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Energy & the Law

Fueling Freedom: Explaining the Value of Fossil Fuels

Posted in Climate Change, Energy Policy, Environmental Policy

steam engineWhich of these statements makes sense to you:

A. “Never before have the rulers of a society intentionally driven it backwards to scarcer, more expensive, and less efficient energy.”

B. “Communism is the optimal system for avoiding dangerous global warming”.

C. “This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time, to change the economic development model that has been reigning for at least 150 years, since the Industrial Revolution.”

D. “Giving society cheap, abundant energy would be the equivalent of giving an idiot child a machine gun.”

E .“Global warming, like Marxism, is a political theory of actions, demanding compliance with its rules.”

What the quiz says about you

B, C and D? Comrade, you took a wrong turn at “fueling” and failed to yield to “freedom”.

A and E? Then you should read Fueling Freedom: Exposing the Mad War on Energy by Kathleen Hartnett White and Stephen Moore.

If you want a real book review, go to the National Review. This post is more of a polemic, a defense of an honorable industry that is vital to the security and prosperity of the world (excluding Venezuela, of course).

Ms. White, Distinguished Fellow-in-Residence at the Texas Public Policy Foundation, spoke last week at TIPRO’s summer conference. See this PowerPoint for the high points of her presentation. It’s no substitute for the presentation itself, but if you want to know more you should read the book.

Facts that will impress your friends 

Here are compelling facts from the book that reveal the importance of fossil fuels to our modern way of life:

  • Human misery remained at about the same level for 100,000 years until the Industrial Revolution in the early 1800’s. Since then, misery has declined and millions have been lifted out of poverty and into the middle class. This progress is a result of human ingenuity and fossil fuels.
  • America produced three times as much food as it did a century ago, with one-third fewer man-hours, on one third fewer acres, and on and at one-third the cost. (Think, natural-gas based fertilizers, tractors, and other fruits of petroleum.)
  • In 1875 the average American family spent 74% of its income on food, clothing and shelter. In 1995 the same family spent 13% of its income on these fundamental necessities.
  • In cost per megawatt hour, oil and natural gas receive 64 cents, wind $56.29 and solar $775.64 in federal subsidies.

Some points might be overstated:

  • Haynesville and non-core Bakken operators might not agree that, “In many places fracking is profitable at $40 per barrel and in most places it is profitable at $50 per barrel.”

Now, for our musical interlude.

Sources for the quiz

A. Fueling Freedom, p. xv (no link, you gotta read the book).

B. IPCC chief Christina Figueres, Daily Caller, January 15, 2014.

C. Figueres, U N Regional Information Centre for Western Europe, February 3, 2015.

D. Paul Ehrlich.

E. Paul Johnson, The Nonsense of Global Warming, Forbes, September 8, 2008.

Control-of-Well Insurance: The Words of the Policy Control

Posted in Litigation, operations

judgeGemini Insurance Company at al v.  Drilling Risk Management Inc construed control-of-well and redrill/extra-expense provisions in an insurance contract.

The question and the rule

The question was whether an insurance policy covered post-blowout expenses (see facts below), and whether each blowout constituted a separate “occurrence”? If so, there would be two deductibles. The rule is simple: An insurance policy is a contract of indemnity whose scope is limited to that expressly set forth in the agreement.

Gemini denied coverage under the contract. The trial court granted summary judgment in favor of DRMI on the coverage and deductible issues. On appeal, the insurer’s denial of coverage was vindicated. Post-blowout casing and liner and associated expenses were required because of pre-existing hole conditions, not as a result of a well-control incident.

Rather than delve into the minutiae of the policy and the events, none of which would be helpful in your next insurance dispute, be reminded not to read too much into the meaning of one agreement. As with any contract, the meaning of an insurance agreement must be determined by the language of the agreement itself.

The facts

While drilling, DRMI encountered a kick in an unexpected high-pressure zone, resulting in uncontrolled subsurface flow. DRMI sidetracked the well, and encountered a second unexpected weak zone at a depth below the original blowout, resulting in a second underground blowout.

A second sidetrack was unsuccessful, never reaching the depth of the second blowout. DRMI drilled a third sidetrack and installed casing and a liner to isolate the zones that caused the second blowout. This one was drilled to total depth. DRMI sought coverage under the policy and a determination that there was one “occurance”.

Beware, home-town justice

Another issue is presented in this case, which was tried in Kendall County, Texas, in the 216th Court (County  Court at Law judge presiding). The plaintiff sued in its own county rather than the county of the defendant or the location of the events (Houston or Louisiana). After denying a motion to transfer venue, the trial court granted partial summary judgment, construing the contract in favor of the hometown plaintiff.  This put the defendants to trial with their case essentially gutted. The result was a $9 million+ judgment for plaintiff. The trial court got it wrong, ignoring testimony from hometown witness, DRMI president Alan Bloxsom, that undermined the company’s contentions.

To be sure, all trial courts don’t favor the homies. The other good news for the visiting team is that the appellate court can set it right. Full disclosure: Gemini drew my attention because I represented a party in the same court in a case with similar players, similar events, and a similar result.

Musical interlude

Yo, Republicans! Do you yearn for the Republican Party you used to know? The one that existed before the 2016 primaries, or during the time of the Bushes, or Reagan, or Ike, Rockefeller and Lincoln? Cookie and the Cupcakes share your pain.

When Can Employee Policies Be Amended?

Posted in Contract Disputes

pete fountainCo-author Michael Kelsheimer

Thinking about changing an employee policy in Texas? Kubala v. Supreme Production Services, Inc. says you can do it (almost) whenever you want. Want to make employees arbitrate their disputes? You can do that too.

Kubala’s employer Supreme announced a new policy requiring employees to arbitrate employment disputes, including Fair Labor Standards Act claims.  Continued employment was conditioned on acceptance of the agreement, which delegated to the arbitrator the power to make gateway determinations as to the arbitrability of any given claim.  Kubala did not sign that agreement after the meeting but continued his employment and accepted payment for his work.

The new policy was announced two days after Kubala had filed a FLSA collective action against Supreme but, as far as the court knew, before Supreme received notice of the suit.

The agreement to arbitrate

The first question was whether there was an agreement to arbitrate any set of claims, such as pre-existing disputes. Kubala’s obligation to arbitrate claims was imposed while he was already employed on an at-will basis.  Thus, the question:  Was there was a valid modification of the terms of his employment?

Arbitration agreements between employers and their employees are broadly enforceable in Texas. To demonstrate a modification of the terms of at-will employment, the proponent must demonstrate that the other party received notice of the change and accepted the change.

The court deemed that acceptance need not be more complicated than continuing to show up for work and accepting wages in return for work. Supreme satisfied this requirement by providing notice at a meeting where the policy was explained. Kubala knew the policy was a condition of continued employment.  He continued to work.  It doesn’t matter that he didn’t sign the agreement.

The delegation clause 

Was there was a valid delegation clause? Yes. The court was not opining on whether the agreement required that the merits of Kubala’s claim be arbitrated.  The only issue was who answers that question. The court concluded that it was plainly the right and responsibility of the arbitrator to determine his or her own jurisdiction.

Doubts

Judge Higginbotham’s cautionary concurring opinion addressed an employer’s ability to impose arbitration after the employee had filed suit. The result could be that the employer could coerce the plaintiff-employee into relinquishing his FLSA-given right to sue. Judge Higginbotham was concerned about “a regime of contracting out justice”.  Supreme’s saving grace was that it was unaware of Kubala’s suit until after the arbitration agreement became effective.

Worried about the presidential election?

Don’t be:

“Democracy is the worst form of government except for all the others that have been tried.”  Winston Churchill.

Be:

“The best argument against democracy is a five-minute conversation with the average voter.” Winston Churchill.

Remember the campaign ad about the 3:00 a.m. phone call? Let Gary Clark, Jr. answer it.

Great New Orleans musician Pete Fountain RIP.

Title Suit Booted for Failure to Join Parties

Posted in Lease Disputes, Litigation, Title Issues

unhappy partyLongoria v. ExxonMobil is like throwing a big party but failing to invite all the right guests.

The Longorias – 59 of them – sued producer-defendants over ownership of 9,200 acres in Brooks County, Texas, acquired in the 1800’s. Plaintiffs claimed their ownership was not recognized in subsequent conveyances and judgments and sought an accounting, damages for conversion of their share of production, to quiet title, and to declare their ownership in the mineral estate.

Trouble for the Longorias

Plaintiffs identified 82 absent interest owners as “Necessary, Nominal Parties” – let’s call them the “uninvited” – but did not join them as defendants. Facing motions to abate and to dismiss, Longoria claimed the uninviteds were not necessary because there was no claim against them. But their pleadings made claims on their interests. The court denied that argument.

Alternatives to joinder and service

Longoria offered to pay the unserved interest owners amounts equal to the royalty paid by the producers for as long as production continued.  Like a party favor for not even being invited. The court dismissed that rationale. If the plaintiffs won the suit the producers’ interests would be diminished. The “uninvited” wouldn’t be bound by the judgment, and could continue to look to the producers for payment of 100% of their royalty.

How long is long enough?

Longoria argued that they served 57 of 64 absent owners (producers argued it was fewer) and weren’t allowed sufficient time to locate and serve the others.  Observing that they had been given nine months to accomplish this task, the court concluded that the Longorias, having made half-hearted efforts at service, were not diligent in pursuing the unserved interest owners.

To understand this result, you need to know that this dispute is the progeny of a suit originally filed in 2004. In a 2008 opinion this same court dismissed that suit on the more or less same grounds as this one, but without prejudice, giving the Longorias another chance to assemble the proper guest list.  Looks like the court finally invoked a judicial curfew, sending everybody home.

Finally, Longoria asked the court to allow substituted service on the unserved defendants.  The denied the motion. It was late and was defective because it was not supported by an affidavit. Even new affidavits filed with a motion for new trial were insufficient because they stated conclusions with no supporting facts.

The takeaways

  • A suit is likely to be dismissed if all parties whose interests could be affected by a judgment are not before the court.
  • Left unsaid in the opinion is that if a party is deliberate in refusing to do what the court orders, the court’s patience will eventually run out, with unpleasant results. In this case, 12 years was enough.

A musical interlude, dedicated to the Longorias’ empty feeling as the producer-defendants and the court of appeal leave the party, hand in hand.

Securities Fraud – a Lesson for Promoters

Posted in Litigation, Regulations

We discussed SEC v. Arcturus et al last week and promised more. Here it is.

Did defendants commit securities fraud?

It doesn’t matter. Violations of Sections 5 of the Securities Act and 15.A of the Exchange Act are strict liability offenses; the defendant’s state of mind is not a consideration.  Thus, because they sold unregistered securities through the United States mail or interstate commerce these defendants were liable unless they could prove an exemption.  They offered no proof of an exemption (such as registration) so they were liable.

But we still wanna know, did they commit fraud?

Yes. It is unlawful under the Exchange Act to use or employ any manipulative or deceptive or contrivance in contravention of SEC rules to sell a security.  If a person makes a material misrepresentation or omission or uses some other fraudulent device in connection with the offer, sale or purchase of a security and acts in interstate commerce he is liable.

The test under Section 17 of the Securities Act is similar. The Fifth Circuit’s standard for misrepresentation is whether the information disclosed, understood as a whole, would mislead a reasonable potential investor.  A statement or omission is “material” if there a substantial likelihood that a reasonable investor would consider the information important in making a decision to invest.

Who, me? 

What information did the the Parvizian defendants omit?  They sold working interests in a prospect that had been forfeited. In other words, they sold interests they didn’t own. Defendants argued that the interests were “in dispute” and they expected to get them back. As you might expect, the court said they should have told that fact to the investors.

“Scienter” galore 

Scienter is a mental state involving an intent to deceive, manipulate or defraud.  It also includes severe recklessness, the definition of which is lengthy, but includes words like “highly unreasonable”, “extreme” and “inexcusable”. Selling interests that you know were terminated without disclosing that to investors evidences “a high degree of scienter”, said the court.

What about the brokers?

The interests were sold through the Balunas companies, who were not registered as brokers with the SEC. There were “consulting agreements”. Balunas would “introduce” prospective venturors and would receive 12% commission and a $4,000 monthly “retainer”. Balunas would cold-call prospects from a lead list.

The “introducing” part is important.  A broker is “any person engaged in the business of effecting transactions and securities for the account of others.”  A mere introduction is deemed not to be effecting a transaction.

Investors, think about this

Have you ever considered the relationship between “invest” and “investigate”. They both derive from Latin but, to my surprise, are not from the same root. Nevertheless, in real life – especially when taking a random phone call from a fast-talking stranger – one should do the first only after doing the other.

Musical Interlude; you can’t do it alone

Promoters like Parvizian need backup. Sometimes backup takes center stage. Here’s betting you can’t name the lead singer for the  Reflections,  or the Tokens.

When is a Joint Venture a Security?

Posted in Litigation, Regulations

salesmanHere are several things to note about SEC v. Arcturus et al:

  • Pay attention to this post if you sell oil deals in the way these defendants did.
  • This is a civil enforcement suit, so nobody’s headed to jail.
  • Not all of the SEC’s many rules make sense. Think Leviticus and the wrong way to sacrifice a goat, except nobody’s headed for the unrelenting wrath of Yahweh.
  • Your “good intentions” won’t save you.
  • The SEC enforces when there are complaints. Break the rules and you‘d better go “yard” for your investors.

Parvizian controlled Arcturus and Aschere, buying and selling interests in drilling projects.  Each project had a managing venturor which supervised the project. Each venture included a confidential information memorandum, PPM, joint venture agreement, subscription agreement, and investor questionnaire.

The SEC alleged that the defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934, and sought injunctions and money. The SEC contended that the projects were securities. Defendants referred to them as “joint ventures” and the investors as “partners” or “venturors”.

First, definitions

A “security” includes an “investment contract”, but that term is not defined in either statute. The courts say an “investment contract” is a transaction or scheme whereby a person:

  • invests his money
  • in a common enterprise
  • expecting profits derived solely from the efforts of others.

The agreements

  • Parvizian’s power was limited to day-to-day management and was subject to the “affirmative vote” of the venturors.
  • The venture was to be “managed and controlled collectively by all the venturors”, including the ability to call a meeting.
  • The venturors had voting rights and could remove the managing venturor by a 60 percent vote.

The reality

But,

  • The court couldn’t find that the venturors had any real powers, based on the way the ventures were actually constituted.
  • The venturors had no information about each other and thus no way to actually have a vote. Parvizian refused to disclose the identities of other venturors when requested.
  • In a process never disclosed to the venturors, Parvizian combined the assets of the partnerships into pools of accounts held by a third party.
  • Parvizian alone controlled and authorized every aspect of drilling and producing operations.
  • The venturors had no personal or firsthand knowledge about any activities or decisions related to the venturess and relied completely on information from Parvizian.
  •  The venturors were unknowledgeable in the oil and gas business.

SEC wins

Courts focus on the “economic realities underlying the transaction and not in the name appended thereto.” Here are factors (among others) that made this investment a security:

  • Access to information does not necessarily protect an investor from complete dependence from a third-party when that party is the sole source of the information and advice regarding the venture and the investor does not have the expertise necessary to make the essential management decisions themselves.
  • Venturors are not similar to general partners when they have no real power.
  • The partners were so dependent on a particular manager that they could not replace him or otherwise exercise ultimate control.
  • The venturors were so inexperienced and unknowledgeable in business affairs as to be incapable of intelligently exercising their venture powers.

Next

Did they commit securities fraud, … and what about the brokers?

Our musical interlude desperately needs a theme. Ladies whose names begin with “C”?  Corrine and Colinda?

Texas Supreme Court Clarifies Nuisance Law

Posted in Litigation

nuisanceGardiner v. Crosstex North Texas Pipeline LLC, has brought clarity to Texas nuisance law. It took the Texas Supreme Court 54 pages; we have it in under 600 words. (We explained the lower court case here.)

  • “Nuisance” now refers, not to a defendant’s conduct or a legal claim or cause of action, but to a type of legal injury involving interference with the use and enjoyment of real property.
  • It refers to a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities attempting to use and enjoy it.

The interference must be substantial

To quote a treatise, the law “does not concern itself with trifles or seek to remedy all the petty annoyances and disturbances of everyday life in a civilized community even from conducted committed with knowledge that annoyance and inconvenience will result.” Crybabies not allowed!

The effect must be unreasonable

Substantial interference is not a nuisance unless the effect on those who otherwise use and enjoy their land is “unreasonable”, based on an objective standard of persons of ordinary sensibilities, not the subjective response of any particular plaintiff. Some plaintiffs are not as special as they think they are.

It’s the effect, not the conduct

The plaintiff must establish that the plaintiff’s discomfort or annoyance is unreasonable, not that the defendant’s conduct or land use was unreasonable.  It concerns the reasonable expectations of a normal person occupying the plaintiff’s land. The effects of the defendant’s conduct or land use must be such that would disturb and annoy persons of ordinary sensibilities and ordinary tastes and habits.

Let us count the factors

The court identified at least ten factors which could determine whether a defendant’s interference with a plaintiff’s use and enjoyment of the land is substantial and whether any particular effect of that interference is unreasonable. This indicates how fact-intensive nuisance cases can be.

The standard of care

Actionable nuisance can be divided into three classifications; in each there must be some level of culpability.

Intentional nuisance

“Intent” here means that the actor desires to cause a consequence of his act or that he believes that the consequences are substantially certain to result from it.  An intent to inflict injury or desire to do harm is not required.  Intent is measured by subjective standard: the defendant must have actually desired or intended to create the interference or must have actually known or believed that the interference would result.

The evidence must establish that the defendant intentionally caused the interference that constitutes the nuisance, not just that defendant intentional engaged in the conduct that caused the interference.

The plaintiff need not separately establish that the defendant’s conduct was also “unreasonable”.

Negligent nuisance

Nuisance not limited to intentional interferences.  A claim of nuisance is appropriate so long as it refers solely to the alleged legal injury.  If the allegation is negligent nuisance, the rules of ordinary negligence apply.

Strict liability

Any activity which involves an unusual hazard or risk relies on a strict liability nuisance. Strict liability is based on the idea that the defendant was engaged in some kind of activity exposing others to a risk of harm from accidental invasion under circumstances that justify allocating certain losses from such risk to the defendant, even though defendant acted with reasonable care. One takeaway from the decision is that the court found no evidence that a compressor station is abnormally dangerous.

Thanks to your supreme court, Texas nuisance law has gone from this to this.

Wyoming Federal Court Strikes Down BLM Fracking Rule

Posted in Environmental Policy, Hydraulic Fracturing, Regulations
wolfCo-author Sandra Mazan

U.S. District Court Judge Scott Skavdahl in State of Wyoming et al v. U.S. Department if Interior et al. struck down Bureau of Land Management regulations applying to hydraulic fracking on federal and Indian lands. He concluded that the BLM had no authority from Congress to issue such regulations.

Background

In March 2015, the BLM issued the regulations, which addressed three areas of oil and gas development: wellbore construction, chemical disclosure and water management, each of which is already subject to state or federal regulation. According to BLM, the Rule was enacted in response to public concern about whether fracturing can cause underground water contamination and an increasing need for stronger regulation.  In response, industry proponents (the IPAA, Petroleum Association of America, Western Energy Alliance, the states of Wyoming and Colorado, and intervenors the states of North Dakota and Utah and the Ute Indian Tribe of the Uintah and Ouray Reservation) filed petitions for review of the regulations under the Administrative Procedure Act contending that it should be set aside as:

  • arbitrary,
  • not in accordance with law,
  • in excess of the BLM’s statutory authority, and
  • contrary to the federal trust obligation to Indian tribes.

Court’s Findings

  • Hydraulic fracking does not fall within BLM’s jurisdiction. Existing BLM regulations pertaining to surface disturbance, reporting requirements and pollution to groundwater in oil and gas operations do not evidence BLM’s broad authority to regulate the fracking process.
  • Congress had not delegated authority to BLM to regulate hydraulic fracking.
  • By enactment of the Safe Drinking Water Act (the SDWA) in 1974, Congress delegated authority to the Environmental Protection Agency to regulate hydraulic fracking on federal, state, and Indian lands; however, by amendment in the 2005 Energy Policy Act, Congress unambiguously excluded hydraulic fracking operations (not involving diesel fuels) from EPA regulation under the SDWA. (You may thank U.S. Rep. Joe Barton for that provision.)
  • By specifically removing the EPA’s authority to oversee fracking under the SDWA, Congress did not intend for another federal agency (i.e., the BLM) to step in and assume a similar role.

The Takeaways

There are several:

  • There is no statutory authority for a federal agency’s regulation of fracking.
  • Score this as a victory for proper statutory interpretation and the rule of law.
  • And a defeat for federal encroachment into activities already regulated by the states.
  • We’ll have to wait and see if this remains the status quo. The BLM has appealed.

To commemorate this ruling we need a happy song.

Texas Comptroller Prevails in Tax Exemption Claim

Posted in operations, Taxation

tooth fairyA fight over the Texas sales tax drew industry-wide attention when the trial judge commented from the bench that he was inclined to exempt purchases of casing, tubing, pumps and related services from Texas state sales tax. His actual ruling denied the relief sought by the taxpayer. In Southwest Royalties v. Hegar, the Texas Supreme Court agreed.

You will want to study this case if you are a tax lawyer, or if you expected the judiciary, channeling the tooth fairy, to redirect to producers millions of dollars in badly-needed state sales tax revenues. Otherwise, proceed directly to the musical interlude. (Tea Party: No micro-aggression here; I acknowledge your sincerely-held belief that no governmental unit, especially the Godless ones, really needs or deserves tax revenues.)

The Tax Code says

The tubulars would be exempt if:

  • They are sold to a manufacturer and directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property if the use or consumption is necessary or essential to the processing operation and directly makes or causes a chemical or physical change to the product being manufactured, processed or fabricated for ultimate sale;
  • They are used or consumed in actual manufacturing, processing or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to a pollution control process; or
  • The use or the consumption of the property is necessary and essential to comply with laws or rules that establish requirements related to public health.

Bored yet? Read on. The worst is over.

Southwest said

Hydrocarbons are tangible personal property once they are severed.  The equipment was used for processing because it was used in or during the process of extracting hydrocarbons from underground reservoirs, separating them into their component parts and bringing them to the surface. Thus, the equipment was used in “processing” the hydrocarbons as they were extracted.

Another point: The equipment was used in processing and is essential for controlling pollution.

The State said

The manufacturing exemption must be construed narrowly, which yields a conclusion that mineral extraction is not manufacturing, processing or fabrication. Construing the statute otherwise is inconsistent with the other provisions of the Tax Code.

Another point: Minerals below the surface are real property and not tangible personal property.

The trial court findings of fact

Physical changes occur in hydrocarbons when they are extracted and lifted, but the equipment was not the direct cause of the changes.  Rather, the changes were directly caused by temperature and pressure changes as the hydrocarbons moved up toward the surface. Southwest did not challenge these findings.

The Supreme Court declared

The court pondered the notion of ambiguity, and gave “processing” its ordinary meaning. Southwest did not prove that the equipment was used in actual processing of hydrocarbons within the meaning of the Tax Code.

There was no evidence that the equipment was applied to cause changes to the characteristics of the hydrocarbons. The change was caused by natural pressure and temperature changes as the hydrocarbons were moved to the surface.This is different from, say, pumps that send superheated water into sulphur formations, causing a physical or chemical change in the sulphur.

Ralph Stanley, RIP.

Take a listen before writing off this tune or this one as whiney vocals and tinny hillbilly banjo noise.

A Development in Trade-Secret Cases

Posted in Contract Disputes, Litigation

angry woman

Co-author Skyler Stuckey

The big trade-secret case, Southwestern Energy v. Berry-Helfand, reported on these pages here and here, has been worked over by the Texas Supreme Court. Highlights:

  • Lack of certainty in damages does not preclude recovery.
  • A “Flexible and imaginative” approach to damages in trade secret cases has its limits
  • For the limitations clock to begin running, notice must be more than a suspicion or subjective belief.

A good tactical call

A defendant’s decision not to call an expert damages witness is reminiscent of the suicide squeeze. Judgment is withheld until the result is in. Run scores – manager is a genius; runner out at the plate – manager is reckless and should be fired. Here Southwestern introduced no witness of its own, but instead attacked factual underpinnings of Helfand’s expert’s methodology and the reliability of his calculations. Decision vindicated? Looks like yes. The jury awarded far less than Helfand’s expert calculated.

Reduced damages for misappropriation

As the court saw it, the only figure in the calculations that bore a relationship to the jury’s award was three-percent override applied to past production revenue on the disputed wells. There was no basis for valuing an override in Southwestern’s deep-rights sale. An estimate based on that sale was no evidence to support the jury’s $10.6 million award. The remainder of his calculations, though overstated, was sufficient evidence of actual damages for trade-secret misappropriation.

The proper measure was the reasonable royalty that would be obtained for the trade secret’s use, not an override. Relying on a “flexible and imaginative approach” for trade secret misappropriation is not justified when objective evidence is available. The compensation in the comparable Petrohawk agreement was probative of the trade secret’s value, and not necessarily of a reasonable royalty. Legally sufficient evidence existed to support actual damages, but insufficient evidence exists to support the entire amount the jury awarded.

The expert’s opinion was insufficient to support the entire judgment because he applied the total average payout (3%) received by the plaintiff under an exemplar agreement with Petrohawk to the total number of wells drilled by the defendant. He should have applied the specific formula for payout in the exemplar contract to each well to determine the exact amount that would have been paid for the trade secret.

Damages remanded – not rendered

Overstated damages do not entirely defeat recovery when legally sufficient evidence shows damages exist. There were damages to be had, just not in the amount awarded.

Breach of contract do-over

The court of appeals’ take-nothing judgment on breach of the confidentiality agreement was reversed and remanded. The jury award, based on the “value of the trade secret”, was not a proper measure of contract damages. Error in the measure of contract damages was not before the appeals court because Southwestern abandoned it on appeal. There was evidence of damages, but not enough to support the full award.

Limitations and the discovery rule – plaintiff survives

For the statute to begin to run on a trade secret misappropriation claim based solely on notice of sufficient facts that would cause a reasonable person to make further inquiry, the facts of which the plaintiff has notice must be egregious. Suspicions, subjective beliefs, and concerns are not sufficient. Southwestern failed to establish the date the misappropriation was discovered or as a matter of law, should have been, and couldn’t identify evidence revealing what Helfand would have discovered had she made further inquiry.

And we close with this enticement from the Supreme Court to unhappy defendants.