WALKER, and MEIER, JJ.
MEIER, J. filed a concurring opinion.
DELIVERED: January 23, 2014
deposed, this provision must likewise be vacated. Nothing in this opinion,
however, precludes further action in the trial court by the parties, if they so
choose, to attempt to obtain a presuit deposition concerning deposition topic (h)
from Rockwell only, not PrairieSmarts. And nothing in this opinion precludes
Respondent from hearing such a request or ruling on it after conducting the rule
202.4(a)(2) benefit-burden test.
25