Advanced Resources Intern., Inc. v. Tri-Star Petroleum Co., TRI-STAR

• Decision Date: 07 September 1993
• Docket Number: 92-2473,TRI-STAR,Nos. 92-2213,s. 92-2213
• Parties: Fed. Sec. L. Rep. P 97,738, 28 U.S.P.Q.2d 1280 ADVANCED RESOURCES INTERNATIONAL, INCORPORATED, Plaintiff-Appellant, v.PETROLEUM COMPANY; James H. Butler, Defendants-Appellees. (Two Cases).
• Court: U.S. Court of Appeals — Fourth Circuit

Page 327

4 F.3d 327

Fed. Sec. L. Rep. P 97,738, 28 U.S.P.Q.2d 1280

ADVANCED RESOURCES INTERNATIONAL, INCORPORATED, Plaintiff-Appellant, v. TRI-STAR PETROLEUM COMPANY; James H. Butler,

Defendants-Appellees. (Two Cases).

Nos. 92-2213, 92-2473.

United States Court of Appeals, Fourth Circuit.

Argued May 6, 1993.

Decided Sept. 7, 1993.

John Paul Kopesky, Hoyle, Morris & Kerr, Philadelphia, PA, argued, for plaintiff-appellant.

John E. Coffey, Hazel & Thomas, P.C., Alexandria, VA, argued (Attison L. Barnes, III, on brief), for defendants-appellees.

Before ERVIN, Chief Judge, MURNAGHAN, Circuit Judge, and BUTZNER, Senior Circuit Judge.

OPINION

MURNAGHAN, Circuit Judge:

Plaintiff-appellant Advanced Resources Inc. (ARI) brought two actions seeking preliminary and permanent injunctions to enjoin Tri-Star Petroleum Company (Tri-Star) and James H. Butler (Butler) from further distributing or otherwise misusing a report written by ARI and supplied to Tri-Star. ARI claimed that it was not told the true use to which the report would be put, and therefore did not include the appropriate disclaimers concerning the accuracy of the report or the source of the information upon which its analyses were drawn. ARI wrote the report, a reservoir simulation study and financial analysis relating to the recovery of methane gas from a geologic formation in the Comet Ridge area of Queensland, Australia, based upon information supplied by Tri-Star. ARI later became concerned that the information it had been supplied was inaccurate. The report has been used by Tri-Star to raise money for a joint venture to recover methane gas. The injunction is necessary, ARI claims, to ensure that misinformation is not disseminated to investors who are not sophisticated in oil and gas matters, and to prevent injury to ARI's reputation.

ARI commenced the action below against Tri-Star and Butler (Tri-Star's President) by filing both a Motion For a Preliminary Injunction and a Complaint seeking permanent injunctive and declaratory relief.

As the basis for the relief sought, ARI claimed a violation of Section 10(b) of the Securities and Exchange Act of 1934 (SEA), 15 U.S.C. Sec. 78j, and Rule 10b-5 thereunder, 17 C.F.R. Sec. 240.10b-5; a violation of Section 43(a) of the Lanham Act, 15 U.S.C. Sec. 1125; common law fraud and misrepresentation; and breach of the duty of good faith.

The district court, after a hearing on the Motion for Preliminary Injunction, denied it on the basis that the court did not have personal jurisdiction over Tri-Star and Butler with regard to the Securities Exchange Act and Lanham Act claims. In addition, the district court concluded that it was unlikely that ARI would succeed on the merits of its claims under the Securities and Exchange Act because ARI was not a purchaser or a seller of securities and therefore lacked standing. It also would not likely succeed under the Lanham Act because ARI and Tri-Star were not "competitors," and therefore the Act did not apply. With respect to ARI's claims under the theory of common law fraud, misrepresentation, and breach of good faith, the district court found that ARI had failed to demonstrate that it would suffer "irreparable harm" if the injunctive relief was not granted.

Tri-Star and Butler filed an answer to ARI's Complaint, thereby waiving their objections with respect to the exercise of personal jurisdiction. They then filed a Motion for Summary Judgment arguing that they were entitled to summary judgment for essentially the same reasons that served as the basis for the district court's denial of ARI's Motion for a Preliminary Injunction; i.e., ARI lacked standing to assert a claim under the SEA, the Lanham Act is inapplicable to ARI's claims because the parties are not competitors, and ARI has not stated a valid claim for fraud or for breach of the covenant of good faith and fair dealing. After a hearing on the Motion, the court granted Tri-Star and Butler summary judgment, entering judgment against ARI on all claims set forth in the Complaint.

We treat herein both ARI's appeal of the Denial of Preliminary Injunction and its appeal of the Grant of Summary Judgment.

I.

Appellant ARI is a consulting firm with expertise in oil and gas recovery based in Arlington, Virginia. Appellee Tri-Star is a Texas corporation and manager of a joint venture, Australian Petroleum Joint Venture (APJV), formed to explore petroleum prospects in Australia. Butler, Tri-Star's president, is an individual with extensive experience in the oil and gas business. Butler and Tri-Star have been working on a project to extract methane gas in the Comet Ridge area of Queensland, Australia (Comet Ridge Project) for several years.

In April 1991, as part of the development of the Comet Ridge Project, Butler asked Scott Reeves, who was then a project manager with ICF Resources, a predecessor of ARI, to perform an analysis relating to the recovery of methane gas from a certain geologic formation in the Comet Ridge area. Butler told Reeves that he was looking for a maximum of four potential partners in the Comet Ridge Project, and intended to solicit those who had worked with him on oil and gas projects in the past. It was Reeves' understanding that any limited number of entities who might see his report would be sophisticated in oil and gas matters and would understand the preparation of an analysis based on untested assumptions as to potential recoverability.

In making his request to Reeves, Butler represented that Tri-Star itself had undertaken a "two-year study" of the Comet Ridge area. According to Reeves, Butler led him to believe that Tri-Star had done the geologic work themselves, that Tri-Star had looked at all wells in the area, and had obtained all relevant information that was available. Thus, Butler was not relying upon ARI for geological expertise.

The purpose of the ARI report, as understood by Reeves, was to furnish an evaluation based on the assumptions provided by Butler which would be helpful in assessing the advisability of undertaking preliminary exploration in the project area. Reeves did not have any understanding that Tri-Star intended to undertake full scale efforts to develop the project area at that time. Reeves ultimately agreed to furnish a reservoir simulation study and a financial analysis of the Comet Ridge Project based on information and assumptions furnished to Reeves by Tri-Star.

During the course of preparing the report, Reeves raised a number of questions about the achievability of some of the assumptions provided by Butler. For example, Butler provided information to Reeves for use in determining gas content, gas saturation, and gas composition in the project area. These variables, like others included in the analysis, could have a significant effect as to projections of recoverable methane. With respect to gas composition, Butler informed Reeves that the gas found in the deposit consisted totally of methane, the valuable hydrocarbon which it was the goal of the Comet Ridge Project to recover. ARI subsequently learned that certain producing gas wells in the same geologic formation showed high concentrations of carbon dioxide gas, a factor which would materially diminish prospects of recovery.

Reeves raised concerns about other assumptions supplied by Butler. However, Butler, based on Tri-Star's purported examination of the geological data, instructed Reeves as to which assumptions to employ. Since nothing in Reeves' experience suggested that the assumptions were necessarily incorrect, he performed the analysis on the basis set forth by Butler.

On December 16, 1991, the report was issued to Butler containing the technical and financial analysis he had requested. At the time Reeves' report was issued, none of the officers of ARI were aware of its existence. Reeves was not authorized under ARI corporate policy to issue any report which was to be used to raise money. Reeves inadvertently failed to include in the report a disclaimer and disclosure of risk factors which had been included in prior progress reports sent to Butler.

Tri-Star and Butler subsequently issued a lengthy document to prospective joint venturers in the Comet Ridge Project which included Reeves' report and made references to that report, but also contained other statements concerning the project area. For example, the document contains statements extolling the favorable possibilities for methane gas recovery in the area. The Technical Summary issued by Tri-Star states, among other things, that:

The two-year study by Tri-Star suggests that the Comet Ridge has the best combination of favorable characteristics of any geologic setting in Australia.

....

The coals of the Bandanna Formation and Reids Dome Beds formation exhibit all of the characteristics necessary for high rates of gas production....

None of the information furnished to Reeves, or any other information of which ARI is aware, would allow such a flat statement to be made with confidence. The Technical Summary specifically asserts that these favorable "characteristics" include high gas content.

Moreover, while a number of the representations made in the Technical Summary do not specifically reference ARI, ARI is referred to in that document in such a manner, it claims, as potentially to confuse those examining the document as to whether ARI endorsed all of the statements contained therein. The Technical Summary drafted by Tri-Star is ambiguous as to the source of the information upon which these favorable predictions are based, and might be taken to suggest that they come from ARI.

ARI has requested that Butler and Tri-Star circulate a corrective disclosure and refrain from using the ARI report further, but Butler and Tri-Star have refused to do so. Butler has stated that Tri-Star will circulate only a more limited disclosure and disclaimer than the one proposed by ARI, and would do so only on the condition that Tri-Star can continue to...