in Re: Union Energy, Inc., Gulf Exploration, Inc. and MC2 Resources, LLC

NO. 12-08-00305-CV
IN THE COURT OF APPEALS
TWELFTH COURT OF APPEALS DISTRICT
TYLER, TEXAS
IN RE: UNION ENERGY, INC., §
GULF EXPLORATION, INC. AND § ORIGINAL PROCEEDING
MC2 RESOURCES, LLC, RELATORS §
MEMORANDUM OPINION
Union Energy, Inc., Gulf Exploration, Inc., and MC2 Resources, LLC (collectively
“Relators”) filed a petition for writ of mandamus challenging the trial court’s July 3, 2008 order
compelling Union Energy, Inc. to produce its stock register to the real parties in interest, Five Star
Explorations, Inc., M. Dewayne Varnadore, Alan K. Jasper, and James J. Fischer (collectively “Real
Parties”).1 We deny the petition.
BACKGROUND
Real Parties filed suit against Relators in Smith County, Texas seeking damages under
various legal theories, including breach of contract, fraud, negligent misrepresentation, alter ego, and
vicarious liability. Following Relators’ answer to the suit, Real Parties served Relators with a
request for production of documents and tangible items. Among the items sought by way of Real
Parties’ request for production was Union Energy, Inc.’s stock register.2 Relators objected to
Request Number 7 because, among other reasons, the request impermissibly invaded “personal,
constitutional, or property rights.”
1
The respondent is the Honorable Jack Skeen, Jr., Judge of the 241st Judicial District Court, Smith County,
Texas.
2
The request in question is, at times, hereinafter referred to as “Request Number 7.”
Thereafter, Real Parties filed a motion to compel production of the stock register. Relators
responded, arguing that the discovery request invaded Union Energy, Inc.’s shareholders’ privacy
interests pursuant to Texas Rule of Civil Procedure 192.6(b) because the disclosure of the identities
of those owning interests in privately held entities would make such persons subject to solicitation
by both Real Parties and the public at large. Relators further relied on the affidavit of Randall May,
in which he stated, in pertinent part, as follows:
1. “My name is Randall May. I am over the age of twenty-one years, and I am fully
competent to make this Affidavit. I have personal knowledge of each statement set
forth herein, and each such statement is true and correct.
2. “Union Energy, Inc. is a privately owned entity. It is of great importance to Union
Energy and its stockholders that the stockholders’ identities remain confidential.
Union Energy takes affirmative steps to protect the confidentiality of its stock
registers, stock ledgers, stock certificates, list of shareholders, and the information
contained therein.
3. “Union Energy would not disclose its stock registers, stock ledgers, stock
certificates, or any list of shareholders to any person who is not an officer, director
or shareholder of the company. In fact, this information has never been disclosed
to any person other than Lane M cN amara, myself, and our attorneys. The stock
registers, stock ledgers, stock certificates and shareholder lists are kept in a secure
place and not accessible to persons not entitled to view them. Since 2003 they have
been kept under lock and key in a filing cabinet and were not rem oved until this
dispute arose.
4. “While MC2 Resources, LLC and Shamrock Oil & Gas, Inc. each have one
shareholder, respectively Lane McNamara and myself, Union Energy has multiple
shareholders. No single person owns a controlling share in Union Energy. Other
than Lane McNamara and myself, none of the other shareholders are investors in
any other entity involved in this case. As these shareholders are current and
possibly future investors, it is vital to Union Energy to keep their identifying
information secret from the world at large, and especially from those individuals
and entities, such as the Plaintiffs, who are its direct competitors. As persons who
can provide working capital and needed infusions of cash into our business, this list
of investors gives Union Energy a competitive advantage in its field which would
be destroyed by forcing the disclosure of their identities. Forcing the disclosure of
Union Energy’s stock registers, stock ledgers, stock certificates or any other
document containing the identity of the shareholders would do just that.”
Following a hearing on Real Parties’ motion to compel, the trial court entered an order
compelling Union Energy to produce its stock register to Real Parties. The Relators subsequently
filed this petition for writ of mandamus as well as a motion for emergency relief, in which they
requested that we stay all proceedings pending our resolution of their petition for writ of mandamus.
2
We granted the motion and issued the stay.
AVAILABILITY OF MANDAMUS
Mandamus will issue to correct a clear abuse of discretion where there is no adequate remedy
by appeal. In re Cerberus Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex. 2005); Walker v.
Packer, 827 S.W.2d 833, 839–40 (Tex. 1992). The trial court abuses its discretion if it reaches a
decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law or if it
clearly fails to correctly analyze or apply the law. Id.
Generally, privileged matters are not discoverable. West v. Solito, 563 S.W.2d 240, 243
(Tex. 1978). If the trial court errs in ordering that privileged material be disclosed, there is no
adequate remedy at law because once the privileged information is revealed, the documents can no
longer be protected. See Walker, 827 S.W.2d at 843.
ASSERTING THE TRADE SECRET PRIVILEGE
In their petition, Relators first contend that the trial court abused its discretion by compelling
Union Energy, Inc. to produce its stock register over their objection that such a document was a
privileged trade secret. Real Parties respond that Relators failed to assert the trade secret privilege
in the trial court.
Trade Secret
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.” In re Bass, 113 S.W.3d 735, 739 (Tex. 2003). The Texas Rules of Evidence set
forth the trade secret privilege as follows:
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. W hen
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.
3
Asserting a Privilege
The party seeking protection of information by a claim of privilege has the burden to plead
and prove the applicable privilege. See In re BP Products North America, Inc., No.
01-06-00679-CV, 2006 WL 2973037, at *4 (Tex. App.–Houston [1st Dist.] Oct. 13, 2006, orig.
proceeding); In re Nance, 143 S.W.3d 506, 510 (Tex. App.–Austin 2004, orig. proceeding). There
is no presumption that documents are privileged. In re BP Products North America, Inc., 2006 WL
2973037, at *4. To meet its burden, the party claiming the privilege must first assert the privilege.
See id. Asserting a privilege is governed by Texas Rule of Civil Procedure 193.3. Id.; but see TEX .
R. CIV . P. 192.6(a), 193.2(f); see also In re Monsanto Co., 998 S.W.2d 917, 926 (Tex. App.–Waco
1999, orig. proceeding) (explaining that asserting privilege and providing proof to support privilege
are distinct concepts).
In the instant case, in their response to Real Parties’ request for production of documents,
Relators made no claim of privilege. Rather, Relators objected that the request sought documents
that were not relevant and not reasonably calculated to lead to the discovery of admissible evidence
and, further, that the discovery requested “invades the personal, constitutional, or property rights of
Defendants which is impermissible under TEX . R. CIV . P. 192.6(b).” Further, Relators made no
written statement that any item responsive to Request Number 7 was privileged nor did they make
any written statement claiming any specific privilege or that any documents were withheld on the
grounds of any privilege. See, e.g., TEX . R. CIV . P. 192.6(a), 193.2(f), 193.3(a). Real Parties never
pointed out Union Energy’s error, see TEX . R. CIV . P. 193.2(f), nor did they request a privilege log.3
See TEX . R. CIV . P. 193.3(b).
Thereafter, Real Parties filed a motion to compel. There is no indication in Real Parties’
motion to compel that they were aware that Relators were asserting any privilege with regard to
Request Number 7, much less that they were aware that Relators were contending that the stock
register in question constituted a trade secret. In their written response to Real Parties’ motion to
compel, Relators stated, in pertinent part, as follows:
3
It is not unusual that Real Parties declined to take either of these actions because Relators had not made
any assertion of privilege at this point in time.
4
[P]laintiff’s discovery request invades defendants’ shareholders’ privacy interests[ ] because
it would require defendants to publicly disclose the identities of those owning interests in privately-
held entities. Defendants’ shareholders are highly concerned about disclosure of their identities. This
information would not only be available for plaintiff to use to harass defendants’ shareholders, but also
for any member of the public to solicit after reviewing the information in the Court’s records.
Therefore, the Court should sustain D efendants’ objection that the disclosure of such information
would include Defendants’ personal rights under T EX . R. C IV . P. 192.6(b).
Subsequently, Relators filed the May affidavit. In his affidavit, May testified regarding the
importance to Union Energy and its stockholders that the stockholders’ identities remain
confidential. May further outlined the steps taken to secure Union Energy’s stockholders’ identities.
Moreover, May related that such a list of investors gives Union Energy a competitive advantage in
its field, which would be destroyed by forcing the disclosure of such investors’ identities.
Thereafter, the trial court conducted a hearing on Real Parties’ motion to compel. At the
hearing, neither party uttered the words “privilege” or “trade secret.” Real Parties proceeded to argue
against Relators’ 192.6(b) objection as follows:
The defendants have alleged some type of statutory or constitutional rights of privacy. I’ve
researched the issues, [and] there’s no authority citing that. I’ve researched or I’ve found no authority
that there’s a constitutional right of privacy in a stock register, that’s a document that’s owned by a
corporation. I’m not even sure a corporation has that kind of right of privacy. It’s not an individual
personal right.
And second, Judge, the only evidence that they’ve offered on the stock register is they’re
concerned that because our clients compete in the oil and gas industry, that my clients are going to
then contact those shareholders and try to enlist them or solicit their investment in oil and gas deals.
Relators responded that the redacted stock ledger they provided Real Parties at the outset of the
hearing would be sufficient to not only provide Real Parties the sufficient evidence they sought in
support of their alter ego argument, but also would “protect [Relators’] interests in the privacy of
their shareholders that provide them a competitive advantage of other investors that they could have
for other [potential] oil and gas ventures.” Relators further stated that they had an interest in
maintaining the privacy of that information because “Union Energy is a privately held corporation.”
Based on our review of the record before us in this proceeding, we conclude that Relators’
objections in response to Real Parties’ request for production of documents did not, even in the most
general sense, amount to an assertion of a privilege. Moreover, the record contains no assertion of
privilege comporting to Rule 193.3. Further still, Relators made no argument in their response to
5
Real Parties’ motion to compel with regard to a trade secret privilege. May’s affidavit arguably
tracks some of the Restatement factors for determining the existence of a trade secret.4 Even
assuming arguendo that a privilege could be asserted in such a manner, we again note that Relators
had the burden both to assert and prove any privilege they sought to claim. May’s affidavit
testimony fails to specifically assert any privilege.
Finally, even if we were to assume that the assertion of privilege could be made for the first
time at the hearing on Real Parties’ motion to compel, the record must still reflect that Relators
satisfied Texas Rule of Appellate Procedure 33.1 in the trial court by asserting the specific privilege
they seek to raise in this original proceeding. See, e.g., In re Nance, 143 S.W.3d at 510; In re
Highland Pines Nursing Home, Ltd., No. 12-03-00050-CV, 2003 WL 22682356, at *6 (Tex.
App.–Tyler Nov. 13, 2003, orig. proceeding) (mem. op.). Under Rule 33.1, to preserve a complaint
for appellate review, a party must present the matter to the trial court, state the specific grounds
therefor, and obtain a ruling. See TEX . R. APP . P. 33.1(a); Wal-Mart Stores, Inc. v. McKenzie, 997
S.W.2d 278, 280 (Tex. 1999). The purpose of the requirement of specificity is to ensure that the trial
court has the opportunity to rule on the issue. See In re Shaw, 966 S.W.2d 174, 182 (Tex. App.–El
Paso 1998, no pet.).
Here, in response to Real Parties’ argument, Relators contended to the trial court that
preventing discovery of the stock register would “protect [Relators’] interests in the privacy of their
shareholders that provide them a competitive advantage of other investors that they could have for
other [potential] oil and gas ventures.” Relators further stated that they had an interest in
maintaining the privacy of that information because “Union Energy is a privately held corporation.”
While Relators referred to a “competitive advantage,” which is among the basic components
considered in the analysis of the question of whether a compilation of information constitutes a trade
secret, the record of the hearing as a whole does not indicate that such a reference by Relators was
sufficient to convey Relators’ desire, if any, to assert such a privilege to the trial court. Indeed, every
indication from Real Parties at the trial court is that they were arguing against the general assertion
of invasion of personal, constitutional, or property rights under Rule 192.6(b) that Relators asserted
4
See R ESTATEM EN T O F T O RTS § 757 cmt. B (1939); In re Bass, 113 S.W .3d 735, 739 (Tex. 2003).
6
both in response to Request Number 7 and in response to Real Parties’ motion to compel. Moreover,
the trial court made no statements indicating that it understood Relators were asserting the stock
register was a privileged trade secret.
Because the entirety of the record before us does not support that Relators asserted the trade
secret privilege as required by the Rules of Civil Procedure or, alternatively, with the level of
specificity required pursuant to Texas Rule of Appellate Procedure 33.1, Relators are not entitled
to argue in this proceeding that the trial court abused its discretion on such grounds.
Tailoring Disclosure
Additionally, as part of their argument that the stock register sought by Real Parties is a trade
secret, Relators argue that, at a minimum, the trial court should have restricted disclosure of the stock
register to Real Parties’ counsel or otherwise redacted the trade secret information. In In re
Continental Gen. Tire, Inc., 979 S.W.2d 609 (Tex. 1998), the court outlined the trial court’s duties
in its application of Texas Rule of Evidence 507 as follows:
First, the party resisting discovery must establish that the information is a trade secret. The
burden then shifts to the requesting party to establish that the information is necessary for a fair
adjudication of its claims. If the requesting party meets this burden, the trial court should ordinarily
compel disclosure of the information, subject to an appropriate protective order.
Id. at 613; see also TEX . R. EVID . 507.
In the case at hand, we have concluded that the record before us does not support that
Relators asserted the trade secret privilege as required by the Rules of Civil Procedure or,
alternatively, with the level of specificity required pursuant to Texas Rule of Appellate Procedure
33.1. Therefore, the trial court was not required to restrict or redact the discovery it compelled.
PERSONAL, CONSTITUTIONAL, OR PROPERTY RIGHTS
Relators next contend that the trial court abused its discretion in granting Real Parties’
motion to compel because Relators were entitled to a protective order shielding Union Energy’s
stock register from discovery pursuant to Rule 192.6(b). Rule 192.6(b) states, in pertinent part, as
follows:
(b) Order. To protect the movant from undue burden, unnecessary expense, harassment,
annoyance, or invasion of personal, constitutional, or property rights, the court may make any order
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in the interest of justice and may–among other things–order that:
(1) the requested discovery not be sought in whole or in part....
TEX . R. CIV . P. 192.6(a)(b)(1).
Relators cite In re Temple-Inland, Inc., 8 S.W.3d 459 (Tex. App.– Beaumont 2000, orig.
proceeding) in support of their proposition that nonparties to a lawsuit have privacy interests at stake,
including being free from harassment and annoyance.5 In In re Temple-Inland, Inc., a party to the
suit sought to discover a list containing the names of nonparties to the litigation who had been barred
from entering onto the relators’ property. Id. at 460, 463. These nonparty individuals were alleged
to have engaged in criminal behavior and embarrassing conduct. Id. at 462. Further, some of these
individuals allegedly had sustained work related injuries on the premises. Id. The trial court
determined that the list containing the identities of these nonparties should be protected under Rule
192.6(b). Id. at 462–63.
In the case at hand, unlike the list containing the identities of “unwitting third parties”sought
in In re Temple-Inland, Inc., see id. at 463, Real Parties sought to discover a list of stockholders
of a party to this suit. Privacy is not attached to stockholder status in Texas. See TEX . GOVT . CODE
ANN . § 411.109(a)(3) (Vernon 2005) (The State Comptroller may obtain criminal history record
information on a stockholder who owns 10% or more of a corporation.); see also TEX . BUS. & COM .
CODE ANN . § 41.153(4)(B) (Vernon 2002) (Names, addresses and titles of stockholders owning more
than 20% of stock shares must be revealed in certain business sales). As such, Relators have failed
to demonstrate that the information sought is protected under Rule 192.6(b).
CONCLUSION
Based upon our review of the record, the materials submitted by the parties, and applicable
law, we hold that the trial court did not abuse its discretion in granting Real Parties’ motion to
compel production of Union Energy’s stock register. Therefore, we deny Relators’ petition for writ
of mandamus and lift the stay imposed by our order dated July 22, 2008.
5
Relators do not specifically reference any constitutional or property rights in support of their contention.
8
JAMES T. WORTHEN
Chief Justice
Opinion delivered October 31, 2008.
Panel consisted of Worthen, C.J., Griffith, J., and Hoyle, J.
(PUBLISH)
9