Court Opinion

ID: 3113013
Source: CourtListenerOpinion
Date Created: 2015-10-16 07:12:53.842263+00
Date Added: 2024-06-11T11:52:36.458811
License: Public Domain

Opinion issued October 17, 2013

                                     In The

                              Court of Appeals
                                    For The

                         First District of Texas
                           ————————————
                             NO. 01-13-00611-CV
                           ———————————
             IN RE VALERO REFINING–TEXAS, LP, Relator

           Original Proceeding on Petition for Writ of Mandamus

                                 OPINION

      This is a mandamus proceeding arising from a pretrial discovery dispute.* In

the underlying proceeding, Valero Refining–Texas, LP contests the Galveston

Central Appraisal District’s appraisal of its Texas City refinery for purposes of

assessing ad valorem property taxes for 2012. See TEX. TAX CODE ANN. §§ 42.01,

*
      The underlying case is Valero Refining–Texas, LP v. Galveston Central
      Appraisal District, No. 12-CV-2040, in the 56th District Court of Galveston
      County, Texas, the Hon. Lonnie Cox, presiding.
42.21 (West Supp. 2012). Valero challenges a trial court order compelling it to

produce all “projected financial statements, including income statements, balance

sheets, and statements of cash flows related to the Property” and all “Documents

relating to the refinery yields, costs, and operating economics of the Property for

each year” from January 2011 to the present.          Valero contends, and GCAD

concedes, that the requested information constitutes trade secrets. GCAD contends

that its requested discovery is necessary to establish the value of Valero’s property.

      We conditionally grant mandamus relief.

                                      Analysis

      Generally, the scope of discovery is within the trial court’s discretion. In re

Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998) (orig. proceeding) (citing

Dillard Dep’t Stores, Inc. v. Hall, 909 S.W.2d 491, 492 (Tex. 1995) (orig.

proceeding)); In re BP Prods. N. Am. Inc., 263 S.W.3d 106, 111 (Tex. App.—

Houston [1st Dist.] 2006, orig. proceeding) (citing In re Colonial Pipeline, 968
S.W.2d at 941). Mandamus relief is available only to correct a “clear abuse of

discretion” when there is no adequate remedy by appeal. Walker v. Packer, 827
S.W.2d 833, 839–40 (Tex. 1992) (orig. proceeding).            The heavy burden of

establishing a clear abuse of discretion is on the party resisting discovery. In re

CSX Corp., 124 S.W.3d 149, 151 (Tex. 2003) (orig. proceeding) (citing Canadian

Helicopters Ltd. v. Wittig, 876 S.W.2d 304, 305 (Tex. 1994) (orig. proceeding)). A

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clear abuse of discretion occurs when a trial court “‘reaches a decision so arbitrary

and unreasonable as to amount to a clear and prejudicial error of law.’” Walker,
827 S.W.2d at 839 (quoting Johnson v. Fourth Court of Appeals, 700 S.W.2d 916,

917 (Tex. 1985) (orig. proceeding)). A trial court has no discretion in determining

what the law is or in applying the law to the particular facts. Id. at 840. A clear

failure by the trial court to analyze or apply the law correctly constitutes an abuse

of discretion. Id.

      Valero contends that the information requested is subject to the trade secret

privilege. Texas Rule of Evidence 507 provides:

      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. The trade secret privilege seeks to balance two competing

interests: a party’s intellectual property interest in the trade secret and the fair

adjudication of lawsuits. See In re Cont’l Gen. Tire, Inc., 979 S.W.2d 609, 612

(Tex. 1998) (orig. proceeding).

      A party resisting discovery by asserting the trade secret privilege has the

burden to establish that the information is a trade secret. Id. at 613. If, as here, the

requesting party concedes that the requested information is a trade secret, then the

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burden shifts to the requesting party to establish that the information is material

and necessary for a fair adjudication of the case. See id. at 615. Whether a trade

secret is necessary to the fair adjudication of a case depends on the nature of the

information and context of the case. In re Bridgestone/Firestone, Inc., 106 S.W.3d
730, 732 (Tex. 2003) (orig. proceeding).

      The party seeking to discover a trade secret must make a particularized

showing that the information is necessary to the proof of one or more material

elements of the claim and that it is reasonable to conclude that the information

sought is essential to a fair resolution of the lawsuit.               See In re

Bridgestone/Firestone, 106 S.W.3d at 731, 732; In re Cont’l Gen. Tire, 979
S.W.2d at 611, 613. “It may be theoretically possible for a party to prevail without

access to trade secret information and yet be unfair to put him to much weaker

proof without the information.” In re Bridgestone/Firestone, 106 S.W.3d at 732.

But the test cannot be satisfied merely by general assertions of unfairness. Id. Nor

is it enough to show that the information would be useful to the party’s expert;

rather, the party must show that it is necessary. See In re Cont’l Gen. Tire, 979
S.W.2d at 611. If an expert can form an accurate opinion on the relevant subject

without the trade secrets, then the information is useful rather than necessary. See

In re XTO Res. I, LP, 248 S.W.3d 898, 905 (Tex. App.—Fort Worth 2008, orig.

proceeding) (holding that party failed to show necessity when expert testified that

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trade secret information would be useful to prepare report with least amount of

uncertainty, but opinion could be formed without it). If an alternative means of

proof is available that would not significantly impair the presentation of the case’s

merits, then the information is not necessary. See In re Union Pac. R.R., 294
S.W.3d 589, 592–93 (Tex. 2009) (orig. proceeding); In re Cont’l Gen. Tire, 979
S.W.2d at 615. The court must weigh the degree of the requesting party’s need for

the information against the potential harm of disclosure to the resisting party. In re

Cont’l Gen. Tire, 979 S.W.2d at 613. If the requesting party establishes that the

documents are necessary, the trial court should ordinarily compel disclosure of the

information, subject to an appropriate protective order. Id.

      GCAD concedes that the requested information consists of trade secrets.

We therefore determine whether the trade secrets are necessary to a fair

adjudication of the case. See In re Union Pac. R.R., 294 S.W.3d at 592; In re

Cont’l Gen. Tire, 979 S.W.2d at 613. Taxable property is generally appraised at its

market value. See TEX. TAX CODE ANN. § 23.01(a) (West Supp. 2012). There are

three potential alternate methods of determining the market value of property: cost,

income, and market data comparison. See id. § 23.0101 (West 2008). GCAD

asserts that the requested records are necessary to complete an income-method

appraisal of the property. An expert for GCAD averred that the income method

applied because it is a valid and recognized method of determining the market

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value of refineries that buyers and sellers of refineries often use. GCAD also

produced an industry article about appraising refineries that analyzes the

application of each of the three appraisal methods to refineries. The article notes

the benefits and shortfalls of each method and concludes that because none of the

three are perfect, the most accurate appraisal would take into consideration all

three appraisal methods.

      Valero disputes the relevance of an income-based valuation in the context of

appraising its refinery.    But even assuming the relevance of the discovery

requested by GCAD, to overcome the trade-secret privilege the evidence must be

necessary and not merely relevant. See In re Bridgestone/Firestone, 106 S.W.3d at

732–33; In re Cont’l Gen. Tire, 979 S.W.2d at 611; In re XTO Res. I, 248 S.W.3d

at 905. GCAD must show that without the trade secrets, its ability to defend its

appraisal will be significantly impaired. See In re Union Pacific R.R., 294 S.W.3d

at 592; In re Bridgestone/Firestone, 106 S.W.3d at 733. GCAD’s expert did not

conclude that the cost or market-data-comparison methods are inappropriate or

inapplicable. Nor did he conclude that the income method is the most appropriate

valuation method or that it is essential to create an accurate appraisal. The industry

article produced by GCAD indicates that an ideal appraisal considers all three

appraisal methods, but it also indicates that, depending on the circumstances, each

of the three methods can produce a competent appraisal.             The information

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requested by GCAD is therefore useful in that it will facilitate an income-method

appraisal and perhaps reach an appraisal with more certainty.            See In re

Bridgestone/Firestone, 106 S.W.3d at 733; In re XTO Res. I, 248 S.W.3d at 905.

Yet, it is not necessary, because an accurate appraisal can be completed without it.

See In re Bridgestone/Firestone, 106 S.W.3d at 733; In re XTO Res. I, 248 S.W.3d

at 905. Moreover, the record before us does not establish that an income-based

valuation is not possible without the requested discovery.

      GCAD contends that Tax Code section 23.0101 requires it to appraise the

property by all three methods to determine the most appropriate method of

appraisal. Section 23.0101 provides that the appraiser shall “consider” the three

appraisal methods and “use the most appropriate method.” TEX. TAX CODE ANN.

§ 23.0101. This statute requires that the appraiser determine which of the three

appraisal methods is the most appropriate given the individual characteristics of the

property that affect the property’s market value and then apply that method. See

id. § 23.01(b) (providing that “each property shall be appraised based upon the

individual characteristics that affect the property’s market value”). It does not

require the appraiser to use all three appraisal methods, as confirmed by other

provisions of the Tax Code that only apply “if” certain methods are used. See id.

§ 23.011 (West 2008) (imposing requirements on appraiser “[i]f the chief appraiser

uses the cost method of appraisal”); id. § 23.012 (imposing requirements on

                                         7
appraiser “[i]f the income method of appraisal is the most appropriate method”);

id. § 23.013 (West Supp. 2012) (imposing requirements on appraiser “[i]f the chief

appraiser uses the market data comparison method of appraisal”). If the use of all

three methods were mandatory, these provisions would not be conditioned on the

use of one particular method.

      Accordingly, GCAD has failed to adequately demonstrate its need for the

requested information, because alternate methods of appraisal are available and it

has presented no evidence that those methods will not produce competent evidence

of the market value of the refinery. Valero asserts that releasing the confidential

financial information covered by the requests for production will allow competitors

to undercut its prices and give those competitors a significant competitive

advantage.   The Supreme Court of Texas has recognized that the release of

confidential financial information such as pricing and production costs can result in

significant harm. See In re Union Pac. R.R., 294 S.W.3d at 592–93.

      GCAD contends that an existing protective order in the case limiting

disclosure of confidential information to parties, experts who agree not to disclose

the information, and attorneys in the case eliminates any potential harm from the

disclosure of the trade secrets. However, a protective order limiting who can view

this type of confidential financial information does not ensure that release of the

information will not violate the trade secret privilege. See id. at 593. Moreover,

                                         8
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. See In re

Cont’l Gen. Tire, 979 S.W.2d at 613.

      Even assuming that the discovery of Valero’s trade secrets would be

necessary for GCAD to conduct an income method appraisal, two other valid

methods of appraisal are available. GCAD has not shown that these methods will

not provide a competent appraisal and evidence of the market value of the

property. Accordingly, GCAD has failed to meet its burden of establishing that the

information is material and necessary to its case. See id. Valero therefore should

not have been compelled to produce its trade secrets, and we need not address

Valero’s further contentions that the requests are overbroad or unduly burdensome.

                                      Conclusion

      We conditionally grant Valero’s petition for writ of mandamus. GCAD

concedes that its two requests for production seek information protected by the

trade secret privilege, and we conclude that GCAD has not satisfied its burden of

demonstrating a necessity for that evidence so as to overcome the privilege. The

writ will issue only if the trial court fails to comply with our directive.

                                                Michael Massengale
                                                Justice

Panel consists of Justices Keyes, Higley, and Massengale.
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