CHAPTER 10 HANDLING CONFIDENTIAL INFORMATION

• Jurisdiction: United States

Mining Agreements II
(May 1981)
CHAPTER 10
HANDLING CONFIDENTIAL INFORMATION
Dean W. Crowell
and Kenneth R. Fimberg
Morrison & Foerster
Denver, Colorado

It should come as no surprise that, in one respect at least, miners are not created equal. Those of us involved in the mining industry are instead a more secretive lot than our fellow creatures, taking particular care to keep to ourselves what we know about a particular patch of earth. Some of the most enduring images of the Old West are the recluse prospector, the claim jumper and the race to the assay office. In some respects, mining today is not much different. Mining information is still highly guarded, but it may be more difficult than it once was to keep it confidential.

The exclusive right to explore for minerals is a valuable property right that can be legally protected.¹ Recovery for the loss of exploration rights has been allowed

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under various theories, such as conversion,² implied contract,³ trespass,⁴ and sometimes assumpsit.⁵

However, an exclusive right to prospect, without a corollary right to the exclusive use of the information obtained through exploration, would be no more than a half-empty right. As explained by the court in the case of Layne Louisiana Co. v. Superior Oil Co., 209 La. 1014, 26 So.2d 20, 22 (1946):

It is a well-known and accepted fact...that the right to geophysically explore land for oil, gas or other minerals is a valuable right. Large sums of money are annually paid landowners for the mere right to go upon their land and make geophysical and seismograph tests. The information obtained as the result of such tests is highly valuable to the person or corporation by whom they are made. If the information thus obtained be favorable, it can be used and is used in dealing with the landowner for his valuable mineral rights. If the information be unfavorable, the fact quickly becomes publicly known and thus impairs the power of the landowner to deal advantageously with his valuable mineral rights. The average landowner is without means or funds to secure geophysical or seismograph information. Where that information, which is

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exclusively his by virtue of his ownership of the land, is unlawfully obtained by others, the landowner is clearly entitled to recover compensatory damages for the disregard of his property rights.

Courts therefore have recognized that information obtained from geological exploration is the exclusive property of the explorer, which, like the right to explore, is entitled to protection.⁶

The discussion that follows sets out a number of situations in which geological information may be wrongfully obtained or disclosed and outlines the protection afforded by tort and equitable principles of law. This paper will then discuss some contractual provisions and other measures that a miner, or a landowner, may implement in order to safeguard and preserve confidential information.

I. Tort and Equitable Protection of Geological Information

Most of the protection afforded geological information, other than by contract or statute, is based on one of two basic approaches. The first approach focuses upon the relationship between the alleged misappropriator of the

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geological information and the owner of that information. This approach affords relief to the wronged-party when there is a fiduciary, confidential or agency relationship between the parties. The second approach concerns the owner's rights in the information itself, apart from any relationship between the owner and the alleged wrongdoer. Both approaches can be observed simultaneously in a number of situations, with the emphasis shifting from one approach to the other depending upon the particular factual situation.

a. Partners, joint venturers and corporate officers.

While mining partnerships and other joint mining enterprises may vary in some respects from more general business arrangements, they are similar in at least one important respect. Each mining partner or joint venturer stands in a confidential or fiduciary relationship with each of the other parties to the agreement. Every mining agreement participant owes his partners or co-venturers a duty to deal with them fairly and in good faith.⁷ The wrongful use by one party of the geological information is a breach of this relationship and may be remedied by the imposition of a constructive trust

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or recovery of the wrongful gain. See Goggin v. Moss, 221 F. Supp. 905 (N.D. Tex. 1962), aff'd, 323 F.2d 36 (5th Cir. 1963) (imposing a constructive trust on the unfaithful fiduciary and also awarding exemplary damages); Wilkins v. Bancroft, 248 Miss. 622, 160 So.2d 93 (1964) (awarding the plaintiff joint venturer the amount fraudulently obtained when the defendant joint venturer falsely represented the price of a joint venture acquisition).

The rules relating to corporate officers are similar. Such officers are not only fiduciaries,⁸ but the wrongful use of "inside" information may run afoul of the "corporate opportunity" doctrine, leading again to the imposition of a constructive trust or the recovery of some form of monetary relief.⁹

b. The lessor.

Absent a contractual obligation or fiduciary duty, it appears that the purchaser or lessee of a mineral interest is not required to disclose to the seller or lessor information

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that has been obtained through geological exploration.¹⁰ As stated in Summers, Oil and Gas §662, at 149 (1962) (quoting Harris v. Tyson, 24 Pa. 347, 64 Am. Dec. 661 (1855)):

The superior scientific knowledge and skill which enables a prospective lessee of mineral lands to acquire information about their mineral qualities by geophysical methods is no different in principle than any other type of superior knowledge whereby a prospective purchaser is enabled to judge the soundness of a horse, the genuineness of a picture, or the quality of a diamond. 'A purchaser is not by our laws bound to make the man he buys from as wise as himself.' [Footnote omitted.] As long as the parties deal at arm's length there is no duty on part of the oil lessee to disclose information gained by geophysical tests.

This line of authority does not imply that the prospective lessee has the luxury of complete silence. A lessee cannot remain silent when required, by contract, to speak or when his silence would amount to a misrepresentation. As well, there is some authority which would require a prospective lessee, if asked by the landowner, to disclose his information. See Burrows v. Fitch, 62 W. Va. 116, 57 S.E. 283 (1907); Smith v. Beatty, 37 N.C. 456, 40 Am. Dec. 435 (1843); but see Summers, Oil and Gas §662, at 149.

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c. Employees.

The unfaithful employee, either past or present, may also pose a problem with respect to guarded information. As stated by another commentator:

Although all employees are not per se fiduciaries, an employee who is entrusted with confidential information such as geological and geophysical data does occupy a fiduciary position. An extremely high duty of fair dealing and undivided loyalty is required of all fiduciaries. This duty of loyalty the fiduciary owes to his employer precludes the employee from engaging in certain types of conduct. In general, the employee is obligated not to compete in any way with his employer or to use his position to gain a personal advantage not contemplated in the employment relationship. This includes an inhibition against his using for his personal gain or making any unauthorized disclosure to others of confidential information that comes into his possession in the course of his employment. He may not deal in the subject matter of his employment. He may not act for himself and personally profit from his employment beyond his agreed compensation, such as by receiving secret payments or gratuities. He must make a full disclosure to his employer with respect to any matter relating to the subject matter of his employment. All of this proscribed conduct is for the benefit of the employer, and consequently the employer may, with full knowledge, either consent to the conduct and thus waive his rights or subsequently ratify it. Any third party who knowingly assists the employee-fiduciary in breaching any of his fiduciary duties is also liable to the employer.

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King, Fiduciary Obligation of a Former Employee, 17 Rocky Mtn. Min. L. Inst. 449, 450-51 (1972) (footnotes omitted).¹¹

The injury to the employer occurs most often when the disloyal employee has provided the misappropriated information to a third-party. For reasons of secrecy or financial capability the third-party is generally in the best position to use the misappropriated information to the disadvantage of the employer. In that regard, the remedies available to the employer are particularly important. There are a variety of remedies for an employee's breach of fiduciary obligations. Generally, the injured employer will be allowed to elect the one which is to his best advantage. The remedies available to the employer include various forms of monetary relief and the imposition of a constructive trust on the secreted information or the mineral wealth obtained by use of such information. See generally Nye v. Lovelace, 228 F.2d 599 (5th Cir. 1956); Kaye v. Smitherman, 225 F.2d 583 (10th Cir. 1955).¹²

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A leading case involving the appropriation of confidential oil information is Hunter v. Shell, 198 F.2d 485 (5th Cir. 1952). In that case Shell Oil Company sought to impose constructive trusts upon certain mineral-related interests wrongfully obtained by Hunter, who was employed by Shell as the senior geologist in charge of Shell's exploration activities along the Texas and Louisiana coast. As stated by the court of appeals:

Hunter's principal duties were to collect geological and geophysical information for use by Shell and to advise the company where to purchase oil and...