Court Opinion

ID: 2854324
Source: CourtListenerOpinion
Date Created: 2015-09-04 17:17:56.993778+00
Date Added: 2024-06-11T12:46:04.004482
License: Public Domain

COURT OF APPEALS
                         SECOND DISTRICT OF TEXAS
                              FORT WORTH

                              NO. 2-07-382-CV

IN RE XTO RESOURCES I, LP,                                            RELATOR
AS SUCCESSOR TO ANTERO
RESOURCES CORPORATION AND
XTO RESOURCES I GP, LLC

                                   ------------

                           ORIGINAL PROCEEDING

                                   ------------

                                  OPINION

                                   ------------

      Relator XTO Resources I, LP (“XTO”) seeks mandamus relief from a trial

court order compelling XTO to furnish to Real Parties in Interest (collectively,

“Threshold”) data consisting of subsurface gas reserves related to certain gas

leases in Wise County, including reserve estimates and future revenue

projections. We hold that XTO established that the data are trade secrets and

that Threshold failed to show that disclosure of the information is necessary to

prevent fraud or injustice, and we conditionally grant the writ of mandamus.
                                  Background

      Threshold sued XTO, alleging that XTO breached contracts with

Threshold by failing to reassign acreage that was not developed in accordance

with the continuous-development obligations contained in certain gas leases.

Threshold alleges that XTO’s failure to reassign the acreage caused it significant

damages because the acreage is no longer available for reassignment.

      Threshold served requests for production on XTO, seeking, among other

things, documents stating XTO’s reserve estimates, recoverable gas reserve

estimates, and projected future revenues for all wells covered by the leases and

identifying “proved undeveloped acreage” and “proved developed not producing

acreage” on the leases.     XTO objected to the requests, asserting that the

information “is confidential and proprietary and closely guarded by XTO” and

that Threshold could calculate its alleged damages from publicly-available

production data.

      Threshold filed a motion to compel, arguing that the requested

information would “assist” their expert and that XTO’s confidentiality concerns

could be addressed by a confidentiality agreement.        XTO filed a response,

asserting that the requested data are trade secrets.

      The trial court held a hearing on Threshold’s motion to compel.

Threshold’s expert witness testified at the hearing, and XTO submitted the

affidavits of two employees. We will discuss the testimony and affidavits in

                                        2
detail later in this opinion. At the conclusion of the hearing, the trial court

granted the motion to compel and signed an order overruling XTO’s objections

to five of six requests for production and ordering production of the subject

data within fourteen days. XTO petitioned this court for mandamus relief from

the order.

                              Standard of Review

      Mandamus will issue to correct a discovery order if the order constitutes

a clear abuse of discretion and there is no adequate remedy by appeal. In re

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

Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding). A trial

court abuses its discretion and no adequate remedy by appeal exists when a

trial court erroneously compels production of trade secrets without a showing

that the information is “necessary.” In re Bass, 113 S.W.3d 735, 738, 745

(Tex. 2003) (orig. proceeding).

                                  Discussion

      Under rule of evidence 507, trade secrets are privileged from disclosure

if the allowance of the privilege will not tend to conceal fraud or otherwise

work injustice. T EX. R. E VID. 507. The party asserting a trade secret privilege

has the burden of proving that the discovery information sought qualifies as a

trade secret. In re Bass, 113 S.W.3d at 737; In re Cont’l Gen. Tire, Inc., 979
S.W.2d 609, 612–3 (Tex. 1998); see also In re CI Host, Inc., 92 S.W.3d 514,

                                       3
516 (Tex. 2002). The burden then shifts to the party seeking the trade secret

disclosure to establish that the information is necessary for a fair adjudication

of a claim or defense in the litigation. In re Cont’l Gen. Tire, Inc., 979 at

612–13.

1.    Are the data trade secrets?

      To determine whether information is a trade secret, Texas courts apply

a six-factor test adopted from the Restatement of Torts.       In re Bass, 113
S.W.3d at 739.     The Restatement factors are (1) the extent to which the

information is known outside of his 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.   Id. (quoting R ESTATEMENT OF T ORTS § 757 cmt. B (1939) and

R ESTATEMENT (T HIRD) OF U NFAIR C OMPETITION § 39 reporter’s n. cmt. d (1995)).

The party claiming a trade secret is not required to satisfy all six factors

because trade secrets do not fit neatly into each factor every time, and other

circumstances may be relevant to the trade secret analysis. Id. at 740. A

court must weigh the factors in the context of surrounding circumstances to

determine whether the data in question are trade secrets. Id.

                                       4
      In In re Bass, the supreme court held that the 3-D geological seismic data

at issue in that case were trade secrets. Id. at 742. The court first noted that

“[i]t is undisputed that the oil and gas industry typically treats seismic data and

all other methods of obtaining subsurface geological data as trade secrets.” Id.

at 740–41 (collecting cases from other jurisdictions). The court then analyzed

each of the six Restatement factors in light of the circumstances. Id. at 741.

The evidence established that (1) Bass at all times maintained the confidentiality

of the data and never showed the data to anyone except its employees and

agents;   (2)   only   four   people—all       of   whom   were   Bass’s   agents   or

employees—had access to the data; (3) the data were kept in a vault accessible

only to those who knew the combination, and employees needed a security

card just to enter the work area; (4) the data were a “vital commodity” upon

which all interpretation of the land’s value was based and had a monetary value

of between $800,000 and $2,200,000, both of which values highly favored

trade secret protection; (5) the seismic shoot took several months to complete

at considerable expense and inconvenience, though there was no evidence of

a specific monetary cost; and (6) duplicating the data would be difficult and

expensive and would require Bass’s permission to conduct another seismic

shoot, and licensing the exiting data from Bass would also be expensive. Id.

at 741–42. The court held that all of the factors except the fifth, for which

there was no specific evidence, weighed in favor of deeming the data trade

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secrets. Id. at 742. Thus, the court held that the data and its interpretations

were trade secrets. Id.

      In this case, XTO presented evidence on all six factors by way of

affidavits—evidence that is similar to the evidence in In re Bass. But before we

turn to the affidavits, we must consider XTO’s assertion that Threshold

conceded that the data are trade secrets at the hearing on the motion to

compel. At the hearing, Threshold’s counsel argued as follows:

            We’ve also, I think, simplified that issue for the Court, your
      Honor, because I think both parties, by looking at the briefing,
      agree that there’s a two-part test.

            This first part being whether or not the information being
      requested by [Threshold] is confidential. And we concede it’s
      confidential. We’re not fighting about that.

            They, being the Defendant, XTO, has submitted two
      affidavits to establish the confidentiality of the information we’re
      seeking.

               ....

               I think we’d be disingenuous to this Court to argue over that
      issue.

               ....

            The second issue, your Honor, the one that entitles us to this
      information, is whether or not it’s necessary, and whether or not
      there’s good cause for it to be disclosed. [Emphasis added.]

Threshold’s counsel then presented testimony from its expert witness, Richard

Strickland, regarding the usefulness of the data in completing Strickland’s

                                         6
analysis. At no time during the hearing did Threshold specifically address the

question of whether the data are trade secrets.

      In its brief in this court, Threshold denies that it conceded that the data

are XTO’s trade secrets. But it is difficult to fathom what Threshold intended

to concede if it did not concede that the data are trade secrets. The quoted

portion of counsel’s trial court argument paraphrased the two-part, burden-

shifting test governing the disclosure of trade secrets, i.e., (1) the information’s

trade-secret status and (2) the necessity of the information to a fair adjudication

of a claim or defense. The remainder of counsel’s argument focused solely on

the necessity of the information to a fair adjudication, just as though the

information’s trade-secret status were conceded or established beyond dispute.

But for the fact that counsel did not say the words “trade secret” in his

argument, it would appear to be a clear concession that the data are trade

secrets.

      Nevertheless, because Threshold now denies that it made such a

concession and the concession on the record is not unequivocal, we will

evaluate the data in light of the six Restatement factors. We conclude that

XTO established the data’s trade-secret status.

      XTO submitted to the trial court the affidavits of two XTO employees:

Kenneth Staab, a senior vice president of engineering; and Kara Sherwood, the

supervisor of digital log data. Relevant to the first Restatement factor—the

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extent to which XTO’s reserve estimates and projected revenues are known

outside of XTO—Staab averred that his entire department, with a staff of thirty-

one persons, works exclusively to evaluate XTO’s reserves and compile data

for XTO’s independent contractors who create reserve forecasts for XTO. See

id. at 741.   While some of the underlying data are publicly available, the

forecasts and conclusions of XTO and its consultants are not. Staab said that

the SEC requires the disclosure of certain global, aggregate information;

otherwise, the data are not made publicly available and are not disclosed to

anyone outside of XTO, with the exception of the consultants involved in the

forecasting process and, on occasion, to working-interest owners who have a

need to know the information. While not as compelling as the evidence in In

re Bass, this factor weighs in favor of trade secret status. See id.

      The second factor involves the extent to which the information is known

by employees and others involved in XTO’s business, and the third factor

considers the measures taken to control the security of the information. See

id. at 741–42.    Staab averred that the data are carefully guarded and are

obtainable only by XTO personnel on a need-to-know basis. He said that the

raw data and the reserve evaluations are maintained in a secure area above the

company’s third floor, access to which requires a card key.        Reserve data

stored offsite “is stored at places with strict security measures in place.” This

uncontested evidence suggests that XTO limits the information within its own

                                       8
organization and vigilantly guards the data, meeting the second and third

Restatement factors.

      Under the test’s fourth factor, the information’s value to XTO and its

competitors must be taken into account. See id. at 742. Staab averred that

the information is highly valuable to the company because it directly affects the

company’s decisions as to whether it is economically feasible to develop a

given property.    He said that the information gives XTO a competitive

advantage in the marketplace and that if the information were disclosed, XTO

would lose that advantage because it would give competitors insight into the

methodology by which XTO evaluates reserves. While Staab did not state a

dollar cost for developing the precise data sought by Threshold, he averred that

the thrity-one persons in his department have a collective annual salary

“approaching $2,000,000.00” and that XTO pays “hundreds of thousands of

dollars” annually to independent consultants to help evaluate its reserves.

Though these sums are not attributable to the specific data sought by

Threshold, they are some evidence of the information’s value to XTO. This

factor weighs in favor of trade-secret status. It also weighs in favor of trade

secret status on the fifth Restatement factor, which considers the amount of

money expended by XTO in developing the data. See id.

      The final factor—the ease or difficulty with which the information could

be properly acquired or duplicated by others—is somewhat less compelling.

                                       9
Staab averred that some of the data underlying its reserve and revenue

calculations are publicly available from the Texas Railroad Commission.

Likewise, Sherwood averred that well data are available from third-party

vendors for a fee and from the Railroad Commission for free. Staab further

averred that Threshold could use the publically-available data to develop its own

reserve projections. But it is not the underlying data that XTO contends are

secret so much as the process of transforming the raw data into reserve

estimates and the estimates themselves. In other words, Threshold could use

readily available data to make its own reserve calculations, but those

calculations would not necessarily match those of XTO; and it is the difference

between the calculations that XTO claims is a secret that gives it a competitive

advantage. Thus, the sixth Restatement factor also weighs in favor of trade

secret status.

       We therefore hold that the data sought by Threshold are trade secrets

protected by rule 507.

2.     Are the data necessary for a fair adjudication?

       We must now turn to the second prong in the rule 507 analysis and

determine whether Threshold carried its burden of showing that the reserve and

revenue estimates and other trade secrets are necessary to a fair adjudication

of Threshold’s claims. See id. at 743; In re Cont’l Gen. Tire, 979 S.W.2d at

613.

                                       10
      The supreme court addressed the question of what a requesting party

must show to establish necessity in In re Continental General Tire. 979 S.W.2d

at 611–12. Looking to the approaches taken by other jurisdictions that had

adopted rules identical or virtually identical to rule 507, the court noted that a

requesting party must establish more than mere relevance to discover trade

secrets; otherwise, the statutory privilege would be meaningless. Id. at 611

(citing Bridgestone/Firestone v. Superior Court, 9 Cal. 2d 709, 712 (Cal. Ct.

App. 1992)).    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. Id. 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, Inc., 106 S.W.3d 730, 732 (Tex.

2003) (orig. proceeding). 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; the party must show that it is necessary.

In re Cont’l Gen. Tire, 979 S.W.2d at 611 (analyzing Bridgestone/Firestone, 9
Cal. 2d at 713, 716)). 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. Id. at 613.

                                        11
      With this standard in mind, we turn to the testimony of Threshold’s

expert witness, Richard Strickland, a petroleum engineer asked to calculate

reserve estimates for Threshold for the leases in question. Strickland testified

as follows:

            Q.     Would it assist you if you had that information made
      available to you?

            A.    Yes. I’d like the full suite of logs, in order to do my
      evaluation; not just . . . the resistivity logs that’s available.

              ....

             Q.   And is it necessary for your report to be as thorough as
      possible to gain access to both [publicly-available logs and XTO’s
      logs]?

            A.    My job is to opine a value of the [disputed acreage],
      had it been developed in a timely fashion.

                  And in order to bring to the Court a -- number that has
      the least amount of uncertainty, and to assist the Court in their
      deliberations. Then it is common to have what is commonly known
      as the well file on the -- on the well, and so that would be both
      internal and external data.

              ....

            Q.    Would it be of benefit to you, and is it necessary for
      you to see that information [concerning reserve estimates and
      valuation forecasts] in order to help fully prepare your opinion in
      this case?

              A.     It certainly would be very helpful, yes.

              ....

                                         12
            Q.   And would that information [concerning wells in the
      surrounding area] be of assistance to you in formulating your
      opinions?

            A.    It certainly would.

           Q.    And is it necessary for you to have data in order to
      have accurate and complete opinions?

            A.    To bring a value number forward with the least amount
      of uncertainty; yes, I need all the information I can get. [Emphasis
      added.]

To summarize, Strickland testified that he “would like” to see a full set of well

logs and that these and other data would “assist” and “help” him to prepare a

report “with the least amount of uncertainty.” Strickland conceded that—as

Staab and Sherwood testified—well logs containing at least some of the

underlying data were available from other sources.       And Strickland did not

testify that he could not form an opinion without the requested information.

      We hold that Threshold failed to carry its burden of showing that

production of XTO’s trade secrets is necessary to a fair adjudication. Strickland

testified that the data would be helpful, not that they were necessary.1

      1
        … The dissent quotes extensively from the argument of Threshold’s
counsel before the trial court and in its brief in this court that allowing XTO to
shield its trade-secret reserve estimates from Threshold while XTO denies that
Threshold suffered any damages would work an injustice. But the argument of
counsel is insufficient to support the discovery of trade secrets; a party must
present evidence. See In re Cont’l Gen. Tire, 979 S.W.2d at 615 (“Regardless
of whether this theory [argued by counsel] might otherwise justify discovery of
the [trade secret information], an issue on which we express no opinion,
plaintiffs presented no evidence supporting this theory to the trial court.”).

                                        13
Weighing Threshold’s desire for information that would “assist” and “help” its

expert prepare a report “with the least amount of uncertainty” against XTO’s

desire to maintain its competitive advantage by protecting its trade secrets, we

hold that the trial court abused its discretion by ordering the production of the

data in question.2

      Having determined that XTO established that the subject data are trade

secrets, that Threshold failed to show necessity, and that the trial court abused

its discretion by compelling the data’s production, we hold that XTO has no

adequate remedy at law and is entitled to mandamus relief. See In re Bass,
113 S.W.3d at 745.

                                   Conclusion

      We sustain XTO’s second issue and do not reach its remaining issues.

See T EX. R. A PP. P. 47.1. We conditionally grant XTO’s petition for writ of

mandamus. We are confident that the trial court will vacate its October 29,

Moreover, the trade-secret data identified in counsel’s argument is the same
data that Strickland testified would “assist” or “help” him; he did not testify
that the data were necessary avoid injustice.
      2
        … The parties also argue about whether Threshold and XTO are direct
competitors in the oil and gas market. The record is devoid of evidence one
way or the other. But even if Threshold does not compete directly with XTO,
XTO is entitled to trade secret protection under rule 507 because Threshold
failed to show necessity. See id. at 615 (holding that plaintiff in defective-tire
case, who was clearly not in competition with defendant tire manufacturer, was
not entitled to discover manufacturer’s trade secrets absent a showing of
necessity).

                                       14
2007 order compelling production, and the writ will issue only if the trial court

fails to do so.

                                            ANNE GARDNER
                                            JUSTICE

PANEL B:     CAYCE, C.J.; GARDNER and WALKER, JJ.

      WALKER, J. filed a dissenting opinion.

DELIVERED: March 26, 2008

                                       15
                        COURT OF APPEALS
                         SECOND DISTRICT OF TEXAS
                              FORT WORTH

                               NO. 2-07-382-CV

IN RE XTO RESOURCES I, LP,
AS SUCCESSOR TO ANTERO
RESOURCES CORPORATION AND
XTO RESOURCES I GP, LLC

                                    ------------

                           ORIGINAL PROCEEDING

                                    ------------

                          DISSENTING OPINION

                                    ------------

      I agree with the majority that trade secrets are privileged from disclosure

if the allowance of the privilege will not tend to conceal fraud or otherwise

work injustice. See T EX. R. E VID. 507. I also agree with the majority that the

party asserting a trade secret privilege has the burden of proving that the

discovery sought qualifies as a trade secret and that the burden then shifts to

the party seeking the trade secret disclosure to establish that the information

is necessary for a fair adjudication of a claim or defense in the litigation. See

In re Bass, 113 S.W.3d 735, 737 (Tex. 2003) (orig. proceeding); In re Colonial
Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1988) (orig. proceeding). I dissent

from the majority’s opinion, however, because the majority has wholly skipped

over the primary argument asserted by Real Parties in Interest (collectively

“Threshold”) that the trade secret information it seeks will “not tend to work

injustice” and is “necessary for a fair adjudication of a defense in the litigation.”

See T EX. R. E VID. 507; Bass, 113 S.W.3d at 737.

      Relator XTO Resources, I, LP (“XTO”), in its responses to Threshold’s

requests for disclosure of XTO’s defensive theories and the general factual

basis for the defenses, specifically asserted that one of its defenses was as

follows: “With respect to Plaintiffs’ [Threshold’s] claims that [XTO] failed to

reassign undeveloped portion of the H Leases and Huddleston Trust Leases,

Plaintiffs [Threshold] have failed to this point to demonstrate the nature and/or

amount of harm, if any, to a legally sufficient degree.”        Thus, at the trade

secrets hearing before the trial court, Threshold argued,

            Your Honor, . . . we think they have, based on their
      objections, a presentation of management that says we think this
      well will be worth “X.” That’s one of the very questions at hand.

             ....

             They can’t [hide] their opinions. In other words, they’ve - -
      they’ve had puds on this same acreage. Those puds had some - -
      value assigned, and as [of] Friday they told us that Plaintiffs have
      failed to demonstrate the nature and amount of harm in any - - to
      legal degree of sufficiency.

                                         2
            And they’re saying there is no damage. They agree that
      they’ve breached some obligations that were not damage.

            Well, we’d like to show that within their own corporate
      documents they [have] given value to these leases. They’ve given
      reserve estimates to these leases.

Likewise, Threshold, in its reply brief in response to XTO’s petition for a writ

of mandamus explained to this court,

      XTO suggests that, although there was a breach, the damages
      resulting from that breach are minimal or even nonexistent.

            ....

             In an effort to address damages, Plaintiffs have requested
      that XTO produce data that supports the calculations of the
      reserves booked by XTO underlying the Wise County leases. This
      will help Plaintiffs and their expert(s) verify their damage model. Of
      equal if not greater significance, it will enable them to discredit the
      position currently being taken by XTO. This latter point, though
      expressly raised in Plaintiffs’ Second Motion to Compel, is wholly
      ignored by XTO. [Emphasis added.]

Threshold further explained in its brief to this court,

             XTO has no basis to contend it did not breach its obligation
      to reassign approximately 1,249 acres to Threshold. Thus, it
      simply says its breach did not damage Threshold. It would be
      patently unfair to permit XTO to tell the jury Plaintiffs are due no
      damages but not to allow Plaintiffs to see basic data that XTO
      keeps outside the context of this litigation which Plaintiffs can use
      to establish their damages. Unless they are allowed to explore this,
      Plaintiffs cannot receive a fair trial.

            ....

                                        3
             Stated succinctly, and in the language of Rule 507, disclosure
      is required to prevent an injustice. Without it [disclosure here]
      Plaintiffs are hampered in refuting XTO’s claim that damages are
      absent.

Thus, in its motion to compel disclosure at the trade secrets hearing, and before

this court, Threshold continuously pointed out the injustice of permitting XTO

to rely on the defense that Plaintiffs were not damaged by XTO’s failure to

reassign particular leases to Threshold, but yet to permit XTO to shield from

disclosure XTO’s own corporate documents showing that internally XTO had

assessed a dollar value to the same leases and wells that it had failed to

reassign to Threshold.

      Because this argument—that allowance of the trade secret privilege would

tend to work an injustice by preventing a fair adjudication of XTO’s no-damages

defense by preventing Threshold from discrediting this position taken by

XTO—appears to raise an alternative ground for affirming Judge Fostel’s ruling,

and because the majority fails to address it, I respectfully dissent.

                                           SUE WALKER
                                           JUSTICE

DELIVERED: March 26, 2008

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