An oil company (MAR) recently brought suit against several defendants, including another energy company, for trade secret misappropriation in violation of the Ohio Uniform Trade Secrets Act (TSA). The plaintiff alleged that defendants improperly used its confidential and proprietary information, including seismic data, to lease land and to drill in Northwest Ohio for oil and natural gas.

Senior District Judge James G. Carr of the Northern District of Ohio was asked to rule on the defendants’ motions under Daubert to exclude the plaintiff’s expert witness testimony.

The plaintiff entered into a consulting agreement with one of the defendants to explore oil and gas reserves and to lease land in Northwest Ohio. After this contract ended, the defendant kept certain materials relating to the plaintiff’s exploration for oil and gas reserves, which included information about the plaintiff’s seismic readings. The defendant began to work with another energy company to lease land and explore for oil and gas reserves in the area of mutual interest that was in his agreement with the plaintiff. The defendant had multiple leases within the previously designated area of mutual interest, with some adjacent to the plaintiff’s leases.

The plaintiff sought lost profits and other monetary damages, including the loss of prospective investment. The company claimed that due to its conflict with the defendant, it lost a potential initial investment of at least $800,000 and a longer-term investment in the millions.

The plaintiff designated a geologist GAB as its expert, who was to render his opinion on the importance and value of seismic data, oil and industry standards of confidentiality, the defendants’ actions in light of those industry standards, the plaintiff’s measures to preserve the confidentiality of the seismic data, and the plaintiff’s damages from defendants’ use of the proprietary information. GAB was to also opine that the plaintiff suffered monetary damages, including the:

  1. cost of acquisition of proprietary geological data, including seismic, drilling, and leasing information;
  2. loss of prospective investments from Marksmen; and
  3. loss of future profits.

Judge Carr explained that Rule 702 applies not only to scientific testimony, but also to other types of expert testimony based on technical or other specialized knowledge, and that rejection of expert testimony is the exception, not the rule.

In their arguments to exclude GAB’s opinion, one of the defendants claimed that GAB was not qualified to offer his opinion on alleged damages of any kind—including the cost of acquisition of the seismic data, lost investment, and loss of future profits. Another defendant contended that GAB didn’t have the necessary qualifications to testify about the duty of confidentiality, oil and gas industry confidentiality standards, or defendant’s state of mind or credibility.

Judge Carr held that the cost of the acquisition of the seismic data was an appropriate measure of damages because it may have had value to the defendant. If the defendant used the plaintiff’s seismic data improperly, what the plaintiff spent and the defendant thereby saved would be a proper metric for the damage award.

One of the defendants argued that as a geologist, GAB was not qualified to speak to the issue of damages. The plaintiff noted that GAB had 34 years of experience in the oil and gas industry, worked for Amoco for 20 years, and as an independent geological consultant for 14. At Amoco, he evaluated oil drilling prospects and oil reserves. GAB was a licensed geoscientist in Texas and regularly calculated reserve forecasts for several oil companies. GAB had a Masters degree in geology from the Colorado School of Mines. The court concluded that GAB was qualified to testify about the general nature of oil and gas exploration, how such exploration has evolved, particularly with regard to the Northwest Ohio region, the use of seismic data, and how geologists and prospectors acquire such data, the costs routinely associated with acquiring seismic data of the sort at issue here, the effect upon a company where a competitor misappropriates and uses the company’s seismic data, the kind and type of benefits the competitor derived from using someone else’s seismic data, and similar issues.

GAB couldn’t, however, give a definitive opinion about the damages, which the plaintiff suffered. Proposing a dollar figure to the jury on the basis of its own financial and other records is the plaintiff’s burden, Judge Carr said.   However, GAB’s testimony could assist the jury in assessing the reasonableness of the plaintiff’s expenditures for the data and the sort of benefits the defendants could reasonably have realized from using the data.

Even with GAB’s experience in the industry and his expertise with oil and gas exploration, he was not an expert in damages. However, Judge Carr held that this didn’t mean that he couldn’t tell the jury about the nature of the overall damage—i.e., the injury—which the defendant’s misuse of the plaintiff’s efforts to develop its leases might have caused to it. The judge said that this discussion could include the expert’s general observations about the effect on a company’s attractiveness to prospective investors in light on this trade secrets dispute; but GAB could not state that the potential investor would or would not have invested, or what would have happened had the plaintiff received the investment, as he had no expertise with these assessments. In essence, GAB could lay a foundation for the general trustworthiness of the report concerning potential investors.

GAB was to opine that an individual defendant involved knew, or should have known, that the other defendant had misappropriated the trade secret in his dealings. GAB believed that the individual was “willfully blind” regarding the other defendant’s acquisition of the geological data.  The individual argued that GAB’s report stated a legal duty of confidentiality, which was outside the scope of GAB’s expertise. Judge Carr responded the plaintiff didn’t have a negligence claim. Rather, the judge explained, GAB’s testimony related to obligations (in this case, not to disclose or use another’s confidential or proprietary information) arising from oil and gas industry standards. The law, while it may acknowledge the existence and legal effect of such obligation, does not create the obligation—as it does, for example, with the attorney-client privileges, Judge Carr wrote.

While a breach didn’t create a legal cause of action, it was relevant to the plaintiff’s claims against the individual for misappropriation of trade secrets. The judge held that GAB’s testimony was relevant because it would assist the jury determine whether the individual knew or had reason to know that the seismic data he used was a product of the defendant’s violation of the industry standard of confidentiality.

The court found that it was appropriate for GAB to testify about the gas and oil industry’s duty of confidentiality.  Judge Carr also stated that under Federal Rule of Evidence 704, an expert witness may opine on ultimate issues to be decided by a jury.  However, an expert cannot know a party’s state of mind, and as a result cannot opine on that point. Unless the individual told GAB his state of mind, Judge Carr held, GAB couldn’t know the individual’s mental state. Judge Carr ruled that GAB could testify that the individual’s actions were inconsistent with industry standards, and could testify that a person with similar experience in the individual’s position would have known the industry standard and acted accordingly. However, GAB couldn’t draw conclusions on the individual’s actual state of mind.

The defendant’s motions to exclude the plaintiff’s expert testimony were granted in part and denied in part.

By: Kurt Mattson,  J.D., LLM

Kurt R. Mattson is the Director of Library Services and Continuing Education at Lionel Sawyer & Collins located in Reno and Las Vegas, Nevada

MAR Oil Co. v. Korpan, — F.Supp.2d —-, 2013 WL 5406078 (N.D.Ohio Sept. 4, 2013)