Protecting Reserve Estimates and Future Revenue Projections from Discovery
Submitted by Mark Waite and Bruce Wilkin, Beirne, Maynard & Parsons, LLP

A company’s reserve estimates and future revenue projections for oil and gas properties are generally considered highly confidential. When litigation over those properties develops, however, those confidential estimates and projections may be the subject of discovery requests issued by a party seeking to prove at least a floor of damages. Parties often insist on highly restrictive confidentiality and protective orders before producing these estimates and projections in litigation, but in the end they are still often produced to the other side. However, a recent opinion issued by the Fort Worth Court of Appeals may provide a model for owners of such data seeking to protect it from discovery altogether. The issue is likely to develop further as parties to other litigation may raise similar objections which reach the courts.

The Fort Worth Court of Appeals recently held that a trial court abused its discretion in ordering an energy company to produce data consisting of subsurface gas reserves related to certain gas leases made the subject of the lawsuit, including reserve estimates and future revenue projections. In re XTO Resources I, LP 248 S.W.3d 898 (Tex. App.—Fort Worth 2008, orig. proceeding).

I. Background

The plaintiff sued an energy company, alleging that the energy company failed to reassign certain acreage that was not developed under gas leases. If the plaintiff could establish liability, it still had to prove its damages, including the potential value and revenue from the properties. To assist its expert in proving the recoverable reserves beneath the subject properties, the plaintiff issued discovery seeking the defendant’s internal reserve estimates and future revenue projections. The defendant objected that the forecasts were highly confidential and, instead of negotiating a confidentiality order to coincide with the production, refused to produce the forecasts altogether. The plaintiff moved to compel production of the records, arguing that the requested information would assist its expert and that the defendant’s confidentiality concerns could be addressed by a confidentiality agreement. The defendant filed a response, asserting that the requested data contained trade secrets, and the plaintiff could calculate its alleged damages from publicly-available production data. The trial court granted the plaintiff’s motion to compel and ordered the energy company to produce the information within 14 days.

II. The court of appeals overturns the trial court’s decision.

A. Reserve estimates and future revenue projections are trade secrets generally protected from discovery.

While it appeared that the plaintiff had conceded in the trial court that the data constituted trade secrets, the court of appeals still analyzed whether the defendant’s reserves constituted trade secrets under the Restatement factors. See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. D (1995); RESTATEMENT OF TORTS § 757 cmt. B (1939).

The most significant factors in the court of appeals’ analysis was the evidence defendant submitted in the form of affidavits to support its claim of privilege, which stated the following:

• While some of the underlying data are publicly available, the defendant’s forecasts and conclusions are not.
• While the SEC requires the disclosure of certain global, aggregate information, this type of data are not made publicly available and are not disclosed to anyone outside of the energy company, its consultants, and working-interest owners on a need to know basis.
• The data are carefully guarded and are obtainable only by the defendant’s personnel on a need-to-know basis.
• While never stating a dollar amount, the information is highly valuable because it gives the defendant a competitive advantage in the marketplace in determining the economic feasibility of developing a given property.

The court of appeals held that this evidence suggested that the information was confidential and valuable, and that the defendant limited the information within its own organization and vigilantly guarded the data. The court noted that it was not the underlying well data that the defendant claimed trade secret protection over, it was the process of transforming the raw data into reserve estimates and the estimates themselves. In other words, the plaintiff could use readily available data to make its own reserve calculations, but those calculations would not necessarily match those of the defendant—it was the difference between the calculations that gave the defendant a competitive advantage. Most importantly, the court of appeals held that the data were entitled to trade secret protection, including protection from discovery.

B. The plaintiff’s expert did not present a sufficient need for the information to pierce the privilege.

The court of appeals also held that the plaintiff did not meet its burden to establish that the information, while generally privileged, was necessary for a fair adjudication of the case. This is because, while the plaintiff’s expert testified that the data would “assist” and “help” him to prepare a report with the least amount of uncertainty, he could not establish the standard required by the rules. This standard requires the party seeking discovery of the trade secrets to establish that discovery of such data is necessary for a fair adjudication of the parties’ claims. The expert also conceded that at least some of the underlying data was available from other sources. Importantly, the expert did not testify that he could not form an opinion without the requested information. Thus, the expert testified that the data would be helpful, not that they were necessary.

The court of appeals held that this testimony did not outweigh the importance of protecting the energy company’s trade secret privilege. Accordingly, the court held that the trial court abused its discretion by ordering the production of the data in question.

III. Possible Implications

Reserve estimates are commonly part of a plaintiff’s damage model. The ability to discover the defendant’s own projections and argue them as at least a floor of damages is common (e.g., “Even the defendant admits that this property is worth $20 million, and we’ll show you that it is really much higher…”). Additionally, these estimates can help the plaintiff’s expert explain away what might otherwise be seen as speculative, if the expert might otherwise have insufficient data to make a reasoned and admissible opinion. When the plaintiff is prevented from discovering the defendant’s reserve estimates altogether, its efforts to build its damage model may be hindered, and perhaps seriously hindered. An energy company could seek to protect such information from discovery by using In re XTO Resources as a model of how to allege trade secret protection through its client’s testimony.

Additionally, the approach in this case may put a plaintiff in a precarious position in seeking to compel such information. In the face of defendant’s objection to the discovery, the plaintiff may need to call the expert to testify about the importance of the information sought. To do so effectively, the expert would need to explain that the information really is necessary to be able to render an opinion. In doing so, however, the expert will become boxed in, and may face exclusion if the records are then not made available. Alternatively, expressing that the information is “helpful”, without more, may not meet the standard set by the In re XTO Resources court.

In re XTO Resources sets a broad precedent that protects reserve estimates and future revenue projections from discovery and may allow energy companies to cut many plaintiffs’ damage models off at their knees. Whether other courts follow this lead remains to be seen. In the meantime, consideration should be given whenever reserves estimates and related forecasts are requested in discovery.