in Re: Gearbox Software LLC

ACCEPTED
05-15-01304-CV
05-15-01304-CV FIFTH COURT OF APPEALS
DALLAS, TEXAS
10/28/2015 4:04:10 PM
LISA MATZ
CLERK
No. _____________________
FILED IN
5th COURT OF APPEALS
DALLAS, TEXAS
In the Court of Appeals for the
10/28/2015 4:04:10 PM
Fifth District of Texas LISA MATZ
Clerk
At Dallas
In re Gearbox Software LLC,
Relator.
Petition for Writ of Mandamus
Michael E. Schonberg
State Bar No. 00784927
J. Michael Heinlen
State Bar No. 24032287
Richard B. Phillips, Jr.
State Bar No. 24032833
Thompson & Knight llp
1722 Routh Street, Suite 1500
Dallas, Texas 75201
Phone: (214) 969-1700
Counsel for Relator
Gearbox Software LLC
ORAL ARGUMENT REQUESTED
List of Parties and Counsel
Relator Counsel
Gearbox Software LLC Michael E. Schonberg
J. Michael Heinlen
Richard B. Phillips, Jr.
Thompson & Knight LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201
Respondent Counsel
Hon. Emily A. Miskel unknown
470th District Court
Collin County Courthouse
2100 Bloomdale Road,
Suite 20146
McKinney, Texas 75071
Real Parties in Interest Counsel
Meghan M. Martel Kathryn J. Murphy
Petitioner Clint Westhoff
Goranson Bain, PLLC
6900 N. Dallas Parkway, Suite 400
Plano, Texas 75024
Brian D. Martel Mike McCurley
Respondent Jimmy L. Verner, Jr.
Ashley McDowell
VernerBrumleyMcCurley
MuellerParker PC
4311 Oak Lawn Avenue, Suite 450
Dallas, Texas 75219
–i–
Table of Contents
Page
List of Parties and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Table of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Statement of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Statement Regarding Oral Argument . . . . . . . . . . . . . . . . . . . . viii
Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Mandamus Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Statement of Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary of the Arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A.  Legal Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.  Mandamus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.  Trade-Secret Privilege . . . . . . . . . . . . . . . . . . . . . . . . . 5
B.  Gearbox established (and the trial court
implicitly found) that the requested documents
contain trade secrets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
C.  The trial court abused its discretion by ordering
Gearbox to produce trade-secret documents that
are not necessary for a fair adjudication of the
case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
– ii –
Page
1.  The only economic interest Mr. Martel has that is
subject to division as community property is his
alleged right to receive future distributions from
Gearbox, which does not require access to—or
analysis of—any trade secrets. . . . . . . . . . . . . . . . . . . . . 10
2.  Mrs. Martel already possesses the information
necessary to determine the value of the future
interest at issue, and Gearbox’s trade secrets are
neither required nor proper. . . . . . . . . . . . . . . . . . . . . . 15
Conclusion and Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appendices and Record (separately bound and filed)
A — Motion to Compel – Gearbox Software, LLC . . . . . . . . . Tab A
B — Subpoena to Compel Production of Documents
and Tangible Things . . . . . . . . . . . . . . . . . . . . . . . . Tab B
C — Gearbox Software, L.L.C.’s Objections and
Responses to Subpoena to Compel Production of
Documents and Tangible Things . . . . . . . . . . . . . . . . . Tab C
D — Gearbox Software, L.L.C.’s Response to
Meghan M. Martel’s Motion to Compel and
Request for Protective Order . . . . . . . . . . . . . . . . . . Tab D
E — Affidavit of Stephen Bahl . . . . . . . . . . . . . . . . . . . . . Tab E
– iii –
F — Privilege Log . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tab F
G — Order in Putnam v. Gearbox Software, LLC,
Cause No. DC–11–06044, District Court of
Dallas County, 116th Judicial District (July 19,
2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tab G
H — Meghan Martel’s Brief in Support of Motions to
Compel (filed under seal) . . . . . . . . . . . . . . . . . . . . Tab H
I — Transcript of Hearing on Motion to Compel
(Sept. 28, 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . Tab I
J — Order on Motion to Compel . . . . . . . . . . . . . . . . . . . . Tab J
– iv –
Table of Authorities
Page
Cases
Gibson v. Gibson,
190 S.W.3d 821 (Tex. App.—Fort Worth 2006, no pet.) . . . . . . . . . 11
In re Bridgestone/Firestone, Inc.,
106 S.W.3d 730 (Tex. 2003) . . . . . . . . . . . . . . . . . . . . 6, 7, 10, 14
In re Cont’l Gen. Tire, Inc.,
979 S.W.2d 609 (Tex. 1998) . . . . . . . . . . . . . . . . . . . . . . 6, 7, 14
In re CSX Corp.,
124 S.W.3d 149 (Tex. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
In re Deere & Co.,
299 S.W.3d 819 (Tex. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
In re Graco Children’s Prods., Inc.,
210 S.W.3d 598 (Tex. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
In re Valero Ref.–Tex., LP,
415 S.W.3d 567 (Tex. App.—Houston [1st Dist.]
2013, no pet.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
In re Valero Refining–Tex., L.P.,
No. 01–14–149–CV, 2014 WL 4115917 (Tex. App—Houston
[1st Dist.] Aug. 21, 2014, orig. proceeding) (mem. op.) . . . . 14, 15, 17, 18
K Mart Corp. v. Sanderson,
937 S.W.2d 429 (Tex. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Lifshutz v. Lifshutz,
61 S.W.3d 511 (Tex. App.—San Antonio 2001, pet. denied) . . . . . . . 12
Marshall v. Marshall,
735 S.W.2d 587 (Tex. App.—Dallas 1987, writ ref’d n.r.e.) . . . . . . . 11
–v–
Page
Texaco, Inc. v. Sanderson,
898 S.W.2d 813 (Tex. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
York v. York,
678 S.W.2d 110 (Tex. App.—El Paso 1984, writ ref’d n.r.e.) . . . . . 12, 13
Statutes
Tex. Bus. Org. Code § 1.002(54) . . . . . . . . . . . . . . . . . . . . . . . . 11
Tex. Bus. Org. Code § 101.106 . . . . . . . . . . . . . . . . . . . . . . . 11, 16
Tex. Bus. Org. Code § 101.106(a-2) . . . . . . . . . . . . . . . . . . . . . . 13
Tex. Bus. Org. Code § 101.1115(a)(1) . . . . . . . . . . . . . . . . . . . . . 12
Tex. Bus. Org. Code § 152.101 . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tex. Bus. Org. Code § 152.406(a)(1) . . . . . . . . . . . . . . . . . . . . . . 13
Tex. Civ. Prac. & Rem. Code § 134A.002(6) . . . . . . . . . . . . . 5-6, 8, 9
Tex. Gov’t Code § 22.221(b) . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Rules
Tex. R. App. P. 52.7(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Tex. R. Evid. 507 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 4, 6, 9
– vi –
Statement of the Case
The underlying case is a divorce proceeding between two individuals in
the 470th Judicial District Court of Collin County, Texas, Cause No. 470–
52347–2015, styled In the Matter of the Marriage of Meghan M. Martel and
Brian D. Martel and in the interest of L.C.M, A.R.M., N.J.M., and K.D.M.,
Children. Relator Gearbox Software LLC is a Texas limited-liability company
that received from Petitioner Meghan Martel a subpoena to produce
documents. The Respondent is the Honorable Emily M. Miskel, presiding
judge of the 470th Judicial District Court. The trial court entered an order
compelling production of financial documents that include confidential
trade-secret information that is not necessary for a fair adjudication of the
underlying divorce case, in which Gearbox is not a party. Accordingly,
Gearbox seeks a writ of mandamus vacating the trial court’s order.
Statement of Jurisdiction
This Court has jurisdiction over this mandamus petition under section
22.221(b) of the Texas Government Code, which states that each court of
appeals may issue all writs of mandamus, agreeable to the principles of law
regulating those writs, against a judge of a district court in the court of
appeals’ district. Tex. Gov’t Code § 22.221(b).
– vii –
Statement Regarding Oral Argument
Gearbox suggests that the Court will benefit from the opportunity to
question counsel at oral argument about whether a trial court can compel a
non-party to produce trade-secret information that is not necessary for a fair
adjudication of any of the claims at issue in this case.
– viii –
Issue
In the underlying divorce proceeding, Mrs. Martel has asked for a share
of her husband’s alleged interest in Gearbox. No valuation of Gearbox is
necessary to adjudicate this claim. The trial court can grant Mrs. Martel’s
request by simply awarding her a percentage (within the range of 0% to 100%)
of whatever interest her husband may own, without forcing a third-party
Texas company to compile and produce its trade secrets. The issue is
whether the trial court abused its discretion by ordering non-party
Gearbox to compile and produce trade-secret information that is not
necessary for a fair adjudication of the case.
Mandamus Record
Per the usual procedure, Gearbox has compiled and submitted the
mandamus record that it believes is pertinent to this proceeding. See Tex. R.
App. P. 52.7(a). The mandamus record is separately filed as the appendix to
this petition. One item in the mandamus record was sealed by the trial court
and has been separately filed under seal in this Court.
– ix –
Statement of Facts
The following uncontested facts are relevant to this petition.
1. Gearbox is a closely held Texas limited-liability company
headquartered in Frisco, Texas. It is in the business of developing and
publishing interactive software (i.e., video games). (App. Tab D at 1.)
2. At the time of the hearing on the Motion to Compel in this matter,
Mr. Martel (the respondent in the underlying divorce proceeding) was a
member of Gearbox. (App. Tab A at 1.)
3. Mrs. Martel is the petitioner in the underlying divorce proceeding and
she alleges a right to some share of Mr. Martel’s alleged interest in Gearbox,
claiming it is community property. (App. Tab A at 3.)
4. It is uncontested that Mrs. Martel possesses more than 15 years’
worth of documents sufficient to calculate the amounts of Mr. Martel’s
prior distributions from Gearbox. (App. Tab H at 2.)
5. Gearbox is not a party to the underlying divorce proceeding. (App.
Tab A at 1.)
6. Although she already possesses documents sufficient to determine the
amounts of Mr. Martel’s prior distributions, Mrs. Martel served a subpoena
on Gearbox demanding the production of confidential financial information
Petition for Writ of Mandamus —Page 1
that Gearbox protects as trade secrets. Mrs. Martel contends this
information is necessary to determine the value of her community-property
interest in Mr. Martel’s alleged membership interest in Gearbox. (App. Tab
B.)
7. Gearbox timely served its response and objections to the subpoena.
(App. Tab C.) Gearbox did not produce any documents because, as stated in
its objections, the document requests: (a) seek production of trade-secret
information protected from discovery under Texas Rule of Evidence 507;
(b) are unduly burdensome; and (c) seek information that is neither relevant
to any issues in dispute nor reasonably calculated to lead to the discovery of
admissible evidence. (Id.)
8. In response, Mrs. Martel filed a motion to compel Gearbox to produce
the documents. (App. Tab A.)
9. Gearbox filed a thorough response to Mrs. Martel’s motion, which
included a privilege log and the affidavit of Stephen Bahl, Gearbox’s Chief
Financial Officer. (App. Tabs D, E, F.)
10. Bahl’s affidavit explains that Gearbox guards the documents at issue
as trade secrets and that it would be costly and burdensome for Gearbox to
comply with the requests. (App. Tab E.)
Petition for Writ of Mandamus —Page 2
11. The court held a hearing on Mrs. Martel’s motion to compel on
September 28. (App. Tab I.)
12. At the hearing, Mrs. Martel did not present any argument or evidence
opposing Gearbox’s argument that she is demanding the production of
trade-secret information. Rather, she offered evidence through David
Fuller, her own valuation analyst, who testified that he needed the
information “to complete an evaluation of the company and the Martels’
interest in the company.” (App. Tab I at 27.)
13. Based on a finding that “[t]he discovery of requested Gearbox
Software, LLC, financial and valuation information is necessary to the fair
adjudication of the case,” the trial court entered an order on October 27
compelling Gearbox “to produce all documents set forth in the Subpoena to
Compel Production of Documents” within seven days. (App. Tab J at 2, 3.)
Thus, Gearbox’s production is due on November 3, 2015.1
Summary of the Arguments
Mrs. Martel seeks to improperly entangle a Texas company in her
personal divorce proceeding. She does not dispute that she is seeking
1
Gearbox has also filed an Emergency Motion for Stay of Discovery
Deadline, asking this Court to stay the production deadline while the Court
considers this mandamus petition.
Petition for Writ of Mandamus —Page 3
corporate trade secrets from a third party with no stake in the divorce action.
She simply insists that the trade secrets are somehow necessary to determine
the future interest her husband may have had in prospective distributions
from his former company.
In opposition to the motion to compel, Gearbox presented
uncontroverted evidence that it carefully guards the requested documents as
trade secrets. Trade secrets are privileged from production under Texas
Rule of Evidence 507. If a party requesting trade-secret documents cannot
show the documents are in fact necessary for a fair adjudication of the case, it
is an abuse of discretion to compel their production. Mrs. Martel failed to
establish that the trade-secret documents she seeks are necessary for a fair
adjudication of her case. The trial court can fairly divide Mr. Martel’s
alleged interest either by partitioning some or all of that interest and its rights
to future proceeds to Mrs. Martel or by assessing its monetary value based
on the voluminous income information that Mrs. Martel already has in her
possession. Because neither of these methods requires access to—or
production of—Gearbox’s trade-secret financial documents, the trial court
abused its discretion by ordering their unnecessary production.
Petition for Writ of Mandamus —Page 4
Arguments
A. Legal Standards
1. Mandamus
Mandamus relief is available when the trial court abuses its discretion
and there is no adequate remedy by appeal. In re Deere & Co., 299 S.W.3d
819, 820 (Tex. 2009) (per curiam). The scope of discovery generally is
“within the trial court’s discretion, but the trial court must make an effort to
impose reasonable discovery limits.” Id. (quoting In re Graco Children’s
Prods., Inc., 210 S.W.3d 598, 600 (Tex. 2006) (per curiam)). A trial court
abuses its discretion if it orders discovery exceeding the scope permitted by
the rules. In re CSX Corp., 124 S.W.3d 149, 152 (Tex. 2003) (per curiam); K
Mart Corp. v. Sanderson, 937 S.W.2d 429, 431 (Tex. 1996) (per curiam);
Texaco, Inc. v. Sanderson, 898 S.W.2d 813, 815 (Tex. 1995) (per curiam).
2. Trade-Secret Privilege
Under the Texas Uniform Trade Secret Act, a trade secret is:
information, including a formula, pattern, compilation,
program, device, method, technique, process, financial
data, or list of actual or potential customers or suppliers,
that: (A) derives independent economic value, actual or
potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use;
and (B) is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy.
Petition for Writ of Mandamus —Page 5
Tex. Civ. Prac. & Rem. Code § 134A.002(6).
Texas law protects trade secrets from discovery by giving their owners a
privilege “to refuse to disclose and to prevent other persons from disclosing
[them].” Tex. R. Evid. 507. Once a trade secret is shown, the party
requesting its disclosure has a burden to prove that the information is
“necessary or essential to the fair adjudication of the case.” In re
Bridgestone/Firestone, Inc., 106 S.W.3d 730, 731–34 (Tex. 2003) (citing In re
Cont’l Gen. Tire, Inc., 979 S.W.2d 609, 610-13 (Tex. 1998)). This has been
described as a “heightened burden” that requires showing more than that
the information is relevant to the suit. In re Cont’l Gen. Tire, Inc., 979 S.W.2d
at 613–14. “[The] party seeking such information cannot merely assert
unfairness but must demonstrate with specificity exactly how the lack of
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 at 733.
Compelling disclosure of trade secrets without requiring the requesting
party to carry its burden undermines both the purpose of the Texas Uniform
Trade Secret Act and Texas companies’ abilities to do business. Therefore, a
trial court abuses its discretion if it orders disclosure of trade secrets when
Petition for Writ of Mandamus —Page 6
the requesting party has not carried its burden to show that the information
is necessary for a fair adjudication of its claim. In re Bridgestone/Firestone, 106
S.W.3d at 734; In re Cont’l Tire, 979 S.W.2d at 615.
B. Gearbox established (and the trial court implicitly found) that the
requested documents contain trade secrets.
As set forth in the affidavit from Gearbox’s CFO, Mrs. Martel seeks
confidential financial documents and records that Gearbox carefully guards
as trade secrets. (App. Tab E at 2). The subpoena demands production of a
litany of lettered items that contain Gearbox trade-secret information. By
way of example, some of the requests are: (a) board records and meeting
minutes; (b) all shareholder agreements; (d) financial statements from 2010
to the present; (e, f) all documents showing wages, salaries, benefits, or
payments to shareholders; (i) tax returns from 2010 to the present; (j) all
budgets and projected budgets; (l) sales records from 2010 to the present;
(o) records of expense payments from 2010 to the present; (p) an aging of
accounts receivable for the past year; (q) documents showing the value of
fixed assets; (r) documents showing estimated capital expenditures and
depreciation; (s) “significant contracts” with anyone; (t) documents
showing intangible assets; (u) documents related to patent and trademark
applications; (v) all leases to which Gearbox is a party; (w) all notes payable
Petition for Writ of Mandamus —Page 7
and security agreements; (y) documents related to pension plans;
(z) documents related to pending or threatened litigation; and (aa)
documents related to contingent liabilities. (App. Tab B at 3–5; App. Tab E
at 2.) These are precisely the types of documents that the Texas Uniform
Trade Secret Act protects. See Tex. Civ. Prac. & Rem. Code § 134A.002(6)
(defining “trade secret” to include, among other things, “financial data”).
The Bahl affidavit also enumerates the numerous safeguards that
Gearbox has set in place to ensure that this information is maintained in
secrecy. (App. Tab E at 2–3.) For instance, the documents at issue are all
preserved in password-protected computers. Gearbox’s offices are protected
by security features including security keys and video cameras. Visitors are
required to sign confidentiality agreements before they are allowed access to
Gearbox offices or work areas. Gearbox educates each of its employees on
the importance of secrecy and discretion in connection with its business
information. Gearbox limits access to its confidential information to those
who absolutely have a need to see it, and it requires such people to enter into
confidentiality agreements before allowing them access to the information.
None of these points was disputed or refuted by Mrs. Martel.
Petition for Writ of Mandamus —Page 8
Subjecting this confidential corporate information to disclosure would
undermine Gearbox’s ability to do business. (App. Tab E at 3.) The release
of Gearbox’s confidential financial information would substantially
jeopardize Gearbox’s competitive position in the marketplace by educating
its competitors. Its leverage position in dealings with potential competitors,
vendors, publishers, bankers—and, frankly, any other third parties in the
competitive gaming industry—would be automatically and irreversibly
injured. In short, the Gearbox documents at issue contain “financial data”
that is the “subject of efforts that are reasonable under the circumstances to
maintain its secrecy” and that “derives…economic value…from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from [their] disclosure or
use.” Tex. Civ. Prac. & Rem. Code § 134A.002(6) (defining “trade secret”).
Mrs. Martel did not dispute Gearbox’s arguments or evidence regarding
the trade-secret status of the requested documents in the trial court.
Accordingly, the uncontroverted evidence established that they are
protected from disclosure by Evidence Rule 507. Moreover, by ordering
production after finding (erroneously, as discussed below) that the
documents are necessary to a fair adjudication of the divorce case, the trial
Petition for Writ of Mandamus —Page 9
court implicitly found that the documents contain trade secrets. See In re
Bridgestone/Firestone, 106 S.W.3d at 732-34 (holding that trade secrets are
subject to discovery only if they are necessary or essential to a fair
adjudication of the case).
C. The trial court abused its discretion by ordering Gearbox to produce
trade-secret documents that are not necessary for a fair adjudication
of the case.
The trial court ordered Gearbox to produce its trade-secret documents
based upon a mistaken—and wholly unsupported—argument that the
financial information they contain is necessary for a fair adjudication of the
divorce case. As explained below, this unfounded conclusion was an abuse of
discretion.
1. The only economic interest Mr. Martel has that is subject to
division as community property is his alleged right to receive
future distributions from Gearbox, which does not require access
to—or analysis of—any trade secrets.
Mrs. Martel’s right to a share of Mr. Martel’s alleged interest in
Gearbox is exceedingly limited. The law on this point is clear. If Mrs. Martel
is entitled to anything, she is entitled only to a partitioned share of Mr.
Martel’s “membership interest” in Gearbox so long at the membership
interest exists. And by statutory definition, Mr. Martel’s membership
interest would have included his “share of profits and losses or similar items
Petition for Writ of Mandamus —Page 10
and the right to receive distributions.” Tex. Bus. Org. Code § 1.002(54). It
does not include a right to participate in management. Id. Nor does it give
him an ownership interest in Gearbox’s assets. See id. at § 101.106 (“A
member of a limited liability company or an assignee of a membership
interest in a limited liability company does not have an interest in any specific
property of the company.” (emphasis added).)
Simply stated, Mrs. Martel has no possible legal interest in Gearbox’s
corporate property. Her only interest, if any, would have been limited in the
same way that Texas law limited her husband’s interest: a narrow interest in
the company’s future distributions of profits or surpluses, if any. See
Marshall v. Marshall, 735 S.W.2d 587, 594 (Tex. App.—Dallas 1987, writ
ref’d n.r.e.) (holding, based on analogous partnership law,2 that “[a]
partner’s partnership interest, the right to receive his share of the profits and
surpluses from the business, is the only property right a partner has that is
subject to a community or separate property characterization”).3 Thus, if the
2
See Tex. Bus. Org. Code § 152.101 (“Partnership property is not property of
the partners. A partner or a partner’s spouse does not have an interest in
partnership property.”).
3
See also Gibson v. Gibson, 190 S.W.3d 821, 823 (Tex. App.—Fort Worth
2006, no pet.) (“A trial court may not award specific partnership assets to a
nonpartner spouse. Only a partner’s partnership interest—the right to receive
a share of the profits and surpluses from the partnership—is subject to
Petition for Writ of Mandamus —Page 11
trial court believes that Mrs. Martel has a cognizable interest in something
Mr. Martel possessed, the court can award her some percentage of whatever
he possessed. No trade secrets are required from Gearbox in order to bestow
this outcome upon Mrs. Martel.
Indeed, Texas law provides a simple, fair, and expedient way for courts
to divide a member’s share of his or her business interest on divorce. The
Texas Business Organizations Code states: “[O]n the divorce of a member,
the member’s spouse, to the extent of the spouse’s membership interest, if
any, is an assignee of the membership interest.” Tex. Bus. Org. Code
§ 101.1115(a)(1) (emphasis added). Thus, if a court determines that a
spouse—like Mrs. Martel—is entitled to a share of a business interest as part
of the division of community property in a divorce, the court may award the
spouse an interest in future “profits and surpluses” (i.e., distributions), if
any.
The El Paso Court of Appeals applied this rule in York v. York, 678
S.W.2d 110, 112–13 (Tex. App.—El Paso 1984, writ ref’d n.r.e.). In that case,
division in a divorce proceeding.”) (emphasis added); Lifshutz v. Lifshutz, 61
S.W.3d 511, 518 (Tex. App.—San Antonio 2001, pet. denied) (“[A] trial court may
not award specific partnership assets to the non-partner spouse in the event of a
divorce. The trial court may only award the spouse an interest in the
partnership.”) (internal citations and quotations omitted).
Petition for Writ of Mandamus —Page 12
the divorcing husband owned a one-third interest in the partnership at issue.4
Without assessing the value of the husband’s partnership interest, the court
held that the wife obtained a one-sixth interest in the partnership, which
entitled her to one-half of whatever future distributions the husband would
receive from the partnership going forward. Id.
Like the court in York, the trial court here should simply enter an order
partitioning Mr. Martel’s membership interest and assigning Mrs. Martel a
percentage interest in whatever distributions her (former) husband receives
from Gearbox. Such an order would provide Mrs. Martel with a share in the
only interest that is subject to a community-property division.5
Dividing Mr. Martel’s alleged partnership interest in this way is
compatible with governing Texas law on both divorces and trade secrets: It
does not require the trial court to determine the uncertain monetary value of
4
Again, the law governing partnerships is analogous to the law governing
limited-liability companies on this issue. See Tex. Bus. Org. Code § 152.406(a)(1)
(“[O]n the divorce of a partner, the partner’s spouse, to the extent of the spouse’s
partnership interest, if any, is a transferee of the partnership interest.”).
5
It would not, however, give Mrs. Martel the right to participate in the
management or conduct of Gearbox’s business. See Tex. Bus. Org. Code §
101.106(a-2) (“A member’s right to participate in the management and conduct of
the business of the limited liability company is not community property.”)
Petition for Writ of Mandamus —Page 13
a future interest, and it respects the fact that a Texas company’s trade-secret
financial documents have no place in a marital squabble.6
Because the trial court can allocate the interest Mrs. Martel wishes to
divide without “valuing” it, Gearbox’s trade-secret financial records are not
“necessary or essential to the fair adjudication of the case.” In re
Bridgestone/Firestone, 106 S.W.3d at 732. Mrs. Martel therefore failed to
meet her heightened burden of showing that the records are more than
simply “relevant” to the suit. In re Cont’l Gen. Tire, 979 S.W.2d at 613–14.
Thus, the trial court abused its discretion by ordering Gearbox to produce
what wasn’t necessary. See In re Valero Refining–Tex., L.P., No. 01–14–
00149–CV, 2014 WL 4115917, at *7–8 (Tex. App—Houston [1st Dist.] Aug.
21, 2014, orig. proceeding) (mem. op.) (holding trial court abused its
discretion in ordering production of trade-secret documents that were not
necessary for a fair adjudication of the case).
6
Recall that the only reason Mrs. Martel wants the records is that her expert, David
Fuller, allegedly needs them to prepare an improper valuation opinion of the Gearbox
“assets.” Neither of the Martels has a cognizable interest in the company’s “assets.”
Only the corporation does, and those assets remain protected from trespass by individual
divorcees.
Petition for Writ of Mandamus —Page 14
2. Mrs. Martel already possesses the information necessary to
determine the value of the future interest at issue, and Gearbox’s
trade secrets are neither required nor proper.
Even if Mrs. Martel were required to present evidence of the monetary
value of Mr. Martel’s membership interest (and she is not), she has all of the
information necessary to claim her share of every interest she wishes to
litigate with her former husband, and she does not need Gearbox’s trade
secrets. Mrs. Martel has prefect clarity into every penny that her husband
ever received as a result of his interest in Gearbox distributions. Since Mr.
Martel’s alleged divisible interest in Gearbox is limited to his right to receive
distributions from the company, the information regarding past distributions
can be used to determine the fair-market value of any membership interest.
Indeed, Mrs. Martel’s own expert testified that historic income can be used
to determine value. (App. Tab I at 29); see also, e.g., In re Valero Ref.–Tex.,
2014 WL 4115917, at *8 (recognizing income approach as a valid method for
determining the fair-market value of property). It bears repeating that no
Gearbox trade secrets are needed to make this determination.
For two reasons, Mrs. Martel’s expert was incorrect when he testified
that he would need more than the records of Gearbox’s past distributions to
determine the value of Mr. Martel’s alleged interest. First, he led with the
Petition for Writ of Mandamus —Page 15
incorrect premise that he must offer an opinion about the overarching value
of Gearbox in order for a judge to allocate an individual’s interest in Gearbox.
(See App. Tab I at 27 (Fuller testifying that he needed Gearbox’s financial
records “to complete an evaluation of the company and the Martels’
interest in the company”) (emphasis added).) Gearbox’s value as a Texas
company in the global marketplace is not relevant to the narrow question of
the percentage of her husband’s future interest that Mrs. Martel should get,
if any.
The only thing that’s arguably relevant is the value of Mr. Martel’s
alleged interest in Gearbox, which is not the same as Gearbox’s value. See
Tex. Bus. Org. Code § 101.106 (“A member of a limited liability company or
an assignee of a membership interest in a limited liability company does not
have an interest in any specific property of the company.”)
Second, Fuller wrongly assumes that he needs more data to render an
opinion than the law requires. As he noted, at least three methods can be
used to assess value: an income approach, a market approach, and an asset
approach. Valuations based on these methods are based on different sets of
data. A valuation using the market approach, for example, is based upon
comparisons of the business at issue with comparable companies. (App. Tab
Petition for Writ of Mandamus —Page 16
I at 29–30.) The asset approach requires analysis of the company’s balance
sheets. (App. Tab I at 30.) And the income approach is based on the
company’s earnings. (App. Tab I at 29.) Fuller’s mistake is in assuming that
he cannot render a valuation opinion without considering data relevant to
each of those approaches. (See App. Tab I at 28–30, 39–42.)
In re Valero Refining–Texas, 2014 WL 4115917, is instructive in this
regard. In that case, the Harris County Appraisal District (HCAD) requested
discovery of financial data related to Valero’s refinery business, including
financial statements and operating business information. Id. at *1. Valero
objected that the discovery requests sought information protected by the
trade-secret privilege in Evidence Rule 507. HCAD moved to compel
production, arguing—like Mrs. Martel argues here—that its expert needed
information relevant to all three valuation methods to render an accurate
appraisal of the property at issue. Id. at 7–8. The trial court agreed and
compelled production.
On mandamus review, the First Court of Appeals recognized that an
ideal appraisal would consider all three appraisal methods, but held that an
ideal appraisal was “not necessary because HCAD [could] complete an
accurate appraisal without it.” Id. at *8 (emphasis in original). And because
Petition for Writ of Mandamus —Page 17
an “ideal” appraisal was not necessary, the court further held that HCAD
“failed to meet its burden of demonstrating that the trade-secret information
[at issue was] necessary and not merely relevant.” Id. Thus, the trial court
abused its discretion, and the court of appeals directed it to vacate the order
compelling production of the trade-secret documents. Id. at *9.
Here, Fuller is not required to present an appraisal of Gearbox at all
because the Court could apportion the interest Mr. Martel still has, if any.
Even if an appraisal were needed, as in In re Valero Texas–Refining, an
“ideal” appraisal is unnecessary because an accurate appraisal will be
sufficient. And Fuller can present an accurate appraisal of Mr. Martel’s
alleged membership interest in Gearbox using an income approach based
upon Gearbox’s past distributions to Mr. Martel, which is information that
Mrs. Martel already possesses. This is entirely consistent with Fuller’s
testimony that a partnership’s distributions are evidence of income.
And while he stated that he would need more information regarding
Gearbox’s “overall earnings” to determine Gearbox’s value, Gearbox’s value
is not relevant or necessary to divide the community property estate. The
historical distributions made to Mr. Martel offer sufficient evidence to assess
Petition for Writ of Mandamus —Page 18
the value of Mr. Martel’s alleged remaining interest in Gearbox—his alleged
right to receive future distributions, which is the only relevant value at issue.
Finally, the trial court’s protective order is not capable of curing this
error. (See App. Tab J at 5-6.) As the First Court of Appeals held in another
case involving Valero, a protective order limiting who can view confidential
financial information “does not ensure that release of the information will
not violate the trade secret privilege.” In re Valero Ref.–Tex., LP, 415 S.W.3d
567, 572 (Tex. App.—Houston [1st Dist.] 2013, no pet.). “Moreover, the
ability of a protective order to limit harm from the disclosure of trade secrets
is only a factor if the trade secrets are necessary and must be disclosed.” Id.
In sum, the trial court can readily award Mrs. Martel a percentage share
of Mr. Martel’s alleged interest by either: (1) awarding her a percentage of
her husband’s alleged interest in future distributions; or (2) assessing Mr.
Martel’s interest based upon past distributions made to him, the details of
which Mrs. Martel already possesses. Neither of these methods requires
production or evaluation of Gearbox’s trade-secret financial documents.
Because Gearbox’s trade secrets are not necessary for a fair adjudication of
the allocation at issue, the trial court abused its discretion by compelling
Gearbox to produce them.
Petition for Writ of Mandamus —Page 19
Conclusion and Prayer
The trial court abused its discretion by compelling Gearbox to produce
its trade-secret documents that are not necessary for a fair adjudication of
the case. The order undermines the protections afforded by Texas law to
Texas companies’ trade secrets. Gearbox respectfully requests that the
Court correct this ruling by issuing a writ of mandamus compelling the trial
judge to vacate that order. Gearbox further requests general relief.
Respectfully submitted,
By: /s/Michael S. Schonberg
Michael E. Schonberg
State Bar No. 00784927
J. Michael Heinlen
State Bar No. 24032287
Richard B. Phillips, Jr.
State Bar No. 24032833
THOMPSON & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201
Phone: (214) 969-1700
Fax: (214) 969-1751
michael.schonberg@tklaw.com
michael.heinlen@tklaw.com
Counsel for Relator
Gearbox Software LLC
Petition for Writ of Mandamus —Page 20
Verification
STATE OF TEXAS §
§
COUNTY OF DALLAS §
Before me, the undersigned authority, on this date personally
appeared Michael E. Schonberg, who was duly sworn, and stated that:
( 1) he is one of the lawyers for Relator Gearbox Software LLC; and
(2) after reviewing the petition for writ of mandamus, he believes
every factual statement in the petition is supported by competent
evidence included in the appendix and record.
``g
~Michael ----
Subscribed and Sworn to Before Me on the~ E?th Day of October,
2015.
Notary Public,
l\
L- o cl e €__M :f. ``e ph <2J))<50'lr
Printed Name of Notary
My Commission expires:
Louellen Jean Stephenson
Nota Public
State of Texas
My Comm. Exp. 01-04-2016
-20-
Certificate of Compliance
This petition was prepared using Microsoft Word 2010 in Equity font.
The font size in the text is 14-point. The font size in the footnotes is 13-point.
This brief contains 4,194 words, not counting the sections excluded by Tex.
R. App. P. 9.4(i)(1).
/s/ Richard B. Phillips, Jr.
Richard B. Phillips, Jr.
Certificate of Service
On October 28, 2015, a copy of this Petition for Writ of Mandamus
was served on counsel for the Real Parties in Interest by electronic service. A
copy was sent by Federal Express to the respondent judge.
__/s/ Richard B. Phillips, Jr.
Richard B. Phillips, Jr.
Petition for Writ of Mandamus —Page 22