SIERRA CLUB v. WOODVILLE PELLETS LLC (2021)

ORDER ON MOTIONS TO QUASH SUBPOENA

Pending before the Court in member case 9:21-mc-5 are Trinity Consultants, Inc.’s (“Trinity”) Motion to Quash Plaintiff's Subpoena (Doc. #1) and Woodville Pellets, LLC's (“Woodville”) Opposed Motion to Quash or Modify (Doc. #4). On August 4, 2021, the Court held a hearing on these motions. After considering the motions, the briefing, and the hearing testimony, the Court denies the motions.

I. BACKGROUND

Plaintiff’ Sierra Club's Second Amended Complaint alleges violations of the Clean Air Act at Defendant Woodville Pellets LLC's (“Woodville”) wood pellets manufacturing facility in Woodville, Texas. The facility converts raw scrap wood materials into small pellets that are exported overseas to be burned as fuel in power plants and homes. Woodville purchased the Facility from German Pellets on or around June 18, 2019. Trinity Consultants, Inc. (“Trinity”) is a non-party environmental consulting firm initially hired by German Pellets to provide expert consulting services related to emissions measurement and air permitting requirements at the facility. Trinity continued to provide expert consulting services at the facility after Woodville purchased the facility.

On June 10, 2021, Sierra Club served a subpoena on non-party Trinity. The original subpoena requested the following information:

REQUEST FOR PRODUCTION NO. 1: All Stack Testing documents, results, or reports related to Stack Testing at the Woodville Pellets facility, including Stack Tests conducted by prior owners German Pellets.

REQUEST FOR PRODUCTION NO. 2: All Air Permit Applications, including the ‘Confidential’ version of any Air Permit Applications, prepared for the Facility, including those prepared for German Pellets.

REQUEST FOR PRODUCTION NO. 3: All documents that show Emission Factors or that were utilized to generate Emission Factors for pollutants (specifically, particulate matter, VOCs, hazardous air pollutants, nitrogen oxides, and carbon monoxide) for the Facility.

REQUEST FOR PRODUCTION ON. 4: All documents related to monitoring, recordkeeping, and reporting requirements under Tile V or SIP Permit No. 98014 prepared on behalf of German Pellets or Woodville Pellets.

REQUEST FOR PRODUCTION NO. 5: Emissions Inventories and related documents prepared on behalf of German Pellets and Woodville Pellets to be submitted to TCEQ, including the basis for calculating emission (i.e. emission factors, production rates, and any other data used to calculate annual emissions).

REQUEST FOR PRODUCTION NO. 6: Any other documents prepared on behalf of German Pellets of Woodville Pellets that relate to Air Permits, Permit Requirements, and compliance with Air Permits.

(9:21-mc-5 Doc. #1). The documents were to be produced in Austin, TX by June 25, 2021. It is undisputed that most of the documents requested in the subpoena Sierra Club had already requested from Woodville but because of various objections had not received. On June 25, 2021, Trinity filed a motion to quash the subpoena in the Western District of Texas. On July 12, 2021, Woodville filed a motion to quash the subpoena and an unopposed motion to transfer here to the Eastern District of Texas. On July 14, 2021, the motions to quash were transferred to this District and on July 15, 2021, the Court consolidated the motions to quash case with the underlying lawsuit. (9:20-cv-178 Doc. #109).

Although Trinity and Woodville were originally reluctant to narrow the subpoena, at the hearing the parties agreed to narrow the subpoena to three categories of documents: (1) all final stack test reports (subject to Woodville's privilege claim); (2) all permit applications, including confidential versions (subject to Woodville's privilege claim); and (3) documents sufficient to show how the Woodville facility's emission factors were derived. At the hearing Woodville indicated that it planned to produce documents to satisfy the third category by August 6, 2021 and Trinity agreed that it would produce additional documents, if any, it felt were relevant to the third category. Woodville also agreed to produce the second category of documents, but portions would be redacted. More specifically, Woodville has asserted that the first category of documents are privileged. To the extent the second category of documents reference and rely on of the first category of documents, Woodville planned to redact that information. Because the parties agreed to narrow the subpoena and produce many of the requested documents, the only issue left for the Court to decide is whether the Texas Environmental, Health, and Safety Audit Privilege Act (“Audit Act”) should apply and prevent production of the first category of documents.

II. APPLICABLE LAW

“Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1). Local Rule CV–26(d) provides guidance to counsel for evaluating when a particular piece of information is relevant to the claim or defense of any party as follows:

(1) It includes information that would not support the disclosing parties contentions.

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(3) It is information that is likely to have an influence on or affect the outcome of a claim or defense;

(4) It is information that deserves to be considered in the preparation, evaluation or trial of a claim or defense; and

(5) It is information that reasonable and competent counsel would consider reasonably necessary to prepare, evaluate or try a claim or defense.

Under Federal Rule of Civil Procedure 45, a court must, on a timely motion, quash or modify a subpoena if it (1) fails to allow a reasonable time for compliance; (2) requires a person who is not a party to travel more than 100 miles from where the person resides; (3) requires disclosure of privileged or protected matter; or (4) subjects a person to undue burden. Fed. R. Civ. P. 45(c)(3)(A)(i)-(iv). “Generally, modification of a subpoena is preferable to quashing it outright.” Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812, 818 (5th Cir. 2004).

In federal causes of action, federal rules govern whether information and materials are protected by privilege. Federal Rule of Evidence 501 states “[t] he common law-as interpreted by United States courts in the light of reason and experience-governs a claim of privilege unless any of the following provides otherwise: the Constitution; a federal statute; or rules prescribed by the Supreme Court.” “Fed. R. Evid. 501. “But in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision,” which it does not here. Id.

Notwithstanding Rule 501, federal courts may recognize and apply state privileges in appropriate circumstances. When determining whether to apply a state evidentiary standard, or to create a new federal privilege, courts must engage in a balancing test. ACLU of Miss. v. Finch, 638 F.2d 1336 (5th Cir. 1981). The proposed privilege should be tested by “balancing the policies behind the privilege against the policies favoring disclosure.” Id. This balancing, however, is weighted against the recognition of the state privilege. First, “evidentiary privileges in litigation are not favored.” Herbert v. Lando, 441 U.S. 153, 99 S.Ct. 1635, 60 L.Ed.2d 115 (1979). Second, the Supreme Court instructs that “[w]hatever their origins, these exceptions to the demand for every man's evidence are not lightly created nor expansively construed for they are in derogation of the search for truth.” United States v. Nixon, 418 U.S. 683, 710, 94 S.Ct. 3090, 41 L.Ed.2d 1039 (1974).

In ACLU of Mississippi v. Finch, the court formulated the policy-balancing test into two distinct analytical inquiries: First, does the fact that the courts of Texas would recognize the privilege itself create good reason for respecting the privilege? Finch, 638 F.2d at 1343. Second, is the privilege intrinsically meritorious in the court's independent judgment? Id.

The first question almost always is answered in the negative. “That the courts of a particular state would recognize a given privilege will not often of itself justify a federal court in applying that privilege.” Id. Courts should apply state privileges when there is no substantial cost to federal substantive policy, but there is almost always such a cost, as privileges hinder the “special federal interest in seeking the truth.” Id. When federal questions or issues play a predominant role in the litigation, the federal interest is very strong. See id. at 1343–44.

The second question involves four conditions: 1) whether communications originate in a confidence that they will not be disclosed, 2) whether confidentiality is essential to the full and satisfactory maintenance of the relation between the parties, 3) whether the relation is one which in the opinion of the community ought to be sedulously fostered, and 4) whether the injury that would inure to the relation by the disclosure of the communications is greater than the benefit thereby gained for the correct disposal of litigation. Id. at 1344. An asserted state privilege should be recognized only if all four conditions are met. Id.

III. DISCUSSION

Woodville asserts that its final stack test reports and the portions of its permit applications that refer to them are privileged under the Texas Environmental, Health, and Safety Audit Privilege Act (“Audit Act”). Under the Audit Act, documents that were gathered as part of an environmental self-audit are privileged and are not admissible as evidence or subject to discovery in a civil action. See Tex. Health & Safety Code Ann. § 1101.051, 1101.101. The Court will assume without deciding that, as Woodville asserts, all stack test reports were done as part of an audit. Because this is a federal question case with no state law claims, Woodville must satisfy the conditions to create a new federal privilege.

Allowing Woodville to shield its final stack test reports from discovery harms the federal interest in the truth-seeking process. The federal interest in this case is strong, as it involves allegations of violations of federal environmental statutes. The first question of the balancing test, does the state interest in the privilege alone provide reason for a federal court to recognize the privilege, must be answered in the negative.

The second question involves addressing the four enumerated conditions. First, although Woodville may have some expectation of privacy, this expectation was by no means absolute. The stack test reports may have been created under an understanding that they would not be disclosed under state law. However, as Sierra Club pointed out in the hearing, the Audit Act does not apply to the EPA. Although the EPA's policy is to not routinely request audit reports, it can do so. Under the Audit Act, disclosure to the EPA or other federal agencies results in a waiver of any applicable Audit Act privilege even though the disclosure of such information exclusively for TCEQ review would not waive the privilege. See Texas Commission on Environmental Quality, A Guide to the Texas Environmental, Health, and Safety Audit Privilege Act, 10 (revised Nov. 2013), https://www.tceq.texas.gov/assets/public/comm_exec/pubs/rg/rg-173.pdf. Once the EPA has an audit, presumably the audit is obtainable through a FOIA request. Although to the Court's knowledge the EPA has not requested Woodville's stack reports, that it could do so undercuts Woodville's argument that the reports originated in a confidence that they would not be disclosed. There is no reason for Woodville to have assumed the documents would be protected in an action based on federal question, especially because no federal court has extended the Audit Act privilege to a federal question case. Accordingly, the Court finds that the documents did not originate in a confidence that they would not be disclosed.

The Court finds the EPA's position on audit privileges and immunity particularly helpful to deciding conditions two, three, and four.

The Agency remains firmly opposed to statutory and regulatory audit privileges and immunity. Privilege laws shield evidence of wrongdoing and prevent States from investigating even the most serious environmental violations․ Audit privilege and immunity laws are unnecessary, undermine law enforcement, impair protection of human health and the environment, and interfere with the public's right to know of potential and existing environmental hazards.

Statutory audit privilege and immunity run counter to encouraging the kind of openness that builds trust between regulators, the regulated community and the public. For example, privileged information on compliance contained in an audit report may include information on the cause of violations, the extent of environmental harm, and what is necessary to correct the violations and prevent their recurrence. Privileged information is unavailable to law enforcers and to members of the public who have suffered harm as a result of environmental violations.

Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, 65 Fed. Reg. 19618, 19623 (April 11, 2000).

Although Woodville claims parties in its position would be much less likely to engage in a voluntary audit if the audit privilege was not upheld, the EPA does not have a privilege and from 1995-2020, over 10,000 entities voluntarily self-disclosed violations at nearly 28,000 facilities under one of EPA's self-disclosed violation policies. EPA's Interim Approach to Applying the Audit Policy to New Owners, EPA, https://www.epa.gov/compliance/epas-interim-approach-applying-audit-policy-new-owners (last visited Aug. 6, 2021). Thus, the element of confidentiality is not essential to the full and satisfactory maintenance of the relation between the parties.¹

The third condition is also not met. As stated in the EPA's policy, “[s]tatutory audit privilege and immunity run counter to encouraging the kind of openness that builds trust between regulators, the regulated community and the public.” 65 Fed. Reg. at 19623. The community has a right to know of the environmental violations that occur in the community. Thus, the relation between Woodville and TCEQ is not one that ought to be sedulously fostered.

Lastly, although Woodville claims the disclosure would significantly impair the proactivity and open communication with the TCEQ fostered by the audit privilege, as stated above, the EPA has no audit privilege and yet entities still complete audits and voluntarily self-disclose violations. Even if Woodville must disclose its audit reports, it still had incentives to conduct them and self-report violations and any injury to Woodville caused by disclosure would be small.

Moreover, there is a huge injury in allowing audit privileges. They “put[ ] the environment at risk [and] hid[e] environmental compliance information from the public” and “impair protection of human health and the environment, and interfere with the public's right to know of potential and existing environmental hazards.” Id. The correct disposal of litigation in the environmental law context is necessary to protect the environment and the public's health. The Clean Air Act gives citizens the authority to bring civil action against entities who violate Clean Air Act emission standards or limitations. 42 U.S.C. § 7604. Preventing disclosure of audit reports would impair citizens’ ability to bring these suits by keeping secret an entities’ potential violations. The injury that would inure to the relation by the disclosure of the communications is not greater than the benefit thereby gained for the correct disposal of litigation and therefore, the fourth condition is not met. Because none of the four conditions are met, the Court cannot apply the state audit privilege and Woodville cannot use it to prevent discovery of its final stack tests. See Fairchild v. Liberty Indep. Sch. Dist., 466 F. Supp. 2d 817 (E.D. Tex. 2006) (Hines, J.) (state evidentiary privilege for tapes or records made of closed sessions was not applicable where school district did not expect communications to be kept from teacher's aide, confidentiality was not essential to full and satisfactory maintenance of relation between parties, and disclosure of tapes to aide would not cause any additional damage to the relationship among board members).

To the extent Trinity and Woodville assert that the stack test reports and confidential permit applications are not relevant, the Court find this argument unpersuasive. The reports and applications likely contain evidence related to the alleged violations, including information on the cause of violations and the extent of the environmental harm. Since the environmental violations are directly at issue in this case, documents that contain information about them are relevant.

IV. CONCLUSION

Because the Audit Act does not apply in federal question cases in federal court, the final stack test reports and confidential permit applications Sierra Club seeks from Trinity and Woodville are not privileged and because the information is relevant, their production is ordered.

Accordingly, it is ORDERED that Trinity's Motion to Quash Plaintiff's Subpoena (9:21-mc-5 Doc. #1) and Woodville's Opposed Motion to Quash or Modify (9:21-mc-5 Doc. #4) are DENIED.

It is FURTHER ORDERED that Trinity and/or Woodville ² has until August 16, 2021 to produce the requested documents to Sierra Club.

FOOTNOTES

1.   Although not clearly stated in the briefing, the Court assumes the parties Woodville is asserting the test should apply to are Woodville and TCEQ.

2.   The parties agree that both Trinity and Woodville should be in possession of all the documents Sierra Club seeks. It does not matter to Sierra Club or the Court who produces the documents as long as they are produced.

Michael J. Truncale, United States District Judge