The Energy Law Blog

The Haynesville Shale

jrjohanson@liskow.com (Jason Johanson) — Mon, 04 Aug 2008 15:03:31 -0500

In March 2008, several oil and gas companies announced the finding of what could potentially be the fourth largest deposit of natural gas in the world underneath northwestern Louisiana, southwestern Arkansas, and eastern Texas: the Haynesville Shale.

The Louisiana Natural Resources Department has now created a website to provide information to the public related to the Haynesville Shale formation. To visit the website, click here.

A blog has also been created to provide information with respect to the area. To visit the blog, click here.

DuPont and ConocoPhillips Settle Environmental Clean-Up Claims against U.S. Government for $52M

cmkornick@liskow.com (Cheryl Kornick) — Wed, 16 Jul 2008 14:56:09 -0500

In 1997, DuPont and ConocoPhillips sued the United States pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), alleging entitlement to reimbursement of costs expended cleaning up hazardous waste from fifteen sites previously owned by the government during World Wars I and II, and the Korean War. E.I. DuPont, et al v. USA, et al, United States District Court for the District of New Jersey, Docket No. 2:97-CV-00487-WJM-MF. The decade-long dispute finally ended in a compromise wherein the government agreed to pay DuPont $51M and ConocoPhillips $1M for past and future clean-up costs.

The settlement comes one year after the Supreme Court decision in U.S. v. Atlantic Research Corp. in which the Court established that a potentially responsible party can sue other responsible parties under Section 107 of CERCLA to recover voluntary clean-up costs. The Third Circuit had previously held that DuPont could not recover under CERCLA. Following the High Court’s decision in Atlantic Research, however, the Third Circuit remanded the case to the district court for reconsideration. This settlement agreement was promoted by the Atlantic Research decision.

Under the terms of the settlement agreement, DuPont agreed to indemnify the United States up to $51M against any claims, past and future, arising from fourteen of the sites, and ConocoPhillips agreed to indemnity up to $1M for the remaining site. The government, DuPont, and ConocoPhillips have admitted no liability in connection with the settlement.

New Bill Prohibits Louisiana Employers from Preventing Employees from Carrying Firearms onto Employer Property if Firearm is in Locked Private Vehicle

cmkornick@liskow.com (Cheryl Kornick) — Tue, 15 Jul 2008 08:42:39 -0500

Effective August 15, 2008, employers will no longer be able to prevent employees from carrying firearms onto employer property if those firearms are in locked, privately-owned vehicles. The change is the result of Senate Bill 51, which was sponsored by Sen. Joe McPherson and signed into law as Act No. 684 by Governor Bobby Jindal on July 2nd of this year. Under the new law, people who lawfully possess firearms cannot be prevented from carrying them onto any designated parking area, including garages and parking lots, as long as the firearm is stored in a locked, privately owned vehicle.

As written, all property owners are subject to the Act’s provisions, including employers who wish to prevent employees from carrying firearms onto employer property. Property where firearms are already prohibited under state or federal law is exempt, as are most employer-owned vehicles which are used by employees for business purposes. In addition, employers are allowed to prevent firearms from being carried in areas where access is restricted by such means as a fence or signage, as long as the employer provides temporary firearm storage facilities or an additional parking area that is unrestricted.

Although the Act provides property owners, tenants, employers and business entities with immunity from civil liability for any damages arising out of incidents involving firearms transported or stored on their property pursuant to the Act, concerns exist, particularly among the state’s industrial sector. The Louisiana Chemical Association (LCA) and the Louisiana Mid-Continent Oil and Gas Association (LMOGA) both opposed the bill, citing safety and liability concerns.

As businesses begin to sort through compliance issues and assess their firearm policies, questions abound. Companies are looking at constitutional and preemption issues, as well as similar laws that have been passed in states like Oklahoma and Florida, for answers.

LDEQ May Require Louisiana Facilities Exempt From Air Permitting to Maintain Emission Records

cmkornick@liskow.com (Cheryl Kornick) — Thu, 10 Jul 2008 09:03:40 -0500

By Clare Bienvenu

Pursuant to Act 547, passed by the Louisiana Legislature in the 2008 Regular Session and recently signed into law by the Governor, the Louisiana Department of Environmental Quality (LDEQ) may now require Louisiana facilities exempt from air permitting requirements to maintain records showing that the actual or potential emissions of the facility meet the exemption. Under existing Louisiana law, a facility is exempt from air permitting requirements if its potential emissions are: (1) less than 5 tpy (tons per year) for each regulated air pollutant; (2) less than 15 tpy for all regulated pollutants combined; and (3) less than the minimum emission rate for each toxic air pollutant listed in LAC 33:III.5112, Table 51.1. See La. R.S. 30:2054(B)(2)(b)(ix) (as enacted by Act 918 in 2003). The original exemption did not authorize LDEQ to mandate the maintenance of emissions records for exempt sources. Act 547 additionally defines “potential emissions” as “the emissions the facility is capable of emitting considering all control measures in place, utilized and properly maintained and historical practices, including hours of operation and number of employees at the facility.” Act 547 itself does not require exempt facilities to maintain records, but allows LDEQ to promulgate standards or regulations to create such a requirement. As such, exempt facilities in Louisiana should be on the lookout for the implementing rule from LDEQ.

U.S. Supreme Court Rules that Punitive Damages Must Equal Compensatory Damages in Federal Maritime Law

cmkornick@liskow.com (Cheryl Kornick) — Wed, 09 Jul 2008 15:26:34 -0500

By: April Rolen-Ogden

Exxon Shipping Co., et al. v. Baker, et al. involved a class action that was filed by commercial fisherman and native Alaskans against Exxon and its tanker captain for economic losses suffered as a result of the now infamous Exxon Valdez oil spill that occurred in 1989.

On the night of the spill, the supertanker was carrying 53 million gallons of crude oil, which translates to just over a million barrels. The tanker captain, Joseph Hazelwood, was seen downing at least five double vodkas in the waterfront bars of Valdez just before leaving port on the evening of the spill. This converts to approximately 15 ounces of 80-proof alcohol, which experts testified would be enough to cause a non-alcoholic to pass out. The tanker ran aground as a result of Hazelwood’s “inexplicable” decision to leave the bridge two minutes before a tricky course correction was required.

When the tanker crashed, the hull was torn open and 11 million gallons of crude oil spilled into Prince William Sound. Exxon spent $2.1 billion in cleaning up the spill; settled a civil action by the United States and Alaska for $900 million; and paid another $303 million in voluntary payments to private parties.

The Court granted certiorari to determine three issues. The first issue was whether federal maritime law allowed acts of managerial agents to be the basis for corporate liability for punitive damages. Second, the Court considered whether the Clean Water Act (CWA), 86 Stat. 816, 33 U.S.C. Sec. 1251 et seq. (2000 ed. And Supp. V) preempts punitive damages awards in maritime spill cases. Finally, the Court analyzed whether the punitive damages awarded against Exxon were excessive as a matter of maritime common law.

The Court was equally divided on the first issue of corporate liability for punitive damages. Exxon argued that punitive damages were barred against shipowners for actions taken by underlings, which were not directed by the owners. In response, the plaintiffs relied on the fact that the Restatement imposes liability for “managerial agents.” The decision to uphold corporate liability for punitive damages for the reckless acts of managerial employees is not precedential given the Court’s equal division on this issue.

On the CWA preemption issue, the Court held that there is no congressional intent in the CWA to occupy the field of pollution remedies. Exxon admitted that the CWA does not displace compensatory damages for water pollution. There is nothing in the statute that indicates a congressional intent to preempt punitive damages, but not compensatory damages, for economic loss.

Finally, and most importantly for the future of maritime claims, the Court held that the punitive damages award against Exxon of $2.5 billion was excessive as a matter of maritime common law. The Court decided that a 1:1 ratio of punitive damages to compensatory damages was appropriate in maritime cases. Specifically, the Court concluded that a 1:1 ratio is a fair upper limit. The Court reasoned that the prevailing American consensus today is that punitive damages are aimed at retribution and deterrence of harmful activity. The stark unpredictability of high punitive awards was found to be in tension with their punitive function due to an implication of unfairness from an unusually high punitive award. A penalty should be reasonably predictable. The Court, thus, limited the punitive damages award to an amount equal to the compensatory damages awarded, which was $507.5 million.

Louisiana Supreme Court Holds That Act 312 is Constitutional

cmkornick@liskow.com (Cheryl Kornick) — Thu, 03 Jul 2008 14:40:37 -0500

On July 1, 2008, the Louisiana Supreme Court held that Act 312 of 2006 (“Act 312”) is constitutional and reversed the district court’s judgment declaring Act 312 unconstitutional and unenforceable under La. Const. art. V, § 16, La. Const. art. I, § 4 and the Fifth Amendment of the United States Constitution. M.J. Farms, Ltd. v. Exxon Mobil Corp., 2007-2371 (La. 7/1/08); ____ So. 2d ____.

In M.J. Farms, the Louisiana Supreme Court resolved several issues regarding the constitutionality and application of Act 312. First, the Court held that the provisions of Act 312 are “called into play when any litigation or pleading making a judicial demand arising from or alleging environmental damage is filed” and the litigation involves “contamination resulting from activities associated with oilfield sites and exploration and production sites.” Second, the Court concluded that Act 312 applies retroactively and prospectively, except for a limited number of cases in which an order had been issued or signed setting the case for trial as of March 27, 2006.

The Court also addressed whether retroactive application of Act 312 would unconstitutionally divest the plaintiff of a vested right in its cause of actions in violation of the substantive due process guaranties established by the Louisiana and United States Constitutions. The Court held that Act 312 does not divest the plaintiff of any cause of actions but, instead, Act 312 established a procedure for judicial resolution of claims for environmental damage. The Court also concluded that Act 312 represents a “reasonable restriction” of private rights under La. Const. Art. I § 4.

Additionally, the Court found that Act 312 does not divest the district court of original jurisdiction because 1) the claim for environmental damages is filed in the district court; 2) the claim is not deferred to the Louisiana Department of Natural Resources until the district court determines environmental damage exists and determines the legally responsible party or parties; and 3) the district court determines which remediation plan to adopt. Finally, the Court held that Act 312 does not deny the plaintiff access to the district court because the district court remains an active participant in the entire restoration process.

One issue the Court did not resolve was whether two trials were appropriate under Act 312. However, the Court did make it clear that it was aware of the two trial issue. Specifically, the Court noted that the denial of supervisory writs in Duplantier v. B.P. Amoco had “no precedential value.” See Duplantier, 07-293 (La. App. 4 Cir. 5/16/07); 955 So. 2d 763 (the Fourth Circuit held that the two trial procedure is contrary to Act 312 and applicable articles of the Code of Civil Procedure because it would result in bifurcation of the trial without consent of all parties and cause piecemeal litigation), writs denied, 07-1241, 07-1265, 07-1271 (La. 9/28/07), 964 So. 2d 367, 368.

To read the Louisiana Supreme Court’s opinion in M.J. Farms click here.

Federal Court Rules Oyster Fishermen Can't Pursue Class Action Against Owners of Pipelines and Storage Tanks for Alleged Damages from Katrina

cmkornick@liskow.com (Cheryl Kornick) — Fri, 27 Jun 2008 11:09:44 -0500

by Kelly Becker

In Barasich, et al. v. Shell Pipeline Co. LP, et al., 2008 U.S. Dist. Lexis 47474 (E.D. La. 6/19/08), at issue was, inter alia, whether a group of commercial oyster fishermen could bring a class action against a group of defendants that owned land-based storage tanks or pipelines that burst as a result of Hurricane Katrina, causing a release of crude oil that allegedly damaged the aquatic wildlife, estuaries, and plaintiffs’ interest in their oyster leases. At the outset, the court reaffirmed its earlier ruling that the plaintiffs failed to state a claim for alleged damages to non-proprietary State-owned natural resources, including marine estuaries. Thus, the only question was whether the plaintiffs could pursue a class action for the remaining claim of purported damage to their individual oyster leases.

The defendants moved to strike the class action, arguing that the plaintiffs could not meet the requirements for class certification under Federal Rule of Civil Procedure Rule 23. That Rule requires plaintiffs seeking to certify a class to establish (1) numerosity, (2) commonality, (3) typicality, and (4) adequate representation. In addition, plaintiffs must demonstrate that (1) common questions of fact and law predominate, and (2) the class action device would be the best method for procedure. The plaintiffs purported to define the class as “all commercial oystermen whose oyster leases were contaminated by oil discharged during Hurricane Katrina due to the negligence of defendants.”

Plaintiffs argued that this proposed class would ensure adequate representation of all individual plaintiffs because plaintiffs’ experts had “developed significant factual information which supports their allegations that the oil from [d]efendants’ spills likely combined and mixed together to create a large oil slick affecting many of the oyster leases,” known as the “washing machine” theory. The defendants’ countered, arguing that fatal to the class definition was any geographic boundaries, making the class not ascertainable. The court agreed with the defendants, holding that the plaintiffs did not meet their burden of adequately defining the class. The court recognized the point raised by the defendants that the plaintiffs failed to establish a geographic boundary and further explained that it would require an individualized determination of the merits of each plantiff’s claim in order to assess whether each plaintiff was a proper member of the proposed class.

The court further held that the plaintiffs had not met their burden of proving that common issues of fact and law would predominate. The court focused heavily on the plaintiffs’ purported attempt to oversimplify the burden of proof that would require more than a common event such as a pipeline or tank rupture. Rather, the court explained that each plaintiff would be required to prove that its particular oyster lease suffered damages as a result of a specific defendant’s release of oil. The court held that “each oyster lessee must establish that the conduct of a particular [d]efendant was a substantial factor in causing the alleged damage to the particular acreage, and that quantifiable damage to that acreage resulted.” Because plaintiffs could not meet this burden with any proof common to the class, the court granted defendants’ motion to strike class certification.

Noble Energy, Inc. v. Bituminous Cas. Co

cmkornick@liskow.com (Cheryl Kornick) — Thu, 26 Jun 2008 14:03:34 -0500

By Tiffany Delery Davis

In Noble Energy, Inc. v. Bituminous Cas. Co., No. 07-20354, 2008 WL 2232085 (5th Cir. 2008), the Fifth Circuit affirmed summary judgment in favor of the defendant, Bituminous Casualty Company, in an insurance coverage dispute concerning whether Bituminous had a duty to defend and indemnify plaintiff, Noble Energy, Inc., in connection with an underlying suit. The underlying suit involved claims arising out of an explosion and fire at a disposal facility.

Flammable gas, condensed from hazardous oilfield waste being unloaded from trucks at the disposal facility, caused a truck’s diesel engine to race and then explode, killing two workers, and injuring several others. Noble sued Bituminous, claiming that Bituminous had a duty to indemnify and defend Noble in the underlying lawsuit, because Noble was an additional insured under the Bituminous policy.

The Bituminous policy contained a pollution exclusion which excluded coverage for “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.” The Fifth Circuit found the policy’s pollution exclusion to be unambiguous, and that the combustible vapor that emanated from the waste met the policy’s definition of “pollutant.” The Court reasoned that any alleged liability for the workers’ deaths and bodily injuries arose out of the discharge, dispersal, release, or escape of the hazardous waste and its vapors. Thus, the Court held that coverage for the claims against Noble in the underlying lawsuit was excluded under the terms of the policy, and Bituminous was not obligated either to defend or indemnify Noble.

The Court did not address whether Noble was an additional insured under the Bituminous policy, explaining that the pollution exclusion would bar coverage of the underlying plaintiffs’ claims even if Noble were held to be an additional insured.

Ninth Circuit Vacates EPA Rule Excepting Oil and Gas Construction Discharges from NPDES Permitting

cmkornick@liskow.com (Cheryl Kornick) — Wed, 25 Jun 2008 09:20:08 -0500

By Claire Bienvenu

On May 23, 2008, the Ninth Circuit vacated EPA’s rule exempting discharges of sediment resulting from oil and gas construction activities from National Pollutant Discharge Elimination System (NPDES) permit requirements. NRDC v. EPA, No. 06-73217 (9th Cir. 5/23/08). The Ninth Circuit found EPA’s rule, which was a codification of a recent exemption added to the Clean Water Act (CWA or the Act), to be an impermissible interpretation of the Act. Unless overturned, the court’s decision to vacate the regulation imposes an unexpected obligation on the oil and gas industry to obtain NPDES permits for all construction activities disturbing land area greater than or equal to one acre in size.

The Decision

EPA’s final rule implemented an amendment to the Clean Water Act’s definition of "oil and gas exploration and production" that was contained in the Energy Policy Act of 2005. The new definition of “oil and gas exploration and production” includes “construction activities,” which brings oil and gas construction activities within the CWA § 402(l)(2) exemption from NPDES permitting. Section 402(l)(2) exempts discharges from oil and gas E&P activities that are composed of flows that “do not come into contact with, any overburden, raw material, intermediate products, finished product, byproduct, or waste products.” In order to revise its codification of this statutory exemption to include discharges from construction activities, EPA revised 40 C.F.R. §122.26(a)(2) to provide that sediment discharged from oil and gas construction activities would not require NPDES permits, even if the discharge contributed to a violation of the water quality standard.

The Ninth Circuit used the following Chevron two step analysis to vacate the regulation. The court first found that there was no clear indication from Congress that it intended to exempt “sediment” discharges from permitting requirements, because the word “sediment” did not appear anywhere in the statute. Instead, Congress only exempted discharges from construction activities where the runoff is not contaminated with the specified contaminants. Citing former EPA guidance, the Court secondly found that EPA’s rule was arbitrary and capricious because it conflicted with EPA’s historical position that sediment constituted “contamination” under CWA § 402(l)(2). The Ninth Circuit rejected EPA’s argument that Congress intended to exempt sediment because it is the pollutant most commonly associated with construction activities.

The Effect

The exemption of sediment discharges from NPDES permitting requirements has been available to oil and gas construction activities since the final rule’s issuance on June 12, 2006. However, the Ninth Circuit’s decision to vacate the rule leaves oil and gas companies without the exemption, at least for the time being, unless the decision is overturned on possible rehearing or appeal to the Supreme Court.

The Ninth Circuit’s decision has particular impact on small oil and gas construction activities (those that disturb one to five acres) because they have not previously been required to obtain an NPDES permit. Small oil and gas construction activities have not needed an NPDES permit because the NPDES permit authorization deadline for small construction activities was June 12, 2006, the same day on which EPA’s final rule excepting sediment discharges from NPDES permitting was promulgated. However, now that the small oil and gas construction activities deadline has passed and there is no exemption available, these construction activities require an NPDES permit. As for large construction activities, they previously required NPDES permits (prior to June 12, 2006). After a brief period of exemption, they require a permit once again.

An EPA Stormwater Construction General Permit is available for these activities. However, oil and gas companies in states that have received NPDES delegation must obtain permits through the state programs. These states enact their own general permits, and the status of these state permits vary throughout the country. In those instances where no general permit is available, oil and gas construction activities will need to obtain individual NPDES permits.

Stay tuned for further developments.

Inadvertent Disclosure of Privileged Electronic Documents Constitutes Waiver of Privilege

cmkornick@liskow.com (Cheryl Kornick) — Mon, 23 Jun 2008 09:06:36 -0500

In Victor Stanley, Inc. v. CreativePipe, Inc., __ F.Supp.2d __, 2008 WL 2221841 (D.Md. 2008), the court held that defendants waived any privilege that may have attached to 165 electronically stored documents, including communications between the defendants and their attorneys, which were mistakenly turned over to the plaintiff.

. Acknowledging the risk of inadvertent disclosure typically associated with large document productions, defendants initially sought the court’s approval of a “clawback agreement.” Despite the plaintiff’s cooperation, defendants abandoned their plans to effectuate such an agreement and decided to conduct a document by document privilege review. Defendants’ decision was based on the court’s extension of discovery time by four months.

After defendants had made a series of document productions over a period of several weeks, the plaintiff discovered the potential privileged/protected documents and immediately notified the defendants. The plaintiff then filed a motion seeking a ruling that any privilege associated with the electronic documents had been waived. The defendants argued that their production of the 165 electronic documents was inadvertent, and, therefore, no waiver had occurred.

In support of their argument, the defendants presented affidavits describing their efforts in conducting a pre-production privilege review. According to defendants, they employed a computer forensics expert who used approximately seventy search terms to locate privileged documents. All documents returned during the keyword search were then delivered to the defendants’ lawyers for a pre-production privilege review.

Documents that were not text-searchable were given to the defendants’ lawyers for manual privilege review. Due to time constraints, however, the lawyers only reviewed the title pages of these documents. Documents whose title page indicated that a privilege might apply were reviewed in their entirety.

Based on the limited information contained in the defendants’ affidavits, the court was left to infer that the text-searchable documents not flagged by the keyword search were produced to the plaintiff along with the non text-searchable files that defense lawyers had determined were not privileged.

The court described three different approaches that have been taken by courts when deciding whether the inadvertent production of privileged materials constitutes waiver. Under the lenient view, the court found that defendant’s conduct would not constitute a waiver because any such waiver requires a “knowing and intentional relinquishment of the privilege/protection.” Based on the decisions of other district courts within its circuit, however, the court found that the appropriate standard to apply was either the strict or intermediate approach.

The strict approach provides that waiver occurs once the privileged information is disclosed “because once disclosed there can no longer be any expectation of confidentiality.” The court found that there was “no legitimate doubt” that the defendants had waived any privilege attaching to the 165 documents at issue under the strict approach. The court further held that even under the intermediate approach, the result would be the same.

The intermediate approach considers the reasonableness of the precautions taken by the producing party to prevent inadvertent disclosure. The court found that the defendants had not met their burden of proving that their conduct was reasonable based on their failure to provide information regarding: “the keywords used; the rationale for their selection; the qualifications of defense counsel to design an effective and reliable search and information retrieval method; whether the search was a simple keyword search, or a more sophisticated one, such as one employing Boolean proximity operators; or whether they analyzed the results of the search to assess its reliability, appropriateness for the task, and the quality of its implementation.”

As to the non text-searchable documents, the court found that defendant’s assertion that time-constraints allowed a review only of the title pages was discredited by the fact that “defendants neither sought an extension of time from the court to complete an individualized review nor reinstated their request for a court-approved non-waiver agreement, despite their awareness of how it would have provided protection against waiver.”

Finally, the court pointed out that because many of the documents contained communications between defendants and their lawyers, “any order issued now by the court to attempt to redress these disclosures would be the equivalent of closing the barn door after the animals have already run away.”

Third Circuit interprets Act 312

cmkornick@liskow.com (Cheryl Kornick) — Tue, 27 May 2008 09:16:39 -0500

In Germany v. ConocoPhillips Co., 2007-1145 (La. App. 3 Cir. 3/5/08), -- So. 2d --, the Third Circuit upheld the trial court’s ruling that under Act 312 a single trial of all issues should be held prior to referring a case to the Louisiana Department of Natural Resources (“LDNR”) for the development of a remediation plan.

In Germany, the plaintiff landowners sued four oil and gas corporations for the remediation of property allegedly damaged by oil and gas operations. ConocoPhillips filed a motion in limine arguing that under Act 312 (codified as La. R.S. 30:29) trial must proceed in three stages. ConocoPhillips argued that the three stages involve: first, a trial to determine whether environmental damage occurred, and if so, the party/parties liable for such damage; second, a referral to LDNR to develop a remediation plan; and third, a trial where the court enters a judgment regarding the remediation plan and determines whether there are any damages incurred by Plaintiff not addressed in the remediation plan. If any unaddressed damages exist, then another trial is to be held on those claims. The Plaintiffs argued that Act 312 does not call for such a bifurcation of the issues and both the trial court and Court of Appeal agreed.

The Court of Appeal based its decision, in part, on the decision of the Louisiana Court of Appeal for the Fourth Circuit in Duplantier Family Partnership v. BP Amoco, 07-293 (La. App. 4 Cir. 5/16/07), 955 So. 2d 763, writs denied, 07-1241, 07-1265, 07-1271 (La. 9/28/07), 964 So. 2d 367, 368. In Duplantier, the Fourth Circuit held that “all claims, both tort and contractual, should be considered at the same time in order to determine the full extent of damages owed to the property owner.” It also stated that “one trial of all issues” serves the interests of judicial efficiency, was the “most plausible interpretation of the statute,” and noted that the bifurcation of trials requires the consent of the parties under Louisiana Code of Civil Procedure articles 1562 and 1736. The Third Circuit in Germany agreed with the court’s reasoning in Duplantier and held that the trial court must resolve all the issues in the matter before it is referred to the LDNR.

For another case involving the same issue of a bifurcated trial under Act 312, see Bernard v. BP America Production Company, 2007-1249 (La. App. 3 Cir. 4/2/08), -- So. 2d --.

Texas -- Right to Arbitate Waived Without Proof of Prejudice to Opposing Party

awooley@liskow.com (Andrew Wooley) — Tue, 13 May 2008 11:18:51 -0500

The Supreme Court of Texas has never before found a waiver of the right to arbitrate, but in a recent five-to-four decision likely to attract multiple friend-of-the court briefs on rehearing, the court vacated an $800,000 arbitration award in favor of two homeowners and remanded their claims for trial based on the conclusion of five justices that the homeowners had waived their right to arbitrate by their pre-arbitration litigation conduct. Perry Homes v. Cull, No. 05-0882, 2008 Tex. LEXIS 423, 2008 WL 1922978 (Tex. May 2, 2008). The court reaffirmed its prior holding that prejudice to the opposing party must be shown to establish a waiver of the right to arbitrate, but in this instance the five-justice majority inferred that prejudice resulted from the homeowners' litigation conduct.

Robert and Jane Cull bought a house from Perry Homes with an accompanying warranty from Home Owners Multiple Equity, Inc. and Warranty Underwriters Insurance Company. The warranty agreement included a broad arbitration clause providing that all claims the Culls might have against Perry Homes or the warranty companies were subject to the Federal Arbitration Act, and would be submitted to the American Arbitration Association (AAA) or another arbitrator agreed upon by the parties.

After experiencing a number of unresolved problems with the house over several years, the Culls sued Perry Homes and the warranty companies. The warranty companies requested arbitration, which the Culls opposed. In their 79-page opposition to the request for arbitration, the Culls complained of fees charged by the AAA and asserted that the AAA “is incompetent, is biased, and fails to provide fair and appropriate arbitration panels.” Nobody pressed the trial court for a ruling on the request for arbitration, and the Culls proceeded with discovery in the lawsuit, including requests for disclosures, requests for documents, a number of depositions, and five motions to compel. Perry Homes filed two motions for protection. After completing discovery and shortly before a scheduled trial date, the Culls asked the trial court to stay the lawsuit and compel arbitration.

The trial court granted the Culls’ motion based on Perry Homes’ and the warranty companies’ failure to show they had suffered prejudice as a result of proceedings in the lawsuit. Perry Homes and the warranty companies sought mandamus relief, but were unsuccessful. After a year in arbitration, the arbitrator awarded the Culls $800,000, which included restitution of the purchase price of their home, mental anguish damages, exemplary damages, and attorney’s fees. Perry Homes and the warranty companies moved to vacate the arbitrator’s award, arguing (among other things) that the case should never have been sent to arbitration after so much activity in court. The trial court overruled their objections and confirmed the arbitration award. The court of appeals affirmed the trial court's judgment. The Supreme Court of Texas reversed the judgments below, vacated the arbitration award, and remanded the case “for a prompt trial.”

All nine justices on the supreme court joined in holding that (1) an order compelling arbitration is subject to appellate review after completion of arbitration, even if pre-arbitration review was sought by mandamus, (2) whether conduct in litigation amounts to a waiver of the right to arbitrate is a question for decision by courts, not arbitrators, (3) whether a party waives an arbitration clause by substantially invoking the judicial process is to be determined from the totality of the circumstances on a case-by-case basis, and (4) prejudice to the opposing party must be shown to establish a party’s waiver of the right to arbitrate.

But only five justices agreed that the Culls’ litigation conduct alone demonstrated prejudice to Perry Homes and the warranty companies sufficient to hold that the Culls had waived the right to arbitrate: “[M]anipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law.” The remaining four justices dissented (in two separate opinions) from the court’s judgment and from the majority’s holding that prejudice could be inferred from the Culls’ litigation conduct. In the dissenters’ view, the trial court did not abuse its discretion by compelling arbitration because Perry Homes had not built a record upon which the trial court could find prejudice necessary to establish waiver of the Culls’ right to arbitrate.

Justice Brister’s opinion for the majority, Justice O’Neill’s concurring opinion, Justice Johnson’s concurring and dissenting opinion, and Justice Willett’s concurring and dissenting opinion are available at the following hyperlinks:

http://www.supreme.courts.state.tx.us/historical/2008/may/050882.htm

http://www.supreme.courts.state.tx.us/historical/2008/may/050882c.htm

http://www.supreme.courts.state.tx.us/historical/2008/may/050882cd.htm

http://www.supreme.courts.state.tx.us/historical/2008/may/050882cd1.htm

All of the opinions are also available at 2008 Tex. LEXIS 423 and at 2008 WL 1922978

Acquisitive Prescription and Predial Servitudes

jrjohanson@liskow.com (Jason Johanson) — Wed, 30 Apr 2008 11:17:57 -0500

In Davis v. Provost, 2007-1519 (La. App. 3 Cir. 4/2/08), -- So. 2d --, the Louisiana Court of Appeal for the Third Circuit reinforced an earlier holding that 1977 La. Acts No. 514 § 1, which allowed the acquisition of a predial servitude through acquisitive prescription, was not retroactive. In Davis, the plaintiffs filed a Petition for Declaratory Judgment seeking access to their property by crossing over a bridge that the defendants had allegedly locked. One of the defendants filed a reconventional demand, alleging that he had exercised for over thirty years a right-of-way over the bridge to gain access to his sugarcane field. The trial court agreed and ruled in favor of the defendant.

The court of appeals vacated and remanded. The court of appeals first noted that the Louisiana Civil Code of 1870 explicitly disallowed the acquisition of a predial servitude through acquisitive prescription. Not until January 1, 1978, when 1977 La. Acts. No. 514 § 1 became effective, could someone obtain a predial servitude through acquisitive prescription. Relying on its earlier holding in Griffith v. Cathey, 99-923 (La. App. 3 Cir. 2/2/00), 762 So. 2d 29, the court held that 1977 La. Acts No. 514 § 1 was not retroactive. Because the defendant filed his reconventional demand on May 17, 2006, the court held that thirty years had not passed, and the trial court had erred in ruling in favor of the defendant. The court remanded for further factual findings.

The ruling may have a significant impact on pipeline servitudes and their ownership.

To read the full opinion, click here.

Taxation of Fuel Provided to Compression Service Operators at No Cost

cmkornick@liskow.com (Cheryl Kornick) — Thu, 17 Apr 2008 11:44:46 -0500

In Bridges v. Production Operators, Inc., 2007-0648 (La. App. 4th Cir. 12/12/07),974 So.2d 54, at issue was whether the provision of fuel by customers to a compression services operator at no cost for use in powering the operator’s compressors was subject to Louisiana sales or use tax.

Production Operators, Inc. (“POI”) operated a gas compression company and used customer-supplied fuel to power its compressors. For its services, POI received a flat monthly fee, regardless of whether its compressors were used, and customers were required to provide compressor fuel at no cost to POI. The Louisiana Department of Revenue contended that the provision of compressor fuel to POI by its customers was a taxable sale in the form of a barter. POI defended against the collection of tax by arguing that there was no transfer of title to the fuel, and to the extent there was a transfer of title, POI did not owe tax because the “sales price” and “cost” of the fuel was zero. The Fourth Circuit agreed with the Department on the first issue, concluding that the transfer of compressor fuel from the customers to the operator constituted a taxable sale in the form of a barter for consideration, but the court did not agree that Henry Hub spot price was the appropriate value of the consideration and instead remanded the matter to the trial court to determine the amount of the consideration for tax purposes.

The Fourth Circuit’s decision in Production Operators, Inc. creates a split among Louisiana courts, for in 2003, the Third Circuit, considering similar facts, held that, though the provision of compressor fuel constituted a taxable transaction, because there was neither a sales price nor value for the compressor fuel, the Department could not recover any tax. Hanover Compressor Company v. Department of Revenue, 02-0925 (La. App. 3d Cir. 2/5/03), 838 So.2d 876. Production Operators, Inc. also leaves open the question of how consideration is to be determined when fuel is supplied to power gas compression operations at no cost tothe operator.

U.S. Supreme Court Declines to Enforce Arbitration Provision Setting Forth Grounds for Judicial Review of Arbitration Award

cmkornick@liskow.com (Cheryl Kornick) — Tue, 08 Apr 2008 09:21:21 -0500

In Hall Street Associates, LLC v. Mattel, Inc., 2008 WL 762537 (U.S. 2008), the Supreme Court held that the grounds for vacatur and modification of arbitration awards provided by §§ 10 and 11 of the Federal Arbitration Act (“FAA”) are exclusive.

The case began as a lease dispute between a landlord, Hall Street Associates, LLC, and tenant, Mattel, Inc., involving a piece of property long used as a manufacturing site. The lease required Mattel to indemnify Hall Street for costs related to the tenant’s failure to follow environmental laws. After pollutants were discovered on the property and Mattel gave notice of intent to terminate the lease, Hall Street filed suit, claiming a right to indemnification under the lease. The parties reached an arbitration agreement providing that the district court “shall” vacate, modify or correct any award where the arbitrator’s factual findings were not adequately supported or were legally erroneous.

The arbitrator found in Mattel’s favor, but the district court vacated the arbitration award, citing the agreement’s provision regarding review for legal error and a 9th Circuit case interpreting the FAA as leaving the parties “free to draft a contract that sets rules for arbitration and dictates an alternative standard of review.” On remand, the arbitrator found for Hall Street. The district court upheld but slightly modified the award, each party appealed to the Ninth Circuit, and the Ninth Circuit reversed in favor of Mattel. Finally, the Supreme Court granted certiorari to decide whether the grounds for vacatur and modification of arbitration awards provided by §§ 10 and 11 of the Federal Arbitration Act are exclusive, and held that they are.

The Supreme Court noted that the FAA was enacted to create a “national policy favoring arbitration” and to “plac[e] arbitration agreements on equal footing with other contracts,” and that the statute supplies mechanisms for enforcing arbitration awards. Under Section 9, a court “must” confirm an arbitration award “unless” it is vacated, modified, or corrected as prescribed in Sections 10 and 11. Section 10 lists grounds for vacating an award, including where the award was procured by corruption or fraud, and where the arbitrators were guilty of misconduct, evident impartiality, or exceeded their powers. Section 11 provides grounds for modification of an award, including “evident material miscalculation,” “evident material mistake,” and “imperfect[ions] in matter of form not affecting the merits.”

In its opinion, the Court rejected an argument that the district court could vacate an award for “manifest disregard of the law” under Wilko v. Swan, 346 U.S. 427 (1953), finding that Wilko had actually rejected the idea of general review of an arbitrator’s legal errors. The Court also rejected an argument to uphold the agreement because the FAA was designed to enforce parties’ contractual agreements. The Court held that while the FAA does allow parties to tailor some features of arbitration, the text of the FAA compels a reading of §§ 10 and 11 as exclusive. Further, the Court cited the statutory interpretation rule of esjudem generis: when a statute includes a list of specific terms followed by a general term, the general term only covers subjects comparable to the specific terms. Here, the Court found that §§ 10 and 11 addressed “egregious departures from the parties’ agreed-upon arbitration” – corruption, fraud, evident partiality, etc. – and “fraud and a mistake of law are not cut from the same cloth.” In addition, Section 9 of the FAA contained no indication of flexibility, providing that the court “must grant” the arbitration award order “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11.” The Court also briefly examined the FAA’s legislative history, finding this history to support its holding. Finally, the Court noted that these provisions of the FAA do not necessarily exclude “more searching review” of arbitration awards based on authority outside the FAA, such as a state statute or common law. Thus, after Hall Street, parties seeking review of arbitration awards still may seek such review under authorities other than the FAA.

For the Supreme Court opinion, see http://www.supremecourtus.gov/opinions/07pdf/06-989.pdf.

Punitive damages for gross negligence are insurable under Texas Law

rltheriot@liskow.com (Robert Theriot) — Tue, 01 Apr 2008 17:22:12 -0500

By Kevin Connolly

On certified question from the Fifth Circuit Court of Appeals, the Texas Supreme Court, in Fairfield Insurance Company v. Stephens Martin Paving, LP, 2008 WL 400397, *1 (Tex. 2008), addressed the issue of whether Texas public policy prohibits a “liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence.” The Court answered this question in the negative and held that Texas public policy does not prohibit coverage under an employer’s liability policy for exemplary damages for an employer’s gross negligence that causes an employee’s death. However, without a clear legislative intent to generally prohibit or allow the insurance of exemplary damages arising from gross negligence, the court declined to make a broad proclamation of public policy but instead offered considerations applicable to the analysis.

The Plaintiff, Roy Bennett, died as a result of injuries sustained when the brooming machine he was operating rolled over. His employer, Stephens Martin Paving, LP, carried a workers’ compensation and employer’s liability insurance policy issued by the Fairfield Insurance Company. After Mr. Bennett’s death, his survivors sued Stephens Martin Paving for gross negligence claiming that the employer failed to provide a safe place to work, failed to follow and enforce OSHA safety rules and regulations, and failed to properly train and supervise its employees. Because Bennett’s survivors were barred by the Workers’ Compensation Act from recovering actual damages, they sought exemplary damages only.

Meanwhile, Fairfield sued Stephens Martin Paving and Bennett’s survivors in federal district court seeking a declaratory judgment that Fairfield owed no duty to defend or indemnify the employer in the underlying suit for exemplary damages. The federal district court concluded that the language in Fairfield’s policy covered exemplary damages and that Texas public policy did not prohibit insurance coverage for those damages. The court entered a judgment declaring that Fairfield had the duty to defend Stephens Martin Paving, as well as indemnify it as provided by the policy if it was adjudicated responsible for the damages sought in the underlying suit brought by Bennett’s survivors. Fairfield appealed, and the Fifth Circuit certified the question of the insurability of exemplary damages for gross negligence to the Texas Supreme Court.

The Texas Supreme Court noted that the determination of whether exemplary damages for gross negligence are insurable requires a two-step analysis. First, the Court had to decide whether the plain language of the policy provided coverage for the exemplary damages sought in the suit against the insured. Second, if the Court concluded that the policy provided coverage, the Court had to determine whether the public policy of Texas allowed for or prohibited coverage in the circumstances presented in the underlying suit. However, because the Fifth Circuit’s question was directed only at the public policy of Texas, the Court limited its discussion to the second prong of the analysis and presumed that the policy language covered the exemplary damages sought.

While considering whether Texas’ public policy should prohibit coverage for exemplary damages, the Texas Supreme Court noted that the deciding court should study the context in which the Legislature has spoken on the issue. Looking to the workers’ compensation statutory scheme and the Texas Department of Insurance’s execution of the same, the Court determined that the Legislature had evidenced an intent to provide additional insurance coverage for an employer’s gross negligence. Therefore, the Legislature’s expressed intent was that Texas public policy does not prohibit insurance coverage for claims of gross negligence.

Although the Legislature’s expressed direction ended the inquiry regarding the case at issue, the Texas Supreme Court recognized that the Fifth Circuit framed its certified question as a broad inquiry into Texas public policy and the coverage of exemplary damages. Although hesitant to opine on policy language and fact situations not before the Court, the Court went on to discuss some of the considerations relevant to determining whether Texas public policy prohibits insurance coverage for exemplary damages in other contexts in the absence of a clear legislative policy decision.

Insurance Company House Counsel May Defend Insureds

rltheriot@liskow.com (Robert Theriot) — Tue, 01 Apr 2008 17:13:41 -0500

By Andrew Wooley

In an opinion filed today in the matter of Unauthorized Practice of Law Committee vs. American Home Assurance Co., the Supreme Court of Texas has authorized liability insurers to use in-house staff attorneys to defend their Texas insureds, so long as there is no conflict of interest between the insurer's and the insured's interests: "We hold that an insurer may use staff attorneys to defend a claim against an insured if the insurer’s interest and the insured’s interest are congruent, but not otherwise. Their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insurer and the insured. We also hold that a staff attorney must fully disclose to an insured his or her affiliation with the insurer."

The majority opinion may be viewed at http://www.supreme.courts.state.tx.us/historical/2008/mar/040138.htm

The dissenting opinion may be viewed at http://www.supreme.courts.state.tx.us/historical/2008/mar/040138d.htm

Jindal signs ethics laws

cmkornick@liskow.com (Cheryl Kornick) — Fri, 14 Mar 2008 14:55:21 -0500

On Tuesday, February 26, the Louisiana Legislature adjourned a special session called by newly-elected Governor Bobby Jindal in the hope of enacting sweeping changes to Louisiana ethics laws relating to elected officials and other state administrators. The session resulted in the passage of a number of bills designed to increase transparency with respect to state officials’ financials, to limit potential influence by lobbyists, and to reduce potential conflicts of interest in state officials’ dealings with state agencies.

Governor Jindal recently signed the last of these bills into law on March 10, highlighted by the following:

Senate Bill 5: Requires the recusal of elected officials who have a conflict of interest from voting on legislation. The bill repealed an exception in the existing ethics code, thus ensuring that under no circumstances will an elected official vote where a conflict is present.
Senate Bill 8: Places a $50 cap on purchase of food and beverages for public servants per occasion, thus eliminating the unlimited spending by lobbyists and special interests. In the past, Louisiana allowed unlimited spending on food and beverage for public officials and employees by lobbyists and those seeking contracts with the state.
Senate Bill 3: Prohibits lawmakers and other elected officials from receiving free tickets to professional sports games, college sports games and big-money cultural events, as well as free fishing trips, hunting trips and golf games from lobbyists. Under the law, elected officials may still receive free tickets to civic, nonprofit, educational or political events when the official is part of the program as a speaker or panel member.
Senate Bill 37: Requires online reports of all state spending by agency and function. Under the law, the Commissioner of Administration will post a monthly report of the appropriations and spending for each budget unit of state government. The website is supposed to be fully functional by January 2009.
House Bill 1: Requires disclosure of income for elected or public officials. Spouses of the officials and candidates for elected offices are included. The law breaks up the officials into three levels, with various required disclosures required for each level: the top tier is for the governor and the governor’s department secretaries and top staff, statewide elected officials, the superintendent of education, and the commissioner of higher education; the middle tier is for state legislators and anyone holding public office representing a voting district of 5,000 or more people; and the lowest tier is for people holding public office representing fewer than 5,000 people, and for members of smaller boards and commissions.
Senate Bill 1: Prohibits public officials or their spouses from contracting with the State of Louisiana. The law allows current contracts to remain in effect until they expire, but disallows the signing any new contracts.

Violations of Environmental Terms in Federal Oil and Gas Lease Insufficient to Support a Claim under the False Claims Act

cmkornick@liskow.com (Cheryl Kornick) — Wed, 12 Mar 2008 12:05:40 -0500

By Clare Bienvenu

In Marcy v. Rowan Cos., Inc., No. 06-31238, 2008 WL 588745 (5th Cir. 2008), the Fifth Circuit Court of Appeals affirmed the district court’s decision to dismiss a qui tam action brought under the Federal Claims Act (FCA). The action alleged that the defendants violated the FCA by concealing the discharge of pollutants from an offshore drilling unit into the Gulf of Mexico.

The plaintiff, who claimed to have illegally dumped the pollutants at the direction of the defendants, asserted that the defendants made a false claim to the federal government by certifying Oil Record Books and MMS 133 reports omitting the discharges. He alleged that the defendants then received the benefit of continuing operations under a federal contract, the federal oil and gas lease. The plaintiff additionally alleged that, by failing to report the discharges, the defendants concealed an obligation to pay the government by fraudulently avoiding fines and penalties under several statutes, including the Federal Water Pollution Control Act, the Act to Prevent Pollution from Ships, the Outer Continental Shelf Lands Act, and the Oil Pollution Act of 1990. The Fifth Circuit, accepting the plaintiff’s factual allegations as true for purposes of the motion to dismiss, determined that the plaintiff failed to state a claim under the FCA, because: (1) any claim the defendants made for payment from the federal government was not a “material” claim; and (2) any obligation to pay the government as a result of violating environmental terms of the lease was merely a speculative obligation.

The Fifth Circuit first considered the plaintiff’s allegation that the defendants knowingly made a false claim for payment, pursuant to 31 U.S.C. §3729(a)(2). In determining this issue, the court looked to the materiality of the claim. In order for a claim to be material and, thus, fall within the scope of the FCA, the claim must be required in order to receive the government payment, or benefit. In this case, the court found that the accurate certification of the reports was not required to retain the lease, because the lease provided that failure to comply with its terms only results in cancellation of the lease at the option of the government. Due to the existence of other remedies that would allow continued operation under the lease despite violations of the terms of the lease, the environmental certifications were not required to retain the benefit of the government lease.

The Fifth Circuit next considered the plaintiff’s allegation that the defendants knowingly concealed an obligation to pay the U.S. government, pursuant to 31 U.S.C. §3729(a)(7). The court found that the plaintiff would be unable to establish the defendants’ “obligation to pay” under the FCA, because the imposition of any fines or penalties resulting from environmental law violations depend solely upon the government’s discretion. Moreover, the speculative fines at issue did not arise directly out of the government lease, but arose out of general environmental laws. The court stated that allowing such general obligations to fulfill an FCA claim would extend the scope of the FCA far beyond its present interpretation.

Renewable Energy & Conservation Tax Act of 2008

cmkornick@liskow.com (Cheryl Kornick) — Fri, 22 Feb 2008 09:44:14 -0500

By Katie Caswell

The House Ways and Means Committee has introduced HR 5351, the Renewable Energy and Energy Conservation Tax Act of 2008, which eliminates the manufacturing tax credit for major oil and gas companies and locks the credit at six percent for other producers and refiners. Further, this bill would force oil and gas companies to change the manner in which foreign tax credits are calculated and claimed for resources extracted overseas. HR 5351 would raise taxes on current energy companies by $17.5 billion and transfers the funds to energy sources such as wind, solar, geothermal, ethanol, and other renewable energy sources in the form of tax credits and bonds.

http://www.govtrack.us/congress/billtext.xpd?bill=h110-5351