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Energy & the Law

Prospect Generator is Vindicated

Posted in Contract Disputes, Litigation

The prospect generator’s worst nightmare is presented in Southwestern Energy Production Co. v. Berry-Helfand and Muncey. I will over-simplify the facts: Hefland and Muncey toil for years generating James Lime prospects in a five-county area in East Texas. They show it. Dry holes are drilled. More data is generated. They show it many times again.  Parties who are shown the data don’t like the prospects. Those parties enter into AMIs with non-recipients that include some of Helfands’ sweet spots. Their objectives, though, are the Travis Peak and Cotton Valley. The son of Hefland’s new partner is involved with Southwestern (Sepco), who is shown the prospect. Sepco enters into a confidentiality agreement, gets more data, and declines to participate. Sepco buys acreage in two counties, drills Travis Peak wells with others, and participates in over 80 James Lime wells, all of which are successful and all of which are clustered in an area of Hefland’s sweet spots. Revenues from the wells exceed $382M by the time of trial.

The Lawsuit

Helfand sues “everybody” (as in 12 defendants) for “everything”. The jury concludes that Helfand’s study was a trade secret and found against Sepco for trade secret misappropriation, statutory theft of a trade secret, breach of fiduciary duty, fraud, and breach of contract. Damages, disgorgement and fees total more than $30M. Sepco appeals.

Breach of Fiduciary Duty

Sepco owed no fiduciary duty because the parties dealt at arms’ length, the agreement expressly defined and limited to Sepco’s obligations of confidentiality, and there was no formal or informal relationship creating a duty of trust and confidence. Jury reversed.

Fraud

The fraud claim was based on several emails over the course of many years. Sepco, at the time it sent the emails, had no interest in the James Lime, but acquired an interest later. There was no evidence that Sepco’s statement that it was not interested in the prospects was false when made or that Helfand relied on it. Jury reversed.

The court noted that mere failure to perform a contract is not evidence of fraud.

To win on fraud by concealment there must be a duty to disclose. Sepco owed no such duty to Helfand.

Misappropriation

As with most trade secret misappropriation cases, this one rested on circumstantial evidence. There were no wells on the prospects before the presentation to Sepco, and later there were 80 wells; Sepco couldn’t show the paper trail one would expect if it had generated the prospects based on its own engineering; Sepco’s leasing and drilling activity corresponded directly with Helfand’s sweet spots; Sepco couldn’t produce a body of independent research comparable to Helfand’s. The court: It was “not unreasonable” for the jury to conclude that Sepco’s success was a product of information it obtained through misappropriation. The jury had the right to consider the circumstantial evidence, determine credibility of the witnesses, and make reasonable inferences from the evidence. Jury affirmed.

Theft of Trade Secrets

The court found that Sepco returned all of its materials to Helfand and that it did not deprive her of a “trade secret” as that word is defined in the Penal Code, nor was there evidence of intent to deprive her of a trade secret. Jury reversed.

Breach of Contract

Sepco breached its three obligations under the confidentiality agreement: to use the confidential information solely to evaluate prospects it was shown, not to disclose the information to third parties, and not to acquire any leases without giving Hefland the right of first refusal. Jury affirmed.

Issues For Lawyers

The court discussed issues such as limitations, jury instructions, trade secret damages, and the use of prior pleadings, all of which will be of interest to trial lawyers.

The Result

$30M+ verdict and judgment reduced to $11M. The disgorgement award was reversed.

The Takeways

More to come. This post is already too long.

 The jury forcefully answered the question posed by this musical  interlude.