Eagle Oil & Gas Co. v. Shale Exploration, LLC

• Decision Date: 19 April 2018
• Docket Number: NO. 01–15–00888–CV,01–15–00888–CV
• Citation: 549 S.W.3d 256
• Parties: EAGLE OIL & GAS CO. and Eagle Wes–Tex, L.P., Appellants v. SHALE EXPLORATION, LLC, Appellee
• Court: Texas Court of Appeals

549 S.W.3d 256

EAGLE OIL & GAS CO. and Eagle Wes–Tex, L.P., Appellants

v.SHALE EXPLORATION, LLC, Appellee

NO. 01–15–00888–CV

Court of Appeals of Texas, Houston (1st Dist.).

Opinion issued April 19, 2018

Bruce W. Bowman, Jr., SBN: 2752000, W. Ira Bowman, SBN: 24050316, GODWIN BOWMAN & MARTINEZ PC, 1201 Elm Street, Suite 1700, Dallas, TX 75270, Elaine A. Carlson, SBN: 3813575, 15 Chestnut Hill Court, The Woodlands, TX 77380, for Appellants.

Brendan K. McBride, SBN: 24008900, 425 Soledad, Suite 620, San Antonio, TX 78205, Matthew R. Pearson, SBN: 078817, Valerie L. Cantu, SBN: 24012498, GRAVELY & PEARSON, LLP, 425 Soledad, Suite 620, San Antonio, TX 78205, for Appellee.

Panel consists of Justices Jennings, Bland, and Brown.

Jane Bland, Justice

A jury found that Eagle Oil & Gas Co. misappropriated a competitor's trade secret information, and it awarded that competitor $14,300,000 in lost profits and $4,500,000 in exemplary damages. The trial court entered judgment on the jury's verdict. Eagle appeals, challenging the judgment as legally barred by res judicata and the economic loss rule. It also challenges the sufficiency of the evidence to support liability for misappropriation of trade secrets, the reliability of the expert testimony supporting the award of lost profits, the construction of the court's charge, and the award of exemplary damages. We conclude that the evidence does not support a finding of malice, and therefore we reverse the award of exemplary damages. We affirm the remainder of the judgment.

BACKGROUND

The Prospect

In 2011, three companies partnered to develop an oil and gas prospect in Daniels County, Montana. The three companies were:

(1) Orion Resources, Inc., led by its owner, John Bumgardner. Orion was responsible for developing geological data;

(2) Black Pearl Exploration, LLC, led by its president, Mike Looney. Black Pearl was responsible for marketing the prospect; and

(3) Shale Exploration, LLC, led by its president, Sam Tallis. Shale was responsible for acquiring mineral rights within the prospect.

Shale Exploration obtained the judgment against Eagle under review in this appeal.

Each of the companies played a role in formulating the Daniels County prospect. Orion researched the geology, Black Pearl focused on locating investors, and Shale researched the ownership of the targeted mineral interests.

Daniels County is in a rural part of Montana. Its northern boundary is the U.S.–Canadian border. The county has a population of about 1,300, but ownership of the mineral interests in the county is highly fractionalized and often does not coincide with ownership of the surface rights. As a result, tens of thousands own mineral rights in the prospect. Most of these owners do not live in the county. Their identities are ascertainable only through title research, which had to be done manually at the county courthouse, as the ownership records were not available online. It took Shale months to complete its research, which it then used to locate and negotiate oil and gas leases with the mineral owners. Shale negotiated these leases in its name. The ultimate goal was to attract a business partner that would drill for oil or gas.

Discussions with Eagle

Black Pearl identified Eagle Oil & Gas Co., an exploration and drilling company, as a possible development partner. Eagle's intermediary, Wynn Purifoy of Cibolo Capital, told Black Pearl that Eagle was interested in learning about the prospect. Eagle and Black Pearl negotiated a confidentiality and non-competition agreement to protect the prospect-related information that would be shared with Eagle. Trevor Hull, an employee of Black Pearl, and Brad Ayres, an employee of Eagle, coordinated these negotiations. Purifoy acted as an intermediary between Ayres's and Hull's communications. Though no party produced a copy of a confidentiality agreement executed by Eagle, two witnesses testified that Eagle had executed the final version sent for its signature.

The written confidentiality agreement does not include Shale as a party or a signatory. Rather, Orion was the counterparty. At the time, Shale was a wholly owned subsidiary of Orion.

During a November 2011 teleconference, Bumgardner presented Orion's geological information about the prospect to Eagle. Bill Fairhurst, a vice president of Eagle, participated in this teleconference, among others. In a face-to-face meeting in December, Sam Tallis discussed Shale's work with Eagle in a two- to three-hour presentation. Pat Bolin, Eagle's chief executive officer, attended the Tallis presentation with Fairhurst. Sid Greehey, a significant investor in Black Pearl, also participated. The presentation disclosed Shale's research and its plan to secure the required mineral leases in the prospect. Tallis revealed the areas within Daniels County that Shale already had leased and those that Shale had targeted as priorities. The presentation included a map of the prospect with Shale's plan notated on it. The map identified three distinct areas of interest and the anticipated value that Shale placed on each area. Tallis described this map as a "treasure map," because it identified the land where mineral leases had yet to be secured but were components of any eventual drilling play. The information also included a lease schedule, and additional maps that distinguished between the land where Shale had negotiated mineral leases from the land not yet leased. Shale left a box of the written materials with Eagle after the December meeting.

After the December meeting, Eagle continued to express interest in the prospect. The parties continued their discussions and exchange of information. Two months later, Eagle was still analyzing the prospect's potential merit, about which it was optimistic.

Eagle is Denied a Deal

But the parties never reached a development deal. In March 2012, Orion, Black Pearl, and Shale instead reached an agreement with the Apache Corporation to develop the prospect. Shale and Orion also divested from one another, with Shale becoming an independent company. In the Apache agreement, Shale promised to acquire leases covering at least 300,000 acres in Daniels County to resell to Apache. Apache in turn promised to purchase the leases from Shale at $800 per acre. When the Apache deal was signed, Shale already had acquired about 120,000 to 150,000 of these 300,000 acres. Shale was obligated to hit its 300,000 target within six months; otherwise, Apache could walk away from the deal.

Eagle Targets the Leases

As Shale continued to secure leases, it began to see competition for its target leases, which jeopardized its deal with Apache. Shale learned that a competing purchaser of mineral leases, called Montana Lease Holdings, had been formed in mid-March by John Gentry. Montana Lease assigned all of the leases that it had acquired—about 11,000 of them—to Eagle Wes–Tex, L.P., a wholly owned subsidiary of Eagle.

The assignment to Eagle Wes–Tex was in place from the beginning. Within days of forming Montana Lease, Gentry signed a lease-purchase agreement with Eagle Wes–Tex. Under the agreement, the leases were assigned to Eagle Wes–Tex. Eagle, however, was the company that paid Montana Lease for the leases upon their assignment to Eagle Wes–Tex.

Sam Tallis of Shale learned from George Lucker, an agent with Montana Lease, that Montana Lease had been acquiring leases in Daniels County to later assign them to Eagle. Lucker showed Tallis a map that he was using to identify lease prospects for Eagle. It was a copy of Shale's map of the prospect that had been shared with Eagle at the December presentation.

Shale Sues Eagle

Shale acquired well over 300,000 acres of mineral leases, and the deal with Apache closed. Apache paid Shale $800 per leased acre to secure development rights in the prospect that had been shared with Eagle at the December presentation.

Shale sued Eagle by intervening in a lawsuit brought against Eagle by Orion and Black Pearl. Shale claimed that Eagle had breached the confidentiality agreement and had engaged in a theft of trade secrets. Eagle Wes–Tex was also joined as a defendant. Eagle Wes–Tex counterclaimed. It alleged that Orion, Black Pearl, and Shale had tortiously interfered with its legitimate business endeavors within Daniels County.

Orion and Black Pearl settled with Eagle and Eagle Wes–Tex. Orion and Black Pearl then nonsuited their claims against Eagle and Eagle Wes–Tex. Shale was not a party to the settlement.

The case proceeded to trial with Shale as the remaining plaintiff. At trial, Shale claimed that Eagle had breached the confidentiality agreement and had misappropriated its trade secrets. As damages, Shale claimed lost profits attributable to (1) leases that it would have acquired but for Eagle's conduct; and (2) increased leasing costs resulting from Eagle's wrongful competition. Both resulted in a lower net profit from the deal with Apache.

Eagle disputed that any confidentiality agreement existed, and it noted that Shale was not a party to that agreement even if it had been executed. Eagle also disputed that it had agreed to hold any of Shale's information in confidence, or that it had misappropriated any confidential information imparted to it.

The jury found for Shale on both of its claims, and it rejected Eagle Wes–Tex's counterclaims. It awarded Shale $14,300,000 in lost profits, composed of (1) $4,000,000 attributable to the leases that Eagle acquired that Shale otherwise could have acquired and then resold to Apache; and (2) $10,300,000 representing the increased cost of acquiring leases due to Eagle's competition. It also found that Eagle acted with malice and awarded $4,500,000 in exemplary damages. The trial court entered judgment on the jury's misappropriation of trade secrets findings and ruled that Eagle Wes–Tex take nothing on its counterclaims.

DISCUSSION

Eagle and Eagle Wes–Tex contend that Orion's nonsuit is res judicata as to Shale's claims, and thus, the nonsuit legally bars the judgment. Alte...