Under Texas law, disclosure of a trade secret to potential investors to enable them to decide whether to invest does not destroy secrecy. Those who learn of the confidential information under those circumstances are not authorized to destroy its protection and may not use the information in a manner harmful to the interests of the one making the disclosure.

Summary of the case

An oil and gas developer owned a working interest in and non-exclusive drilling rights for a natural gas reservoir. The developer had an alleged trade secret, a seismic map of the area. Lamont, a co-owner, director and officer of the developer, learned of the map as he was negotiating — in conjunction with his resignation from the company — acquisition of a portion of the developer’s working interest. He allegedly never was asked to sign a confidentiality agreement. The developer allegedly disclosed the map to other potential investors as well. After he resigned, Lamont and his investment partner allegedly used the map and secretly obtained the drilling rights that the developer did not own. Lamont and his partner then allegedly removed all of the gas from the reservoir. They were sued for trade secret misappropriation and other torts. As part of their defense, Lamont and his partner asserted that the map’s secrecy was forfeited by disclosure of it to Lamont and other potential investors. The Texas Appellate Court recently rejected that defense and affirmed a trial court’s entry of judgment for the plaintiffs based on a $4.9 million jury award. Lamont v. Vaquillas Energy Lopeno Ltd., No. 04-12-00219-CV (Dec. 11, 2013).

Formation of Ricochet

Hamblin and Lamont formed Ricochet, a Texas oil and gas development company. Each owned 50% of the company. They were its only directors and its two most senior officers.

The alleged trade secret

Vaquillas Energy and JOB Energy entered into a Prospect Generation Agreement with Ricochet. Pursuant to that agreement, they paid monthly fees in exchange for which they were given confidential information concerning promising projects and were given a right of first refusal to explore and develop prospects.

Ricochet had a working interest in the promising Lopeno natural gas prospect. A key to developing Lopeno was the acquisition of drilling rights on one or both of the primary surface properties over the gas reservoir. Ricochet acquired drilling rights with respect to one of the two properties. In her capacity as a director and officer of the company, Hamblin had a copy of a seismic map relating to Lopeno. The map allegedly was a trade secret belonging to Ricochet. She showed the map to potential investors including Vaquillas and JOB who agreed to buy a portion of Ricochet’s working interest.

Lamont’s resignation from Ricochet and alleged misappropriation. In conjunction with negotiations regarding Lamont’s separation from Ricochet, Hamblin gave Lamont a copy of the seismic map and offered him a portion of the company’s working interest in the Lopeno prospect. Lamont accepted the offer, withdrew from Ricochet, and then showed the map to an experienced oil and gas investor who proceeded to buy 10% of Lamont’s working interest. Lamont and his investment partner secretly formed a new company which outbid Ricochet for drilling rights on the contiguous property Ricochet did not own. The new company immediately began drilling and depleted the reservoir, thereby preventing Vaquillas and JOB from withdrawing gas there.

The lawsuit

Vaquillas and JOB sued Lamont and his partner in a Texas state court, alleging that the seismic map was a trade secret which the defendants misappropriated (the plaintiffs also alleged tortious interference with prospective economic advantage). A jury trial resulted in a verdict for Vaquillas and JOB and the multi-million dollar award for lost profits. Lamont and his partner appealed. They argued that even if the map qualified as a trade secret, it ceased to be one because the developer showed it to Lamont and other prospective investors, and Lamont had a right to disclose it to his investment partner. The appellate court rejected those arguments and affirmed.

The appellate court’s reasons for affirming

1. According to the appellate court, Texas law holds that “[t]rade secret status is not destroyed simply by showing the protected item to buyers, customers, and licensees,” and so “Ricochet’s limited disclosure to Lamont and other potential investors did not destroy the secrecy of the” seismic map. Citations omitted.

2. Lamont claimed that he was free to disclose and use the seismic map after he left Ricochet’s employ. The court concluded that Lamont was entitled to review the map for purposes of deciding whether to invest in the wells. However, with regard to using the map in order to drill in competition with Ricochet, “It was not unreasonable for the jury to determine [that the defendants] misused the map to locate the [gas] and in doing so, their actions fell ‘below the generally accepted standards of commercial morality and reasonable conduct’” (quoting precedent). Ricochet’s failure to obtain a confidentiality agreement with Ricochet was not dispositive. The court quoted precedent holding that employees are forbidden “from using trade secret information acquired during the employment relationship in a manner adverse to [their] employer, and this obligation survives the termination of employment.” According to the court in Lamont, he “did not have authority to destroy the trade secret status of the [seismic map], even after his resignation became effective.”

Takeaways

Texas law is quite favorable to owners of trade secrets, more so than the law of some other states. In part, that may account for this decision. However, Lamont’s use of the map for purposes in addition to simply making a passive investment also seems to have influenced the appellate ruling.