Banks; oil and gas leases; trade secrets. All three came to a front in a longstanding legal battle that culminated in a decision by the Eight Circuit Court of Appeals on Friday July 17, 2015, affirming that a bank had misappropriated an energy company’s trade secrets.
The Court of Appeals upheld a decision from the U.S. District Court for the District of North Dakota that Macquarie Bank Ltd. misappropriated confidential geological and seismic information it had received as part of the collateral on a loan to develop oil and gas leases, some of which were to be on reserves of North Dakota’s Bakken Shale formation.
The story began in 2004, when Bradley Knickel, owner of Lexar Energy, Inc., approached Macquarie Bank to obtain a loan to develop oil and gas leases in North Dakota. Knickel provided confidential information about the leased land as a part of the collateral to Macquarie Bank for the loan. Soon after, Knickel assigned all of his interest in the trade secrets to LexMac and Novus, two other companies owned by Knickel. LexMac and Novus then granted Macquarie Bank the nonexclusive right to use the trade secrets for certain purposes under the Credit Agreement and the Mortgage.
By 2007, the oil and gas leases were not progressing as expected, and Macquarie sought to foreclose on the leases, and sued Defendants for breach of contract. In response, Defendants brought counterclaims asserting, among other things, that Macquarie had misappropriated the confidential data by disclosing it to Macquarie’s’ U.S. subsidiary to use to acquire other leases on the land. Macquarie responded that it had no duty to keep the data confidential, because the parties had not entered into a formal confidentiality agreement. Macquarie further argued that the information did not constitute “trade secrets” at all, claiming it had no value because neither the bank nor Lexar had actually used the information to develop the land.
The three-judge panel of the Eighth Circuit disagreed with Macquarie, and held that because “value is not assessed using hindsight,” the information Macquarie had used was trade secret information disseminated without consent. The Court held: “[t]he information had value because it was used to determine the development potential of the leases. Macquarie also derived actual economic value from the information when Macquarie used it to solicit bids for the leases.” Further, the Court held that though Macquarie was permitted to use the information to a certain extent, its use to solicit other, competing bids “exceeded the scope of LexMac and Novus’s consent”.
This decision has implications for banks who procure confidential information as part of a lending agreement. Even absent an explicit confidentiality agreement, such confidential information may be subject to trade secret protection, and the value of the information is not in the eye of the beholder—or the lender, as the case may be—but in that of the Court.
The case is Macquarie Bank Limited v. Bradley D. Knickel, et al., No. 14-1683 (July 17, 2015).