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Hydraulic Fracturing Trade Secrets at Risk in Wyoming

Monday, March 17, 2014 3:28 pm by and

One of the more hotly debated issues since the shale gas boom started in the U.S. has been the requirement for mandatory disclosure of the chemical mixture used in the hydraulic fracturing process. In crafting chemical disclosure regulations, states have had the difficult job of determining the appropriate balance between public disclosure of the chemicals used in hydraulic fracturing fluids and protection of a company’s intellectual property rights associated with the proprietary formulas.

On March 12, 2014, the Wyoming Supreme Court issued a decision that could make it difficult for oil and gas operators in that state to protect proprietary information regarding hydraulic fracturing chemicals from disclosure to the public and their competitors. At issue is whether information regarding the type, chemical compound name, and/or Chemical Abstract Services (“CAS”) number of chemicals or other constituents injected through hydraulic fracturing or other well stimulation operations in Wyoming are “trade secrets” subject to protection from disclosure under the Wyoming Public Records Act (“WPRA”).

In its decision, the state’s highest court ruled:

  1. that the state has the burden of justifying why a chemical deserves trade secret protection rather than simply relying on the arbitrary and capricious standard under the Wyoming Administrative Procedure Act (“APA”); and
  2. that the narrow definition of “trade secrets” developed in federal case law under the federal Freedom of Information Act (“FOIA”), rather than a broader standard, should be applied when determining whether information is exempt from public disclosure under the WPRA.

Background

As many oil and gas producing states have done over the past few years, the Wyoming Oil and Gas Conservation Commission (the “Commission”) passed new regulations in 2010 that included a chemical disclosure requirement for hydraulic fracturing operations. The rules require companies engaged in hydraulic fracturing to disclose to the Commission the identity of chemicals used for well stimulation, including the chemical additives, compounds and concentrations or rates proposed to be mixed.

The rules also provide an exemption from public disclosure for “trade secrets, privileged information and confidential commercial, financial, geological or geophysical data furnished by or obtained from any person.” The rules are designed to protect the public’s interest in knowing what chemicals are being used during hydraulic fracturing while balancing industry’s need to protect proprietary information in order to maintain competitive advantage.

Under the rules, an oil and gas operator may protect proprietary information from public disclosure by submitting a written trade secret protection request to the Commission Supervisor justifying and documenting the nature and extent of the proprietary information.  If the Supervisor finds the information to be a trade secret, then that information will not be disclosed to the public.

Between November 2011 and February 2012, several environmental groups submitted public records requests to the Commission, seeking disclosure of a vast array of information, including all records the Commission had in its possession that “list or identify the type, chemical compound name, and/or Chemical Abstract Services (CAS) number of chemicals or other constituents that have been or will be injected through hydraulic fracturing or other well stimulation operations.”  The Supervisor declined to produce the requested information based on his determination that the information was subject to the trade secret exemption of the WPRA.

District Court Action

On March 23, 2012, the environmental groups filed a petition for review in the Wyoming Seventh Judicial District Court seeking disclosure of the information and challenging the Commission’s decision to uphold the various companies’ trade secret claims under the APA.  The plaintiffs argued that the Commission “unlawfully withheld from disclosure as trade secrets or confidential commercial information the identities of hydraulic fracturing chemicals” and that the agency “did not provide factual support for the trade secret or confidential commercial information status of the chemicals and products.”  

The plaintiffs claimed that the Supervisor’s refusal to disclose the information requested was arbitrary, capricious, an abuse of discretion, and not in accordance with law and petitioned the court to set aside the Commission’s determination that the underlying information qualified as trade secrets.  

On March 21, 2013, the district court issued an order that upheld the Commission’s policy for evaluating trade secret claims, finding that the policy was in compliance with the WPRA and concluding that the plaintiffs had failed to support their argument that the Supervisor’s decision to grant trade secret protections was arbitrary, capricious, or not in accordance with law.

Wyoming Supreme Court Review 

The case was appealed to the Wyoming Supreme Court, which considered two main issues:

  1. whether the district court properly evaluated the Commission’s decision under the more deferential “arbitrary and capricious” standard of the APA rather than requiring the appellants to follow the procedures outlined in the WPRA; and
  2. how “trade secrets” are defined under the WPRA.

In tackling the first issue, the Supreme Court noted that the appellants (i.e., the environmental groups) filed their initial petition for review with the district court pursuant to the APA. Judicial review under the APA is deferential and requires the court to ask simply whether the Commission’s decision in upholding the trade secret claims of the companies was arbitrary and capricious or otherwise contrary to law.

The Supreme Court concluded that the APA’s arbitrary and capricious standard was inapplicable and that the WPRA sets forth the appropriate procedure for assessing whether the Supervisor’s decision not to disclose was justified. The Supreme Court noted that under the WPRA, the appellants should have applied to the district court for an order directing the Supervisor to “show cause” why he decided to uphold the trade secret claims of the various companies and not to disclose the records. 

Specifically, the Supreme Court reasoned that, without the “show cause” procedures under the WPRA, the district court lacked a “sufficient basis” to determine whether the Supervisor acted properly. The Supreme Court noted: 

In determining whether the custodian has met his burden, a show cause proceeding provides the district court with a variety of tools to make evidentiary determinations as to each piece of information in dispute, including oral testimony by lay and expert witnesses; detailed affidavits; in camera review of the contested records and related sensitive information; closed proceedings and sealed submissions to ensure protection of the same; or such other alternative procedures it deems necessary to develop an adequate factual basis to determine whether information is a trade secret under the WPRA.

In reversing and remanding the case, the Supreme Court acknowledged that the appellants did not cite the WPRA as the appropriate standard for review in the original petition; therefore, the district court must determine whether to allow the pleadings to be amended or to dismiss the case. If the case is dismissed by the district court, the appellants may file a new action seeking review under the WPRA. 

Before reversing and remanding the case, the Supreme Court did provide some guidance as to the definition of “trade secrets” that the district court should consider. The parties argued three possible definitions for the term “trade secrets” under the WPRA, including the definition under FOIA, the Restatement of Unfair Competition (3rd Edition), and the Uniform Trade Secrets Act. The Supreme Court considered the purpose of the WPRA and relevant case law, eventually adopting the definition of trade secrets articulated by the federal courts under FOIA. 

The Supreme Court reasoned that the narrower common law definition under FOIA was more in line with the WPRA than the other “broader” definitions that were proposed, holding that “a trade secret under the WPRA is a secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort, with a direct relationship between the trade secret and the productive process.”

The Supreme Court left to the district court to decide the question of whether “individual ingredients of hydraulic fracturing formulae can constitute trade secrets” under the definition adopted, noting that if and when the district court hears the case, it will be tasked with reviewing “the disputed information on a case-by-case, record-by-record, or perhaps even on an operator-by operator basis . . . and making particularized findings which independently explain the basis of its ruling for each.”

Conclusion

The war over the disclosure of proprietary information is far from over in Wyoming.  Even if the district court orders the Supervisor to show cause why public inspection of the information requested should not be permitted, the district court could ultimately find that such information meets the definition of “trade secrets” under the WPRA. However, given the narrow definition of “trade secrets” adopted by the Wyoming Supreme Court, some in the industry remain concerned that trade secrets may be at risk. 


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