Frac-fluid recipes threaten to become pressure points in benzene litigation

Joseph M. Schreiber
Vorys, Sater, Seymour and Pease LLP
Houston

New requirements for disclosure of chemicals used in hydraulic fracturing create a very real danger that frac-fluid recipes could become a major issue in personal injury lawsuits, particularly litigation alleging disease from benzene exposure.

Over the past year, along with intense media scrutiny and environmental activism, state legislatures have enacted disclosure laws requiring base-level reporting of chemicals in frac fluids. Furthermore, the US Department of the Interior plans to propose disclosure rules for fracing on federal lands.

Litigation related to hydraulic fracturing is in its early stages and so far has centered on groundwater-contamination claims. But personal-injury litigation has begun to follow.

While current personal-injury litigation involves alleged injuries to workers in the fields, such as rig-crew members and truck drivers exposed to frac fluid, it is not hard to foresee a wave of personal-injury lawsuits from individuals living near wellsites who blame fracing chemicals for their injuries. Benzene is a very likely target.

The recent attention to frac-fluid recipes probably will become a pressure point exploited by plaintiffs' lawyers sooner rather than later. Experience in other litigation predicts the parameters of this fight, why it is important, and how companies can defend themselves now for the future litigation.

Chemical disclosure

Colorado is the latest state to enact a law requiring disclosure of the chemicals in frac fluids. Its law follows on the heels of Texas HB 3328, which will, as of July 2012, require oil and gas companies to post the chemicals used in fracing operations on the third-party central web site of the Interstate Oil & Gas Compact Commission. Arkansas and Wyoming have their own regulations. Several other states are working on regulations requiring disclosure of ingredients in frac fluids.

Most of the bills are similar in that they require disclosure of the amount of water, other inert ingredients (such as sand), and chemicals by family or even by name and approximate amount. The Texas law is on the books, but details of the regulations are being worked out by the Texas Railroad Commission. At minimum, the Texas law requires disclosure of each chemical ingredient that is subject to reporting on a Material Safety Data Sheet (MSDS), and all other chemicals not listed that were intentionally included in the frac-fluid formula and used in the hydraulic fracturing of a well. The law will not require that exact concentrations of the ingredients be provided.

Essentially, the operator or drilling contractor must disclose the chemicals used, but not the specific formula. This is a major distinction.

Provision will be made for operators to withhold information already required (the chemical names of fluid components) based on trade secrets, subject to challenge by the landowner on whose property the relevant well is located, an adjacent landowner, or the state.

The benzene target

The frac-chemical disclosure laws and most commentary to date assume that the center of dispute will be groundwater contamination. This may turn out to be so. But the heightened concern over frac-fluid recipes will encourage personal-injury litigation.

Benzene is a convenient target. The aromatic substance is ubiquitous. It occurs naturally in crude oil, typically at a concentration of 0.2-1.73%. It also is a by-product of some frac fluids—particularly those using diesel—and is the frequent subject of groundwater contamination complaints. It was one of the first chemicals regulated under the Occupational Safety and Health Administration and has been the subject of 3 decades of litigation. The first decades of litigation involved heavily exposed production workers employed at refineries, chemical plants, and steel mills. Over the years, a docket of low-dose benzene cases has developed involving solvents with low percentages of benzene and lower lifetime exposures to the plaintiffs.

The signature diseases of benzene litigation are the blood cancers acute myelogenous leukemia (AML) and certain of the myelodysplastic syndromes (MDS). These diseases have been conclusively linked to benzene exposure since the late 1970s. Other hematopoietic (blood system) cancers like non-Hodgkin's lymphoma, multiple myeloma, and other myelodysplastic syndromes such as RARS have controversial causation links to benzene but are the subjects of continuing litigation. All of these diseases occur randomly and spontaneously in the population as de novo (naturally occurring) cancers, particularly in older people. They occur far more commonly as de novo cancers than cancers caused by exposure to benzene.1 However it is difficult to distinguish through chromosomal abnormalities de novo AML and MDS from that caused by benzene. The litigation battle in benzene-blood cancer cases is typically based on dose of exposure (higher dose of benzene exposure causing more risk of cancer), latency (the time between exposure and disease manifestation), and in blood cancers other than AML and certain types of MDS, on whether benzene can cause the plaintiff's disease.

Since OSHA began regulating benzene in the late 1970s, industrial exposure to benzene and the volume of benzene in products have decreased dramatically. This has not stopped the litigation, however. More products with lower levels of benzene have been targeted, and litigation science has found associations between benzene and hematopoietic cancers at lower and lower exposure levels.

The combination of relatively common occurrence of AML and MDS in the general population with fracing's expanded use near high-population areas brightens benzene as a target for plaintiffs' lawyers. However, benzene concentrations in frac fluid are typically very low, as is the amount of benzene found in water allegedly contaminated by fracing. Operators and drilling contractors are likely to be targets in benzene litigation originating from fraced wells. Because the small dose of exposure is a prime defense, plaintiffs' lawyers will find another pressure point and will generally sue everyone in the chain of ownership or control of the well or its instrumentalities.

Pressure points

Pressure points in litigation are areas that have an ability to affect the settlement value of a case in a manner disproportionate to their relevance in a trial. Trade-secret protection in litigation is one of those areas.

Plaintiffs' lawyers will press very hard for disclosure of trade secrets in litigation if the trade secrets are somewhat relevant to the case but are inordinately valuable to the company. If the risk of losing the trade secret is greater than the cost of litigation, willingness to settle and settlement value will be affected accordingly.

Analogous to fracing recipes are skim-stock formulas in tire-tread separation litigation. Skim stock is the prevulcanized rubber used to bind the steel belts in radial tires to the rest of the tire. The formulas are secret and impossible to reengineer after a tire is cured (cooked) because curing changes the chemical character of the rubber. While tire companies use many of the same or similar ingredients in their skim stock, the amounts and the recipes are different and closely guarded. They are also extremely valuable to the companies and their competitors.

Similarly, frac-fluid formulas would be impossible to reverse-engineer from injection wells, runoff ponds, or even seepage into groundwater. The formulas are proprietary. Many of the chemicals used are similar among operators in the same fields and formations. However, the specific formulas are secret. A particular formula that is effective in a particular field or type of geological formation will give a trade advantage to the operator or drilling contractor that uses it.

While the state disclosure laws for frac chemicals all require the chemical names to be disclosed, they take into consideration industry's need to keep the amounts of chemicals used and the formulas themselves secret. Lobbying by operators and drillers and the carve-out for formulas in disclosure laws make obvious that the formulas are pressure points that may be exploited.

In tire-tread separation litigation, plaintiffs demanded disclosure of the skim-stock formulas through requests for production of documents, hired experts who opined that the skim-stock formula was necessary to the adjudication of the case, and fought through the appellate courts for disclosure of the skim stock. They did this while stating that they could prove their cases without it.2

The plaintiffs' motives were apparent to the defendant tire companies. The skim-stock formulas are extremely valuable to the companies, are closely guarded from competitors, and are considered essential intellectual property of tire manufacturers. Tire litigation involves complex defenses typically involving rubber degradation from underinflation, puncture, or postcrash tire failure (rather than crashes caused by tire failure). Therefore, in cases where causation was not clear, the skim-stock formulas would become a large issue. When a trial court would order the disclosure of the skim stock, which occurred from time to time, the company was forced to litigate the trade-secret issue through the appellate courts. The risk of losing the trade-secret formulas at times forced settlements in the cases regardless of the strength of causation defenses.

Because of the similarities between the trade-secret protection sought for frac-fluid formulas, questionable causation, and plaintiffs' need for a pressure point, it is likely that plaintiffs' attorneys will seek to make discovery of frac-fluid formulas a pressure point in litigation.

Protecting trade secrets

Federal courts and most states have a trade-secret privilege in litigation based on US Supreme Court Standard 508. Texas' trade secret privilege is found at Texas Rule of Evidence 507, which states: "A person has a privilege, which may be claimed by the person or the person's agent or employee, to refuse to disclose or 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 the disclosure is directed, the judge shall take such protective measures as the interests of the holder of the privilege and of the parties and the furtherance of justice may require."

Texas' trade secret rule is typical of those of other states.

The party seeking to discover a trade secret, once the privilege is invoked, must make a preliminary, particularized showing that the information sought is relevant and necessary to the proof of, or defense against, a material element of one or more causes of action presented in the case, and that it is reasonable to conclude that the information sought is essential to a fair resolution of the lawsuit. The court will weigh the degree of the requesting party's need for the information with the potential harm of disclosure to the resisting party. The court will look at six factors:

• The extent to which the information is known outside the business.

• The extent to which the information is known by employees and others involved in the business.

• The extent of measures taken to guard the secrecy of the information.

• The value of the information to the business and to its competitors.

• The amount of effort or money expended in developing the information.

• The ease or difficulty with which the information could be properly acquired or duplicated by others.

In essence, the plaintiff will request documents showing the frac-fluid formulas or will ask a specific interrogatory seeking the formulas. The defendant has to object to the discovery request seeking the trade secret, claim the trade-secret privilege, and submit an affidavit showing why the formula is secret, what is done to protect it from being disclosed, and why. The plaintiff will then come back with an affidavit from an expert explaining why the plaintiff needs the trade secret, and a hearing will be held.

The second and third listed measures taken to guard the secrecy of the information tend to be very important to the court's decision. They are also the only factors on which the defendant company must act before litigation starts. If the company considers frac-fluid formulas worth protecting, it must proactively limit the ability of employees and competitors to access the information. If the trade-secret information is valuable enough to protect from litigation, the company must take steps to keep the information secret prior to the start of litigation.

This is true of any trade secret a company wants to keep secret.

In the tire litigation, evidence supporting the trade-secret status of the skim-stock formulas involved limited computer access to the formulas, paper copies kept under lock and key, and confidentiality agreements with employees and contractors.

A further consideration in the fracing arena is the extent to which the company that owns the frac-fluid formula (be it the operator, drilling contractor, or fluid manufacturer) shares it with its coventurers and contracting parties in the field. If the fracing formula is created by a service provider, and that company contracts to sell the frac fluid to a drilling contractor, who then discloses the formula to the operator, each of the parties must take precautions to limit disclosure within itself and with outside companies. If the formula is tweaked or altered at the wellsite, the alterations must be kept secret. This may not be easy to do when completion operations are under way and well difficulties are being addressed on the fly, but the precautions are necessary if the company wishes to keep the formula from being a pressure point in litigation.

Specific protections can be put in place in the field, such as nondisclosure agreements among employees, putting the paper formulas in safes on wellsites or trailers, password-protecting computers, and tracking who has access to the formulas in the company computers. Companies may be taking these steps already. Documenting them prospectively is just as important as taking the steps themselves.

Further protections

If a court orders the disclosure of a trade secret, including a formula, companies have further protections against general disclosure.

A court ordering the disclosure of frac-fluid formulas may allow protection of the trade secret in a less stringent manner than outright refusal to disclose. The parties can and should agree to a protective order entered by the court. If the form of protective order cannot be agreed to, a company may move for protection and let the court fashion the protective order.

Further, Texas Rule of Civil Procedure 76a provides for the sealing of court records and sealing the courtroom itself upon a showing of a specific, serious, and substantial interest that clearly outweighs the presumption of openness of courts, of probable harm that sealing will have upon the general public health and safety, and of the absence of less-restrictive means than sealing records that will adequately and effectively protect the specific interest asserted.

By moving to seal court records and the courtroom during discussion of the trade secret, and insisting at each stage that a trade secret could be disclosed that the records should be filed under seal (as part of a motion to compel, motion for summary judgment, deposition record, etc.), the company can further protect the trade secret. Also, if the trade secret privilege assertion—the motion to enter a protective order or motion to seal records—is denied by the court, the company needs to file a writ of mandamus or other interlocutory appeal (as the jurisdiction allows) to protect the trade secret. Simply losing a preliminary argument on a motion, then giving up until an eventual appeal after a trial, will not likely be enough. The appellate courts may consider the trade secret waived.

If at any point the company falls lax and fails to insist on sealing the record or court, the protection can be lost.

To protect trade secrets in the benzene litigation that looms, and to keep those secrets from becoming convenient pressure points for personal-injury plaintiffs, companies need to protect frac-fluid formulas as important intellectual property now—and keep careful records documenting their efforts.

References

1. Natelson, E., "Benzene-induced acute myeloid leukemia; A clinician's perspective," American Journal of Hematology, February 2007, p. 1.

2. See, for example, In re Bridgestone/Firestone Inc., 106 S.W.3d 730, 733 (Tex. 2003).

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