trade secretCo-author David Lisch

Congress has passed the Defend Trade Secrets Act of 2016 and the president is expected to sign it into law. The DTSA allows suits in federal court for misappropriation of trade secrets. Before the DTSA, most litigants would sue in state court under the Uniform Trade Secrets Act (the UTSA), approved by 48 of the 50 states (New York and North Carolina being the exceptions).

What is a trade secret?

It remains what it was: Your interpretations, evaluations, and that other work product that derives economic value from not being generally known to your competition. The operative word is “secret”. The key is to take reasonable steps to prevent unauthorized disclosure. Anything on the wall in your booth at NAPE is pretty much toast.

Why would I use the DTSA instead of the UTSA?

Here are several reasons:

  • It is a federal statute, which means federal court jurisdiction. There could be benefits in a particular case to be in federal court.
  • It allows seizure of property to prohibit the dissemination of a trade secret without advance notice to the other side in “extraordinary circumstances.”
  • It increases penalties for a criminal violation from $5 million to the greater of $5 million or three times the value of the stolen trade secret.
  • It allows recovery of actual damages, restitution, injunctive relief, exemplary damages of up to two times actual damages, and attorney’s fees.
  • If you’ve been paying attention you should already be protected by a confidentiality agreement, but the statute provides additional rights and remedies.

Do I need to act?

The statute does not eliminate the need for confidentiality agreements when showing a prospect. You will want to update your employment agreements to include the immunity notice required under the DTSA so that you can also recover punitive damages and attorney fees from an employee gone wrong.

Speaking of trademarks

This act doesn’t address your logos, slogans and other manifestations of your “brand” that could be protected by existing copyright and trademark laws. You do that by registering. Gray Reed can help.

Why do we need this legislation?

There are two theories. First, there are benefits of uniformity and consistency in the law. Plus, service and discovery is often easier and more orderly in federal court, especially between litigants from different states. And there would be less jockeying between state and federal court.

The competing theory: Having failed to eradicate the federal debt, balance the budget, stabilize Social Security and Medicare for the sake of our grandchildren, replace the Affordable Care Act, reform immigration laws, and slow the avalanche of overbearing federal regulations, Congress chose a bipartisan agenda: Feeding its insatiable need to federalize every aspect of life in our great country. Nothing says “Git Er Done” like a new federal statute that duplicates existing law in 48 states.

There’s more to know

Here is an article on the topic by Gray Reed employment lawyers Michael Kelsheimer, Travis Crabtree and the aforesaid David Lisch.

Guy Clark, RIP. Compare his original to Jerry Jeff’s.

Co-author Brooke Sizer

The “tradition” of stealing a prospect generator’s maps – and getting caught at it – is alive and well. Lamont et al v. Vaquillas Energy Lopeno Ltd et al is the second recent Texas case on theft of trade secrets and, like the first, resulted in a large judgment against the alleged thieves.

The Players

Ricochet, owned by Hamblin and Lamont, entered into Prospect Generation Agreements with Vaquillas and JOB.

In September 2004, Ricochet’s geologist Maier identified the Lopeno Prospect beneath two contiguous tracts — Worley and El Milagro. Maier created a seismic map of the prospect that became known among the parties as the “Treasure Map”. Vaquillas and JOB agreed to participate as working-interest owners. Ricochet obtained a lease over the Worley property but not El Milagro because it was in litigation over a previous lease. The meetings among Ricochet, Vaquillas and JOB were considered by everyone to be confidential, and the seismic information was to be kept secret.

In August 2006, Lamont notified Hamblin that he wished to separate from Ricochet. In February 2007, agreements dividing Ricochet’s oil and gas prospects and a separating Lamont from Ricochet were signed, and Lamont tendered his resignation as director, officer and chief operating officer, all retroactive to December 31, 2006. Lamont signed a Joint Operating Agreement for the Lopeno Prospect as a 29% working-interest owner. Thereafter Maier sent Lamont a copy of the Treasure Map without requiring him to sign a confidentiality agreement.  The parties drilled the Worley well.

In January 2007 Lamont met Carranco and in February provided Carranco with seismic maps of four different prospects, including Lopeno. In February, Lamont received a copy of the Worley well log and he and Carranco immediately began efforts to lease the El Milagro property under the name of Montecristo. In March, Lamont informed Ricochet that Crazy Horse, a company of Carranco’s, had purchased 10% of Lamont’s 29% working-interest.

Lamont and Carranco, using Montecristo, were successful in leasing the El Milagro property by outbidding Ricochet. They paid a bonus of over $1 million. During the next six months, L.O.G. drilled a well on El Milagro and depleted the Lopeno Prospect reservoir, thereby depriving Vaquillas of the ability to produce from the Worley.

The Incriminating Evidence

Lamont and Carranco did not conduct any independent research of the gas reservoir. It was only after viewing the seismic data and the well log that Lamont and Carranco sought to lease the El Milagro property. Also, in order to secure a bank loan to pay the lease bonus, Lamont submitted a letter containing information that was drawn directly from the seismic data and Treasure Map. Lamont and Carranco claimed the well-log led them to pursue the El Milagro property; however, the log only provided information regarding the Worley well, and Lamont and Carranco began drilling the El Milagro without attempting to obtain any seismic data on that property.

The Questions for the Court

Did the Treasure Map lose its trade secret status in light of Ricochet’s failure to require confidentiality agreements and by showing the map to potential investors? Lamont claims that he owed no duty to Ricochet after the effective date of his resignation.

No. The map did not lose its status as a trade secret. In Texas, employees are forbidden from using trade secrets acquired during employment, and this obligation survives termination. Furthermore, disclosure of a trade secret is not destroyed by limited communication and furtherance of the owner’s economic interests, such as showing protected items to prospective buyers or customers.

Were Lamont and Carranco liable for using a trade secret if the trade secret was discovered by “improper means”?

Yes. Obtaining knowledge of a trade secret without spending time and resources to discover it independently is improper unless the secret is voluntarily disclosed or reasonable precautions to ensure its secrecy are not taken.

 

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.

Many years ago, in the days of cheap oil and cheaper natural gas, The Superior Oil Company often hired geologists and engineers away from Mobil Oil. As a result of many years of attracting good talent, Superior became the largest independent producer in the U.S. In 1986 Mobil acquired Superior. It was said at the time that the only reason for the transaction was so that Mobil could get its maps back. Sounds like a joke, but it makes you wonder how often things like that go on in the oil business. I don’t know, but I’d bet the answer is, with electronic records and the thumb-drive, more than you would think.

I’ve written before on the importance of protecting trade secrets, and how miscreants who’ve been careless on their journey to perdition have paid the price. Now it will be more difficult for data thieves.       

The Texas legislature adopted the Uniform Trade Secrets Act, effective September 1, 2013.  I direct you to Tilting the Scales, a blog from Jamie Ribman and Cleve Clinton, two of  my Looper Reed colleagues who explain the changes in the law very well.

The good news is the opportunity for a musical interlude about treachery, one of  a trial lawyer’s favorite topics.   

 

For the sake of conversation let’s say I burgle your trade secrets after failing to close a big deal that would have saved your company. I would be in big trouble, according to a bankruptcy court in In re TXCO Resources., Inc., a case study in treachery and self-dealing in the executive suite worthy of J.R Ewing at his most disgruntled.

This short summary of the 69-page opinion can’t do justice to the thorough discussion of the tort of misappropriation, including the definition and examples of trade secrets in the oil patch and their significance in the development of unexplored areas (pp. 22–44), the scope of trade secret protection (pp. 53-54), ways to measure damages (pp. 55-66) and an interesting journey through the life-cycle of a south Texas oil prospect.

TXCO Seeks a Buyer

TXCO held leases on one million acres in southwest Texas. It was 2008 (think $147 per barrel to $35), and TXCO’s financial status became precarious. Peregrine Petroleum showed interest in acquiring TXCO’s assets. TXCO provided confidential information in several stages so that Peregrine could evaluate the deal.

The trade secrets were typical of an E&P company’s confidential information: subsurface data, production data, and operations data. The parties were unable to reach an agreement, and TXCO filed for bankruptcy. TXCO lost its leases and attempted reacquire them and other leases nearby, but the owners leased to Peregrine instead. (You can see where this is going).

TXCO Proves Misappropriation

Suspecting that Peregrine had used the confidential information, TXCO sued for misappropriation of trade secrets, breach of contract, tortious interference, violations of the Texas Theft Liability Act, and unfair competition by misappropriation. The evidence showed that Peregrine had taken the trade secrets and used them to acquire leases that TXCO once owned. Peregrine was liable for misappropriating the data by using it to make leasing decisions.

See pages 45 to 52 for a handy guide on how to steal trade secrets.

And $15,873.383 in Damages

TXCO could not prove lost profits because of its precarious financial situation. TXCO never fulfilled its lease commitments, and several mineral owners testified that they would not have re-leased to TXCO. Furthermore, because the amount of potential production from the leases could not be accurately predicted, TXCO could not prove lost profits proximately caused by Perregrine’s theft to a reasonable certainty.

The court then examined the value of the data to Peregrine. The court did not use Peregrine’s profits as a measure, because Peregrine had not actually produced hydrocarbons. But the court stated that the “lack of actual profits does not insulate the defendants from being obligated to pay for what they have wrongfully obtained in the mistaken belief their theft would benefit them”.  And to recover on this theory does not require the victim to prove a specific injury.

To determine the value of the data to Peregrine, the Court imposed a “reasonable royalty”. The court determined what a fair price for the information would have been at the time the misappropriation occurred. Because the type of information obtained by Peregrine is typically acquired in an exploration agreement, the appropriate measure of damages was “the amount Peregrine would have spent drilling the wells to earn acreage under an exploration agreement with TXCO, discounted by the 50% working interest that Peregrine would have carried.”

 Based on this analysis, the court awarded TXCO $15,873,383. 

The court denied recovery for tortious interference-with-prospective-contractual relations because TXCO could not prove that it would have obtained the leases absent Peregrine’s misconduct. Recall that the mineral owners were reluctant to deal with TXCO because of its financial status, and they had received better offers from other parties.

The Court denied recovery for the other claims because TXCO was unable to prove damages.

Today’s appropriate musical interlude.  I couldn’t find the Allman Brothers’ versionfo ths song, but Elmore James is pretty good.