FRACKING FAD: THE MORALLY AMBIGUOUS METHOD OF EXTRACTION AND THE TRADE SECRET PROTECTIONS OF ITS CHEMICAL FORMULAS.

• Author: Villio, Vince

INTRODUCTION

Hydraulic fracturing, more commonly known as "fracking," is the "process in which fractures in rocks below the earth's surface are opened and widened by injecting chemicals and liquids at high pressure: used especially to extract natural gas or oil." (1) While this phenomenon has seen a vast array of controversy and debate in the last decade, it is not a novel process. (2) After the idea of injecting non-explosive materials into the ground to stimulate oil well production took hold of the drilling industry in the 1930s, the process as it is known today was introduced by Stanolind Oil in 1949. (3) Each well that implemented this new process saw an increase in production of 75% on average. (4)

As a result of the advent of this incredibly efficient technique, the process has become widespread throughout the industry; some wells that originally used one "frac stage" may now use as many eight, or even forty for the largest of wells. (5) However, as its use has now permeated the industry, so too has the controversy. Many actors, both individuals and groups, have called for strict regulation of the industry and even the banning of the process because of its alleged damaging effects on persons, property, and the environment as a whole. (6)

The public backlash against the fracking industry has resulted in numerous states passing or petitioning for legislation that requires the drilling companies to disclose certain information that the drilling industry considers to be protected by trade secret law. (7) One of the major disputes surrounding the recent legislative action is the content that states are requiring companies to disclose. (8) Recent legislation in California and a proposed bill in Alaska mandate the public disclosure of the chemicals in the formula used during well injections, some of which the fracking industry considers to be protected as trade secrets. (9) This, above all, has been the perpetual fuel source for a seemingly unending debate. While this Note does not propose to solve an incredibly intricate and delicate problem, the analysis and arguments that follow will serve as balancing points to present the choices that should not be considered and why the current model of state regulation will not sustain any positive yields for any interests.

This Note focuses on the impact that the trend of disclosure of alleged trade secrets has on the law of trade secrets and the national oil and gas industry. Neither one of these issues is new, but the increased media attention of the hydraulic fracturing industry has caused scholars to look into this budding area of industry. This Note takes two propositions and combines them to make a policy argument. The first proposition comes from Professor Keith B. Hall's scholarly work on the law of trade secrets in relation to chemical makeup of frac fluids and the increasing trend of mandatory disclosure. (10) Professor Hall analyzes in depth a majority of the issues stemming from the trade secret debate ingrained in the trend of disclosure. (11) The amount of background and analysis provided by this article lays the foundation that the chemical formulas and other proprietary information claimed by the hydraulic fracturing industry most likely are and should be considered trade secrets. (12) The article provides detailed insight into background, such as the intricacies of multiple state statutes and regulations; (13) however, Professor Hall finds the issue does not require a federal overhaul. (14) The second proposition, that the issue demands uniformity through federal action, can be found in Professor Michael Burger's article on the regulation and political economy of the fracking industry. (15) Professor Burger wrote this article in response to Professor David B. Spence's suggestion that the current federal regulation is enough. (16) As this Note argues in favor of a uniform federal law, it takes many of the arguments advanced by Professor Spence in determining whether the issue is under- or over-regulated by the federal government, and applies these arguments through the issues brought up in Professor Burger's response to Spence's theory. This analysis is undertaken to advocate for the idea that in order to protect the trade secrets of the hydraulic fracking industry, uniform federal regulation and oversight is necessary.

Part I of the paper provides a brief introduction into the hydraulic fracturing process. Part II of the paper focuses exclusively on the proprietary nature of the chemical compounds and processes and whether the trade secret statuses of these assets afford them any protections under current and proposed state regulations. Part III examines the federal policy aspects currently regulating the industry. Part IV will briefly detail the current regulations' economic impact on the oil and gas industry, as well as the possible and plausible future impacts. Part V argues in favor of greater federal interaction with the industry in order to allow for a sustainable oil industry and a greater free-market incentive for the industry to continue to grow, while still protecting the sanctity of trade secret law.

1. BACKGROUND OF THE HYDRAULIC FRACTURING PROCESS

   Currently, regulations in many states require a disclosure of chemicals that will be used in the process. (17) The fracking process itself contains many levels of processes with a myriad of different methods and chemicals. (18) It is necessary at this point of the discussion to explain the fracking process in greater detail to give insight to the nature of use of the proprietary items contested. In an oversimplified explanation:

   Fracking is the process of opening seams in deep rock with high-pressure fluids mixed with sand and trace amounts of chemicals. The liquid is extracted, leaving the sand in place. The sand holds open the fractures in the rock. The hydrocarbon [(oil or like resource)] then flows out along these fractures, up the borehole, and is transshipped. (19)

   Currently, there are three methods of fracking that are commonplace in the industry: slick water, gel, and acid. (20) Although acid fracking usually does not involve the use of proppants, (21) the other two methods employ their use of proppants to the extent that the proppant industry has seen demand increase more than five-fold in the last decade. (22)

   These chemicals are not placed within the fracking fluid at random; each additive has its own "specific engineered purpose." (23) "Generally, these additives serve two distinct but overlapping goals: (1) to ensure the safety and integrity of the well and (2) to increase the productive efficiency of the well." (24) It is logical that companies involved in these processes would wish to protect their information or methods; if it were realistically and financially possible for competitors to reverse-engineer the chemical makeup of frac fluid, a company's incentive to invest in advancing fracking technology declines drastically. (25)

   In defense of the state disclosure mandates, these regulations "were adopted to achieve two primary goals: (1) to reassure the public about the safety of hydraulic fracturing operations in the wake of allegations of potential groundwater contamination; and (2) to provide regulators with more information about the process." (26) This Note seeks to establish that these regulations result in unfavorable penalties for the industry as a whole and undermine the very spirit of trade secret law by forcing the energy industry to either submit to disclosure or avoid the advantages associated with drilling in that jurisdiction in an effort to keep proprietary information secret.

2. CHEMICAL COMPOUNDS AND PROCESSES ARE TRADE SECRETS

   At first glance, it appears that the use, nature, and application of the chemical compounds would appear to fall within the definition of trade secrets. The chemicals included in the fracking fluid definitively are part of a formula, and the methods used to create fluid are also well within the protective scope of U.S. trade secret law. (27) However, like many modern legal issues that encompass growing technologies, the answer is never simple. (28) In this Part, the nature of the trade secret debate will be analyzed by examining general trade secret applicability.

   This analysis stems almost entirely from the debate over whether or not chemical compounds and processes of fracking are protected by U.S. trade secret law. The drilling industry maintains that these are trade secrets, and that the mandatory disclosure regulations being passed infringe upon the protection of the industry's assets. (29) The keystone to this segment rests squarely upon whether or not trade secret protection is available to the industry.

   1. A Baseline Examination of Trade Secret Law

      A trade secret is traditionally defined as "any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others." (30) This definition is sufficiently broad to encompass many things, (31) and in the modern era, the protection of such qualifying information that gives an entity an advantage is crucial in any competitive business model. (32) The protection can be extended to any "formula, pattern, compilation of data, computer program, device, method, technique, process, or other form or embodiment of economically valuable information." (33)

      An example of one of the most commonly mentioned trade secrets is the formula used in producing The Coca-Cola Company's flagship soft drink, Coca-Cola. Although the formula was allegedly deciphered in 1979 by Charles Salter, and more recently by the radio program This American Life, (34) the company continues to maintain the formula as a protected trade secret since proportions and procedures have never been officially revealed. (35) This aura of mystique not only keeps the consumer interested, (36) but also acts...