Continental General Tire, Inc., In re

• Decision Date: 12 November 1998
• Docket Number: No. 98-0125,98-0125
• Citation: 979 S.W.2d 609
• Parties: 42 Tex. Sup. Ct. J. 141 In re CONTINENTAL GENERAL TIRE, INC., Relator.
• Court: Texas Supreme Court

Page 609

979 S.W.2d 609

42 Tex. Sup. Ct. J. 141

In re CONTINENTAL GENERAL TIRE, INC., Relator.

No. 98-0125.

Supreme Court of Texas.

Argued Oct. 22, 1998.

Decided Nov. 12, 1998.

Julie Caruthers Parsley, John Cornyn, Eugene W. Brees, II, Austin, Kenneth J. Moran, Richmond, VA, for Relator.

Ray Chester, Waylon L. Allen, Austin, for Respondent.

PHILLIPS, Chief Justice, delivered the opinion of the Court, in which GONZALEZ, HECHT, ENOCH, SPECTOR, OWEN, BAKER and ABBOTT, Justices, join.

Under our rules of evidence, a party has a privilege to refuse to disclose its trade secrets "if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice." See TEX.R. EVID. 507. The issue is whether Rule 507 protects from discovery a tire manufacturer's chemical formula for its "skim stock," a rubber compound used in tire manufacturing. The trial court ordered the manufacturer to produce the formula under a protective order, and the court of appeals denied the manufacturer's requested mandamus relief without opinion. We hold that, when a party resisting discovery establishes that the requested information is a trade secret under Rule 507, the burden shifts to the requesting party to establish that the information is necessary for a fair adjudication of its claim or defense. Because relator established that the formula was a trade secret, and because the real party in interest did not meet its burden of establishing necessity, we conditionally grant mandamus relief. Nothing in the relief we grant prohibits plaintiffs from seeking to discover the formula under the procedure we set forth.

I

While Kenneth Fisher was driving his pick-up truck on Highway 190, his left front tire blew out, causing him to lose control of the vehicle. Fisher's truck crossed the median and struck Dora Pratt's car, killing Pratt and her passenger. Pratt's heirs, Luz Enid Rivera, Brenda Beatriz Killens, Gilberto DeJesus Cruz, Dora Maria Cruz, and Toribio Nieves, filed the underlying products liability action against Continental General Tire, the manufacturer of the failed tire.

It is undisputed that the tire failed because its tread and outer belt separated from the inner belt. The belts are made from brass-coated steel cords encased in a skim-stock rubber compound. These belts, along with the other tire components, are assembled into a "green tire," to which heat and pressure are applied in a process called "vulcanization." This process causes the components in the tire, including the skim stock, to chemically bond with each other. Plaintiffs contend that either a design or manufacturing defect in the skim stock prevented the belts of Fisher's tire from properly bonding. To secure evidence to prove this claim, plaintiffs requested Continental to produce the chemical formula for the skim stock used on this tire.

Continental objected, claiming that the formula is a trade secret that Texas Rule of Evidence 507 protects. After a hearing, the trial court ordered Continental to produce the formula, subject to a protective order which the trial court had earlier entered for other confidential material produced by Continental.

The trial court stayed its order pending Continental's efforts to obtain mandamus review. After the court of appeals denied relief, we granted Continental's mandamus petition and heard oral argument.

II

Continental claims that the skim-stock formula is protected by Texas Rule of Evidence 507, which provides in full:

A person has a privilege, which may be claimed by the person or the person's agent or employee, to refuse to disclose and to prevent other persons from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the judge shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.

TEX.R. EVID. 507. This rule, adopted in 1983, is based on Supreme Court Standard 508, a proposed rule of evidence promulgated by the United States Supreme Court in 1969. See 3 MCLAUGHLIN, WEINSTEIN'S FEDERAL EVIDENCE § 508.01, at 508-5 (2d ed.1998); PRELIMINARY DRAFT OF PROPOSED RULES OF EVIDENCE FOR THE UNITED STATES DISTRICT COURTS AND MAGISTRATES, 46 F.R.D. 161, 270 (1969). Although Congress did not adopt Standard 508 as a federal rule of evidence, see MCLAUGHLIN, supra at 508-5, twenty states, including Texas, have adopted some version of it. ¹

This Court has never addressed the scope of Rule 507. Moreover, of the other jurisdictions adopting Supreme Court Standard 508, only two have directly considered its scope. See Bridgestone/Firestone v. Superior Court, 7 Cal.App.4th 1384, 9 Cal.Rptr.2d 709 (Cal.Ct.App.1992); Rare Coin-It, Inc. v. I.J.E., Inc., 625 So.2d 1277 (Fla.Ct.App.1993).

In Bridgestone/Firestone, the plaintiffs sued the tire manufacturer for wrongful death caused by a tire failure. Claiming that belt separation caused the tire failure, the plaintiffs sought to discover defendant's compound formula. Defendant asserted California's trade secret privilege, which is virtually identical to our Rule 507. See CAL. EVID.CODE § 1060. The trial court ordered defendant to produce the formula, and defendant sought interlocutory review.

The court of appeals, in analyzing the rule, first noted that a requesting party must establish more than mere relevance to discover trade secrets, or the statutory privilege would be "meaningless." 9 Cal.Rptr.2d at 712. "Allowance of the trade secret privilege may not be deemed to 'work injustice' within the meaning of Evidence Code section 1060 simply because it would protect information generally relevant to the subject matter of an action or helpful to preparation of a case." Id. Rather, to show "injustice," the party seeking to discover a trade secret

must make a prima facie, particularized showing that the information sought is relevant and necessary to the proof of, or defense against, a material element of one or more causes of action presented in the case, and that it is reasonable to conclude that the information sought is essential to a fair resolution of the lawsuit.

Id. at 713. The court perceived this as a balancing process, in which the trial court must weigh the interests of both sides and "must necessarily consider the protection afforded the holder of the privilege by a protective order as well as any less intrusive alternatives to disclosure proposed by the parties." Id. Applying these principles, the court noted that plaintiffs' expert, although averring generally that the formula could assist him in determining a defect, did not "describe with any precision how or why the formulas were a predicate to his ability to reach conclusions in the case." Id. at 716. The court thus determined that the information, although perhaps useful, was not necessary to the plaintiffs' claim. The court consequently denied the discovery.

Similarly, in Rare Coin-It, the court was called upon to interpret section 90.506 of the Florida Statutes, a trade secret privilege identical to ours. The court held:

When trade secret privilege is asserted as the basis for resisting production, the trial court must determine whether the requested production constitutes a trade secret; if so, the court must require the party seeking production to show reasonable necessity for the requested materials.

625 So.2d at 1278. ² See also Inrecon v. Village Homes at Country Walk, 644 So.2d 103, 105 (Fla.Ct.App.1994).

The approach adopted in California and Florida is consistent with the federal courts' treatment of trade secrets. Although Congress did not adopt Supreme Court Standard 508, the federal rules nonetheless allow a court, in the discovery context, to "make any order which justice requires to protect a party or person from ... undue burden or expense, including ... that a trade secret or other confidential research, development, or commercial information not be revealed or be revealed only in a designated way...." FED.R.CIV.P. 26(c)(7). Federal courts applying this rule recognize that "[t]here is no absolute privilege for trade secrets and similar confidential information." Federal Open Mkt. Comm. v. Merrill, 443 U.S. 340, 362, 99 S.Ct. 2800, 61 L.Ed.2d 587 (1979) (quoting 8 WRIGHT & MILLER, FEDERAL PRACTICE AND PROCEDURE § 2043, at 300 (1970)); see also Centurion Indus. v. Warren Steurer & Assocs., 665 F.2d 323, 325 (10th Cir.1981); National Util. Serv., Inc. v. Northwestern Steel & Wire Co., 426 F.2d 222, 227 (7th Cir.1970); A.H. Robins Co. v. Fadely, 299 F.2d 557, 561 (5th Cir.1962); Kleinerman v. United States Postal Serv., 100 F.R.D. 66, 69 (D.Mass.1983); 6 MOORE'S FEDERAL PRACTICE § 26.46, at 26.144 (3d ed.1998). Rather, federal courts apply a balancing test with shifting burdens, comparable to that articulated by the California appellate court in Bridgestone/Firestone.

In federal court, the party resisting discovery must establish that the information sought is indeed a trade secret and that disclosure would be harmful. The burden then shifts to the requesting party to establish that the information is "relevant and necessary" to his or her case. If the trial court orders disclosure, it should enter an appropriate protective order. See generally 8 WRIGHT & MILLER, FEDERAL PRACTICE & PROCEDURE § 2043 (1994); see also, e.g., American Standard, Inc. v. Pfizer Inc., 828 F.2d 734, 740-41 (Fed.Cir.1987); Heat & Control, Inc. v. Hester Indus., 785 F.2d 1017, 1025 (Fed.Cir.1986); Centurion Indus. v. Warren Steurer & Assocs., 665 F.2d 323, 325 (10th Cir.1981); In re Independent Serv. Org. Antitrust Litig., 162 F.R.D. 355, 356 (D.Kan.1995); Exxon Chem. Patents, Inc. v. Lubrizol Corp., 131 F.R.D. 668, 671 (S.D.Tex.1990); Culligan v. Yamaha Motor Corp., 110 F.R.D. 122, 125 (S.D.N.Y.1986). Cf. Kleinerman v. United States Postal Serv., 100 F.R.D. 66, 69 (D.Mass.1983) (discovery of trade secrets...