Opinion issued August 21, 2014




                                      In The

                              Court of Appeals
                                     For The

                          First District of Texas
                            ————————————
                              NO. 01-14-00149-CV
                           ———————————
IN RE VALERO REFINING – TEXAS, L.P. AND VALERO REFINING CO.
                      TEXAS, Relators



            Original Proceeding on Petition for Writ of Mandamus


                         MEMORANDUM OPINION

      This is a mandamus proceeding arising from a pretrial discovery dispute.1

In the underlying proceeding, Valero Refining-Texas, LP contests the Harris

County Appraisal District’s appraisal of its Harris County refinery for purposes of

assessing ad valorem property taxes for 2012. See TEX. TAX CODE ANN. §§ 42.01,
1
      The underlying case is Valero Refining – Texas, LP and Valero Refining Company
      Texas v. Harris County Appraisal District, cause number 2012-56551, pending in
      the 215th District Court of Harris County, Texas, the Honorable E. Palmer
      presiding.
42.21 (West Supp. 2012). Valero challenges a trial court order compelling it to

produce financial statements and operating business information. Valero contends

that the requested information constitutes trade secrets. HCAD contends that the

information it seeks does not merit trade secret protection and that, in any event, its

production is necessary to establish the value of Valero’s property.               We

conditionally grant mandamus relief.

                                    Background

      Valero owns and operates a refinery in Houston, Texas. Valero sued HCAD

asserting that the appraised property-tax value of the refinery for 2012 was over

market and not equal and uniform.         HCAD requested discovery of extensive

financial data relating to the market value Valero’s refinery business.            For

example, HCAD sought production of all documents and tangible things:

   • consisting of monthly and annual financial reports of the subject property,
     including revenue from sales, cost of sales, margins, gross margins, variable
     and fixed expenses, and net margins (Request 5);

   • containing the historical operating income and expenses by product (Request
     6);

   • evidencing refinery expenses by cost category, including operating
     personnel, maintenance, chemicals, catalysts, corporate general and
     administrative expenses, and overhead monthly (Request 7);

   • evidencing the quantity of refinery inputs and outputs (Request 9);

   • evidencing product volumes (Request 11);

   • evidencing quantity of energy consumption (Request 12);

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   • evidencing utility purchases that indicate quantity and cost of utilities
     (Request 13);

   • containing the most recent Solomon Associates Fuel Refinery Performance
     Analysis reports and data (“Solomon Report”) (Request 23); and

   • containing a summary of logistics in and out of the refinery for multiple
     categories of substances (Request 22).

      Valero objected that these discovery requests sought information that is

protected by the trade secret privilege.    In particular, Valero argues that the

document requests include within their scope Valero’s extremely secret and

sensitive Business Unit Report (“BUR”), which contains Valero’s strategic plans

and financial statements for all of Valero’s properties. Valero also objected that

the requests were overbroad, unduly burdensome, and not likely to lead to the

discovery of admissible evidence. HCAD moved to compel production, arguing it

needed the information to prepare a market-value appraisal to defend against an

unequal-appraisal claim using the income appraisal method.

      In its response to HCAD’s motion to compel, Valero attached the affidavit

of Roy G. Martin, Jr., Senior Vice President of Ad Valorem Tax for Valero

Refining – Texas L.P. and Valero Energy Corporation.         Martin averred that

HCAD’s requests sought information that constituted Valero’s trade secrets. In its

response, Valero also argued that the discovery requests were overbroad and

burdensome. Valero further objected on the basis that the income and expense

information that HCAD sought was irrelevant because the income method of

                                        3
appraisal was not relevant or applicable here. In reply to Valero’s response to

HCAD’s motion to compel, HCAD offered the affidavits of James L. Watson, a

professional engineer engaged by HCAD, and Grady Graham, an HCAD

employee, to demonstrate that the requested information was necessary.

      On August 9, 2013, the trial court held an evidentiary hearing at which

Martin testified that the requested information constituted Valero’s trade secrets

and that the income method was not an appropriate method of appraisal in this

case. On HCAD’s behalf, Watson testified that the requested information was

necessary to a fair adjudication of the case.

      On September 19, 2013, the trial court granted HCAD’s motion to compel

and overruled Valero’s objections.        The trial court’s order stated that the

information sought did not merit trade secret protection and that HCAD established

a need for the information.

      On October 13, 2013, Valero filed a motion for reconsideration or to stay

enforcement of the order granting HCAD’s motion to compel because a similar

case, In re Valero Refining-Texas, LP, 415 S.W.3d 567 (Tex. App.—Houston [1st

Dist.] 2013, orig. proceeding), was pending before this court. The trial court

denied the motion on October 30, 2013.

      On November 8, 2013, Valero filed its First Amended Petition. Valero

abandoned its market value claim and asserted only that the tax on its refinery was



                                           4
not equal and uniform. On the same day, Valero filed its “Motion to Vacate

Portions of Court’s September 19 & October 30 Orders Because of Plaintiffs’

Abandonment of Market Value Claim.” Valero requested that the trial court vacate

the portions of the order that required Valero to comply with the previously-

objected to HCAD requests.       On December 13, 2013, the trial court denied

Valero’s motion to vacate.

                                    Discussion

      Valero contends that the trial court abused its discretion in ordering Valero

to produce the requested information because the information warrants trade secret

protection and HCAD failed to establish that the information is necessary to a fair

adjudication of this case. Valero also contends that HCAD’s discovery requests

are irrelevant, overly broad, and burdensome.

A.    Standard for Mandamus Relief

      Generally, the scope of discovery is within the trial court’s discretion. In re

Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex.1998) (orig. proceeding) (citing

Dillard Dep’t Stores, Inc. v. Hall, 909 S.W.2d 491, 492 (Tex. 1995) (orig.

proceeding)); In re BP Prods. N. Am. Inc., 263 S.W.3d 106, 111 (Tex. App.—

Houston [1st Dist.] 2006, orig. proceeding) (citing In re Colonial Pipeline, 968

S.W.2d at 941). Mandamus relief is available only to correct a “clear abuse of

discretion” when there is no adequate remedy by appeal. Walker v. Packer, 827



                                         5
S.W.2d 833, 839–40 (Tex. 1992) (orig. proceeding).           The heavy burden of

establishing a clear abuse of discretion is on the party resisting discovery. In re

CSX Corp., 124 S.W.3d 149, 151 (Tex. 2003) (orig. proceeding) (citing Canadian

Helicopters Ltd. v. Wittig, 876 S.W.2d 304, 305 (Tex. 1994) (orig. proceeding)). A

clear abuse of discretion occurs when a trial court “‘reaches a decision so arbitrary

and unreasonable as to amount to a clear and prejudicial error of law.’” Walker,

827 S.W.2d at 839 (quoting Johnson v. Fourth Court of Appeals, 700 S.W.2d 916,

917 (Tex. 1985) (orig. proceeding)). A trial court has no discretion in determining

what the law is or in applying the law to the particular facts. Id. at 840. A clear

failure by the trial court to analyze or apply the law correctly constitutes an abuse

of discretion. Id.

B.    Applicable Law

      “A trade secret is any formula, pattern, device or compilation of information

which is used in one’s business and presents an opportunity to obtain an advantage

over competitors who do not know or use it.” Computer Assocs. Int’l, Inc. v. Altai,

Inc., 918 S.W.2d 453, 455 (Tex. 1996). Rule 507 of the Texas Rules of Evidence

provides for the protection of trade secrets:

      A person has a privilege, which may be claimed by the person or the
      person’s agent or employee, to refuse to disclose and to prevent other
      persons from disclosing a trade secret owned by the person, if the
      allowance of the privilege will not tend to conceal fraud or otherwise
      work injustice. When disclosure is directed, the judge shall take such



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      protective measure as the interests of the holder of the privilege and of
      the parties and the furtherance of justice may require.

TEX. R. EVID. 507. The trade secret privilege seeks to balance two competing

interests: a party’s intellectual property interest in the trade secret and the fair

adjudication of lawsuits. See In re Cont’l Gen. Tire, Inc., 979 S.W.2d 609, 612

(Tex. 1998) (orig. proceeding).       Rule 507 accommodates both interests by

requiring a party to disclose a trade secret only if necessary to prevent “fraud” or

“injustice.” Id. Disclosure is required only if necessary for a fair adjudication of

the requesting party’s claims or defenses. Id.

      The party asserting the trade secret privilege has the burden of proving that

the discovery information sought qualifies as a trade secret. In re Bass, 113

S.W.3d 735, 737 (Tex. 2003) (orig. proceeding). If the resisting party meets its

burden, the burden shifts to the party seeking the trade secret discovery to establish

that the information is necessary for a fair adjudication of its claim. Id. It is an

abuse of discretion for the trial court to order production once trade secret status is

proven if the party seeking production has not shown necessity for the requested

materials. Id. at 738.

      To determine whether a trade secret exists, the following six factors are

weighed in the context of the surrounding circumstances: (1) the extent to which

the information is known outside of the business; (2) the extent to which it is

known by employees and others involved in the business; (3) the extent of

                                          7
measures taken to guard the secrecy of the information; (4) the value of the

information to the business and to its competitors; (5) the amount of effort or

money expended in developing the information; and (6) the ease or difficulty with

which the information could be properly acquired or duplicated by others. In re

Union Pac. R.R. Co., 294 S.W.3d 589, 592 (Tex. 2009) (orig. proceeding) (per

curiam). The party claiming a trade secret is not required to satisfy all six factors

because trade secrets do not fit neatly into each factor every time. In re Bass, 113

S.W.3d at 740.

      Once a trade secret privilege is established, the burden shifts to the party

seeking to discover a trade secret to make a particularized showing that the

information is necessary to the proof of one or more material elements of the claim

and that it is reasonable to conclude that the information sought is essential to a fair

resolution of the lawsuit. See In re Bridgestone/Firestone, Inc., 106 S.W.3d 730

731–732 (Tex. 2003) (orig. proceeding); In re Cont’l Gen. Tire, 979 S.W.2d at

611, 613. “It may be theoretically possible for a party to prevail without access to

trade secret information and yet be unfair to put him to much weaker proof without

the information.” In re Bridgestone/Firestone, 106 S.W.3d at 732. But the test

cannot be satisfied merely by general assertions of unfairness. Id.

      Nor is it enough to show that the information would be useful to the party’s

expert; rather, the party must show that it is necessary. See In re Cont’l Gen. Tire,



                                           8
979 S.W.2d at 611. If an expert can form an accurate opinion on the relevant

subject without the trade secrets, then the information is useful rather than

necessary. See In re XTO Res. I, LP, 248 S.W.3d 898, 905 (Tex. App.—Fort

Worth 2008, orig. proceeding) (holding that party failed to show necessity when

expert testified that trade secret information would be useful to prepare report with

least amount of uncertainty, but opinion could be formed without it).          If an

alternative means of proof is available that would not significantly impair the

presentation of the case’s merits, then the information is not necessary. See In re

Union Pac. R.R., 294 S.W.3d at 592–93; In re Cont’l Gen. Tire, 979 S.W.2d at

615. The court must weigh the degree of the requesting party’s need for the

information against the potential harm of disclosure to the resisting party. In re

Cont’l Gen. Tire, 979 S.W.2d at 613. If the requesting party establishes that the

documents are necessary, the trial court should ordinarily compel disclosure of the

information, subject to an appropriate protective order. Id. An appellate remedy

does not exist if a trial court orders a party to produce privileged trade secrets

absent a showing of necessity. In re Bass, 113 S.W.3d at 745.

C.    Analysis

      1.     Trade Secrets

      To establish the applicability of the trade secret privilege, Valero offered

Martin’s affidavit and Martin’s oral testimony. Having reviewed each discovery



                                         9
request and Martin’s affidavit and oral testimony supporting Valero’s assertion of

the trade secret privilege, we conclude that Valero established the applicability of

the trade secret privilege.

      In determining whether the requested information constitutes a trade secret,

we weigh six factors. In re Union Pac. R.R. Co., 294 S.W.3d at 592. Under the

first factor, we consider the extent to which the information is known outside

Valero’s business. See In re Bass, 113 S.W.3d at 741. According to Martin’s

affidavit, the documents requested include personnel and HR documents,

confidential business documents, and process-related documents. He averred that

the information is confidential and that the process-related documents “are

absolutely not known outside VLO and VRT.”           Similarly, at the evidentiary

hearing, Martin testified that the financial and operating information contained in

the Business Unit Report, which is within the scope of HCAD’s document

requests, is “not known to anyone outside of Valero.” Because Valero adduced

evidence demonstrating that no one outside of Valero has access to the information

HCAD seeks to discover, Valero has satisfied this factor.          See id. at 740

(concluding relator satisfied first factor with testimony that company had not

provided outside access to requested data).

      Under the second factor, we consider the extent to which the information is

known by employees and others involved in Valero’s business. See id. at 741.



                                        10
Martin averred that the “documents requested are accessible to only a few people

at VRT and at VLO’s headquarters.” According to Martin’s affidavit, less than

one-percent of VLO personnel have access to documents that summarize financial

performance on a specific refinery basis and VLO’s Global Information Security

Policies prohibit photocopying such documents. Martin further averred that “[n]o

single refinery specific financial information is ever made public. VLO’s 10-K,

for example, aggregates broad summary data by geographic region.                 Such

aggregate 10-K data for the Refinery would include data for eight (8) refineries.”

       Likewise, Martin testified at the hearing that “very few people,” “less than

one percent,” have access to any form of these documents. He testified that those

people discuss the BUR each month and the meetings are held in the “Emergency

Management Center,” a secure room with access control. At the hearing, Martin

testified that:

       There are lots of people that work on putting the information together
       for the Business Unit Report or the BUR; but the finished product is
       seen by [] very few people. And essentially, it’s done for the benefit
       of the most senior management of Valero, which would be, obviously,
       the CEO, the CFO of Valero, as well as the lead refinery person for
       Valero, the executive vice president over refinery; and also, the
       general counsel is usually in these meetings. There may be one or two
       other folks that have access to the BUR, but the access to the BUR [is]
       highly regulated and controlled.

Because Valero adduced evidence that only a few Valero employees have access to

the data HCAD seeks to discover, Valero has satisfied the second factor. See id. at



                                         11
742 (holding relator satisfied second factor because only four people, all of whom

were agents and employees, has access to the data).

      Under the third factor, we consider the extent of measures Valero has taken

to guard the secrecy of the requested information. See id. Martin averred that the

documents HCAD seeks to discover are “guarded by VRT and Valero personnel.”

He averred that Valero uses “security passwords,” prohibits leaving the premises

or departments with this information, and that “VLO’s global Information Security

Policies expressly forbid the photocopying of such documents.” Similarly, Martin

testified that the Business Unit Reports are hand-delivered to authorized recipients

in a sealed envelope, and that the recipient must sign for it and is prohibited from

duplicating the report and passing it on to someone else. Because Valero adduced

evidence that it takes significant measures to guard the secrecy of the requested

information, Valero has satisfied the third factor. See id. (holding relator satisfied

third factor because uncontested evidence showed company “vigilantly guard[ed]

the data”).

      Under the fourth factor, we consider the information’s value to Valero and

Valero’s competitors. See id. Martin averred that the “documents would reveal

information important to VLO’s competitors.” According to Martin’s affidavit, “a

competing refinery with access to this data would know VRT’s profit margins” and

would be able to undercut VLO “with respect to acquiring crude and with respect



                                         12
to selling finished product,” could use Valero’s process methods and formulas, and

could “improve its efficiencies to match the efficiencies achieved by VRT.” At the

hearing, Martin testified that seeing Valero’s BUR would be valuable to

competitors and that Valero would not want its competitors to see the BUR

because that would give the competitor a “very unfair advantage in terms of our

profitability or lack of profitability [and] whatever efficiencies we may have.”

According to Martin, a competitor could “take advantage of that and cut [Valero]

out of the market, say a supply market for crude or maybe bid our products against

or products in certain areas and take away what market share we have. It will be

very detrimental financially to [Valero].”        Because Valero offered evidence

demonstrating that Valero’s information is valuable to Valero and its competitors,

Valero has satisfied the fourth factor. See id. (holding relator satisfied fourth factor

because expert testified data was “vital commodity” and “would be valuable to any

oil and gas contractor in the area”); In re Cayman Island Firm of Deloitte &

Touche, No. 04-01-00491-CV, 2001 WL 1042233, at *4 (Tex. App.—San Antonio

Sept. 12, 2001, orig. proceeding) (not designated for publication) (holding affiant’s

statement that information was “highly confidential and proprietary and would

greatly benefit [relator’s] competitors,” while “sketchy” on details, was sufficient

to establish trade secret privilege).




                                          13
      In reviewing the fifth factor, we consider the amount of money expended by

Valero in developing the information. See In re Bass, 113 S.W.3d at 742. In his

affidavit, Martin averred that “[a] great amount of money is spent in developing

the documents.” Regarding the financial reports, he averred that because of the

personnel used to develop the documents, their efforts “amount to many thousands

of dollars[’] worth of productivity.” Martin averred that “VRT employs a number

of people whose job is to develop these reports [and] [p]ersonnel at VLO’s

headquarters in San Antonio are charged with the responsibility of reviewing and

maintaining this data.” Regarding the other documents relating to VRT’s process

operations, Martin averred that “the majority of the employees of VLO and VRT

are involved in creating those documents; it is simply the heart of Valero’s refining

business.” At the hearing, Martin testified that “hundreds of accountants across

[Valero’s] system” compile the information contained in the BUR on a daily basis

and that the information is summarized at the end of each month. Because Valero

proffered evidence that it expends considerable resources developing the requested

information, Valero has satisfied the fifth factor. Cf. id. (not weighing factor in

relator’s favor because “the record [was] bare of information on this factor”).

      Under the final factor, we consider the ease or difficulty with which the

information could be properly acquired or duplicated by others. See id. Martin

averred that the documents “could not be developed by anyone other than VLO



                                         14
and VRT [and that] [n]o one else has access to the data necessary to produce

them.” At the hearing, Martin likewise testified that a non-Valero entity could not

duplicate the information contained in the BUR. Because Martin’s testimony as a

whole constitutes evidence that it would be difficult for another company to

duplicate or acquire this information, Valero has satisfied the sixth factor. See id.

Considering the six factors, we conclude that Valero met its burden to demonstrate

that the requested documents merit trade secret protection.

      HCAD contends that it did not request the BUR and, therefore, whether the

BUR is a Valero trade secret is irrelevant. We disagree. At the hearing, Martin

testified that the BUR contains refinery-specific information requested by HCAD.

Moreover, Martin testified that Valero regards “the financial information, wherever

it is, as a trade secret.”    Martin testified that “[w]hether it be the income

information, the Solomon report, anywhere the information is contained in

Valero’s records, they are deemed to be a trade secret.” Accordingly, we conclude

that the BUR may serve as the basis for Valero’s trade secret contention.

      We hold that the information that the trial court ordered Valero to produce is

protected by Texas Rule of Evidence 507. See In re Bass, 113 S.W.3d at 741–42.

      2.     Necessary to a fair adjudication of the case

      Having determined that the trial court ordered disclosure of trade secrets, we

turn to whether HCAD demonstrated that disclosure is necessary to a fair



                                         15
adjudication of this case. See In re Union Pac. R.R., 294 S.W.3d at 592; In re

Cont’l Gen. Tire, 979 S.W.2d at 613. We conclude that this court’s recent case, In

re Valero Refining-Texas, LP, 415 S.W.3d 567 (Tex. App.—Houston [1st Dist.]

2013, orig. proceeding), controls, and, accordingly, we hold that HCAD failed to

meet its burden to show that disclosure was necessary to a fair adjudication of this

case.

        Taxable property is generally appraised at its market value. See TEX. TAX

CODE ANN. § 23.01(a) (West Supp. 2012). There are three potential alternate

methods that may be used to determine the market value of property: cost, income,

and market data comparison. See id. § 23.0101 (West 2008). HCAD, like the

Galveston County Appraisal District (“GCAD”) in In re Valero, asserts that the

financial and operating information that the trial court ordered Valero to produce is

necessary to complete an income-method appraisal of the property. See In re

Valero, 415 S.W.3d at 571. In support of this position, HCAD proffered Graham’s

affidavit, Watson’s affidavit, and Watson’s oral testimony.

        Watson averred that “it has been my experience that actual buyers and

sellers rely upon the income method to determine a sales price for a refinery.”

Watson testified at the hearing that the income method is the most relevant to

finding actual market value because sellers and buyers of refineries use it. In his

affidavit, Graham averred that the income approach was the most appropriate



                                         16
appraisal method. Similarly, in In re Valero, an expert for GCAD averred that the

income method is a valid and recognized method of determining the market value

of refineries that buyers and sellers of refineries often use. See In re Valero, 415

S.W.3d at 571.

      HCAD, just as GCAD did in In re Valero, also offered into evidence an

industry article about appraising refineries that discusses the use of each of the

three appraisal methods. As we noted in In re Valero, the article “notes the

benefits and shortfalls of each method and concludes that because none of the three

are perfect, the most accurate appraisal would take into consideration all three

appraisal methods.” See In re Valero, 415 S.W.3d at 571.

      Taking the same position as it had in In re Valero, Valero disputed the

relevance of an income-based valuation in the context of appraising its refinery.

To overcome the trade-secret privilege, the evidence must be necessary and not

merely relevant. See In re Bridgestone/Firestone, 106 S.W.3d at 732–33; In re

Cont’l Gen. Tire, 979 S.W.2d at 611; In re XTO Res. I, 248 S.W.3d at 905. HCAD

must show that without discovery of the trade secrets, its ability to defend its

appraisal will be significantly impaired. See In re Union Pacific R.R., 294 S.W.3d

at 592; In re Bridgestone/Firestone, 106 S.W.3d at 733.

      In In re Valero, GCAD’s expert did not conclude that the cost or market-

data-comparison methods were inappropriate or inapplicable. Nor did he conclude



                                        17
that the income method is the most appropriate valuation method or that it was

essential to create an accurate appraisal. HCAD seeks to distinguish that case by

arguing that, here, Graham and Watson did testify that the income method is the

most appropriate method. Even considering that evidence, however, as we noted

in In re Valero, the industry article produced by HCAD “indicates that an ideal

appraisal considers all three appraisal methods, but it also indicates that, depending

on the circumstances, each of the three methods can produce a competent

appraisal.” In re Valero, 415 S.W.3d at 571. Therefore, we conclude that the

information requested by HCAD is “useful in that it will facilitate an income-

method appraisal and perhaps reach an appraisal with more certainty,” but not

necessary because HCAD can complete an accurate appraisal without it. See In re

Valero, 415 S.W.3d at 571 (citing In re Bridgestone/Firestone, 106 S.W.3d at 733;

In re XTO Res. I, 248 S.W.3d at 905).

      HCAD has not shown that cost and market-data-comparison methods will

not provide a competent appraisal and evidence of the market value of the

property. Accordingly, HCAD has failed to meet its burden of demonstrating that




                                         18
the trade-secret information is “necessary and not merely relevant.”2 Therefore,

the trial court erred in concluding that the requested information was necessary to a

fair adjudication of this case. Because we hold that the trial court abused its

discretion by compelling Valero to produce information protected by the trade

secret privilege, we need not address Valero’s contentions that the requests are

overbroad or unduly burdensome. 3

                                      Conclusion

      We conclude that HCAD’s requests for production seek information

protected by the trade secret privilege and that HCAD has not satisfied its burden

of demonstrating production of Valero’s trade secrets is necessary to the fair

adjudication of the case. Accordingly, we conditionally grant Valero’s petition for

writ of mandamus and direct the trial court to vacate the portions of its order that

compel Valero to respond to HCAD’s requests for production 5, 6, 7, 9, 11, 12, 13,



2
      HCAD contends that the trial court’s protective order limiting disclosure of
      confidential information to parties eliminates any potential harm that could result
      from Valero’s production of the requested information. But whether a protective
      order is able to limit harm from the disclosure of trade secrets is only a factor if
      the trade secrets are necessary and must be disclosed. See In re Cont’l Gen. Tire,
      979 S.W.2d at 613.
3
      HCAD relies on In re MHCB (USA) Leasing & Fin. Corp., No. 01-06-00075-CV,
      2006 WL 1098922 (Tex. App.—Houston [1st Dist.] Apr. 27, 2006, orig.
      proceeding) for the proposition that the requested information may be discoverable
      in an equal and uniform case. But HCAD’s reliance on In re MHCB is inapposite
      because the relator in that case did not assert the trade secret privilege. The In re
      MHCB court thus held only that the requested information was “reasonably
      calculated to lead to the discovery of admissible evidence.” See id. at *4.

                                           19
22, and 23. We are confident that the trial court will comply, and the writ will

issue only if it does not.




                                            Rebeca Huddle
                                            Justice

Panel consists of Justices Keyes, Sharp and Huddle.




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