Opinion issued August 21, 2014
In The
Court of Appeals For The
First District of Texas ———————————— NO. 01-14-00149-CV ——————————— IN RE VALERO REFINING – TEXAS, L.P. AND VALERO REFINING CO. TEXAS, Relators
Original Proceeding on Petition for Writ of Mandamus
MEMORANDUM OPINION
This is a mandamus proceeding arising from a pretrial discovery dispute.1
In the underlying proceeding, Valero Refining-Texas, LP contests the Harris
County Appraisal District’s appraisal of its Harris County refinery for purposes of
assessing ad valorem property taxes for 2012. See TEX. TAX CODE ANN. §§ 42.01, 1 The underlying case is Valero Refining – Texas, LP and Valero Refining Company Texas v. Harris County Appraisal District, cause number 2012-56551, pending in the 215th District Court of Harris County, Texas, the Honorable E. Palmer presiding. 42.21 (West Supp. 2012). Valero challenges a trial court order compelling it to
produce financial statements and operating business information. Valero contends
that the requested information constitutes trade secrets. HCAD contends that the
information it seeks does not merit trade secret protection and that, in any event, its
production is necessary to establish the value of Valero’s property. We
conditionally grant mandamus relief.
Background
Valero owns and operates a refinery in Houston, Texas. Valero sued HCAD
asserting that the appraised property-tax value of the refinery for 2012 was over
market and not equal and uniform. HCAD requested discovery of extensive
financial data relating to the market value Valero’s refinery business. For
example, HCAD sought production of all documents and tangible things:
• consisting of monthly and annual financial reports of the subject property, including revenue from sales, cost of sales, margins, gross margins, variable and fixed expenses, and net margins (Request 5);
• containing the historical operating income and expenses by product (Request 6);
• evidencing refinery expenses by cost category, including operating personnel, maintenance, chemicals, catalysts, corporate general and administrative expenses, and overhead monthly (Request 7);
• evidencing the quantity of refinery inputs and outputs (Request 9);
• evidencing product volumes (Request 11);
• evidencing quantity of energy consumption (Request 12);
2 • evidencing utility purchases that indicate quantity and cost of utilities (Request 13);
• containing the most recent Solomon Associates Fuel Refinery Performance Analysis reports and data (“Solomon Report”) (Request 23); and
• containing a summary of logistics in and out of the refinery for multiple categories of substances (Request 22).
Valero objected that these discovery requests sought information that is
protected by the trade secret privilege. In particular, Valero argues that the
document requests include within their scope Valero’s extremely secret and
sensitive Business Unit Report (“BUR”), which contains Valero’s strategic plans
and financial statements for all of Valero’s properties. Valero also objected that
the requests were overbroad, unduly burdensome, and not likely to lead to the
discovery of admissible evidence. HCAD moved to compel production, arguing it
needed the information to prepare a market-value appraisal to defend against an
unequal-appraisal claim using the income appraisal method.
In its response to HCAD’s motion to compel, Valero attached the affidavit
of Roy G. Martin, Jr., Senior Vice President of Ad Valorem Tax for Valero
Refining – Texas L.P. and Valero Energy Corporation. Martin averred that
HCAD’s requests sought information that constituted Valero’s trade secrets. In its
response, Valero also argued that the discovery requests were overbroad and
burdensome. Valero further objected on the basis that the income and expense
information that HCAD sought was irrelevant because the income method of
3 appraisal was not relevant or applicable here. In reply to Valero’s response to
HCAD’s motion to compel, HCAD offered the affidavits of James L. Watson, a
professional engineer engaged by HCAD, and Grady Graham, an HCAD
employee, to demonstrate that the requested information was necessary.
On August 9, 2013, the trial court held an evidentiary hearing at which
Martin testified that the requested information constituted Valero’s trade secrets
and that the income method was not an appropriate method of appraisal in this
case. On HCAD’s behalf, Watson testified that the requested information was
necessary to a fair adjudication of the case.
On September 19, 2013, the trial court granted HCAD’s motion to compel
and overruled Valero’s objections. The trial court’s order stated that the
information sought did not merit trade secret protection and that HCAD established
a need for the information.
On October 13, 2013, Valero filed a motion for reconsideration or to stay
enforcement of the order granting HCAD’s motion to compel because a similar
case, In re Valero Refining-Texas, LP, 415 S.W.3d 567 (Tex. App.—Houston [1st
Dist.] 2013, orig. proceeding), was pending before this court. The trial court
denied the motion on October 30, 2013.
On November 8, 2013, Valero filed its First Amended Petition. Valero
abandoned its market value claim and asserted only that the tax on its refinery was
4 not equal and uniform. On the same day, Valero filed its “Motion to Vacate
Portions of Court’s September 19 & October 30 Orders Because of Plaintiffs’
Abandonment of Market Value Claim.” Valero requested that the trial court vacate
the portions of the order that required Valero to comply with the previously-
objected to HCAD requests. On December 13, 2013, the trial court denied
Valero’s motion to vacate.
Discussion
Valero contends that the trial court abused its discretion in ordering Valero
to produce the requested information because the information warrants trade secret
protection and HCAD failed to establish that the information is necessary to a fair
adjudication of this case. Valero also contends that HCAD’s discovery requests
are irrelevant, overly broad, and burdensome.
A. Standard for Mandamus Relief
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
5 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
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.
B. Applicable Law
“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.” Computer Assocs. Int’l, Inc. v. Altai,
Inc., 918 S.W.2d 453, 455 (Tex. 1996). Rule 507 of the Texas Rules of Evidence
provides for the protection of trade secrets:
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
6 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). Rule 507 accommodates both interests by
requiring a party to disclose a trade secret only if necessary to prevent “fraud” or
“injustice.” Id. Disclosure is required only if necessary for a fair adjudication of
the requesting party’s claims or defenses. Id.
The party asserting the 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 735, 737 (Tex. 2003) (orig. proceeding). If the resisting party meets its
burden, the burden shifts to the party seeking the trade secret discovery to establish
that the information is necessary for a fair adjudication of its claim. Id. It is an
abuse of discretion for the trial court to order production once trade secret status is
proven if the party seeking production has not shown necessity for the requested
materials. Id. at 738.
To determine whether a trade secret exists, the following six factors are
weighed in the context of the surrounding circumstances: (1) the extent to which
the information is known outside of the business; (2) the extent to which it is
known by employees and others involved in the business; (3) the extent of
7 measures taken to guard the secrecy of the information; (4) the value of the
information to the business and to its competitors; (5) the amount of effort or
money expended 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. Co., 294 S.W.3d 589, 592 (Tex. 2009) (orig. proceeding) (per
curiam). 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. In re Bass, 113
S.W.3d at 740.
Once a trade secret privilege is established, the burden shifts to the party
seeking to discover a trade secret to 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, Inc., 106 S.W.3d 730
731–732 (Tex. 2003) (orig. proceeding); 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,
8 979 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 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 at 592–93; 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. An appellate remedy
does not exist 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.
C. Analysis
1. Trade Secrets
To establish the applicability of the trade secret privilege, Valero offered
Martin’s affidavit and Martin’s oral testimony. Having reviewed each discovery
9 request and Martin’s affidavit and oral testimony supporting Valero’s assertion of
the trade secret privilege, we conclude that Valero established the applicability of
the trade secret privilege.
In determining whether the requested information constitutes a trade secret,
we weigh six factors. In re Union Pac. R.R. Co., 294 S.W.3d at 592. Under the
first factor, we consider the extent to which the information is known outside
Valero’s business. See In re Bass, 113 S.W.3d at 741. According to Martin’s
affidavit, the documents requested include personnel and HR documents,
confidential business documents, and process-related documents. He averred that
the information is confidential and that the process-related documents “are
absolutely not known outside VLO and VRT.” Similarly, at the evidentiary
hearing, Martin testified that the financial and operating information contained in
the Business Unit Report, which is within the scope of HCAD’s document
requests, is “not known to anyone outside of Valero.” Because Valero adduced
evidence demonstrating that no one outside of Valero has access to the information
HCAD seeks to discover, Valero has satisfied this factor. See id. at 740
(concluding relator satisfied first factor with testimony that company had not
provided outside access to requested data).
Under the second factor, we consider the extent to which the information is
known by employees and others involved in Valero’s business. See id. at 741.
10 Martin averred that the “documents requested are accessible to only a few people
at VRT and at VLO’s headquarters.” According to Martin’s affidavit, less than
one-percent of VLO personnel have access to documents that summarize financial
performance on a specific refinery basis and VLO’s Global Information Security
Policies prohibit photocopying such documents. Martin further averred that “[n]o
single refinery specific financial information is ever made public. VLO’s 10-K,
for example, aggregates broad summary data by geographic region. Such
aggregate 10-K data for the Refinery would include data for eight (8) refineries.”
Likewise, Martin testified at the hearing that “very few people,” “less than
one percent,” have access to any form of these documents. He testified that those
people discuss the BUR each month and the meetings are held in the “Emergency
Management Center,” a secure room with access control. At the hearing, Martin
testified that:
There are lots of people that work on putting the information together for the Business Unit Report or the BUR; but the finished product is seen by [] very few people. And essentially, it’s done for the benefit of the most senior management of Valero, which would be, obviously, the CEO, the CFO of Valero, as well as the lead refinery person for Valero, the executive vice president over refinery; and also, the general counsel is usually in these meetings. There may be one or two other folks that have access to the BUR, but the access to the BUR [is] highly regulated and controlled.
Because Valero adduced evidence that only a few Valero employees have access to
the data HCAD seeks to discover, Valero has satisfied the second factor. See id. at
11 742 (holding relator satisfied second factor because only four people, all of whom
were agents and employees, has access to the data).
Under the third factor, we consider the extent of measures Valero has taken
to guard the secrecy of the requested information. See id. Martin averred that the
documents HCAD seeks to discover are “guarded by VRT and Valero personnel.”
He averred that Valero uses “security passwords,” prohibits leaving the premises
or departments with this information, and that “VLO’s global Information Security
Policies expressly forbid the photocopying of such documents.” Similarly, Martin
testified that the Business Unit Reports are hand-delivered to authorized recipients
in a sealed envelope, and that the recipient must sign for it and is prohibited from
duplicating the report and passing it on to someone else. Because Valero adduced
evidence that it takes significant measures to guard the secrecy of the requested
information, Valero has satisfied the third factor. See id. (holding relator satisfied
third factor because uncontested evidence showed company “vigilantly guard[ed]
the data”).
Under the fourth factor, we consider the information’s value to Valero and
Valero’s competitors. See id. Martin averred that the “documents would reveal
information important to VLO’s competitors.” According to Martin’s affidavit, “a
competing refinery with access to this data would know VRT’s profit margins” and
would be able to undercut VLO “with respect to acquiring crude and with respect
12 to selling finished product,” could use Valero’s process methods and formulas, and
could “improve its efficiencies to match the efficiencies achieved by VRT.” At the
hearing, Martin testified that seeing Valero’s BUR would be valuable to
competitors and that Valero would not want its competitors to see the BUR
because that would give the competitor a “very unfair advantage in terms of our
profitability or lack of profitability [and] whatever efficiencies we may have.”
According to Martin, a competitor could “take advantage of that and cut [Valero]
out of the market, say a supply market for crude or maybe bid our products against
or products in certain areas and take away what market share we have. It will be
very detrimental financially to [Valero].” Because Valero offered evidence
demonstrating that Valero’s information is valuable to Valero and its competitors,
Valero has satisfied the fourth factor. See id. (holding relator satisfied fourth factor
because expert testified data was “vital commodity” and “would be valuable to any
oil and gas contractor in the area”); In re Cayman Island Firm of Deloitte &
Touche, No. 04-01-00491-CV, 2001 WL 1042233, at *4 (Tex. App.—San Antonio
Sept. 12, 2001, orig. proceeding) (not designated for publication) (holding affiant’s
statement that information was “highly confidential and proprietary and would
greatly benefit [relator’s] competitors,” while “sketchy” on details, was sufficient
to establish trade secret privilege).
13 In reviewing the fifth factor, we consider the amount of money expended by
Valero in developing the information. See In re Bass, 113 S.W.3d at 742. In his
affidavit, Martin averred that “[a] great amount of money is spent in developing
the documents.” Regarding the financial reports, he averred that because of the
personnel used to develop the documents, their efforts “amount to many thousands
of dollars[’] worth of productivity.” Martin averred that “VRT employs a number
of people whose job is to develop these reports [and] [p]ersonnel at VLO’s
headquarters in San Antonio are charged with the responsibility of reviewing and
maintaining this data.” Regarding the other documents relating to VRT’s process
operations, Martin averred that “the majority of the employees of VLO and VRT
are involved in creating those documents; it is simply the heart of Valero’s refining
business.” At the hearing, Martin testified that “hundreds of accountants across
[Valero’s] system” compile the information contained in the BUR on a daily basis
and that the information is summarized at the end of each month. Because Valero
proffered evidence that it expends considerable resources developing the requested
information, Valero has satisfied the fifth factor. Cf. id. (not weighing factor in
relator’s favor because “the record [was] bare of information on this factor”).
Under the final factor, we consider the ease or difficulty with which the
information could be properly acquired or duplicated by others. See id. Martin
averred that the documents “could not be developed by anyone other than VLO
14 and VRT [and that] [n]o one else has access to the data necessary to produce
them.” At the hearing, Martin likewise testified that a non-Valero entity could not
duplicate the information contained in the BUR. Because Martin’s testimony as a
whole constitutes evidence that it would be difficult for another company to
duplicate or acquire this information, Valero has satisfied the sixth factor. See id.
Considering the six factors, we conclude that Valero met its burden to demonstrate
that the requested documents merit trade secret protection.
HCAD contends that it did not request the BUR and, therefore, whether the
BUR is a Valero trade secret is irrelevant. We disagree. At the hearing, Martin
testified that the BUR contains refinery-specific information requested by HCAD.
Moreover, Martin testified that Valero regards “the financial information, wherever
it is, as a trade secret.” Martin testified that “[w]hether it be the income
information, the Solomon report, anywhere the information is contained in
Valero’s records, they are deemed to be a trade secret.” Accordingly, we conclude
that the BUR may serve as the basis for Valero’s trade secret contention.
We hold that the information that the trial court ordered Valero to produce is
protected by Texas Rule of Evidence 507. See In re Bass, 113 S.W.3d at 741–42.
2. Necessary to a fair adjudication of the case
Having determined that the trial court ordered disclosure of trade secrets, we
turn to whether HCAD demonstrated that disclosure is necessary to a fair
15 adjudication of this 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. We conclude that this court’s recent case, In
re Valero Refining-Texas, LP, 415 S.W.3d 567 (Tex. App.—Houston [1st Dist.]
2013, orig. proceeding), controls, and, accordingly, we hold that HCAD failed to
meet its burden to show that disclosure was necessary to a fair adjudication of this
case.
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 that may be used to determine the market value of property: cost, income,
and market data comparison. See id. § 23.0101 (West 2008). HCAD, like the
Galveston County Appraisal District (“GCAD”) in In re Valero, asserts that the
financial and operating information that the trial court ordered Valero to produce is
necessary to complete an income-method appraisal of the property. See In re
Valero, 415 S.W.3d at 571. In support of this position, HCAD proffered Graham’s
affidavit, Watson’s affidavit, and Watson’s oral testimony.
Watson averred that “it has been my experience that actual buyers and
sellers rely upon the income method to determine a sales price for a refinery.”
Watson testified at the hearing that the income method is the most relevant to
finding actual market value because sellers and buyers of refineries use it. In his
affidavit, Graham averred that the income approach was the most appropriate
16 appraisal method. Similarly, in In re Valero, an expert for GCAD averred that the
income method is a valid and recognized method of determining the market value
of refineries that buyers and sellers of refineries often use. See In re Valero, 415
S.W.3d at 571.
HCAD, just as GCAD did in In re Valero, also offered into evidence an
industry article about appraising refineries that discusses the use of each of the
three appraisal methods. As we noted in In re Valero, 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.” See In re Valero, 415 S.W.3d at 571.
Taking the same position as it had in In re Valero, Valero disputed the
relevance of an income-based valuation in the context of appraising its refinery.
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. HCAD
must show that without discovery of 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.
In In re Valero, GCAD’s expert did not conclude that the cost or market-
data-comparison methods were inappropriate or inapplicable. Nor did he conclude
17 that the income method is the most appropriate valuation method or that it was
essential to create an accurate appraisal. HCAD seeks to distinguish that case by
arguing that, here, Graham and Watson did testify that the income method is the
most appropriate method. Even considering that evidence, however, as we noted
in In re Valero, the industry article produced by HCAD “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.” In re Valero, 415 S.W.3d at 571. Therefore, we conclude that the
information requested by HCAD is “useful in that it will facilitate an income-
method appraisal and perhaps reach an appraisal with more certainty,” but not
necessary because HCAD can complete an accurate appraisal without it. See In re
Valero, 415 S.W.3d at 571 (citing In re Bridgestone/Firestone, 106 S.W.3d at 733;
In re XTO Res. I, 248 S.W.3d at 905).
HCAD has not shown that cost and market-data-comparison methods will
not provide a competent appraisal and evidence of the market value of the
property. Accordingly, HCAD has failed to meet its burden of demonstrating that
18 the trade-secret information is “necessary and not merely relevant.”2 Therefore,
the trial court erred in concluding that the requested information was necessary to a
fair adjudication of this case. Because we hold that the trial court abused its
discretion by compelling Valero to produce information protected by the trade
secret privilege, we need not address Valero’s contentions that the requests are
overbroad or unduly burdensome. 3
Conclusion
We conclude that HCAD’s requests for production seek information
protected by the trade secret privilege and that HCAD has not satisfied its burden
of demonstrating production of Valero’s trade secrets is necessary to the fair
adjudication of the case. Accordingly, we conditionally grant Valero’s petition for
writ of mandamus and direct the trial court to vacate the portions of its order that
compel Valero to respond to HCAD’s requests for production 5, 6, 7, 9, 11, 12, 13,
2 HCAD contends that the trial court’s protective order limiting disclosure of confidential information to parties eliminates any potential harm that could result from Valero’s production of the requested information. But whether a protective order is able 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. 3 HCAD relies on In re MHCB (USA) Leasing & Fin. Corp., No. 01-06-00075-CV, 2006 WL 1098922 (Tex. App.—Houston [1st Dist.] Apr. 27, 2006, orig. proceeding) for the proposition that the requested information may be discoverable in an equal and uniform case. But HCAD’s reliance on In re MHCB is inapposite because the relator in that case did not assert the trade secret privilege. The In re MHCB court thus held only that the requested information was “reasonably calculated to lead to the discovery of admissible evidence.” See id. at *4.
19 22, and 23. We are confident that the trial court will comply, and the writ will
issue only if it does not.
Rebeca Huddle Justice
Panel consists of Justices Keyes, Sharp and Huddle.