Does South Carolina Recognize an Evidentiary Privilege for Trade Secrets?

by Nexsen Pruet, PLLC
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The Fourth Circuit recently certified this question to the South Carolina Supreme Court in Theodore G. Hartsock, Jr., as Personal Representative of the Estate of Sarah Mills Hartsock v. Goodyear Dunlop Tires North America, Ltd., et al 2018 WL 1938540 (April 25, 2018).

Answer

South Carolina recognizes a qualified privilege for trade secrets.

Procedural History

Ms. Hartsock was killed when the vehicle in which she was riding was struck head on by another vehicle that crossed the median on I-26 after a blowout of an allegedly defective tire designed, manufactured and marketed by Defendants.

This survival and wrongful death action was filed alleging negligence, strict liability and breach of warranty pursuant to SC law. The district court recognized subject matter jurisdiction pursuant to diversity.

During discovery, the parties had a dispute over certain material related to the design and chemical composition of the allegedly defective tire. Defendants objected to producing materials it asserted constituted trade secrets. The district court, applying federal discovery standards, found the subject material constituted trade secrets.  As a result, the court ordered Defendants to produce the material pursuant to a confidentiality order.  Plaintiff did not contest the finding that the material constituted trade secrets, however, Defendants disputed the application of federal discovery standards in reaching that conclusion and argued SC trade secret law applied. Defendants’ motion for reconsideration, based on the position that SC law controlled, was denied. The district court certified its order for interlocutory review, and stayed the underlying action. The Fourth Circuit accepted the appeal and thereafter certified this question to the SC Supreme Court.

Analysis

The Supreme Court reached the conclusion that SC recognizes a qualified privilege for trade secrets through an analysis of how our state recognizes privileges and evaluation of the South Carolina Trade Secrets Act. (“Trade Secrets Act”).

Generally, the commonality of privileges is that public policy favors the confidentiality of the information. In SC, it is matter not intended to be introduced into evidence or about which testimony will be offered.

Rule 501, SCRE, is SC’s only evidentiary rule relative to privileges and it broadly provides that privilege will be governed by common law as interpreted by the court; unlike other jurisdictions, SC does not delineate specific privileges through rules of evidence, but through statutory, constitutional or common law.

Here, the pivotal issue was what protection is afforded trade secrets during litigation.  Without using the word “privilege,” the General Assembly, in the Trade Secrets Act, demonstrated its intent to create a qualified privilege for trade secrets by providing that the holder of a trade secret may refuse to disclose it and by likewise providing the necessary factors to overcome such a refusal. Specifically, a “substantial need” for the trade secret must be established by the party seeking discovery before the holder of a trade secret is compelled to disclose it. The requisite factors set forth in S.C.Code Ann. §39-8-60(B), include:

(1) the factual allegations of the initial pleading have been made with particularity;

(2) the information sought is directly relevant to the allegations plead with particularity;

(3) the party seeking discovery will be substantially prejudiced if the information is not provided; and

(4) there is a good faith belief that the testimony or evidence derived from the trade secret information will be admissible at trial.

These factors, coupled with Rule 26(c) (7), SCRCP, require a higher standard than the “relevant and necessary” inquiry; the information sought must be relevant not only to the general subject matter of the litigation but relevant specifically to the issues involved in the litigation. The party seeking the information must demonstrate, with specificity, how the withholding of the information will impair its case to the point that an unjust result is a real and not merely a possible threat. A mere assertion of unfairness is insufficient to overcome the qualified privilege.

Here, the court recognized the delicate balance between the law’s overarching search for the truth and the overshadowing value of the confidentiality of a trade secret.  Our General Assembly chose to strike that balance through the heightened “substantial need” test. If substantial need is established such that the balance tips in favor of the party seeking the information, the qualified privilege is overcome and the holder of the trade secret will be required to disclose it. The holder is not completely vulnerable, however, as the disclosure will be pursuant to an appropriate order providing protection of the trade secret through discovery as well as trial.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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