Tony Sanchez III
Following the second-ever trial held in the Business Court, the court determined that a squabble over allocation of the proceeds (and responsibility for paying attorney’s fees) of the settlement of a lawsuit brought by Sanchez Oil and Gas against a competitor who misappropriated the company’s trade secrets.
Mesquite Energy, Inc. f/k/a Sanchez Energy Corporation, On Its Behalf and as the Assignee of Evolve Transition Infrastructure, LP f/k/a Sanchez Midstream Partners LP f/k/a Sanchez Production Partners LP v. Sanchez Oil and Gas Corporation (2026 Tex. Bus. 10; March 4, 2026) arose from a dispute over the allocation of settlement proceeds resulting from a prior trade secret misappropriation lawsuit in Harris County between three Sanchez entities and Terra Energy Partners and certain individuals (the Terra litigation). In 2016 three former employees of Sanchez Oil and Gas left the company and took thousands of proprietary files with them to the benefit of their new employer, Terra. The Sanchez entities sued the former employees and Terra in Harris County district court. Sanchez Production Partners (formerly Sanchez Midstream Partners) was included in the Terra litigation because it wasn’t clear at the outset of the litigation which specific stolen data belonged to which entity. Sanchez Energy Corp. paid attorney’s fees and litigtion expenses until March 2019, when the Terra plaintiffs amended their retention agreement with the attorneys to proceed on a contingency fee basis in the future.
Sanchez Energy Corp. filed for Chapter 11 bankruptcy in August 2019, emerging as Mesquite in June 2020. In September 2022 the parties entered into a settlement agreement resolving claims asserted against Sanchez Oil and Gas and the Sanchez family during the bankruptcy proceedings. That agreement released Sanchez Oil and Gas from claims Mesquite possessed as of September 12, 2022. In 2024 the parties to the Terra litigation negotiated a settlement. After the deduction of the plaintiff’s attorney’s contingency fee, the net settlement proceeds were placed in escrow. Subsequently, Mesquite, on its own behalf and on behalf of Evolve (formerly known as Sanchez Production Partners) sued Sanchez Oil and Gas to settle the proper allocation of the settlement proceeds.
In an opinion by Judge Barnard, the court determined that each party was entitled to 50% of the proceeds and that Sanchez Oil and Gas had to pay Mesquite half of the legal expenses Sanchez Energy paid until March 2019. First, the court ruled that Sanchez Midstream Partners, added to the lawsuit after it was filed, did not prove an independent ownership interest in the trade secrets at issue in the Terra litigation. It didn’t own them, nor did it “suffer[] a distinct injury arising from [the] stolen data ….” Because Sanchez Midstream was added to the suit “out of caution and expediency,” any subsequent assignment from Sanchez Midstream couldn’t expand “[Sanchez Energy Corporation’s] interests or support allocation of a separate share of the Terra settlement proceeds [it].”
The court next determined that the settlement proceeds should be divided equally between Mesquite and Sanchez Oil and Gas because the record “shows the trade secrets underlying the Terra Litigation were developed through the partie’s joint efforts, and neither party proved exclusive ownership.” Mesquite argued that its percentage of ownership of the trade secrets should “turn[] on ‘the amount of effort or money expensed … in developing the information.” In re Bass, 113 S.W.3d 735, 739 (Tex. 2003) (quoting Restatement of Torts §757 cmt. B. (1939)). But, as the court pointed out, that was only one of six factors considered by the Bass court. Although Mesquite provided funding for the development of the trade secrets at issue, “Texas law does not hold that the party providing funding automaticlly acquires exclusive ownership of proprietary information developed, as in this case, through collaborative operations.”
Sanchez Oil and Gas argued that the service agreement between the parties should govern and that the cost-saving initiatives contained in the trade secrets “were developed and implemented by [Sanchez Oil and Gas’s] ownership of the trade secrets.” The language of the agreement, however, didn’t say anything about which party owned the information they jointly developed. Witnesses at trial also spoke to the “significant overlap in corporate leadership and corporate control between the parties.” Additionally, a number of employees worked for both companies. The court thus concluded that the creation of the trade secrets “did not occur through arm’s-length dealings between fully distinct entities, in which [Sanchez Oil and Gas] retained all operational control.” Sanchez Oil and Gas failed to prove sole ownership based on contract principles. Instead, Mesquite provided the funding and Sanchez provided operational management and implementation phase. In other words, the record showed joint development and co-ownership.
Sanchez further argued that the 2022 post-bankruptcy settlement agreement barred Mesquite’s claim to a share of the settlement proceeds. The court disagreed. First, Mesquite’s pre-bankruptcy predecessor paid the attorney’s fees for three years for the direct benefit of Sanchez. “Unjust enrichment,” the court wrote, “occurs when a person has wrongfully secured a benefit or has passively received one which it would be unconscionable to retain” (citations omitted). Sanchez thus bore 100% of the burden and risk of prosecuting the Terra litigation, without which there would be no settlement proceeds to divide. The court thus ruled that “[Sanchez] shall be legally and equitably required to bear half of the litigation costs.”
