In re PrairieSmarts LLC
Fort Worth Court of Appeals, No. 02-13-00338-CV (January 23, 2014)
Justices Gardner, Walker (Opinion), and Meier
Fort Worth Court of Appeals, No. 02-13-00338-CV (January 23, 2014)
Justices Gardner, Walker (Opinion), and Meier
A party seeking a pre-suit deposition under Texas Rule of Civil Procedure 202 must show that the deposition may prevent a failure or delay of justice in an anticipated suit, or that the likely benefit of the deposition outweighs the burden or expense of the procedure. But when the party to be deposed invokes the trade-secret privilege of Texas Rule of Evidence 507 and shows that the information sought is a trade secret, the petitioner must meet a higher, “totally separate” burden—it must demonstrate that the information sought is necessary for a fair adjudication of its anticipated claims. In this case, the Court of Appeals concluded the petitioner’s evidence addressed the Rule 202 balancing-of-burdens inquiry, but did not satisfy the Rule 507 necessity standard. The Court therefore conditionally granted mandamus relief from the trial court’s order permitting pre-suit discovery.
Four employees of TD Ameritrade left the company at various times and formed their own company, PrairieSmarts. PrairieSmarts later filed a patent application for a program called PortfolioDefense, which prompted TD Ameritrade to file a petition for pre-suit depositions of a PrairieSmarts corporate representative and one of the employees. The petition also sought production of documents at the depositions. After a hearing and in camera consideration of the documents at issue, the trial court ordered the depositions and document production, subject to a protective order with “attorneys’ eyes only” provisions. PrairieSmarts sought mandamus.
TD Ameritrade contended the circumstances under which PortfolioDefense came into existence suggested misappropriation of TD Ameritrade’s trade secrets. TD Ameritrade pointed out that: three of PrairieSmarts’s four principals were directly responsible for developing a similar program at TD Ameritrade; PrairieSmarts was formed only five days after one of its co-founders left TD Ameritrade; PrairieSmarts took only three months to develop its program, compared to fourteen months for TD Ameritrade; and the programs were so similar that they generated nearly identical outcomes. TD Ameritrade’s petition sought discovery of matters such as the process by which PortfolioDefense was designed, developed, and tested, as well as the data, assumptions, and methodology underlying the product.
The Court of Appeals began by highlighting the differences between the standards of Rule 202 and Rule 507, emphasizing that both standards must be satisfied when the party from whom pre-suit discovery is sought establishes trade-secret status. The petitioner must first overcome Rule 507, “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.” Then the petitioner must show that it is entitled under Rule 202 to take the discovery before filing suit “because allowing the requested deposition and associated document production may prevent a failure or delay of justice in an anticipated suit or [] the likely benefit of allowing the [discovery] to investigate a potential claim outweighs the burden or expense of the procedure.”
The Court agreed with PrairieSmarts that the information TD Ameritrade sought is a trade secret. The Court noted, among other things, that PortfolioDefense is PrairieSmarts’s only asset, its programming code is accessible only to two of PrairieSmarts’s principals, it cannot be duplicated by others without access to its underlying code and its models, and PrairieSmarts invested hundreds of thousands of dollars in development. To obtain the discovery it sought, therefore, TD Ameritrade was required to show the discovery was necessary to its case, and not merely the most convenient, least expensive, or least burdensome way of proceeding.
The Court concluded the circumstances relied on by TD Ameritrade in support of its petition, while relevant to the reasonableness of a pre-suit investigation, did not “rise to the level of a particularized showing that PrairieSmarts’s trade secret information is necessary to enable TD Ameritrade to prove 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.” That is, TD Ameritrade’s evidence addressed its Rule 202 burden, not its Rule 507 burden. TD Ameritrade’s allegations of “highly suspect circumstances at play” certainly established that PrairieSmarts’s trade-secret information might be useful to TD Ameritrade in prosecuting a lawsuit, but it did not establish necessity. TD Ameritrade did not show that discovery of PrairieSmarts’s trade secrets was the only means available to discover whether the potential defendants had misappropriated TD Ameritrade’s trade secrets. The Court concluded TD Ameritrade failed to meet its burden under Rule 507, and the trial court abused its discretion by ordering the pre-suit depositions and document production.
