United States: Toward Greater Certainty: No-Evidence Challenges To Expert Opinions

An expert's opinion admitted into evidence without objection generally constitutes probative evidence, even if the basis for the opinion is unreliable – that is, it is some evidence. But if an expert bases his opinion on assumptions that vary from the actual facts, then the opinion is no evidence and legally insufficient to sustain a finding. Determining the line between "some evidence" and "no evidence" is tough.

The Texas Supreme Court explored those boundaries in Southwestern Energy Prod. Co. v. Berry-Helfand, No. 13-0986, 2016 Tex. LEXIS 480 (Tex. June 10, 2016). In that case, Helfand, an engineer, sued Southwestern Energy Production Co. (SEPCO) for misappropriation and theft of trade secrets arising from its use of a "treasure map" identifying drilling prospects. After SEPCO executed a confidentiality and noncompete agreement that required SEPCO to maintain the information's confidentiality, use it solely to evaluate the purchase of the information, and return or destroy the information if SEPCO did not purchase it, Helfand disclosed the prospects to SEPCO. SEPCO did not buy the information. Helfand then approached Petrohawk. Petrohawk purchased the information from Helfand for $1.8 million, a sliding-scale overriding royalty interest (which averaged three percent on these leases), and a 6.25 percent after-payout working interest.

Meanwhile, SEPCO embarked on an aggressive drilling campaign, acquiring 1,888 leases and drilling more than 140 wells clustered around the "sweet spots" identified by Helfand. The wells had a 100 percent success rate and generated $381.5 million in revenue. When Helfand discovered SEPCO's illicit activities, she sued for misappropriation.

At trial, Helfand's expert opined that the value of the trade secret to SEPCO was $11.445 million and that a reasonable royalty was three percent of the $381.5 million in revenue SEPCO made from the disputed wells, which amounted to the same $11.445 million. Helfand also testified that she averaged a three percent overriding royalty on the Petrohawk leases. SEPCO did not present a damages expert. And, although the trial court denied its pre-trial motion to exclude the expert's testimony, SEPCO did not object to the expert's testimony at trial.

Helfand's expert used the Petrohawk agreement as the basis for his damage calculations. SEPCO argued that the expert had no reliable basis for applying the Petrohawk compensation structure to the damage-model wells, and even if he did, neither that agreement nor the evidence substantiated a "reasonable royalty" of three percent. SEPCO complained that the expert:

  • failed to provide any basis for applying the Petrohawk compensation structure outside the tri-county area it covered;
  • considered wells that should not have been included in the damage model;
  • failed to make a deduction to the overriding-royalty-interest calculations based on SEPCO's actual working interest in the disputed wells; and
  • incorrectly applied a flat three percent overriding royalty to production revenues instead of a sliding scale to determine the overriding royalty that would be due based on the actual royalty burden for the damage-model wells.

The Court agreed that the expert's testimony was no evidence that a three percent overriding royalty interest, 6.25 percent working interest and $20 per-acre prospect fee were reasonable and customary for a prospect identification agreement. But the Court found that the Petrohawk agreement was evidence of "the prices past purchasers or licensees of the trade secret may have paid," and Helfand testified to a three percent overriding-royalty average in transactions under that agreement. So the record supported the expert's reliance on the Petrohawk compensation structure in calculating damages based on the acreage and production of the disputed wells.

As to SEPCO's first three arguments, the Court found that the expert's damage calculations overstated the damages but were not entirely lacking in probative value because:

  • any discrepancy among the counties would go only to the amount of damages, not the existence of damages;
  • the same was true of the fact that the damages calculations included wells that were drilled before SEPCO even had access to Helfand's proprietary information; and
  • SEPCO's argument about the proportionate reduction of the overriding royalty based on working interest was immaterial to the court's ultimate disposition.

But as to SEPCO'S final point, the Court agreed that "[f]ailure to take the sliding-scale overriding royalty into consideration in calculating a reasonable royalty for Helfand's trade secrets [was] a critical misstep." It explained that, even absent an objection, an expert's opinion cannot be considered probative evidence if the opinion is contrary to the actual facts. The Court explained that, "when there is objective evidence from which more certainty can be gleaned, it is incumbent on the plaintiff to produce that evidence...Because the actual overriding royalty interest on the disputed wells could have been determined under the methodology of the exemplary transaction [the Petrohawk agreement], applying three percent across the board paints an incomplete and misleading picture about the royalty terms a willing buyer and seller would negotiate."

Because legally sufficient evidence supported less than the full amount awarded, the Court remanded for a new trial

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