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LLC v. Oilfield Tracking Services, LLC

United States District Court, E.D. Pennsylvania

June 22, 2018

H2O RESOURCES, LLC, Plaintiff,
v.
OILFIELD TRACKING SERVICES, LLC, CARRIZO OIL & GAS, INC., DREW GLADULICH, THOMAS GLADULICH, and THOMAS WILKERSON, Defendants.

          MEMORANDUM

          ROBERT F. KELLY, Sr. J.

         Government regulations of various states require that water produced during the removal of oil and gas from the ground be collected and disposed of into approved water disposals and be closely monitored to discourage dumping, contamination, and pollution. Due to these regulations, Plaintiff H2O Resources, LLC (“H2O”) developed an oilfield water tracking system called “Water TRAC” that assisted oil and gas companies in managing the large quantity of water produced and used during the oil and gas removal process.

         H2O filed suit in this Court against Defendants Oilfield Tracking Services, LLC (“OTS”), Carrizo Oil & Gas, Inc. (“Carrizo”), Drew Gladulich (“Gladulich”), Thomas Gladulich, and Thomas Wilkerson (“Wilkerson”) (collectively, “Defendants”), alleging Defendants developed a scheme to defraud and misappropriate H2O's trade secrets, proprietary data, and confidential information to create a new oilfield water tracking company and a new oilfield water tracking system to drive H2O out of the market. H2O and Carrizo entered into two “Master Service Agreements” (“MSA”) during the course of their business relationship, the latter of which applies to this case and contains arbitration and forum selection clauses. Carrizo and Wilkerson now move to dismiss the Complaint and compel arbitration or, in the alternative, transfer the action to the United States District Court for the Southern District of Texas. OTS, Drew Gladulich, [1] and Thomas Gladulich similarly move to dismiss the Complaint and compel arbitration, but do not move for transfer. For the reasons noted below, Defendants' Motions are granted to the extent they seek arbitration of H2O's allegations, and we will therefore dismiss H2O's Complaint without prejudice.

         I.BACKGROUND[2]

         A. H2O's WaterTRAC Platform

         Due to government regulations of various states that regulate water produced during the removal of oil and gas from the ground, H2O in 2008 began developing its preliminary WaterTRAC platform after receiving confirmation that states would accept electronically gathered water tracking data. (Compl. ¶ 41.) WaterTRAC is an oilfield tracking system that assists oil and gas companies manage the large volume of water produced during the oil and gas removal process from the ground. (Id. ¶ 43.) H2O's WaterTRAC platform consists of the WaterTRAC hardware, [3] the WaterTRAC database, which is a secure regional database that collects, stores, and organizes raw water data, and the WaterTRAC software, which “further operate[s] on the raw data to create enhanced water tracking data[] [and] [is] also stored in the WaterTRAC database.” (Id. ¶ 45.) The WaterTRAC platform is able to track fresh and produced water via a series of water meters, GPS trackers, and antennas to transmit the raw data, such as volume and location, to the database through the internet. (Id. ¶ 50.) The raw data is then organized through the proprietary WaterTRAC event processing software, in which the enhanced water tracking data is stored in the WaterTRAC database. (Id.) According to H2O, the raw data alone is sufficient for its clients to “pull reports, produce bills of lading, and produce state regulatory reports.” (Id. ¶ 45.)

         Some clients use tanker trucks to transport water. (Id. ¶ 51.) In that case, the WaterTRAC hardware tracks the water from pick-up to drop-off using the truck's volume and GPS locations. (Id.) The raw data is then transmitted to the database through the internet, “where [H2O's] proprietary WaterTRAC event processing software processe[s] and organize[s] that raw data and the WaterTRAC database store[s] that processed and enhanced water tracking data.” (Id.) When clients use pipelines to transport their fresh and produced water, the WaterTRAC hardware track[s] the water through a series of water meters. (Id. ¶ 52.) As before, the raw data is processed and organized by the WaterTRAC event processing software and then stored in the WaterTRAC database. (Id.)

         The typical scope of services provided by H2O relating to the sale of the WaterTRAC platform includes

(1) the installation, maintenance, and service of the WaterTRAC hardware, (2) automated flow metering, (3) electronic field mapping and geo-fence design of water collection locations, (4) real-time raw data transmission to the WaterTRAC database, (5) database management, (6) formatting data for submission to governmental regulatory agencies, (7) consulting on the regulatory requirements for the client's operational areas, (8) alerts relating to various tracking parameters, (9) retention of water tracking data, and (10) user-training and WaterTRAC database access for a limited number of authorized employees of H2O Resources' clients.

(Id. ¶ 49.) H2O also provides trained field employees to install and maintain the WaterTRAC hardware in connection with its sale of the WaterTRAC platform services. (Id. ¶ 55.)

         Every company that purchases H2O's services is provided with the ability to access the WaterTRAC database. (Id. ¶ 59.) To facilitate that benefit, the company is permitted to identify and authorize certain individuals to access their company's water tracking data in the database. (Id.) These employees periodically pull reports on the water tracking data for internal and external reporting purposes. (Id.) In addition, H2O assists the authorized individuals in understanding their company's data and answers questions about the enhanced water tracking data and the WaterTRAC database. (Id.) Prior to gaining access to the database, each authorized user is emailed and required to review and accept H2O's “Legal and Privacy Statement, ” which states, in part:

You are entitled to view copy and print any documents from this database but only for your own internal business purposes. You acquire absolutely no rights or licenses in or to the database or the materials contained within the database other than the limited right to use the database in accordance with this Legal and Privacy Statement. Any sale, transmission or redistribution of this database or its content, and any copying, modification or other use of this database or its content for any purposes other than your own internal business purposes, are strictly prohibited. All present and future rights in and to trade secrets, trademarks, service marks, copyrights and other proprietary rights under the laws of any domestic or foreign governmental authority (the “Intellectual Property Rights”) shall at all times be and remain the sole and exclusive property of H2O Resources LLC. Except as specifically permitted by the terms of this Legal and Privacy Statement, you shall not use the Intellectual Property Rights or the database, or any derivations thereof, for any purpose, without H2O Resources LLC's prior written approval.

(Id. ¶ 60, Ex. A (“Legal and Privacy Statement”)) (emphasis in original). Every user of the WaterTRAC database is also provided with a unique username and password that are necessary for accessing it. (Id. ¶ 61.) Before a user gains access to the database, he or she is required to review and accept the Legal and Privacy Statement that is prompted on the home login screen. (Id.)

         B. H2O and Carrizo's Business Relationship

         In late 2011, Wilkerson hired H2O to provide services on behalf of Carrizo.[4] (Id. ¶ 62.) Specifically, Carrizo wanted H2O to monitor fresh water movements in its Pennsylvania pipeline and to assist in the creation of detailed regulatory reports in compliance with Pennsylvania law. (Id.) Carrizo eventually expanded its relationship with H2O to include monitoring the movement of fresh and produced water by truck in Pennsylvania. (Id. ¶ 63.) By late 2012, H2O's services were being used for Carrizo's pipeline operations near San Antonio, Texas. (Id.) And by the end of 2013, H2O's services were used for Carrizo's pipeline operations in Ohio. (Id.)

         1.The Master Service Agreements

         H2O and Carrizo entered into an MSA in late 2011 (“2011 MSA”). (Id. ¶ 64.) In addition, H2O and “Carrizo (Eagle Ford) LLC, ” which is a wholly owned subsidiary of Carrizo that was formed to develop Carrizo's oil and gas resources in South Texas, executed an MSA in 2014 (“2014 MSA”). (Id. ¶ 65.) Carrizo is included under the 2014 MSA because the agreement covered affiliates of Carrizo (Eagle Ford) LLC. (Id.) Further, the 2014 MSA superseded the 2011 MSA because it states that it “sets forth the full and complete arrangement of the parties . . .and supersedes any and all . . . agreements and representations of the parties prior to the execution hereof.” (Carrizo's Mem. Law Supp. Mot. Dismiss to Compel Arbitration or Transfer Venue, Ex. B (“2014 MSA”) § 10.13.) The 2014 MSA contains an arbitration provision and a forum selection clause, providing as follows:

10.3. Arbitration of Disputes. If a dispute, claim or controversy arises out of, in connection with, or results from the performance of this agreement, or the breach thereof, and if such dispute, claim or controversy cannot be settled through direct discussions, the parties agree to first endeavor to settle the dispute in an amicable manner by mediation administered by the American Arbitration Association . . . before resorting to arbitration. Thereafter, any unresolved dispute, claim or controversy arising out of, in connection with, or resulting from the performance of this agreement, or the breach thereof, will be settled by a binding arbitration conducted pursuant to the Rules of the American Arbitration Association. Arbitration is to be conducted in Houston, Texas before a single arbitrator with expertise in the subject matter of this contract.
10.7. Governing Law; Jurisdiction; Venue. The terms and provisions of this agreement will be construed under and governed by the laws of the State of Texas without giving effect to the principles of conflicts of laws. Notwithstanding anything herein to the contrary, Carrizo and [H2O] agree that any litigation concerning or relating to this agreement and/or the relationship between the parties hereto shall be initiated and maintained in Harris County, Texas. The parties hereto, without reservation, consent to the exclusive and mandatory jurisdiction of the courts of Harris County, Texas, over any litigation concerning or relating to this agreement or the relationship between the parties to the same.

(Id. §§ 10.3, 10.7) (emphasis in original) (capitalization omitted); see also (Compl. ¶ 66.)

         2.Tracking Carrizo's Truck-Based Water Operations in Pennsylvania

         Around approximately September 2013, Carrizo introduced Drew Gladulich to H2O during an in-person meeting between Wilkerson and Mary Gilstrap (“Gilstrap”), who at all relevant times was H2O's Head of Operations and Environment. (Compl. ¶¶ 24, 74.) H2O alleges Wilkerson went out of his way to ensure Gilstrap knew that Gladulich was a Carrizo employee. (Id. ¶ 75.) Wilkerson asked Gilstrap for Gladulich to have full access to Carrizo's data in the WaterTRAC database, resulting in Gladulich accepting H2O's Legal and Privacy Statement and the subsequent issuance of computer credentials to access the database. (Id. ¶¶ 76-77.) Following Gladulich's acceptance of the Legal and Privacy Statement, his computer credentials were used to access the WaterTRAC database nearly every day. (Id. ¶ 77.)

         Between late 2013 and 2014, Gladulich would ask Gilstrap via a series of telephone calls about various basic aspects of the WaterTRAC database, including how to enter it and how to access and download information. (Id. ¶ 78.) In addition, every few months between 2013 and 2015, he would also ask Gilstrap detailed questions over the phone or in-person about the enhanced water tracking data in the WaterTRAC database. (Id. ¶ 79.) During these calls and meetings, Gladulich held himself out as “just a business person” with no understanding of technology or knowledge relevant to understanding the WaterTRAC database. (Id. ¶ 80.) Based on his representations, Gilstrap provided him with additional information to assist his understanding of the database and the underlying WaterTRAC event processing software used to create enhanced water tracking data. (Id. ¶ 81.) At times, she would also provide him with confidential and proprietary information about the WaterTRAC system because she believed he needed the information for Carrizo's internal benefit. (Id.)

         In early 2014, H2O alleges Gladulich began feigning problems with the Carrizo data that H2O's system had gathered and been reported in the WaterTRAC database, in what H2O believed at the time was an effort to discredit it. (Id. ¶¶ 82-83.) To ensure that Gladulich fully understood why his allegations of problems with the WaterTRAC system and database were mistaken, Gilstrap provided him with even more information about the platform. (Id. ¶ 83.) For example, on three or four occasions during the first few months of 2014, Gladulich requested to speak with Gilstrap over the phone to have her defend erroneous measurements and discrepancies between the data collected through the WaterTRAC platform and other third-party measurement sources, and he would then demand an explanation of H2O's system, data, and collection methods. (Id. ¶ 84.) To fully disprove Gladulich's unfounded accusations, Gilstrap would, at times, be “pressured” into providing confidential and proprietary details about the WaterTRAC hardware, system, and database. (Id. ¶ 85.)

         H2O pleads additional examples of Gladulich and others seeking information regarding confidential and proprietary information about the WaterTRAC platform. One instance occurred when Gilstrap explained details about H2O's data collection units relating to the calibration and placement characteristics of its WaterTRAC water meters. (Id. ¶ 86.) She explained the water meters were calibrated on a specific schedule and that they were placed at specific locations along a pipeline because H2O discovered those locations enabled more accurate monitoring of water volume. (Id.) Another instance occurred in early 2014, when Wilkerson “demanded” via telephone that H2O audit the water tracking movements of a particular hydraulic fracturing job. (Id. ¶ 88.) Gilstrap reviewed all of the relevant water movements using the data in the database and recognized that a few of the water transfers were not classified properly. (Id. ¶ 89.) She then corrected the classifications as part of her audit and presented the results of her audit at an in-person meeting with Wilkerson and Gladulich. (Id. ¶¶ 89-90.) At the meeting, she noted that the corrections would have been made anyway as part of H2O's normal review of data in the WaterTRAC database. (Id. ¶ 90.)

         “In another more egregious example, ” Gladulich demanded via telephone that Gilstrap explain the logic behind H2O's naming of water locations in the database to defend concerns raised regarding the accuracy of H2O's data. (Id. ¶ 94.) In particular, Gladulich wanted to know how H2O was able to identify “whether a particular water tracking location was a water pull (pick up) or deposit (drop off/disposal).” (Id.) Gilstrap's explanation of the location naming logic was significant because she provided Gladulich with information unknown to other H2O customers “and provided him the ability to understand the power of that naming logic.” (Id. ¶ 95.) The naming logic “underlies [H2O's] organization of raw data in the WaterTRAC database in conjunction with the WaterTRAC event processing software” and “is not readily identifiable via the enhanced water tracking data actually provided to clients.” (Id. ¶ 96.) It functioned to allow H2O “to identify the location name, the purpose (i.e., pick-up, drop-off, or disposal) of a particular geo-location . . . whether the data point is associated with a pipeline, truck, storage tank, well . . .[, ]” and was created and maintained as H2O's own proprietary and confidential information. (Id.)

         In May 2014, an in-person meeting took place in Pennsylvania between Gilstrap, Gladulich, and Wilkerson, in which Gladulich “mentioned that ‘the shortcomings of the WaterTRAC platform' would not be an issue anymore because the ‘new water tracking system would address it.'” (Id. ¶ 99.) At the end of the meeting, Wilkerson walked Gilstrap to her car and told her that Gladulich had gone to Carrizo management and gotten approval to use another water tracking system. (Id. ¶ 100.) Consequently, Wilkerson told her that Carrizo would no longer need the WaterTRAC platform to monitor water moved by truck, but that Carrizo would still use it to track pipeline water. (Id.) H2O did not doubt Carrizo's representation because around May 2014, Jerry Murphy, an H2O employee who serviced H2O's equipment in Pennsylvania, reported to Gilstrap that Carrizo started using a bar-code-based water tracking system on its trucks in Pennsylvania.[5] (Id. ΒΆ 101.) Even though H2O ...


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