in Re Michael Rockafellow & MTBC, Ltd., Relator ( 2013 )

In The
Court of Appeals
Seventh District of Texas at Amarillo
________________________
No. 07-12-0372-CV
________________________
IN RE MICHAEL ROCKAFELLOW; MTBC, LTD.;
AND TBC WAREHOUSE, INC., RELATORS
________________________
April 30, 2013
ON PETITION FOR WRIT OF MANDAMUS
Before QUINN, C.J., and HANCOCK and PIRTLE, JJ.
Relators, Michael Rockafellow and his company, MTBC, Inc., have filed their
petition for writ of mandamus, asking this Court to direct respondent, the Honorable Les
Hatch of the 237th District Court of Lubbock County, to vacate the order of August 7,
2012, ordering Rockafellow and MTBC to disclose their suppliers of certain hair care
products to real party in interest, SalonQuest, L.L.C. We will conditionally issue a writ of
mandamus so directing.
Factual and Procedural History
In the underlying case, SalonQuest has filed suit against Rockafellow, MTBC,
Jane Does 1–5, and ABC Companies 1–5, alleging causes of action in tortious
interference with contract and with business relations, civil conspiracy, and breach of
contract. The substance of the discovery dispute stemming from this litigation,
however, is not unfamiliar to this Court; that dispute had its beginning well before suit
was filed. In 2010, SalonQuest learned that Rockafellow and MTBC had sold
SalonQuest products to grocery store outlets in south and central Texas and, before
filing suit against anyone, attempted to discover the identities of the distributors or
authorized retailers from which MTBC had attained SalonQuest hair care products and
which, by selling product to MTBC, had diverted SalonQuest products outside the
distribution channel that SalonQuest has designed and to which SalonQuest and its
customers had agreed by contract. To that end, SalonQuest filed its petition in the trial
court seeking pre-suit deposition of Rockafellow. See TEX. R. CIV. P. 202. Ultimately,
the trial court granted the relief SalonQuest requested and authorized (1) pre-suit
deposition of Rockafellow and (2) disclosure of documents related to MTBC’s
acquisition of SalonQuest’s hair care products, both tools in furtherance of SalonQuest’s
efforts to learn the identities of the companies or individuals from whom MTBC obtained
SalonQuest products for later resale to unauthorized retail outlets.
Rockafellow sought extraordinary relief from this Court by way of petition for writ
of mandamus, asking that this Court direct respondent to vacate the January 2011 order
authorizing pre-suit deposition of Rockafellow on the basis that the identities of
Rockafellow’s suppliers were protected by the trade secret privilege and that
2
SalonQuest had not made the requisite showing that the requested information was
necessary for a fair adjudication of its claims such that it would be entitled to compel the
disclosure of trade secret information. See In re Rockafellow, No. 07-11-00066-CV,
2011 Tex. App. LEXIS 5495 (Tex.App.—Amarillo July 29, 2011, orig. proceeding)
(mem. op.). We agreed and conditionally granted mandamus relief directing the
respondent to vacate the order authorizing pre-suit deposition of Rockafellow. See id.
at *12–14.
Months later, SalonQuest filed suit against Rockafellow, MTBC, and the Doe and
ABC defendants. It is this pending suit which gives rise to the instant petition for writ of
mandamus. After filing suit, SalonQuest once again sought to discover the identities of
individuals or entities from whom Rockafellow and MTBC obtained its supply of
SalonQuest products. Rockafellow and MTBC resisted SalonQuest’s discovery
requests, and SalonQuest filed a motion to compel. The trial court held a hearing on
the motion and, after considering the evidence presented and the parties’ trial briefing
on the issue, granted SalonQuest’s motion to compel by order signed August 12, 2012,
in which it ordered Rockafellow to disclose the requested information.
We are once again asked to determine whether Rockafellow has shown that the
requested information is privileged as trade secret and, if so, whether SalonQuest has
made a sufficient showing that it is nonetheless entitled to the information. See TEX. R.
EVID. 507; In re Union Pac. R.R., 294 S.W.3d 589, 591 (Tex. 2009) (orig. proceeding)
(per curiam). Based on our analysis of the evidence and application of the principles
relating to trade secret privilege, we will again conditionally grant mandamus relief.
3
Background: The Diversion and Anti-Diversion Industries
It is helpful to outline our elementary understanding of the diversion industry and
its offspring, the anti-diversion industry. Though SalonQuest has suggested that this
case involves Rockafellow’s immoral practice of interrupting the authorized or preferred
distribution channel by tempting distributors or salons to provide him the products, it
appears that the diversion industry is a highly developed, widely recognized, and multi-
million-, perhaps multi-billion-, dollar industry. In other words, this is big business. And
Rockafellow is not the only one involved in this business; he testified that there are ten
or eleven major competitors in the diversion industry nationwide.
Diversion, as a business, seems to have come about in the climate of certain
manufacturers’ development of salon-only retail distribution policies in which the
products would be sold to the consumer only through an authorized salon. When the
product began showing up for sale on shelves of drug stores and grocery stores,
however, it became clear that the product had been diverted outside the intended
channel of distribution somewhere along the way. As this diversion industry grew, so
did the anti-diversion industry in response, and a good amount of time and resources
were devoted to trying to eliminate, reduce, or identify diversion. Some manufacturers
and distributors have been more successful at this venture than others.
In a rather simplified model, as we understand it, diversion in the hair care
products industry involves three primary players: manufacturer, distributor, and
authorized retailer, typically a salon. From the authorized retailer, the product goes to
the consumer. A diverter, like Rockafellow, interrupts this authorized distribution chain
4
somewhere along the channel, usually, it seems, between distributor and retailer or
between retailer and consumer. The diverter then sells the product to an unauthorized
retail outlet from which the consumer can purchase the product. Unless the diverter has
found a supply through the manufacturer, the record before us suggests that the
diverter’s suppliers likely will be—or are somehow affiliated with—either authorized
distributors or authorized retailers. Rockafellow testified that, of his five to seven
suppliers of SalonQuest products, “some,” but not all, of them are salons.
We also learn from the record that several tools have been developed to deter,
eliminate, or identify diversion. In fact, it would appear that Patricia Urban, a private
investigator who owns an anti-diversion consulting company in Ohio and who testified
for SalonQuest at the hearing, has made a career of such efforts, having been involved
in the industry since 1989 and having worked with SalonQuest since its inception in the
late 1990s. Urban explained that there are contractual tools available to combat
diversion. One of those tools is a non-diversion agreement, typically made between a
distributor and an authorized retailer. In such agreements, the retailer agrees to certain
non-diversion measures such as audits, reporting requirements, and restrictions on
quantities to be sold. Typically, the manufacturer is named as a third-party beneficiary
to these agreements and, in the example in the record before us, is expressly granted
the right to enforce contractual provisions against the authorized retailer. From Urban’s
testimony, we understand that, in most instances, SalonQuest is a third-party
beneficiary to the non-diversion agreements between a distributor and an authorized
5
retailer of SalonQuest products. 1 Urban identifies these non-diversion agreements as
an “effective tool” in combating diversion.
We also learn of several available anti-diversion technologies developed in an
attempt to prevent diversion or to identify the route through which diversion is occurring.
Laser coding, UV coding, RFID tags, and other types of coding are used to track and
identify products along the distribution channel. While all parties seem to agree that
none of these higher technology tools is absolutely foolproof, there would appear to be
an understanding that they can serve to provide a deterrent effect or, at least, provide
the manufacturer or distributor with information regarding the sources of supply for the
diversion industry. 2 SalonQuest does not employ any of these coding or tracking
measures.
Analysis
Availability of Mandamus
Mandamus will issue only to correct a clear abuse of discretion or the violation of
a duty imposed by law when there is no other adequate remedy by law. Walker v.
Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding). Thus, evaluating whether
1
She did explain that in a small percentage of cases, SalonQuest would have a
non-diversion agreement directly with a salon. This was only done under certain
circumstances and was the atypical arrangement.
2
Rockafellow explained that the only guaranteed way to avoid diversion is for a
company to sell a product that no one wants. Under-the-label coding seems to be the
most effective anti-diversion measure that Rockafellow has encountered. He adds that
RFID tags have been used effectively, too. Beyond those two methods, Rockafellow
explained there are other measures but, as a diverter, he chose not to reveal those
measures so as to not offer even more assistance to SalonQuest in its anti-diversion
efforts.
6
mandamus relief should be granted requires that we determine whether there has been
a clear abuse of discretion by the trial court and, if so, whether an adequate appellate
remedy exists. See id.
In particular, a trial court abuses its discretion when it erroneously compels
production of trade secrets without a showing that the information is “material and
necessary.” See In re Bass, 113 S.W.3d 735, 738, 743 (Tex. 2003) (orig. proceeding);
see also Walker, 827 S.W.2d at 840 (concluding that “a clear failure by the trial court to
analyze or apply the law correctly will constitute an abuse of discretion, and may result
in appellate reversal by extraordinary writ”). Further, the Texas Supreme Court has
held that no adequate appellate remedy exists if a trial court orders a party to produce
privileged trade secrets absent a showing of necessity. In re Bass, 113 S.W.3d at 745
(citing In re Cont’l Gen. Tire, Inc., 979 S.W.2d 609, 615 (Tex. 1998) (orig. proceeding)).
We will first address whether respondent abused his discretion by ordering that
Rockafellow disclose the information at issue. That is, we must determine whether
Rockafellow made the requisite showing that trade secret privilege applies to the
information requested and then, if so, whether SalonQuest made an adequate showing
that the information was necessary to fairly adjudicate its claims despite
characterization of the information as trade secret.
Trade Secret Privilege Generally
The trade secret privilege is governed generally by Texas Rule of Evidence 507:
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
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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. In the trial court, the party resisting discovery on the basis of the
trade secret privilege must establish that the information is a trade secret. In re Cont’l
Gen. Tire, 979 S.W.2d at 613. The burden then shifts to the requesting party to
establish that the information is necessary for a fair adjudication of its claims. Id. If the
requesting party meets this burden, the trial court should ordinarily compel disclosure of
the information, subject to an appropriate protective order. Id. In 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. In other words, “[w]hen
trade secret privilege is asserted as the basis for resisting production, the trial court
must determine [1] whether the requested production constitutes a trade secret; [2] if so,
the court must require the party seeking production to show reasonable necessity for
the requested materials.” In re Union Pac. R.R., 294 S.W.3d at 591 (quoting In re Bass,
113 S.W.3d at 738).
Is the information sought trade secret?
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.” In re Bass, 113 S.W.3d at 739 (quoting
Computer Assocs. Int’l. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996)). 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
8
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., 294 S.W.3d at 592; In re Bass, 113 S.W.3d at 739.
Because trade secret materials may not always “fit neatly into each factor every time”
and because other factors may also be relevant depending on the circumstances of a
particular case, we will weigh the factors in the context to determine whether the
materials qualify as trade secret. In re Bass, 113 S.W.3d at 740.
In a situation factually similar to the instant case, our sister court weighed the
factors of the balancing test to determine whether similar requested information was
trade secret. See John Paul Mitchell Sys. v. Randalls Food Mkts., Inc., 17 S.W.3d 721,
726, 737–39 (Tex.App.—Austin 2000, pet. denied). Paul Mitchell involved the same
general context at issue here: diversion of hair care products outside the manufacturer’s
preferred closed distribution chain. Id. at 726. In that case, Jade Drug Company sold
Paul Mitchell products to Randalls grocery stores, which are non-salon locations and lie
outside the preferred chain of distribution. Id. As was and did Rockafellow, Jade was
called on to provide its list of suppliers and resisted on the basis of trade secret. Id.
Jade established by affidavit that there was restricted access to its supplier list, it took
time and money to develop the list, the list was valuable to the company, and the list
was not readily obtained or duplicated. Id. at 738. The Austin court concluded that
9
Jade established that the list was “carefully compiled and closely guarded” and met its
burden of showing that its supplier list was trade secret. Id.
Here, by the affidavit also before us in the previous mandamus proceeding,
Rockafellow explained that he has been in this business for twenty-five years and that it
was “through substantial effort and expertise” that he developed his “vast network of
industry contacts and sources.” He also stated that his contacts and suppliers are “not
readily known to the public, and to a large extent, not readily known in the industry
itself.” Rockafellow explained the confidential nature of his relationships with the
suppliers and how MTBC’s network of contacts and sources is the “most valuable part
of its business” without which MTBC could not compete. Rockafellow went on to
explain that only he communicates with MTBC’s suppliers and, apart from him, only the
office manager and the warehouse manager have access to information that would
enable them to determine the identities of MTBC’s suppliers. Both managers had been
advised of the importance of keeping such information confidential. Rockafellow’s
affidavit also described the ramifications of having to divulge suppliers’ identities which,
according to Rockafellow, would quickly culminate in MTBC going out of business.
In this proceeding, we also have a record of the hearing on the motion to compel.
We now review that testimony, in addition to Rockafellow’s affidavit, to determine
whether the evidence still and again supports the conclusion that the information
sought—here, the identities of MTBC’s suppliers of SalonQuest products—is a trade
secret. See In re Union Pac. R.R., 294 S.W.3d at 592; In re Bass, 113 S.W.3d at 739.
10
(1) the extent to which the information is known outside of his business
Though diversion is a widely known concept in the hair care product business,
Rockafellow testified that he has developed his own contact list over the course of
twenty-six years and keeps that information to himself. Rockafellow has competitors
and, although it appears that Rockafellow is a known diverter within the hair care
products industry, his supply contacts are kept secret. Rockafellow testified that there
are approximately ten or eleven major competitors in the diversion business nationwide.
Again, they are widely known as diverters but their suppliers, too, are kept secret; he
does not know the identities of his competitors’ suppliers.
(2) the extent to which it is known by employees and others involved in his business
Rockafellow testified that only he, his office manager, and his warehouse
manager have access to information regarding the identities of clients who supply hair
care products to MTBC. He explained that, in the course of carrying on business, there
will be other employees who may have partial information but not “the whole puzzle.”
That is, it appears that a few other people within the organization may have limited
information regarding suppliers, but only Rockafellow does the negotiating and dealing
with a supplier or a prospective supplier.
(3) the extent of the measures taken by him to guard the secrecy of the information
Rockafellow explained that only a limited supply of products will travel outside the
intended closed channel of distribution and be available for diversion. So, supply is
limited, and, according to Rockafellow’s calculations, there are eleven or twelve major
diversion businesses competing for that supply. Consequently, Rockafellow takes
11
measures to protect his limited supply of products: “Everything is kept pretty secret.” In
his ongoing efforts to keep most everything secret, names of companies, telephone
numbers, bills of lading, and such are all kept “close to our vest.” As Rockafellow
explains, diversion, by its nature, means not revealing your supply contacts.
Nothing leaves the MTBC office unless the law requires that it must, and all
pertinent information is kept under lock and key. Rockafellow described his electronic
security system which unlocks the doors at 8:00 a.m. and sounds an alert when anyone
enters the building. The main entrance is composed of glass, too, so as to facilitate
identification of all those coming and going. At 5:00 p.m., the security system locks the
doors, and a person wishing to gain entrance must knock and receive permission to
enter the building. He adds that this system protects the company’s information but
also provides added security for employees’ safety. Officer workers are kept to the
minimum necessary to carry on business, and those employees cannot make copies
without permission. Rockafellow includes the cost of this very litigation as another
expense and another measure in guarding the secrecy of his contacts.
(4) the value of the information to him and to his competitors
Rockafellow explained that people in the diversion industry know one another but
do not know from whom one another is buying supply. He does not know his
competitors’ suppliers. Supply is vital to his business and, therefore, the identities of
those who supply the products for diversion is, likewise, vital. He explained that, if his
competitors were to obtain the identity of his suppliers, the competitors could outbid him
for the supply. In that event, the outcome is “simple”: he would eventually have nothing
12
to sell and would go out of business. Though we cannot arrive at a dollar amount that
the information would be worth to a potential competitor, we do learn from the record
that MTBC generated $45 million in total sales for the year 2011, which would lend itself
to the conclusion that the information at issue could be very valuable indeed. 3
(5) the amount of effort or money expended by him in developing the information
We learn that Rockafellow has spent twenty-six years developing relationships
with suppliers. We do not know what resources he has spent in developing those
relationships, but he does point out that he has expended money in protecting it.
Rockafellow explains that MTBC’s growing success is due in large part to the fact that
he is “known as someone who doesn’t give up his sources.” Indeed, he cites litigation
costs in resisting disclosure as an expenditure in furtherance of protecting his client list.
(6) the ease or difficulty of properly acquiring or duplicating information
It is difficult to determine the ease with which others could acquire or duplicate
the information, given that much of the dealings seem to rest on the reputations and
prior dealings with the diverter. As Rockafellow explains, he has developed his
suppliers’ list over the course of a quarter of a century, and he attributes his longevity in
the business to his reputation for protecting the identities of his supply sources. 4
3
We note that the total sales figure does include non-SalonQuest products but
emphasize, nonetheless, that the information at issue is valuable to MTBC and would
likely prove valuable to its competitors.
4
In its response to Rockafellow’s petition, SalonQuest points to a number of what
it considers inconsistencies between Rockafellow’s affidavit and his testimony in
support of its assertion that Rockafellow’s claim of trade secret are of “dubious
credibility.” SalonQuest characterizes these inconsistencies as factual disputes which
13
Acknowledging SalonQuest’s point that Paul Mitchell stands in a different
procedural posture than does the instant case, we remain persuaded by our sister
court’s application of the relevant factors to a similarly situated party in a similar
business context. See Paul Mitchell, 17 S.W.3d at 738. With that, we still see no
compelling distinction between the examination of relevant facts by our sister court in
Paul Mitchell and still find its application of the balancing test in this context persuasive. 5
See id. In light of the relevant factors, we conclude that Rockafellow showed that
access to the information sought is strictly limited and is not readily accessible, the
information sought is highly valuable to MTBC, and the information sought is the
would defeat Rockfellow’s request for mandamus relief. Without addressing each of
SalonQuest’s examples, we note that we have evaluated the cited statements and
consider them more accurately characterized as elaboration or clarification in response
to specific questions on that particular subject.
5
Despite the primarily procedural distinctions between Paul Mitchell and the
instant case, we point out that the Austin court of appeals specifically addressed the
issue before us: “We now turn to the particular facts of this case to determine if the trial
court abused its discretion in refusing to compel discovery of Jade’s list of suppliers.”
Id. at 738. After analyzing the factors relevant to the application of the trade secret
privilege, the Paul Mitchell court ultimately concluded that “Jade met its burden of
establishing trade secret protection for its list of suppliers.” Id. SalonQuest maintains
that because no breach of contract claims against Jade’s suppliers were pending in that
case, the degree of necessity in Paul Mitchell was obviously distinguishable from the
case at bar. In other words, SalonQuest claims that it has a greater need for the
information than Paul Mitchell did in that case because SalonQuest, unlike Paul
Mitchell, has breach of contract claims pending in the underlying case. We
acknowledge this procedural distinction, but note, in response, that the fact that
SalonQuest does have pending breach of contract claims against as-yet unidentified
defendants has no bearing on the first step in our analysis. That is, the Austin court’s
well-developed analysis of the application of the trade secret privilege–which relates
solely to the resisting party’s burden–remains persuasive in our consideration of that
same first step in the analysis. Likewise, for purposes of analyzing this first step, we are
not at all persuaded by one of SalonQuest’s proposed factual distinctions, that one
being the fact that Paul Mitchell used UV coding and therefore could have discovered
the information by reviewing data gained from such coding. In fact, as we will discuss,
that distinction may very well come to weigh against SalonQuest in its efforts to make
an adequate showing of necessity.
14
product of a great deal of time and effort on Rockafellow’s part and is not easily
accessible or duplicated. See id.; see also In re Union Pac. R.R., 294 S.W.3d at 592.
We conclude that Rockafellow carried his burden of showing that the supplier list and
information related to the identities of MTBC’s suppliers are trade secret. In doing so,
he successfully shifted the burden to SalonQuest to establish that such information was
necessary for a fair adjudication of its claims.
Is the Information Necessary for or Essential to Fair Adjudication?
We now address the second prong of the test in which we must determine if
discovery of this trade secret material is “necessary for a fair adjudication” of
SalonQuest’s claims. See In re Cont’l Gen. Tire, 979 S.W.2d at 613. Necessity
depends on whether the trade secret’s production is “necessary or essential to the fair
adjudication of the case.” In re Union Pac. R.R., 294 S.W.3d at 592. The Texas
Supreme Court has acknowledged that it has not “state[d] conclusively what would or
would not be considered necessary for a fair adjudication, indicating instead that the
application of the test would depend on the circumstances presented.” Id. (quoting In re
Bridgestone/Firestone, Inc., 106 S.W.3d 730, 732 (Tex. 2003) (orig. proceeding)). We
are directed to consider “the nature of information and the context of the case.” Id.
With this in mind, we revisit the general principles from cases on this subject.
It is not an adequate showing of necessity when the requesting party makes
general assertions of unfairness. 6 In re Union Pac. R.R., 294 S.W.3d at 592–93; see In
6
So, SalonQuest’s assertions which highlight the “shady” nature of the diversion
industry are inadequate to satisfy its burden of showing that the requested information is
necessary to the fair adjudication of its claims.
15
re Bridgestone/Firestone, 106 S.W.3d at 734 (concluding that “[t]he mere possibility of
unfairness is not enough to warrant disclosure” of trade secret). Further, there are
cases which suggest that we must also consider the availability of other means of
acquiring the requested information. See In re Cont’l Gen. Tire, 979 S.W.2d at 615
(adopting rule, pre-dating Texas Rule of Evidence 507, from Automatic Drilling Machs.,
Inc. v. Miller, 515 S.W.2d 256, 259 (Tex. 1974) (orig. proceeding), which considers
availability from other sources in determining whether disclosure of trade secret is
warranted); In re XTO Res. I, LP, 248 S.W.3d 898, 904–05 (Tex.App.—Fort Worth
2008, orig. proceeding) (concluding that requesting party failed to adequately show
necessity when the record revealed that, among other shortcomings, documents
“containing at least some of the [requested] underlying data were available from other
sources”). The Texas Supreme Court explained this “guiding principle[]”:
[T]rade secret information is generally discoverable when not allowing
discovery would significantly impair a party’s ability to establish or rebut a
material element of a claim or defense. A party’s ability is significantly
impaired when the information is unavailable from any other source and
no adequate alternative means of proof exist.
In re Bridgestone/Firestone, 106 S.W.3d at 736 (O’Neill, J. concurring). Indeed, the
requesting party who bears the burden of showing necessity of trade secret information
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.” Id. at 733 (majority opinion). So, it would appear that
the burden which has shifted to SalonQuest is a fairly heavy one.
Keeping in mind that our evaluation of SalonQuest’s “necessity” burden depends
on the nature of the information and the context of the case, we now turn to the
16
evidence SalonQuest has presented in support of its position that the requested trade
secret information is “necessary or essential for a fair adjudication of [its] claims.” See
id. at 731. SalonQuest explains generally that it “needs the information both for the
breach of contract claims asserted against the Jane Doe defendants as well as the
tortious interference claim and civil conspiracy claims asserted against Rockafellow.”
But, again, the issue becomes whether SalonQuest has demonstrated “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.”
See id. at 733.
An assessment of this issue on these facts will call for an evaluation of what
SalonQuest has and has not done to otherwise discover the points at which diversion
has occurred along its distribution route. That is, we must look to determine whether
SalonQuest has established that not forcing Rockafellow to provide the identities of his
suppliers will pose a real threat—rather than a mere possibility—of an unjust result. Id.
And, here, when we cannot be confident from the record that SalonQuest is unable to
find out the requested information through any of a number of other available methods
for tracking or deterring diversion, we cannot conclude that SalonQuest has carried its
burden of showing such a threat.
The record reveals a number of available means of combating diversion, both
technological and contractual tools. The record also reveals that SalonQuest has not
fully employed many of those methods. With respect to high technology methods of
tracking and identifying diversion, SalonQuest considered, explored, but, ultimately,
rejected certain coding technology as too expensive. So, SalonQuest has, for business
17
reasons, opted not to employ technologically advanced methods of tracking its product
along the distribution channel. In defense of SalonQuest’s failure to use such methods
to detect deviations from the preferred distribution channel, its witness on anti-diversion
measures, Urban, testified to the following:
I can tell you in general terms that SalonQuest is a much smaller company
than most of these manufacturers that employ the high technology. We
know that it is an important tool. We continue to look at what we can do
cost effectively to enhance our ability. And frankly up until about two
years ago, and particularly with this HEB problem, we were doing a pretty
darn good job of controlling diversion using all of the other tools. It is
apparent that we need to continue to enhance because as much as we
have tried, we can’t. We have not been able to stem the source -- identify
and stop the source of this diverted product.
SalonQuest evidently undertook a cost-benefit analysis to arrive at its decision not to
use the advanced measures available for combating and identifying diversion. That
may, in fact, be a sound business decision, but that does not excuse SalonQuest in this
context from having to make a showing that it attempted to identify the suppliers from
within its own intended chain of distribution before it attempts to defeat Rockafellow’s
trade secret privilege. SalonQuest’s exercise of sound business judgment does not
mean that it can, then, simply resort to Rule 507 to gain access to the information from
Rockafellow when SalonQuest has, by its own admission, decided not to utilize other
available means of seeking out that information. SalonQuest cannot ask the courts to
use Rule 507 to eliminate or alleviate the risk of not using alternative—albeit more
expensive—means of obtaining the requested information.
SalonQuest has emphasized that these tracking and coding technologies are not
foolproof, and they may well be correct on that point, too. While it may be true that
these advanced tracking and coding methods would not yield the information which
18
SalonQuest seeks, the decision not to employ such means, again, is a business
decision, the risks of which should be borne by SalonQuest and not visited on
Rockafellow or the courts. Further, the possibility that, even with advanced means of
tracking, SalonQuest may not find what it seeks should not relieve them of the duty of
looking.
Moreover, it appears that, through agreements between its distributors and its
authorized retailers, SalonQuest retains some amount of power to compel audits of
retailer’s accounts. These agreements designate SalonQuest as a third-party
beneficiary and specifically grant SalonQuest the power to enforce the contract
provisions against the salon. So, it appears that SalonQuest could request audits either
in the cooperative spirit it maintains with its distributors or directly against the salons by
way of its rights as third-party beneficiary. The record suggests, however, that
SalonQuest has concentrated its efforts in reviewing data from one of its major
distributors and only with respect to one type of link on the distribution chain. Urban
explained the steps she took to identify MTBC’s suppliers:
I look at salon purchases. I look at distributor purchases. I interact with
the diversion control department at BSG corporate headquarters. I talk to
sales consultants. I talk to SalonQuest field reps. We have people out in
the field to go out and check salons to see product there. We utilize all of
the avenues that are available to us to try to determine where the leaks
are and to stop them wherever they may be occurring.
Urban added that she “work[ed] closely with the diversion control department” of one of
its large distributors in investigating instances of diversion. She explained that she
asked the distributor’s “diversion control person” to work with Urban and SalonQuest to
review salon accounts, and personally reviewed sales reports from the distributor for
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“potentially questionable purchasing patterns” by salons. From her testimony on the
measures employed to find out on its own the information requested, it appears that the
measures were limited largely to data from the distributor. Nothing in the record
suggests that SalonQuest exercised what seems to be its right to inspect authorized
salon’s sales data. In other words, it appears that SalonQuest has sought assistance
from one of its larger distributors and enlisted its assistance in routing out the diverting
salons, but there is no evidence to suggest that SalonQuest has utilized the full
spectrum of anti-diversion investigatory tools that are available through its contractual
rights as third-party beneficiary to the distributor-salon non-diversion agreements.
We remind the parties that we are directed to examine each case on its own
circumstances. See In re Union Pac. R.R., 294 S.W.3d at 592. We have considered
the nature of information at issue here and the context in which it was developed and is
sought. See In re Bridgestone/Firestone, 106 S.W.3d at 732. With that in mind and
understanding that the availability of the requested information through other sources is
not a dispositive consideration, we observe that availability is, likewise, not one which
we can overlook in this context considering the nature of the information at issue. Cf. In
re West Tex. Positron, Ltd., No. 07-04-00506-CV, 2005 Tex. App. LEXIS 496, at *13–15
(Tex.App.—Amarillo Jan. 20 2005, orig. proceeding) (mem. op.) (considering availability
of requested information in concluding that requesting party demonstrated requisite
need for information and denying mandamus relief). 7 In this context, the potential harm
7
Of course, availability from other sources is a consideration which can weigh in
favor of either party as illustrated by our opinion in West Texas Positron, in which we
observed that the requesting party had shown that the requested information was “not
ascertainable elsewhere” and “could be obtained from only two sources, those being the
partnership’s records . . . and the customers themselves, and the customers were
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of disclosure outweighs the degree of the requesting party’s need for the trade secret
information. See In re Cont’l Gen. Tire, 979 S.W.2d at 613.
Here, in light of evidence that SalonQuest could procure the information from
other sources or through alternative avenues which it has yet to adequately explore, we
conclude that it has failed to make an adequate showing that compelling disclosure of
trade secret information was necessary for a fair adjudication of its claims. See In re
Union Pac. R.R., 294 S.W.3d at 592.
Rule 507 and Fraud or Injustice
Rule 507 permits the application of the trade secret privilege “if allowance of the
privilege will not tend to conceal fraud or otherwise work injustice.” See TEX. R. EVID.
507. Both at the trial court and before this Court, SalonQuest has vigorously advanced
the position that diversion is “a shady business” and is not worthy of trade secret
protection. In doing so, it seems to be asking the Court to declare the diversion industry
in its entirety an injustice or fraud. 8 But the seemliness and fate of the diversion
business are issues which belong more appropriately to the industry and marketplace
forces. The courts are not in the business of deterring diversion, nor can we endorse
subject to confidentiality agreements in their contracts with the partnership.” See id. at
*15. On those facts, the requesting party had shown that the requested information was
“necessary to [her] ability to pursue judicial determination of the value of her partnership
interest.” Id. at *14.
8
In fact, it could be understood that the “fraud-or-injustice” portion of Rule 507
served as the thrust of SalonQuest’s contention. SalonQuest’s attorney remarked to the
trial court at the opening of the hearing that “the key question for this Court is the
second part of Rule 507, which says it should still be allowed if the allowance of the
privilege will not tend to conceal fraud or otherwise work injustice.”
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the practice of resorting to Rule 507 as an alternative marketplace tool for investigating
it when other investigatory means exist but have not been utilized.
Summary
In summary, Rockafellow met his burden of showing MTBC’s list of suppliers was
trade secret and, thereby, shifted the burden to SalonQuest to show that disclosure of
the information was necessary for a fair adjudication of its claims. SalonQuest failed to
make such a showing. It did show that disclosure through Rockafellow would likely be
more convenient and probably more accurate but, in this instance, it is not necessary for
a fair adjudication of SalonQuest’s claims that Rockafellow be required to disclose the
trade secret information. Therefore, the trial court abused its discretion when it
authorized the deposition of Rockafellow and compelled disclosure of trade secret
information without an adequate showing by SalonQuest that such information was
necessary for a fair adjudication of its claims. See In re Bass, 113 S.W.3d at 738, 743.
Conclusion
Having concluded that the information in question was trade secret and not
discoverable as privileged information pursuant to Rule 507 in the absence of an
adequate showing of necessity, which SalonQuest has failed to make, we conclude that
Rockafellow has shown he is entitled to mandamus relief as requested. Accordingly,
we conditionally grant the petition for writ of mandamus and direct the respondent to
vacate its order dated August 7, 2012, in which it ordered the disclosure of documents
concerning the identities of MTBC’s suppliers of SalonQuest products. Because we are
confident the respondent will comply with this directive, the writ will issue only if the
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respondent fails to do so. Our disposition of this case serves to lift the stay previously
imposed by the Court. See TEX. R. APP. P. 52.10(b).
Mackey K. Hancock
Justice
Quinn, C.J., dissenting.
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