Free Motion for Judgment as a Matter of Law - District Court of Colorado - Colorado

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 1 of 14

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-cv-00413-JLK-BNB M.D. MARK, INC., Plaintiff, vs. KERR-McGEE CORPORATION and ORYX ENERGY COMPANY, Defendants. DEFENDANT'S MOTION FOR JUDGMENT AS A MATTER OF LAW AT THE CLOSE OF PLAINTIFF'S EVIDENCE Defendant Kerr-McGee Corporation1 ("Kerr-McGee") respectfully submits this Motion for Judgment as a Matter of Law pursuant to Rule 50(a) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."). INTRODUCTION Plaintiff M.D. Mark, Inc. ("M.D. Mark") has failed to establish a legally sufficient evidentiary basis for the jury to rule in its favor on its claims of breach of contract and misappropriation of trade secrets relating to approximately 16,000 miles of seismic data ("the Merger Data") received by Kerr-McGee as a result of its 1999 merger with Oryx Energy

1

Oryx ceased to exist on February 26, 1999, at which time it became Kerr-McGee as a result of a statutory corporate merger.

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 2 of 14

Company ("Oryx"). M.D. Mark has also failed to establish legally sufficient evidence in support of its claims for exemplary damages. M.D. Mark bases its claims regarding the Merger Data on the fatally flawed premise that the Merger Data was wrongfully transferred to a Kerr-McGee subsidiary which was not a party to the 1999 merger with Oryx. The evidence, however, shows that Kerr-McGee ­ not a subsidiary ­ received Oryx's interest in the Merger Data by operation of law and as permitted by the applicable license agreements, when Oryx merged into Kerr-McGee on February 26, 1999. After that, Kerr-McGee transferred its interest to its wholly-owned subsidiary, as permitted by the applicable license agreements and custom and practice in the industry. The evidence also shows that the 1994 license agreement between M.D. Mark and Kerr-McGee, executed five years before the merger of Oryx into Kerr-McGee, does not apply to the Merger Data, and does not prohibit any of the so-called "transfers" about which M.D. Mark complains. Additionally, M.D. Mark has not proven beyond a reasonable doubt that Kerr-McGee acted willfully or wantonly or with fraud or malice sufficient to support an award of exemplary damages. Based on the evidence in M.D. Mark's case alone, a reasonable jury would necessarily find in favor of Kerr-McGee on M.D. Mark's merger data and exemplary damages claims. Therefore, the Court should grant judgment as a matter of law against M.D. Mark and in favor of Kerr-McGee. LEGAL STANDARD Under Fed.R.Civ.P.50(a)(1), judgment as a matter of law is appropriate "[i]f a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue." Under Rule 50,

-2-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 3 of 14

the trial court has a "duty to enter judgment as a matter of law . . . as soon as it is apparent that either party is unable to carry a burden of proof that is essential to that party's case." Advisory Comm. Notes to 1991 Amendment to Fed.R.Civ.P. 50(a). Motions for judgment as a matter of law are appropriate when a plaintiff's evidence cannot establish the elements of its claims. Lake Hefner Open Space Alliance v. Dole, 871 F.2d 943, 945-46 (10th Cir. 1989). ARGUMENT I. M.D. MARK HAS PRESENTED INSUFFICIENT EVIDENCE FOR THE JURY TO FIND THAT KERR-MCGEE BREACHED A CONTRACT OR MISAPPROPRIATED TRADE SECRETS IN RELATION TO THE MERGER DATA. A. Kerr-McGee Corp. Lawfully Acquired The Merger Data.

As a matter of law, the merger between Kerr-McGee and Oryx did not constitute an unauthorized transfer of the Merger Data. Texas courts2 have ruled on this precise issue, recognizing that a merger is not a conveyance or transfer, and does not give rise to claims based on a prohibited conveyance or transfer. TXO Prod. Co. v. M.D. Mark, Inc., 999 S.W.2d 137 (Tex. Ct. App. 1999) ("M.D. Mark I") (no "transfer" of seismic data occurred during corporate merger); M.D. Mark, Inc. v. Nuevo Energy Co., 988 S.W.2d 463 (Tex. Ct. App. 1999) ("M.D. Mark II") (same); See also Exs. B-11, B-12. More to the point, these Texas decisions specifically hold that, when two oil companies merge, the surviving company's retention of seismic data previously licensed by the non-surviving company is not an unlawful transfer and no transfer fee is due. See id. Other jurisdictions agree that a merger is not a conveyance or
2

Texas law should apply. As is stipulated in this case, PGI and Oryx, the parties to the applicable license agreements were both headquartered in Texas. Further, the contracts were executed in Texas, and the seismic data that is at issue was physically stored in Texas at the time PGI licensed it to Oryx. See Tr. 699:1-700:1 (Marilyn Davies Testimony).

-3-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 4 of 14

transfer. See e.g., U. S. Shoe Corp. v. Hackett, 793 F.2d 161, 165 (7th Cir. 1986) (guaranty passed during merger by operation of law). Moreover, state corporate codes throughout the country, including those in Texas, Oklahoma, Delaware, and Colorado, are based upon the Model Business Corporation Act ("MBCA"). See Pueblo Bancorporation v. Lindoe, Inc., 37 P.3d 492, 498 (Colo. Ct. App. 2001); see also Tr. 240:25-241:6. As the MBCA states: [t]he surviving corporation automatically becomes the owner of all real and personal property . . . of each party that is merged into it. A merger is not a conveyance, transfer, or assignment . . . it does not give rise to a claim that a contract with a party to the merger is no longer in effect on the ground of non-assignability, unless the contract specifically provides that it does not survive a merger. Mod. Bus. Corp. Act § 11.07 off. cmt. (emphasis added). This model statute codifies decades of "support for what seems to have become a well-established proposition in American law ­ that, outside of a few special situations, neither contractual nor statutory nonassignment provisions are applicable to corporate merger or consolidation." Effect Of Corporate Reorganization On Nonassignable Contracts, 74 Harv. L. Rev. 393, 402 (1960). M.D. Mark's own expert witness, John Moye, agreed when he testified that a "merger is a combination of entities, and therefore, the seismic data would come to the merged company without needing a specific transfer." Tr. 189:8-10 (John Moye Testimony). Moye also testified, that the PGI-Oryx license agreements, such as the one admitted as Exhibit 19, did, in fact, allow a corporation that is a survivor of a merger to receive the Merger Data. Tr. 200:24-201:5 (Moye Testimony). Only when an agreement explicitly provides that a merger constitutes an unauthorized transfer do courts permit this statutory mandate to be overridden. Without such an express

-4-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 5 of 14

prohibition, "courts will not rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained." M.D. Mark II, 988 S.W.2d at 465; see also Exhibit B-12. Based on this law, from Texas and other jurisdictions, M.D. Mark has failed to offer sufficient proof that Kerr-McGee breached a contract or misappropriated data. Admittedly, Moye testified that Kerr-McGee never actually received the Merger Data. Tr. 204:1-2. However, Moye had earlier testified, and it is undisputed, that Sun Operating Limited Partnership ("SOLP") is the entity that held the Merger Data prior to the Kerr-McGee-Oryx merger. Tr. 192:6-8, 193:7-10 (Moye Testimony). It is also undisputed that SOLP was a wholly-owned subsidiary of Oryx. Tr. 192:6-15, 193:7-10 (Moye Testimony). Therefore, KerrMcGee was automatically vested with Oryx's ownership interest in SOLP, which included the Merger Data, as a result of the 1999 merger. See, e.g., Imperial Enters., 535 F.2d 287 (transfer during subsidiary's merger with parent corporation occurred by operation of law). The testimony of M.D. Mark's own expert witness echoes this inescapable legal conclusion. Tr. 189:8-10, 204:12-16 (Moye Testimony). Additionally, Moye testified that Exhibit 186 is a document in which "Kerr-McGee Corporation, sells, assigns and transfers its beneficial interest in Sun Operating Limited Partnership to Kerr-McGee Oil & Gas Onshore LLC." Tr. 192:24-193:2 (Moye Testimony). Kerr-McGee could not have made this assignment if it never actually held an interest in SOLP (which included the Merger Data). The evidence discussed above makes explicitly clear that the Merger Data was not transferred by Oryx or SOLP to a Kerr-McGee subsidiary, but rather, vested automatically with Kerr-McGee by operation of law.

-5-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 6 of 14

Moreover, Kerr-McGee's possession of the Merger Data was more than a simple "passthough" transaction. If that were the case, Kerr-McGee's assignment of its interest in SOLP, and, thus, the Merger Data, could have been made simultaneously with the February 26, 1999 merger. Kerr-McGee, however, held the data for a full four months before transferring its interests to Kerr-McGee Oil & Gas Onshore LLC, a wholly-owned subsidiary in June 1999. See Exhibit 186. B. Kerr-McGee's Subsidiaries Are Permitted To Use The Merger Data.

M.D. Mark emphasizes that the Merger Data is now held by a Kerr-McGee subsidiary that was not a direct party to the merger. This fact is of no consequence because the applicable license agreements, as well as industry custom and practice, permit Kerr-McGee to share the Merger Data with its subsidiary and affiliated corporations. Many of the applicable license agreements contain the following provision, "Subject to the terms and conditions of this paragraph Licensee may disclose the Data by providing copies thereof: (1) to a wholly owned subsidiary of Licensee . . . ." See, e.g., Ex. 3 at ¶ IV. Accordingly, Moye testified as to the inescapable conclusion that paragraph 4 of the license agreements allows for the licensee to disclose the data to a wholly-owned subsidiary. Tr. 200:18 (Moye Testimony). Kerr-McGee Oil & Gas Onshore LLC is a wholly-owned subsidiary of Kerr-McGee. Tr. 188:1-3 (Moye Testimony). Thus, Kerr-McGee did not act improperly when it transferred the Merger Data to it subsidiary. Even if this Court were to look beyond the plain language of the license agreements, the law on subsidiaries dealing with trade secretes undermines M.D. Mark's argument. See SI Handling Sys., Inc. v. Heisley, 658 F. Supp. 362, 370 (E.D. Pa. 1986) (citing Copperweld Corp.

-6-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 7 of 14

v. Independence Tube Corp., 467 U.S. 752, 771 (1984)). In Heisley, a parent corporation, SI, brought a lawsuit alleging misappropriation of trade secrets owned by its wholly-owned subsidiary, SII. Defendants moved for summary judgment, arguing that SI did not own the trade secrets and therefore could not sustain the suit in the absence of an "agreement[] between SII and its parent, SI, relating to a transfer of [the] technology." Heisley, 658 F. Supp. at 370. The court rejected this argument wholesale, noting that defendants "conveniently neglect to explore the relationship between SI and SII and have offered no support for their conclusion." Id. With regard to both the "ownership" and "transfer" of trade secrets, the court held that a parent corporation and its wholly-owned subsidiary "are essentially one and the same entity." Id. Accordingly, because a parent is legally construed as the same entity for purposes of trade secret ownership, there was no need for any transfer or transfer agreement regarding such secrets in order for the parent to sue. Heisley's logic, relying upon the U.S. Supreme Court, is inescapable: [a] parent and its wholly-owned subsidiary have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate consciousnesses, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. . . . [T]he subsidiary acts for the benefit of the parent, its shareholder. Id. See also Pizza Mgmt., Inc. v. Pizza Hut, Inc., 737 F. Supp. 1154, 1166 (D. Kan. 1990) (applying Copperweld to hold that parent cannot civilly conspire with its wholly-owned subsidiary to commit a tort since the parent "and its wholly-owned subsidiary have shared goals, particularly economic ones").

-7-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 8 of 14

In fact, M.D. Mark's own witness, Patricia Cherne, confirmed that corporations may share seismic data with their subsidiaries even where license agreements do not specifically provide that seismic data can be shared with subsidiary and affiliate companies of the licensee. Cherne testified that even when her license agreements did not contain specific language regarding subsidiaries, such as in Exhibits 84 and 85, her seismic data company still permitted "affiliate subsidiaries, wholly-owned subsidiaries to use the data, as long as they remain affiliated." Tr. 522:13-15, 534:23-535:1 (Patricia Cherne Testimony). The language in Cherne's license agreements is similar to the language in the license agreements applicable here. Compare Ex. 85 ("LICENSEE cannot and will not assign, transfer, or convey any of its rights and/or privileges under this Agreement to any third party") with Ex. 42 ("PURCHASER agrees that said data, and copies thereof, shall be for its own internal use only and shall not be sold, traded, disposed of or otherwise made available to third parties . . . ."). Thus, according to M.D. Mark's witness, it is practice within the industry to allow subsidiaries the use of licensed data, even when not specifically authorized by the applicable license agreement. C. The 1994 M.D. Mark-Kerr-McGee Contract Does Not Apply To The Merger Data.

M.D. Mark's attempts to apply the 1994 Kerr-McGee-M.D. Mark Contract ("1994 Contract") (Ex. 60) to the Merger Data are misplaced and unsupported by the law and M.D. Mark's evidence. The construction of an unambiguous contract is a question of law for the court. In re Kaiser Steel Corp., 998 F.2d 783, 789 (10th Cir. 1993); Florom v. Elliott Mfg., 867 F.2d 570, 575 (10th Cir. 1989). A contract must be construed to ascertain and effectuate the intent of the parties as determined primarily from the language of the contract. E. Ridge of Fort Collins, LLC v. Larimer & Weld Irrigation Co., 109 P.3d 969, 974 (Colo. 2005). An

-8-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 9 of 14

unambiguous contract must be enforced as written. Kaiser v. Market Square Discount Liquors, 992 P.2d 636, 640 (Colo. App. 1999). However, even if a contract is ambiguous and the court considers extrinsic evidence to determine the parties intent, such evidence cannot be used to supply terms that were never contemplated by the contracting parties. Benham v. Pryke, 744 P.2d 67, 72 (Colo. 1987). In its relevant part, the 1994 Contract states that it: supersedes, modifies, amends, and replaces all previous understandings and agreements, written or oral, between the parties with relation to the subject matter hereof as well as any previous agreements and contracts between the parties relating to a license for the Data which is the subject matter of this Agreement or a license for any other Data provided to Licensee by MDM or any of MDM's predecessors . . . . Ex. 60 at ¶ IX. The plain language of the 1994 Contract makes clear that it supersedes and replaces only prior agreements entered into by the parties to it, i.e., agreements between Kerr-McGee and M.D. Mark (which encompasses agreements with PGI). Id. Also clear from the plain language of the 1994 Contract is that Oryx is not a party to it. In fact, Oryx and Kerr-McGee did not merge until five years later in 1999. The 1994 Contract by it plain and clear terms, does not apply to any agreement that Oryx had with PGI or M.D. Mark. See generally Ex. 60; see also Tr. 678:23-680:6 (Carlos Salazar Testimony). Furthermore, the 1994 Contract applies only to data in Kerr-McGee's possession at the time the 1994 Contract was executed, which does not include the Merger Data. See Ex. 60. In response to a "hypothetical" question, Moye testified that the language quoted above would apply to data that Kerr-McGee acquired after the date of this agreement. Tr. 207:22-25.

-9-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 10 of 14

However, the plain language of the contract defies Moye's testimony. The language upon which Moye relied refers only to future corporate reorganizations and mergers affecting the data contemplated in the agreement ­ meaning data licensed to Kerr-McGee as of May 13, 1994. See Ex. 60. It does not refer to data licensed to Oryx, a non-party to the 1994 Contract, that KerrMcGee would acquire five years in the future. Contrary to the well-established law of contract interpretation, Moye's testimony asks the court to add a term to the contract that is not supported by its plain language. Benham v. Pryke, 744 P.2d 67, 72 (Colo. 1987). Here, the parties to the 1994 Contract never contemplated that it would apply to data acquired in the future. As such, the Merger Data is unaffected by the terms of the 1994 Contract, and M.D. Mark's claims must fail as they relate to the Merger Data, regardless of the 1994 Contract. D. M.D. Mark's Misappropriation Claim Falls With Its Contract Claim.

Since it is established that Kerr-McGee and Kerr-McGee Oil & Gas Onshore LLC had statutory and contractual rights to possess and use the Merger Data, M.D. Mark's misappropriation claim fails with the fall of its contract claim. Misappropriation of a trade secret means: (a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (b) Disclosure or use of a trade secret of another without express or implied consent by a person who: (I) Used improper means to acquire knowledge of the trade secret; or (II) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was: (A) Derived from or through a person who had utilized improper means to acquire it . . . .

-10-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 11 of 14

C.R.S. § 7-74-102(2) (emphasis added). Furthermore, C.R.S. § 7-74-102(1) defines "improper means" as including "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means." This definition makes clear that no misappropriation occurred because the alleged "transfers" to Kerr-McGee and its subsidiary were authorized by corporate merger law and the license agreements. II. M.D. MARK HAS FAILED TO OFFER SUFFICIENT PROOF THAT IT IS ENTITLED TO EXEMPLARY DAMAGES. Kerr-McGee is entitled to judgment as a matter of law on the issue of exemplary damages because no reasonable jury could find that M.D. Mark has met its burden of proof on the issue. First, punitive damages are not recoverable for breach of contract. See, e.g., Decker v. Browning-Ferris Indus. of Colo., Inc., 947 P.2d 937 (Colo. 1997); Decker v. Browning-Ferris Indus. of Colo., Inc., 931 P.2d 436 (Colo. 1997); Ballow v. PHICO Ins. Co., 878 P.2d 672 (Colo. 1994). Second, as to the remaining misappropriation claims, a court shall submit the question of punitive damages to the jury where the plaintiff has shown evidence of fraud, malice, or wanton and reckless conduct on the part of the defendant. Amber Properties v. Howard Elec. & Mech., 775 P.2d 42 (Colo. App. 1988). Courts have reserved exemplary damages in misappropriation of trade secrets claims for the worst offenders. See Telex Corp. v. Int'l Bus. Machs. Corp., 510 F.2d 894, 929, 933 (10th Cir. 1975) (affirming an award of punitive damages where the defendant obtained trade secrets "by a massive and persuasive program designed to induce the breach of known obligations of [the defendant's] employees or former employees."); In re S & D Foods, Inc., 144 B.R. 121, 166-67 (Bankr. D. Colo. 1992) (holding that plaintiff was entitled to exemplary damages for misappropriating trade secrets in a case involving "deceit and misrepresentation . . . beyond

-11-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 12 of 14

peradventure of a doubt" where it was "patently clear" that several parties were "affirmatively misled"). Exemplary damages are appropriate in cases such as Telex and S & D Foods where the evidence is clear and substantial. Here, M.D. Mark has not offered evidence of bad conduct even approaching those in Telex and S & D Foods. M.D. Mark's only evidence is a lack of documentation to support rightful possession. Tr. 439:3-7, 440:7-13, 446:3-4, 449:2-4 (Anne Lane Testimony). M.D. Mark has not provided evidence that Kerr-McGee willfully or maliciously acquired the data, or that Kerr-McGee knowingly acted improperly. Furthermore, rights to exemplary damages under C.R.S. § 13-21-102 must be proved beyond a reasonable doubt. S. Park Aggregates, Inc. v. Nw. Nat. Ins. Co., 847 P.2d 218 (Colo. App. 1992). Here, M.D. Mark simply has not proven malicious, fraudulent, willful and wanton, or reckless conduct sufficient to award exemplary damages. It certainly has not offered proof beyond a reasonable doubt. As such, its claims for exemplary damages fail as a matter of law. CONCLUSION For the reasons stated above, Kerr-McGee respectfully requests the Court to enter judgment as a matter of law against M.D. Mark pursuant to Fed.R.Civ.P. 50(a) for (1) M.D. Mark's claims of breach of contract and misappropriation of trade secrets relating to the Merger Data and (2) M.D. Mark's claims for exemplary damages.

-12-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 13 of 14

Dated September 21, 2007. Respectfully submitted,

s/M. Antonio Gallegos Scott S. Barker Gregory E. Goldberg M. Antonio Gallegos H OLLAND & H ART LLP 555 Seventeenth Street, Suite 3200 Post Office Box 8749 Denver, Colorado 80201-8749 Phone: (303) 295-8361 Fax: (303) 295-8261 [email protected] [email protected] [email protected] A TTORNEYS F OR D EFENDANTS

-13-

Case 1:01-cv-00413-JLK-BNB

Document 243

Filed 09/21/2007

Page 14 of 14

CERTIFICATE OF SERVICE
I hereby certify that on September 21, 2007, I electronically filed the foregoing document with the Clerk of Court using CM/ECF system, which will serve, via electronic mail, the following: PELZ, BONIFAZI & INDERWISH, P.C. Harlan P. Pelz Daniele W. Bonifazi [email protected] [email protected]

s/ Julie J. Winkler

3764869_4.DOC

-14-