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IN RE: Craig L. BLAIR, BMB/SWC Ranches, LLC d/b/a SWC Ranches Capitan Energy, Incorporated, Saturn SWD Operating, LLC, Thunderhead II Management LLC, Thunderhead Petroleum LLC, Thunderhead Petroleum II, LP, Antelope Production, LLC, Orla Metro Management LLC, Onager Electric LLC, and CD Florian Disposal, LLC, Relators.
In this original proceeding, Relators Craig L. Blair, BMB/SWC Ranches, LLC d/b/a SWC Ranches Capitan Energy, Incorporated, Saturn SWD Operating, LLC, Thunderhead II management LLC, Thunderhead Petroleum LLC, Thunderhead Petroleum II, LP, Antelope Production, LLC, Orla Metro Management LLC, Onager Electric LLC, and CD Florian Disposal, LLC (“Relators”) seek a writ of mandamus directing the trial court to vacate its discovery order authorizing access to Relators’ native accounting database files. After reviewing the petition, response, and the record, we deny Relators’ requested mandamus relief but direct the trial court to reform the complained-of discovery order to allow the confidentiality process to be conducted.
A. The essential dispute
In the underlying cause of action Real Parties in Interest Kirk Covington, Renee J. Brunson, Bruce Kyle Covington individually and as co-trustee of the Catalpa Trust, Earmark Enterprises, LLC, Gary Covington, and Porosity LP (“Real Parties”) allege they have not received the water-sale-income proceeds they are entitled to under a contract they have with Relators, who sell the water generated on their ranch. According to the Real Parties, Relators have misled Real Parties for several years by representing there is no water on their ranch, when in fact, Relators have been generating millions of barrels which they sell to other companies Relators own (intercompany transfers) at a low price, and is resold to third parties at a higher price or use it for their own off-lease operations.
Real Parties have maintained from the inception of the case Relators’ accounting records will reveal information that supports their allegations, so through a request for production, they requested Relators’ native accounting files.1 Relators’ accounting files are accessible through their vendor, WolfePak, which according to the parties, provides a service similar to Quickbooks to companies in the oil and gas industry. Real Parties desire the requested accounting files in their native format because they require access to the searchable metadata contained in the native files as it provides information regarding any changes that may have been made to the file. In preparing to disclose the native accounting files, Relators discovered confidential information could not be redacted, so they produced the records in a static Excel spreadsheet format. Real Parties objected to the production of the records in static format because they claim that the records do not contain the searchable metadata the native format provides.
Essentially, this mandamus action concerns the parties’ dispute over the form in which the requested accounting records must be produced.
B. Procedural history
Real Parties assert that in July 2020, Relators agreed to produce the requested accounting records in native format in order to avoid having the trial court appoint an auditor. On March 26, 2021, after Relators failed to voluntarily produce the records, Real Parties filed requests for production where they requested the financial records in native form. Relators objected that the requests were “overly broad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence.” Real Parties also requested the “hard copy accounting records” and Relators objected the records were kept in electronic form, not hard copy.
After receiving Relators’ responses to the requests for production, Real Parties filed a motion to compel that was referred to a special master.2 Real Parties argued they required access to Relators’ financial files which according to statements made by their CFO at a deposition, were located in Relators’ WolfePak database. Real Parties attached their expert's affidavit, a certified fraud examiner and master analyst in financial forensics, who had performed an evaluation of the “limited” accounting records Relators had already produced. The expert identified many irregularities including $86 million in allegedly unreported sales of water. The expert also opined access to the “native WolfePak file” was needed in order to analyze inter-company transactions and determine the validity of the charges, as well as access to the embedded audit trail that may reveal if expense records were manipulated after suit was filed.
Real Parties’ motion to compel was not heard on its July 19, 2021 scheduled date because the parties entered into a Rule 11 agreement, where Relators agreed to produce native copies of the WolfePak accounting databases within two weeks, in the same format and with the same information as was available to Defendants or their experts. The agreement also reflected the hearing on the motion to compel would be passed and the order submitted to the special master indicated the motion to compel had been resolved, without prejudice.3
Relators did not comply with the Rule 11 agreement because they discovered that disclosure of their WolfePak records in native form would require them to reveal confidential and privileged information. Instead of producing the native accounting files, Relators learned the same information could be produced in static Excel spreadsheet format, so they produced the information in this manner.
On August 23, 2021, a hearing was held where the Real Parties notified the special master of the discovery dispute. Real Parties argued obtaining access to the native WolfePak files was necessary in order to see if the data was manipulated and if so, who manipulated it. Relators argued that the Rule 11 agreement only required them to disclose the information in Excel spreadsheet format, which still allows Real Parties to examine whether financial information has been manipulated. The special master responded, “[w]e're playing games. It's not effective unless you have the database. And I don't want any spreadsheets, I don't want any documents, the basis of that order was the Wolfpack [sic] native database period. That's the way I intended my order to read. If it didn't, then we're going to do a new order because that's what I intended. Okay. So if that would shortcut this proceeding, let's get it done. Because that is what I intended to order, plain and simple.” The special master then stated that a motion to enforce the Rule 11 agreement had been filed, which would be heard on September 1, 2021 in order to give Relators time to file a response.
Relators filed a response to the motion to enforce the Rule 11 Agreement and argued it was impossible to comply with the agreement because they could not redact privileged information from the native WolfePak files. They produced more of the requested files in static Excel spreadsheet format and claimed this file format contained the requisite audit trail, as hyperlinks were included to help Real Parties search through the information.
In response, Real Parties filed another affidavit from their expert where she explained the Excel files produced by Relators did not contain all of the relevant information contained in the native WolfePak files. She also stated with the native files, auditors could verify transactions or uncover manipulation “with one click,” as opposed to the inordinate amount of time it would take to analyze the Excel spreadsheets.
At the September 1, 2021 hearing, the special master held the Rule 11 Agreement invalid and granted Real Parties’ original motion to compel sua sponte. The order stated Relators had not filed a response to the motion to compel and that as such, the special master could rule on the motion with or without a hearing following the fourteen-day deadline to file a response. It further stated Relators were to produce “complete native copies of all WolfePak accounting databases” to give to WolfePak's representatives. WolfePak would then redact confidential/privileged information with input from Relators. Relators were also ordered to prepare a privilege log and schedule a conference with the special master if any problems arose. Additionally, the documents and information produced were to be maintained as “Attorney's Eyes Only.” Finally, the special master imposed sanctions against Relators.
Pursuant to Rule 171, Relators objected to the special master's order and secured a de novo hearing in the trial court. See Tex.R.Civ.P. 171. At the de novo hearing held on September 27, 2021, Relators argued the special master ruled on the motion to compel sua sponte, without affording them notice and without having a motion to compel pending before it, as it had been withdrawn. They also maintained Real Parties had not complied with the procedure hurdles set out in In re Weekley Homes, 295 S.W.3d 309, 322 (Tex. 2009)(orig. proceeding), namely they had failed to show Relators had defaulted on their obligation to search their records and produce the requested records. Finally, Relators argued the special master's proposal of allowing their vendor, WolfePak, to look through their accounting files and remove any confidential information would still cause Relators to lose their attorney-client privilege.
Real Parties detailed instances of alleged fraud they had thus far uncovered to emphasize that access to the native file format was vital because it provided an audit trail and would shorten their work time by tenfold. Real Parties also reminded the trial court back in October of 2020, the trial court told Relators if they did not want for the court to appoint an auditor in the name of the court, they needed to turn the records over to Real Parties’ accountants and despite this directive, the records were never produced. Real Parties further argued per the special master referral order, the special master had authority to act sua sponte, and the special master took care to protect Relators’ privileged information by involving them in the process and requiring materials be marked “Attorney's Eyes Only.” Real Parties offered an email from WolfePak stating although it was a non-trivial exercise, information could be redacted from the native accounting files. Relators understood the process would be costly but said they would pay for it.
On September 28, 2021, the trial court overruled Relators’ objections to the special master's recommendation. Relators filed their mandamus petition seeking relief from the trial court's September order. This Court stayed all proceedings in the underlying cause pending resolution of this mandamus action.
A. Standard of Review
1. Standard of Review
Mandamus will issue to correct an abuse of discretion when an adequate remedy by appeal does not exist. In re Garza, 544 S.W.3d 836, 840 (Tex. 2018)(orig. proceeding)(per curiam). A trial court abuses its discretion when its ruling is so arbitrary and unreasonable that it constitutes a clear and prejudicial error of law. In re CSX Corp., 124 S.W.3d 149, 151 (Tex. 2003)(orig. proceeding)(per curiam).
Discovery affords parties the opportunity to seek the truth, so disputes may be decided by what the facts reveal, not by what facts are concealed. In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998)(orig. proceeding)(per curiam). The scope of discovery largely rests within the discretion of the trial court. Ginsberg v. Fifth Court of Appeals, 686 S.W.2d 105, 108 (Tex. 1985)(orig. proceeding). As such, the reviewing court may not reverse the trial court for an abuse of discretion because it disagrees with the trial court's decision so long as that decision is within the trial court's discretionary authority. Walker v. Packer, 827 S.W.2d 833, 839-40 (Tex. 1992)(orig. proceeding). “A discovery order that compels production beyond the rules of procedure is an abuse of discretion for which mandamus is the proper remedy.” In re Nat'l Lloyds Ins. Co., 507 S.W.3d 219, 223 (Tex. 2016)(orig. proceeding)(per curiam). Mandamus relief is available when a trial court compels production of electronic data and information beyond the permissible bounds of discovery. In re Weekley Homes L.P., 295 S.W.3d 309, 322 (Tex. 2009)(orig. proceeding). The harm a party will suffer from being required to relinquish control of its data for forensic inspection, and the harm that might result from revealing private conversations, trade secrets, and privileged or otherwise confidential communications, cannot be remedied on appeal. Id. at 322-23.
B. The trial court did not abuse its discretion by considering the Real Parties’ motion to compel.
In this mandamus action, Relators assert the trial court abused its discretion in two instances. First, Relators argue the trial court abused its discretion because it ruled on Real Parties’ motion to compel without having the motion to compel pending before it, as it had been withdrawn. Relators rely on In re Harris, where the trial court ordered Relator to produce a computer hard drive, external hard drives, and flash drives when there was no motion to compel against the Relator pending and without requiring the Real Party to identify which discovery requests Relator had not complied with. In re Harris, 315 S.W.3d 685, 697 (Tex.App.—Houston [1st Dist.] 2010, orig. proceeding). Based on these facts, the Court held the trial court abused its discretion in ordering overbroad discovery. Id. at 697-98.
Unlike in Harris, the Real Parties here filed a motion to compel and pursuant to Tex.R.Civ.P. 171, the parties agreed a special master would hear discovery disputes. The parties entered into a Rule 11 agreement where Relators agreed to turn over the native WolfePak files and Real Parties’ motion to compel was “removed from the docket without prejudice.” When Relators did not comply with the Rule 11 agreement, the parties went back to where they were before the Rule 11 agreement—with the Real Parties’ unresolved motion to compel pending. After the special master ruled on the motion to compel, Relators exercised their right to object to the special master's order and obtained a trial de novo. Relators claim because they did not receive notice of the hearing before the special master on the motion to compel, they were not able to introduce evidence regarding the adequacy of the financial documents they produced in Excel spreadsheet format. However, per the order in which they agreed to the special master, the special master had authority to issue a ruling on motions after the 14-day response period had passed, with or without a hearing. Additionally, at the trial de novo, Relators were able to present their case, urge the arguments they may not have been able to make before the special master, and have the trial court decide the issue. Thus, as argued by the Real Parties, this procedure followed cures Relators’ complaints they lacked notice and did not have an opportunity to provide details regarding the Excel records they produced. Accordingly, Relators are not entitled to mandamus relief on this issue. Having addressed Relators’ first issue, we now turn to Relators’ issue concerning the trial court's order for Relator to produce their accounting files in native format.
C. The trial court did not abuse its discretion by ordering Relators to produce responsive records in native format.
1. The law applicable to Electronic Discovery
Rule 196.4 provides when a specific request for electronic data has been made, the responding party is required to produce responsive electronica data that is reasonably available in the ordinary course of business. See Tex.R.Civ.P. 196.4. In In re Weekley Homes, the Supreme Court summarized the “proper procedure” under Rule 196.4. In re Weekley Homes, 295 S.W.3d at 322. First, Rule 196.4 requires a requesting party to “specifically request production of electronic or magnetic data and specify the form in which [it] wants it produced.” Id. at 314. A responding party must produce the requested electronic data in the form specified “or object on grounds that the information cannot through reasonable efforts be retrieved or produced in the form requested.” Id. at 315. The parties should make reasonable efforts to resolve the dispute without court intervention. Id. at 322. If the parties are unable to settle the matter, either party may request a hearing on the objection at which the responding party must demonstrate that the requested information is not reasonably available because of undue burden or cost. Id. If the trial court agrees the information is not reasonably available, it may still order the production if the requesting party shows that the benefits of production outweigh the burdens. Id.
In disputes concerning the form in which requested electronic information must be produced, neither party gets to dictate the form in which electronically stored information will be produced. In re State Farm, 520 S.W.3d at 607. “[I]f the responding party objects that electronic data cannot be retrieved in the form requested through “reasonable efforts” and asserts that the information is readily obtainable from some other source that is more convenient, less burdensome, or less expensive, the trial court is obliged to consider whether production in the form requested should be denied in favor of a reasonably usable alternative form” Id. The trial court must assess whether any enhanced burden or expense associated with producing data in the requested form is justified when weighed against the proportional needs of the case. Id. at 599. The proportionality inquiry requires a case-by-case balancing in light of the following factors:
1) Likely benefit of the discovery, including the speculative nature of the benefit of obtaining the information, or a showing of a “particularized need” (which weighs in favor of production);
2) The needs of the case, such as whether information contained in metadata is useful or dispositive;
3) Amount in controversy, and whether the amount justifies the additional expense that accompanies production of e-discovery in particular formats;
4) The parties’ resources, including both financial and technological resources; while the limits of a parties’ resources does not necessarily foreclose discovery requests, ‘the court must apply the standards in an even-handed manner that will prevent use of discovery to wage a war of attrition or as a device to coerce a party, whether financially weak or affluent.’;
5) Importance of the issues at stake in litigation, such as the precedential value or importance beyond monetary values;
6) The importance of the proposed discovery in resolving the litigation, including whether the request is merely a ‘fishing expedition’; and
7) Any other articulable factor bearing on proportionality.
Id. at 608-12.
“As a threshold matter, the requesting party must show that the responding party has somehow defaulted in its obligation to search its records and produce the requested data.” In re Weekley Homes, 295 S.W.3d at 317. The requesting party should also show the responding party's production has been inadequate and a search of the requested data could recover relevant materials. Id. “Finally, when determining the means by which the sources should be searched and information produced, direct access to another party's electronic storage devices is discouraged, and courts should be extremely cautious to guard against undue intrusion.” Id. at 322.
Real Parties argue In re Weekley Homes does not apply because this case does not involve intrusive electronic discovery. We disagree. We recognize searching Relators’ accounting databases is not the same as a forensic search of one of Relators’ electronic storage devices such as a computer. However, the trial court's order allows access to Relators’ accounting files that appear to be similar to files stored on a computer which raises undue intrusion concerns similar to those addressed in In re Weekley Homes. See In re Methodist Primary Care Group, 553 S.W.3d 709, 718 (Tex.App.—Houston [14th Dist.] 2018, orig. proceeding)(“The supreme court's intrusion concerns apply regardless of whether the responding party stores its data on a hard drive in its possession or instead stores its data in a database that can be accessed remotely.”). As such, we examine whether the trial court could have reasonably determined Real Parties met their evidentiary burden of showing Relators’ defaulted on their discovery obligations, Relators’ production was inadequate, and a search of the requested native accounting files would uncover relevant information. In re Weekley Homes, 295 S.W.3d at 317.
The record shows Relators agreed to produce their accounting files in native format on the condition certain information such as American Express charges and employees’ personal information be redacted. However, when preparing to turn over their native accounting files to the Real Parties, Relators’ chief financial officer determined the WolfePak software would not allow documents to be omitted or redacted. Relators consulted with WolfePak's customer support and determined they could remove the confidential information by exporting the databases into Excel spreadsheets. According to Relators, these Excel spreadsheets mirrored the information contained in the WolfePak native database and could be imported into WolfePak to be viewed in the WolfePak environment. Relators claimed they took a substantial amount of time to convert the databases into Excel spreadsheets and once they completed the task, they disclosed the Excel spreadsheets to the Real Parties. Relators maintained the Excel spreadsheets protected their confidential information and were searchable in a similar manner to the native format.
At the hearing, Real Parties submitted their expert's affidavit disputing Relators’ claim the Excel spreadsheets were an adequate substitution for the native records. Real Parties’ expert asserted the native Wolfepak file is a relational database that contains the relationships or links between different types of data, such as invoices and payments and the Excel spreadsheets Relators produced did not link the data in the same way, making a search of the same data in the Excel spreadsheets much more time consuming. Real Parties’ expert also claimed in reviewing the Excel spreadsheets, there was evidence a “large number of changes” had been made to Relators’ accounting files on or around various dates relevant to the litigation and a search of the native files would reveal when and who made the changes. For example, their expert maintained Relators’ chief financial officer altered 188 entries valued at over 50 million dollars, including one 17 million dollar entry called “water royalty payables” that was deleted. Additionally, and most important to addressing Relators’ confidentiality concerns, Real Parties informed the trial court according to WolfePak's legal counsel, confidential information could be redacted from WolfePak files.
Based on the evidence presented by Real Parties, the trial court could have determined Relators defaulted on their obligation to produce the requested data in native form, the static Excel spreadsheet records produced by Relators were inadequate because they would not reveal whether the data had been manipulated, the native files would reveal whether the data had been manipulated, and the information contained in the metadata is dispositive to the issues in the case. Accordingly, the record supports the trial court's decision to overrule Relator's objections to the special master's order granting Real Parties’ motion to compel and uphold the special master's order. We conclude Relators are not entitled to mandamus relief on this issue, as well.
3. Relators’ confidentiality concerns
Here, the trial court determined the benefits of its discovery order outweighed the burden imposed on the Relators. Because “courts should be mindful of protecting sensitive information and should choose the least intrusive means of retrieval,” we direct the trial court to reform the discovery order to allow the confidentiality process to be conducted. See In re Weekley Homes, 295 S.W.3d at 316.
We deny the petition for writ of mandamus and direct the trial court to reform the discovery order as detailed above. Additionally, we lift the temporary stay imposed by this Court's September 30, 2021 order.
1. Production of data in “native format” means that the data retains the file structure associated with and defined by the original creating application. In re State Lloyds, 520 S.W.3d 595, 601 (2017)(Tex. 2017)(orig. proceeding) (citing U.S. ex rel. Carter v. Bridgepoint Educ., Inc., 305 F.R.D. 225, 228 (S.D. Cal. 2015)). In retaining the structure, the native files contain metadata, which is information about the file itself such as whether changes were made to the file, when changes were made, and who made those changes. Id.
2. Five months into the case, the parties agreed to submit discovery disputes to a special master and the Honorable Dick Alcala was appointed. The order provided that either party could refer a discovery matter by filing a motion with the Court and sending a copy to the special master. The opposing party would then have fourteen days to respond. The special master order further stipulated the special master may rule on motions by submission without a hearing or may hold hearings as he deems appropriate and any party may object to an order issued by the special master by filing a written objection with the Court.
3. The record reflects this proposed order was never signed by the Special Master.
YVONNE T RODRIGUEZ, Chief Justice
Response sent, thank you
Docket No: No. 08-21-00167-CV
Decided: August 05, 2022
Court: Court of Appeals of Texas, El Paso.
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