Sw. Energy Prod. Co. v. Berry-Helfand, NO. 13–0986

• Court: Supreme Court of Texas
• Writing for the Court: JUSTICE GUZMAN delivered the opinion of the Court.
• Citation: 491 S.W.3d 699
• Parties: Southwestern Energy Production Company, Petitioner, v. Toby Berry–Helfand and Gery Muncey, Respondents
• Decision Date: 10 June 2016
• Docket Number: NO. 13–0986

491 S.W.3d 699

Southwestern Energy Production Company, Petitioner,
v.
Toby Berry–Helfand and Gery Muncey, Respondents

NO. 13–0986

Supreme Court of Texas.

Argued October 13, 2015
Opinion delivered: June 10, 2016

Bradley A. Waters, F. Lee Butler, William Bart Davis, Adams and Reese LLP, Constance H. Pfeiffer, David M. Gunn, John S. Adcock, Beck Redden LLP, Houston TX, Mike A. Hatchell, Locke Lord LLP, Austin TX, for Petitioner

C. Zan Turcotte, Percy L. Isgitt, Isgitt, Dees & Turcotte, Houston TX, Daniel M. Downey, Dan Downey P.C., Austin TX, Darrin M. Walker, Law Office of Darrin Walker, Kingwood TX, Don Wheeler, Law Office of Don Wheeler, Center TX, George Chandler, Chandler Mathis & Zivley PC, Lufkin TX, Gregory D. Smith, Nolan Duane Smith, Ramey & Flock, P.C., Tyler TX, Harriet O'Neill, Law Office of Harriet O'Neill, PC, Austin TX, Michael T. Gallagher, The Gallagher Law Firm, Houston TX, Scott Hanson McLemore, Plezia McLemore Reddell Ardoin & Story, PLLC, Houston TX, Walter Perry Zivley Jr., Chandler Mathis & Zivley PC, Houston TX, for Respondents.

Gloria Leal, Gloria Leal & Associates, Austin TX, for Amicus Curiae Texas Alliance of Energy Producers.

Frank Macchiarola,Washington DC, for Amicus Curiae America's Natural Gas Alliance.

JUSTICE GUZMAN delivered the opinion of the Court.

In this trade-secret misappropriation case, a jury found an oil-and-gas operator misused proprietary information acquired under a confidentiality agreement and profited handsomely from its use. The trade secrets at issue purported to identify ten localized areas in East Texas oil-and-gas formations offering optimized production from both a relatively untapped geologic reservoir and deeper strata with more established production (multiple stacked-pay potential). The jury valued the trade-secret information at $11.445 million and awarded that amount as both tort damages for misappropriation and contract damages for breach of the confidentiality agreement. Though not stated as a percentage, the damages are equal to three percent of $381.5 million—the past production revenue generated by wells the operator drilled in the target areas. In addition to actual damages assessed by the jury, the trial court awarded $23.89 million in equitable disgorgement of past profits. The court of appeals affirmed the actual-damages award for misappropriation, but reversed and rendered a take-nothing judgment on the breach-of-contract and disgorgement awards. 411 S.W.3d 581, 614 (Tex.App.–Tyler 2013).

In cross appeals to this Court, the primary issues are (1) sufficiency of the evidence to support the jury's actual damages awards, (2) whether limitations bars the misappropriation claim as a matter of law, and (3) availability of equitable disgorgement for misappropriation and breach of a non-fiduciary duty of confidence. Reviewing the record in the light most favorable to the jury's verdict, we conclude the record

491 S.W.3d 705

bears evidence of actual damages, the evidence is legally insufficient to sustain the entire jury award, and limitations is not conclusively established. We therefore reverse and remand the breach-of-contract and misappropriation-of-trade-secret claims for a new trial. We do not address the equitable-disgorgement issue because the trial court may balance the equities differently following a new trial.

I. Background

Toby Berry–Helfand, an experienced reservoir engineer, worked full time for nearly seven years analyzing data on East Texas oil-and-gas formations to identify locations in the James Lime reservoir where gas production could be enhanced with horizontal drilling designed to intersect and drain multiple fractures while optimizing the potential for payout from the James Lime and deeper production zones.¹ At the time Helfand's work commenced, industry interest in the James Lime was anemic because commercially viable methods of developing the field were lacking. Helfand intended to leverage advancements in horizontal drilling techniques and target stacked-pay drilling prospects that would reduce development costs and make James Lime exploration more efficient, economical, and enticing. The objective was to pinpoint the “sweet spots” for drilling and producing from the James Lime with multiple stacked payout. Helfand's business plan was to market the idea as a “play,” a large-scale campaign of mineral leasing and exploration focused on those specifically delineated areas.

Helfand's research encompassed 2.75 million acres across five counties and consumed thousands of hours spent analyzing “every shred” of publicly accessible well data and historical production records from every well in the five-county area, including a handful of successful James Lime vertical wells. Helfand meticulously recorded the fruits of this endeavor, creating a uniquely comprehensive study and annotated map of the James Lime's production potential in Angelina, Cherokee, Nacogdoches, Shelby, and San Augustine counties.

Over the years, Helfand collaborated with two geologists on the undertaking: Gery Muncey, who worked with Helfand from 1998 to 2001, and Leon Wells, who worked with Helfand from 2003 to 2005. With their assistance, Helfand created a “treasure map” of the best localized spots for drilling the James Lime formation in East Texas, ultimately identifying ten sweet spots. According to Muncey, the sweet-spot areas were limited to 30,000 acres, which is about 1% of the acreage under study.²

Helfand's drilling methodology was not limited to locating sweet spots; she also advocated a preferred method for exploiting the reservoir without damaging it. For optimal results, Helfand recommended drilling a pilot hole and using log data to narrow a zone for development using an underbalanced-horizontal-drilling technique.

Helfand's sweet-spot methodology was first put to the test in 2000 when Helfand and Muncey partnered with David Michael Grimes and Grimes Energy to drill the Chandler # 1 well in the Black Bayou prospect of Nacogdoches County. The well was not successful. According to Helfand,

491 S.W.3d 706

Grimes shut in the well after production was thwarted by improper testing methods.

Muncey and Helfand parted ways the following year, but he maintained contact with her and retained a 20% interest in the James Lime information and methodology. Helfand continued to pursue the James Lime play on her own until Wells offered his assistance in 2003. Operating as “Team Works,” Helfand and Wells refined the James Lime methodology with further data and analysis, including information obtained from nearly 150 James Lime horizontal wells.

In 2004, Helfand and Wells decided to generate interest in the James Lime play by acquiring a drill-ready prospect as a sample of their inventory and then marketing the prospect to exploration companies with deep pockets and the technical ability to properly develop other sweet spots. After evaluating and prioritizing a number of drilling sites with stacked-pay potential, Helfand and Wells selected two Nacogdoches County prospects, Pearson and Pearson Northeast, that had a number of “positive features”—favorable geologic structure for James Lime development, adjacent James Lime production, existing or prior production in two deeper zones (the Travis Peak and Pettet), wells that had penetrated two additional zones (Cotton Valley and Haynesville/Bossier) with strong hydrocarbon indications, plenty of leasable acreage, and ready access to existing pipelines. With financing from several investors, Helfand secured the Pearson prospects by obtaining leases covering 6,300 acres and all depths.

In presentations to a number of industry players, Team Works pitched the Pearson prospects as part of a larger play. The dispute in this case arises from Team Works's February 2005 presentation to Southwestern Energy Production Co. (SEPCO), which was facilitated by Wells's son, a reservoir engineer employed by SEPCO.

At the time of the presentation, SEPCO had not acquired any mineral leases with James Lime as the primary drilling objective, had never drilled a James Lime well, had been dissuaded from pursuing James Lime ventures by an internal study conducted in 2003, had declined to participate in a James Lime play with Sonerra Resources in 2003, and had zero horizontal wells. SEPCO had drilled only one well in the vicinity of the Pearson prospects (Reavley # 1), which was a Travis Peak well, and had previously purchased a single James Lime vertical well (Lois Foster Blount # 1). By all accounts, before the Team Works presentation, SEPCO had not acquired sufficient information to engage in a large-scale James Lime play.

Despite SEPCO's apparent indifference to James Lime development, Wells's son found the play “interesting” and, in an email exchange predating the presentation, told his father that SEPCO was “working the same area (many of the same fields)—just that we are targeting some deep ideas,” and even though SEPCO had “not considered [the James Lime] at all ..., given the size potential and the proximity to other ideas/acreage that [SEPCO was] pursuing,” SEPCO would “definitely want to look at this [James Lime play].” Helfand, who was not privy to the email exchange, was evidently unaware SEPCO was a potential competitor and did not know SEPCO had executed an unrecorded joint exploration agreement...