Hydraulic Fracturing in Illinois: Draft Regulations to Protect Chemical Proprietary Information

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Last month, the Illinois Department of Natural Resources (“IDNR”) published its first draft of the regulations (62 Ill. Adm. Code 245) (the “HFRA Draft Regulations”) under the Illinois Hydraulic Fracturing Regulatory Act (225 ILCS 732/1-1 et seq.) (the “IHFR Act”). The IHFR Act requires applicant companies to provide chemical disclosures of proppant and water mixtures that are injected into shale formations as part of the hydrocarbon extraction process. Because applicant companies may consider their mixtures proprietary, the Act contains provisions designed to allow the applicant companies to protect disclosures of trade secrets. The HFRA Draft Regulations would place a substantial burden on companies to establish and protect their information, even if trade secret protection is, in fact, warranted. The HFRA Draft Regulations also permit the government and health professionals to access the proprietary information. The IDNR will be revising these regulations after the public comment period, which will remain open until January 3, 2014. Companies who may be concerned about trade secret protection for hydraulic fracturing fluids should consider providing comment on the HFRA Draft Regulations.

Shale Oil and Gas: Hydraulic Fracturing
Shale oil and gas production companies use the hydraulic fracturing process to access hydrocarbons from underground shale formations. The process involves drilling into shale formations, creating extraction veins in the formation, and subsequently injecting proppant and water mixtures including sand (or other proppants) and chemicals to expand and maintain the veins. Although production companies in Illinois have been using the hydraulic fracturing process for years, the increase in shale oil and gas production nationally encouraged Illinois lawmakers to pass the IHFR Act. At the time of the IHFR Act’s signing in June 2013, Governor Quinn touted Illinois’ hydraulic fracturing regulatory program as the strongest in the country.

Under the newly-issued HFRA Draft Regulations’ Permit Application Requirements,[1] applicants for a hydraulic fracturing permit must disclose the details of each operation or project, including a chemical disclosure report which must identify “each chemical and proppant anticipated to be used in hydraulic fracturing fluid for each stage of the high volume horizontal hydraulic fracturing operations,” including the following:

a. for each stage, the total volume of water anticipated to be used in the high volume horizontal hydraulic fracturing treatment of the well or the type and total volume of the base fluid anticipated to be used in the high volume horizontal hydraulic fracturing treatment, if something other than water;

b. each hydraulic fracturing additive anticipated to be used in the hydraulic fracturing fluid, including the trade name, vendor, a brief descriptor of the intended use or function of each hydraulic fracturing additive, and the Material Safety Data Sheet (MSDS), if applicable;

c. each chemical anticipated to be intentionally added to the base fluid, including, for each chemical, the Chemical Abstracts Service number, if applicable; and

d. the anticipated concentration in the base fluid, in percent by mass, of each chemical to be intentionally added to the base fluid.

HFRA Draft Regulations Section 245.210(a)(8).
Most shale production processes use a similar group of chemicals for their water mixtures. However, the exact composition used in the hydraulic fracturing process can differ from company to company and from well to well. Applicant companies may view specific compositions as a competitive advantage and wish to protect these as proprietary trade secrets. In order to protect the information as proprietary under the HFRA Draft Regulations, the applicant company would have the burden of establishing that the information in its chemical disclosure is a trade secret.

Trade Secrets
Under the Illinois Trade Secrets Act (“ITSA”), technical data, formulas, and methods or processes ordinarily will qualify for trade secret protection. Accordingly, information in the chemical disclosure report can be protected as a trade secret under the ITSA if the information is:

  1. “sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use” and
  2. “the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.”[2]

As long as such information remains secret, the rights in the trade secret are enforceable. However, if the “secret” operative components of a chemical formula can be reverse-engineered, independently discovered, or is otherwise publicly disclosed, a company cannot prevent others from using the information.

Trade secret protection can also be forfeited by the owner’s disclosure of the information to a third party without appropriate protection. Under the IHFR Act, the chemical disclosure report must be filed with the IDNR and the IDNR is required to post each applicant company’s chemical disclosure to its website - making each disclosure publicly available.  Absent a mechanism to assure continued confidentiality, this disclosure alone would forfeit trade secret protection. Like the IDNR, many government regulatory agencies must balance the competing interests of providing government accountability through access to public records and providing adequate safeguards for applicant companies’ competitive positions. Courts have recognized this problem and recognized the importance to the public of regulatory bodies being properly able to protecting the confidential information the agency needs for effective government oversight. The inability to properly safeguard confidential information disclosed to a government agency may impair the government’s own ability to obtain necessary information in the future. Courts further recognize that disclosing parties have a property interest in confidential data provided to government agencies, and have found that the government’s failure to protect such information from public disclosure “would constitute a Fifth Amendment taking, requiring payment of compensation by the government.”[3]

Trade Secret Protection in Illinois HFRA Regulations: Section 245.720
Mindful of these trade secret issues, the IHFR Act and the HFRA Draft Regulations attempt to balance the competing needs of effective regulatory disclosure and to protect trade secret information. However, applicant companies need to be aware that assertion of a claim for trade secrets requires specific steps at the time of filing and proper justification of the trade secret claim. Under the IHFR Act, the IDNR must post any copies of the master lists of the chemical disclosures it receives within 21 days of receipt.[4] Under the HFRA Draft Regulations, applicant companies would be able to protect their trade secret chemical disclosure information if that information is submitted under a claim of trade secret and the applicant company submits with its disclosure a redacted copy of the chemical disclosure report deleting specific trade secret information:

When an applicant, permittee, or person performing high volume horizontal hydraulic fracturing operations furnishes chemical disclosure information to the Department… under a claim of trade secret, the applicant, permittee, or person performing high volume horizontal hydraulic fracturing operations shall submit redacted and un-redacted copies of the documents identifying the specific information on the master list of chemicals claimed to be protected as trade secret.[5]

The IDNR shall use the redacted copy when posting the master list of chemicals on its website if it determines that the trade secret claim is properly justified.

Justification Requirements
In addition to making a claim of trade secrets and providing a redacted copy of the chemical disclosure report, the applicant company must provide a justification of the claim of trade secret as part of the applicant company’s claim, or within five (5) days of making its claim.[6] The justification shall include:

  1. a detailed description of the procedures used by the person to safeguard that portion of the information on the master list of chemicals for which trade secret is claimed from becoming available to persons other than those selected by the person to have access to the information for limited purposes;
  2. a detailed statement identifying the persons or class of persons to whom that portion of the information on the master list of chemicals for which trade secret is claimed has been disclosed;
  3. a certification that the person has no knowledge that the portion of the information on the master list of chemicals for which trade secret is claimed has ever been published or disseminated or has otherwise become a matter of general public knowledge;
  4. a detailed discussion of why the person believes that the portion of the information on the master list of chemicals for which trade secret is claimed is of competitive value; and
  5. any other information that shall support the claim of trade secret.[7]

For the most part, these justification requirements are consistent with the trade secret requirements of the ITSA. First, the applicant company needs to provide an affirmative statement describing that the policy and procedures it uses to protect trade secret information are “reasonable under the circumstances to maintain its secrecy or confidentiality.”[8]

Second, the applicant company must provide an affirmative statement that there is value to the information “from not being generally known to other persons who can obtain economic value from its disclosure or use.”[9] The ITSA limits the relevant class of persons for the purposes of determining whether or not information is a trade secret to, “other persons who can obtain economic value from [the information’s] disclosure.”[10] The HFRA Draft Regulations do not differentiate between the applicant company’s disclosure to a certain class of employees and/or relevant personnel in the industry versus its disclosure to potential business partners irrelevant for purposes unconnected to the IHFR Act. For example, if an applicant provided the subject trade secret information to a potential investor under a nondisclosure agreement, is the applicant company required to provide information on that person or persons in its justification disclosure?  This requirement could lead to potential conflict with the applicant’s duties under such a nondisclosure or confidentiality agreement.

Third, the applicant company must also provide an affirmative statement identifying the specific information (technical data, formula, method, or process) that is “sufficiently secret.”[11] This justification requirement is unclear as to how an applicant company will certify that the compositions of its proppant and water mixtures are trade secrets. As mentioned above, a number of regular and known chemicals are used in the relevant processes and an applicant company’s protected interest will lie in the actual recipes for its proppant and water mixtures.

Fourth, the applicant company must provide reasons for why ”the portion of the information on the master list of chemicals for which trade secret is claimed is of competitive value.” This appears to mirror the requirement of a trade secret under ITSA that the information is “sufficiently secret to derive economic value, actual or potential, from not being generally known”[12] in the industry. In addition, there is a catchall for applicant companies to provide any other justification information they believe would support their trade secret claim.

IDNR Determination of Trade Secrets Status
The filing of the claim of trade secret and accompanying justification information alone does not automatically confer trade secret status. After the justification information is provided, the IDNR will then determine whether or not the justification demonstrates that the chemical disclosure shall be protected as a trade secret.[13] A denial shall be appealable.[14] Further, even if trade secret status is conferred, any person requesting to inspect IDNR records of chemical disclosure information granted trade secret protection may file a request to review the propriety of the IDNR’s trade secret grant.[15] Under the IHFR Act and HFRA Draft Regulations, the IDNR is required to maintain any information furnished under a claim of trade secret as confidential until it “receives official notification of a final order by a reviewing body with proper jurisdiction that is not subject to further appeal rejecting a grant of trade secret protection for that information.”[16]

It appears that the IDNR will protect valid trade secrets from disclosure if an applicant company makes the proper justification for the same. Applicant companies should be ready to provide each of the justification requirements at the time of application: a detailed description of the trade secret policy and procedure, the list of persons to whom the trade secret information has been disclosed, a certification that the specific claimed trade secret information has not become a matter of general public knowledge, and a detailed discussion of the competitive value of the trade secret information.

Trade Secret Disclosures to Health Professional: Section 245.730
Even if the IDNR determines an applicant company’s trade secret claim is valid, disclosure may still occur through the IDNR’s duty to health professionals. The IDNR is allowed to disclose an applicant company’s trade secret information to a health professional for the purpose of determining what health care services are necessary for treatment of an affected patient.[17] A health professional must complete and submit a request to obtain trade secret chemical information which shall:

  1. state a need for the information and articulate why the information is needed;
  2. identify whether the affected patient requires emergency or nonemergency health care services; and
  3. identify the name and profession of the health professional and the name and location of the facility where the affected patient is being treated.[18]

The HFRA Draft Regulations provide that the health professional shall not use the confidential information for any purpose other than the health needs asserted in the request.[19] As soon as circumstances permit, the health professional must inform the trade secret owner of the names of all health professionals to which the information was disclosed, and the trade secret owner can request a confidentiality agreement from them.[20] As written, the IHFR Act and HFRA Draft Regulations have several gaps. There is no requirement in this initial request for the health professional to undertake a duty to keep any information received as confidential nor does it protect any information disclosed by the health professional to non-health professionals. Further, although a confidentiality requirement may be requested, there is no requirement that the health professional enter into such an agreement as a condition of requesting the information. This presents a potential for public disclosure. IDNR may want to consider adding such a requirement. It also might want to consider suggesting a form confidentiality agreement.

Immediate Response Time for Requests for Information by Health Professionals
Applicant companies must be prepared to react quickly to requests by health professionals even though the HFRA Draft Regulations do not expressly protect an applicant company that discloses its information to a heath professional without a confidentiality agreement. In non-emergency situations, the trade secret holder must respond within the same business day.[21] In emergency situations, the health professional can request a chemical disclosure directly from the applicant company at any time (24/7), and the applicant company within two (2) hours, by any means determined by the applicant company as a secure means of disclosure. [22]

Implementation
The public comment period ends January 3, 2014, and the IDNR may ultimately resolve these issues when it revises the draft regulations. K&L Gates will be playing an active role in reviewing the entirety of the draft regulations and comments during the public comment period. Further, K&L Gates is in a position to actively assist clients in drafting and submitting comments: (i) generally in favor of buttressing or strengthening the current trade secret and confidentiality provisions of the regulations, and (ii) responding to specific public requests favoring weakening or altogether deleting those provisions.

Notes:

[1] HFRA Draft Regulations Section 245.210.

[2] 765 ILCS 1065/2(d).

[3] See Tri-Bio Labs., Inc. v. United States, 836 F.2d 135 (3d Cir. 1987); see also Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984).

[4] HFRA Draft Regulations Section 245.720(a).

[5] HFRA Draft Regulations Section 245.720(b) (emphasis added).

[6] HFRA Draft Regulations Section 245.720(c).

[7] HFRA Draft Regulations Section 245.720(c).

[8] 765 ILCS 1065/2(d).

[9] 765 ILCS 1065/2(d).

[10] 765 ILCS 1065/2(d).

[11] 765 ILCS 1065/2(d).

[12] 765 ILCS 1065/2(d).

[13] HFRA Draft Regulations Section 245.720(d).

[14] HFRA Draft Regulations Section 245.720(e).

[15] HFRA Draft Regulations Section 245.720(f).

[16] HFRA Draft Regulations Section 245.720(g).

[17] HFRA Draft Regulations Section 245.730.

[18] HFRA Draft Regulations Section 245.730(a)(1-3)(emphasis added).

[19] HFRA Draft Regulations Section 245.730(g).

[20] HFRA Draft Regulations Section 245.730(f).

[21] HFRA Draft Regulations Section 245.730(c)(2)

[22] HFRA Draft Regulations Section 245.730(b)(2).

 

Topics:  Chemicals, Energy, Environmental Policies, Fracking, Natural Gas

Published In: Civil Procedure Updates, Energy & Utilities Updates, Health Updates, Intellectual Property Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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