Blawgletter®

The Value of Class Actions Just Fell. Again.

Another Term, another chance to gut class actions

If you've watched the Supreme Court over the last several years, you may have marveled at how earnestly some of the justices have worked to render Rule 23 a dead letter. Behold:

• You have to arbitrate class claims individually. AT&T Mobility, LLC v. Concepcion, 531 U.S. 321 (2011).

• You can't use statistical methods we don't find compelling to prove class claims. Dukes v. Wal-Mart Stores, Inc., 131 S. Ct. 2541 (2011).

• No, really, you have to arbitrate class claims individually, no matter what. American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

• Hey, didn't you hear what I said about not using statistical methods to prove class claims? Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).

The Court split 5-4 in all four cases, with the same five justices in the majority (Chief Justice Roberts and Justices Alito, Kennedy, Scalia, and Thomas) and the same four justices dissenting (Justices Breyer, Ginsburg, Kagan, and Sotomayor) every time.

We exaggerate only a little

In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the Court did uphold a crucial principle in securities fraud class actions -- that class plaintiffs may take advantage of a presumption that the securities buyers relied on the defendants' failure to disclose material information. And in Erica P. John Funds, Inc. v. Halliburton, 131 S. Ct. 2179 (2011), the Court did rule that class plaintiffs need not show "loss causation" in order to establish grounds for class certification of a securities fraud case.

But both rulings related to securities law violations, which hurt rich people more than poor ones, and in the 2014 decision the Court also ruled that defendants must have the chance to show at the class certification stage that the nondisclosure didn't inflate the price of the securities.

Other kinds of class cases

Class actions involving consumer fraud (Concepcion), antitrust law violations (Behrend and Italian Colors), and short-changing workers through discriminatory practices (Dukes) didn't fare nearly so well. In each case, the little person stood against the behemoth corporation -- and got a shellacking.

Last week, the Court took another class action case that aims to benefit the regular Joe and Josephine. In Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146 (U.S.), the Court will address -- big shout out to our friends at SCOTUSblog -- these questions:

(1) Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and (2) whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages.

The problem, as the petitioner Tyson Foods sees it, arises from the fact that class plaintiffs used averages to show how much time Tyson didn't pay, in the aggregate, for class members' donning and doffing gear they needed to wear to work at Tyson's pork processing plant in Storm City, Iowa. Using averages, Tyson insists, means that "hundreds" of the 3,344 class members did not suffer any compensable damages.

What will happen

Employment discrimination, consumer fraud, and antitrust claims almost always pit weak economic actors against far more powerful ones. Tyson Foods has the same David v. Goliath orientation. Blawgletter -- who will sign off with our last post on June 15 to begin The Contingency on June 16 -- expects that what happened to the plaintiffs in Concepcion, Dukes, Italian Colors, and Behrend will also occur to those in Tyson Foods.

Although the Court will not state the rule this way, the Court will come close to saying that class plaintiffs must present a near-perfect statistical model if they wish to use statistics to support a finding that questions common to class members predominate over individual ones. Justices Scalia and Thomas Some justices seem to think that forcing a defendant to pay an amount equal to the total harm it caused the class should never happen if any class member did not suffer recoverable damages.

Perfection becomes the enemy of the good, in their view. Or, more likely, the enemy of what they may see as a bad thing -- defendants having to pay for 100 percent of the harm they caused.

Get ready for The Contingency

My new law blog will go live on Tuesday, June 16, 2015. Please stand by for info on how to find The Contingency, how to subscribe, and other fun facts.

Contingent Fees and Taxes for Qui Tam Relators

As the June 16th launch date for The Contingency gets ever closer, Blawgletter post from five years ago offers a preview of the sort of subjects The Contingency will deal with on a more regular basis.

                                                                                                Barry Barnett

*   *   *   *

Qui Tam Winner May Deduct Contingent Fee, Tax Court Affirms

Jan. 22, 2010

Blawgletter often handles business cases on a contingent fee basis.  We earn a percentage of the client's recovery. No recovery, no fee.

But guess what?  The client may owe tax on the recovery. Which could of course affect the client's net.  And the Internal Revenue Service may regard the entire recovery -- including the contingent fee that goes to the lawyer -- as taxable income to the client. See Roco v. Commissioner, 121 T.C. 160, 165 (Tax Ct. 2003) (holding that payment to False Claims Act relator for exposing contractor's fraud on the federal government amounted to a "reward" and therefore counted as gross income). Which would reduce the client's net further.

But we got decent news yesterday from the U.S. Tax Court, which ruled on whether another False Claims Act/qui tam relator, Albert D. Campbell, "must include the entire $8.75 million qui tam payment in gross income or is entitled to exclude the $3.5 million attorney's fee payment and thus include only the $5.25 million qui tam payment in gross income." Campbell v. Commissioner, 134 T.C. No. 3 (Tax Ct. Jan. 21, 2010)[, aff'd, 658 F.3d 1255 (11th Cir. 2011)]. Yes, the court held. No surprise there.

But the court went on to decide that Mr. Campbell "may deduct" the contingent fee "as a miscellaneous itemized deduction." Because he testified he paid the fee and corroborated his testimony with the contingent fee agreement between him and his lawyers, the court concluded, Mr. Campbell "has substantiated the payment of the fees" and thus could deduct them. Hooray.

The tax treatment of qui tam proceeds may not apply to other sorts of recoveries -- such as ones that compensate for actual loss. We suggest you get advice from a tax professional.

*   *   *   *

Blawgletter adheres to that last suggestion -- "get advice from a tax professional" -- but we also note that at least one court since Campbell v. Commissioner has confirmed its basic ruling. See Bagley v. United States, 963 F. Supp. 2d 982, 1002 (C.D. Cal. 2013) (ruling that "the litigation expenses incurred by Bagley in pursuing his FCA lawsuit as a qui tam relator, may be deducted as ordinary and necessary business expenses incurred for a trade or business"); 

Bonus:

Qui tam relators fared less well when they argued for treating a False Claims Act award as a capital gain rather than ordinary income. See Patrick v. Commissioner, 142 T.C. 124, 130 (Tax Ct. 2014) (rejecting taxpayer Patrick's effort to characterize qui tam award as capital gain after concluding that taxpayer failed to satisfy "sale or exchange" or "capital asset" requirement for capital gain treatment); Alderson v. United States, 1200 (C.D. Cal. 2010) ("Because Alderson's did not hold a property interest in the information he exchanged to the Government, his subsequent recovery of $27 million was not a capital gain.").

Federal Circuit Split Highlights Patent Policy Debate

Policy debate

If a firm that performs steps A, B, and C of a "method" patent induces the firm's customers to take step D -- the final one -- does the firm infringe the patent?

The question -- which a two-judge majority on a Federal Circuit panel answered no -- produced 62 pages of opinions and a sharp dissent. See Akamai Technologies, Inc. v. Limelight Networks, Inc., No. 09-1327 (Fed. Cir. May 13, 2015). 

The ruling doesn't settle the issue; the court sitting en banc or the Supreme Court will have to do that.

But, to a surprising extent, the majority explicitly echoed the arguments by organizations that went to make patents harder to get and patent lawsuits more difficult for plaintiffs to win.

Single-entity rule

Akamai sued Limelight Networks for infringing Akamai's patent on a process for fetching online content. (The technology related to a method for easing access to data during "peak usage" by making segments of content available on multiple servers in more than one location.) A jury found that Limelight and its customers committed acts that together would have infringed the Akamai patent if a single entity had engaged in the conduct and awarded Akamai $40 million.

After much appellate review, the case landed again before a three-judge panel.

But "[f]or method patent claims, direct infringement only occurs when a single party or a joint enterprise performs all of the steps of the process." Akamai, slip op. at 7 (citing cases). Although performed all but one of the steps in Akamai's content-fetching process, the fact that users of Limelight's "content delivery network" did the final step ("tagging" the content they wanted) triggered the bar of the single-entity rule.

In spite of the existence of behavior constituting infringement, the majority held, no one infringed.

Amici speaky

But the words of the statute and logic alone did not produce the outcome.

The majority stressed "concern" in Congress and state legislatures "about the vulnerability of innocent customers to charges of patent infringement". Akamai, slip op. at 23. Citing the contentions of infringement defendants and their champions, it went on (per Judge Richard Linn):

Several amici, the White House, and other commentators identify numerous instances where patentees have sent demand letters to or sued dozens, hundreds, or, in some cases, even thousands of unsophisticated downstream users. If the law were expanded to impose joint and several liability on users of a single prior art method step, it would subject swathes of innocent actors across diverse industries to these practices. Using real patents as examples, amici warn that individuals could be liable for patent infringement for so little as initiating communication with a doctor or swiping a debit card. Another amici [sic] explains that “the hundreds if not thousands of contracts in a technology company’s supply chain could expose each actor in that supply chain to potential patent infringement liability . . . .” Cisco Br. at 5.

Id. at 24-25 (footnotes omitted).

Dissent

Judge Kimberly Moore summarized her reasons for dissent as follows:

Today the majority holds that the actions of multiple parties can only result in direct infringement of a method claim in three circumstances: in a principal-agent relationship, in a contractual arrangement, or in a joint enterprise functioning as a form of mutual agency. It divorces patent law from mainstream legal principles by refusing to accept that § 271(a) includes joint tortfeasor liability. The majority’s rule creates a gaping hole in what for centuries has been recognized as an actionable form of infringement. It claims that this result is mandated by the statute. I do not agree.

The single entity rule promulgated in BMC [Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007)] and Muniauction[, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008)] is a recent judicial creation inconsistent with statute, common law, and common sense. For centuries, the concerted actions of multiple parties to infringe a patent gave rise to liability. The plain language of § 271(a) codified this joint infringement. To construe that language otherwise would permit identical language in the statute to have inconsistent meanings. Congress meant to and did codify liability for joint infringement. It did not, as the majority suggests, purposefully do away with a broad swath of recognized forms of liability for infringement. I respectfully dissent from the majority’s decision to interpret § 271(a) in a manner that condones the infringing conduct in this case. 

Akamai, slip op. at 1-2 (dissent).

The future

Blawgletter expects that further review will probably ensue from the panel decision. The Supreme Court looked at the case last year (ruling that "inducement" liability for patent infringement requires proof of "direct" infringement, at least in method patent cases) after an en banc decision by the Federal Circuit. Another rehearing by the full court of appeals and another trip to the Supreme Court both seem plausible.

In the meantime, what effect will the panel's 2-1 ruling have? It will at the least prompt defendants in cases involving method patents to claim that someone else performs at least one step in the patent's process. It will also encourage method-patent plaintiffs to try fit their cases within the principal-agent,  contract, and joint enterprise exceptions that the panel recognized to the single-entity rule.

Tips on Interviewing Fact Witnesses, Part 2

Nuts and bolts, part two

Last time, we went over how to set up and get ready for an interview of a fact witness. Now we get to the main event.

These tips apply mainly in the context of gathering information about who knows what and who will make a credible witness for the trier of fact. But you may find some of them useful in other situations as well. 

Starting with the easy stuff

• Begin the interview by identifying yourself, offering the witness your business card, and briefly explaining who you represent and giving a basic overview of the dispute.

• Make clear that you do not represent the witness personally.

• Don't promise confidentiality unless you know you can deliver on the promise.

• Make sure you give an accurate case description that stresses the strengths of your client’s position.

• Ask the witness for permission to take notes.

• Also request permission to take the witness’s photo with your smartphone or tablet. (Don't forget to take the picture!)

• Orally outline what you plan to cover, explaining that you will begin with basic background and then will move to work history and then the witness’s involvement with the parties and the subject matter of the dispute.

• Ask where the witness came from, grew up, and went to high school and when the witness graduated; how many brothers and sisters the witness has and the age differences between or among the siblings; where and when the witness went to college and what the witness studied; and where and when the witness worked after graduating high school, college, or business/law/medical/other school. Do not rush over these questions; the questions deal with familiar territory and the witness’s favorite subject (himself or herself), and the answers will give you insights about the witness while helping you develop a rapport with the witness.

• Keep a professional and cordial tone; avoid making personal or critical comments about others.

Getting to the merits

• Say that now you want to talk about the witness’s involvement with your client, the opposing party, and the subject matter of the dispute.

• Ask the witness to describe her or his first contact with each of those; and, for each, get a chronological description of the witness’s history from that first contact to now.

• Use documents sparingly, mainly to refresh memory or frame a subject that you want to know about.

• Take notes in as much detail as you can, but don’t let note-taking cause you to lose rapport with the witness.

Saying goodbye

• Say that you have finished with the questions you have for now.

• Explain that either side in the dispute may want to subpoena documents from the witness, take the witness’s deposition, or call the witness to testify at trial.

• Ask the witness whether you can get back in touch if you have any further questions.

• Offer to answer any questions the witness may have.

• Thank the witness for the time.

Following up

• Within 24 hours, edit your interview notes, attach the photo, and send a copy of the notes-plus-photo to trial team members.

• Update the Cast of Characters and the Chronology to reflect the new info you obtained from the interview. 

• Provide the witness’s contact into to the paralegal.

• Send the witness an email briefly expressing thanks for meeting with you and encouraging the witness to contact you with any questions. 

 

Tips on Interviewing Fact Witnesses

How-to tips, in two parts

You’ve identified someone as a potential fact witness in a dispute that involves or may involve your client. You want to find out what subjects the witness knows about. You don’t yet need to depose the witness, present the witness for deposition, or attend the other side’s deposition of the witness; if you did, you'd probably want to do a lot more than simply conduct an interview. But for now, how do you go about getting the background info you may need to use later on?

Today Blawgletter starts with tips on pre-interview work. We'll get to the interview itself on Thursday.

Setting up the interview

• Request and arrange interviews of your client’s current employees through in-house counsel.

• If you don’t represent the witness or the witness’s employer – because, for example, the witness no longer works for your client – try to have someone the witness trusts (possibly a former co-worker) introduce you to the witness and encourage the witness to talk or meet with you.

• Make a personal connection with the witness by calling instead of sending email or texts, but choose an appropriate time to call (e.g., during work hours for probably friendly witnesses and outside of work hours for likely neutral and possibly hostile ones).

• Unless you have reason to worry that the witness will not talk with you again – in which case you should get as much info as you can on the initial call – give him or her an estimate of how long the interview will last.

• If the witness agrees to meet in person, choose a place that offers convenience and privacy for the witness; often a law office near where the witness works will do.

• Avoid interviews in the witness’s workplace, which will present distractions.

• Although ethical rules in most places allow clients to make reasonable payments to witnesses for their time and expenses, any compensation tends to undercut a witness’s credibility and should not happen routinely.

Preparing for the interview

• Collect basic info on the witness from a Google search and from social media if you can do so without alerting the witness.

• Search PACER and WestlawNext for info on the witness’s involvement in legal disputes, whether as party, fact witness, expert witness, or in some other way.

• Get a document chron of key case documents plus any interesting documents that mention the witness; keep it to less than a redweld-full, as you likely won't have time to use more than a few of them.

• Prepare a list, two pages or shorter, of topics and issues that you want to ask the witness about.

• Dress appropriately but in any event better than you expect the witness will.

Next

You've now set up the interview and gotten ready for it. We'll talk about the main event and your follow-up on Thursday.

Ethos!

 Vexing judges

Bryan Garner  writes in his ABA Journal column that "[t]here's a disconnect between what judges say they want" in briefs "and what lawyers give them."

He offers three reasons to favor the judges' view -- "the 'halo effect'", "less is more", and "easy is better".

While Blawgletter agrees with each point, we also think Garner has hit on something more basic. It has to do with the most powerful way to appeal to an audience -- ethos, or moral character.

Garner's reasons 

The first point -- about the "halo effect" -- relates to what happens in a reader's mind when your writing deploys what Garner calls "clean, precise, crisp sentences". The reader notices your "professional care" and may even equate it (perhaps wrongly) with "substantive soundness."

Garner's "less is more" idea posits that a short-but-punchy brief can sway with swagger and avoid weak points that dilute the strong ones.

And "easy is better" means that "the ideal brief spares the judge any unnecessary effort, physical or mental." Long, tedious briefs tax judges' ability, and willingness, to grasp your points.

So far, so good. But do the three have a unifying theme?

Logos, pathos, and ethos

A fourth century B.C. Athenian can shed light on the question.

In Rhetoric, Aristotle (or his students) identified three kinds of appeals to an audience -- logos (argument from reason), pathos (persuasion by means of emotional appeal), and ethos (convincing through the moral character of the speaker or writer).

Those of us who went to law school tend to think that a focus on reason (logos) ranks highest in the persuader's art. We also suspect that the messier business of playing on the audience's feelings (pathos) comes next. Your stature as a moral person (ethos) hardly counts at all.

Character trumps everything else

But that way of thinking about persuasion grossly overvalues the analytical skills that our law teachers imparted to us. As Oliver Wendell Holmes wrote, "[t]he life of the law has not been logic . . . . The law . . . cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics." You have to put life into the logic. Else it means nothing to people -- a group that notably includes judges.

Nor does emotion count most. When in doubt, people tend to go with how they feel about one side or the other. Who wears the black hat? That packs a bigger wallop than the cold rationality of the parties' competing positions. But feelings get you only so far with your audience.

That leaves the biggest of the big three -- character. You make judgments about the moral traits of people all the time. And the reader of a brief quickly forms a view about the credibility and good faith of the writer. Can I trust what she says? Did he do the hard work necessary to give me a true understanding of the facts and the law? Does she have sound judgment? Does he seem wise? Has she tried to help me find the right outcome?

Back to the briefs 

The importance of ethos to your ability to persuade means that writing with an earnest desire to convince the court with your high moral character will produce more effective briefs. Precision and snappiness will earn you a halo effect, using only the space you need and no more will project confidence, and simplifying without oversimplifying will stimulate gratitude. All three enhance the judges' opinion of your worthiness and therefore foster belief in the rightness of your logic and emotion.

Ethos!

Hottest Oil & Gas Claims, Part 6: Unreasonable Expenses

Short-payment of royalties – when do post-production costs cross the line into unreasonableness?

This next-to-last entry in Blawgletter's seven-part series on the hottest oil & gas claims for returns to the theme of royalty owners who receive less than they believe the lease entitles them to. Part 6 addresses what happens when the operator deducts post-production expenses that it paid to its affiliates rather than independent entities. May the royalty owners sue to bar deduction of affiliates' "unreasonable" charges and recover shortages on earlier royalty payments due to those unreasonable charges?

Legal backdrop

Royalty owners often complain when operators agree to compute royalties (per the lease) “at the mouth of the well” but then deduct costs that arise downstream. They may feel even more unhappy if the leases (in which they reserved their royalty interests) provide something like “the royalty shall be free of all costs related to the exploration, production and marketing of oil and gas production from the lease”. 

Under Texas law, even an express bar on post-production costs may have no effect. See Potts v. Chesapeake Expl., L.L.C., 760 F.3d 470 (5^th Cir. 2014) (applying Heritage Resources v. NationsBank, 939 S.W.2d 118 (Tex. 1996), to declare no-deduct clause surplusage); Warren v. Chesapeake Expl., L.L.C., 759 F.3d 413 (5^th Cir. 2014) (same); but see Chesapeake Expl., L.L.C. v. Hyder, 427 S.W.3d 472, 477 (Tex. App. – San Antonio 2014, pet. granted) (“[W]e interpret the parties’ agreement as the royalty clause excluding all costs and expenses of production and post-production, including post-production costs and expenses incurred between the point of delivery and the point of sale.”)^* (emphasis in original). Even in jurisdictions that, like Texas, permit deduction of post-production costs despite clauses that appear to prohibit the practice, might the royalty owners still have a claim for short-payment?

The Fifth Circuit in Warren left open the issue of the impact of sales to affiliates. The panel noted that “the parties have not argued or briefed, and this opinion does not consider, the relationship among affiliated Chesapeake entities or the impact, if any, that relationship might have on matters at issue regarding the payment or calculation of royalties.” Warren, 759 F.3d at 419. The non-decision raises the question of whether a royalty owner mount a claim that the operator, through its affiliates, charged more than a reasonable amount for post-wellhead costs (such as expenses to gather, compress, treat, process, and market oil and gas).

Plaintiff's perspective

The traits that a good royalty-owner claim would have include these: 

• Large production from the lease area during the (statute of limitations) look-back period;

• Benchmark comparisons that show substantially lower charges for the post-production services that the operator’s affiliates provide and charge for;

• Evidence of a large gap between the affiliates’ costs of providing post-production services and the charges to the operator; and

• High market prices during the look-back period.

Final installment

The series for the 66th Annual Oil & Gas Law Institute comes to an end next week, when we'll address landowners' claims for damage to the surface.

Your comment

The hottest oil & gas claims series reflects industry conditions as of early 2015. Has the passage of three months affected the sorts of claims that industry participants have made? With the price of West Texas Intermediate rising from around $48 per barrel to almost $57, has pressure on contracts eased? What effects have resulted from the ongoing slump in natural gas prices, which have fallen below $2.55 per mmBtu from over $2.80 in January 2015?

Let us hear your thoughts.

_______________

The Supreme Court of Texas granted review in Hyder and heard argument in the case on March 24, 2015. See Chesapeake Exploration L.L.C. v. Hyder, No. 14-0302 (Tex.). You can see video of the argument here.

Hottest Oil & Gas Claims, Part 5: Exculpatory Clauses

Blawgletter's seven-part exposition of the hottest oil and gas claims for 2015 (which we co-wrote for the Institute for Energy Law's 66th Oil & Gas Law Conference in Houston) moves into an area that plaintiffs hate and defendants love -- the exculpatory clause. Specifically, the ones that the American Association of Petroleum Landmen put in the AAPL's standard-form joint operating agreements, or JOAs.

Changes in the JOA from the 1977 and 1982 forms to the 1989 version present the question of whether the exculpatory clause excuses breach of contract and, if so, which kinds of breach. We'll address that before turning to what fact patterns make avoiding the preclusive effect of JOA exculpatory clauses more likely.

Legal Backdrop

Since 1977, the dominant model for JOAs has excused the operator from “losses sustained or liabilities incurred” unless they “result from gross negligence or willful misconduct.”¹ But what if the operator broke a  promise in the JOA itself? Does the non-operator still have to show gross negligence or willful misconduct to win a claim of breach?

The answer may depend on which version of the model JOA applies. Under the 1989 form, the Supreme Court of Texas held in Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012), a party to a JOA does have to prove a higher degree of fault even for a simple contract claim.² The Court pointed out that 1977 and 1982 models spoke of “operations” by the operator but that the 1989 form dealt, in contrast, with “activities under this agreement”.³ As the Court explained:

Reading the clause as written, we conclude that the model form transformation is significant, as the change in language broadens the clause’s protection of operators. . . . The agreed standard exempts the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or willful misconduct.

Id. at 795. The Court thus held that the clause barred Reeder’s liability for failing (negligently) to repair oil wells. Id. at 797.

The older clauses, on the other hand, do not apply to pure claims for breach of the JOA, the Tenth Circuit has held, contrary to a 1992 ruling by the Fifth Circuit. In ⁴Shell Rocky Mountain Production, LLC v. Ultra Resources, Inc., 415 F.3d 1158, 1171 (10^th Cir. 2005), the court declined to require gross negligence or willful misconduct for a claim that the operator mishandled “administrative and accounting duties”.⁵ A district court in Houston reached the same conclusion under Texas law, noting that Reeder had the effect of overruling a contrary Fifth Circuit decision. MDU Barnett Ltd. P’ship v. Chesapeake Expl. Ltd. P’ship, No. H-12-2528, 2014 WL 585740, at *1 & *7 (S. D. Tex. Feb. 14, 2014) (holding that 1982 exculpatory clause did not cover claims for breach of JOA and rejecting Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5^th Cir. 1992), under Reeder).

Plaintiff perspective

In contrast to the other issues this paper addresses, the question of what effect a JOA exculpatory clause may have presents a challenge more for the plaintiff than for the defendant. What factors will aid a plaintiff whose defendant claims a contractual right to exculpation for wrong-doing less culpable than “gross negligence or willful misconduct”?

• Absence of contractual privity between the plaintiff and defendant under the JOA (e.g., the plaintiff or defendant did not become a party to the JOA and does not qualify as a third-party beneficiary);

• Applicability of a pre-1989 JOA form – and therefore a narrower exculpatory clause – to some or all of the damage-causing conduct (as a result, for instance, of conduct occurring at a time or place to which an older JOA form applies);

• For JOAs using the 1989 form, the source of injury to the plaintiff does not involve the operator’s “activities under this Agreement” or concern its role “as Operator”;

• For JOAs using the 1977 or 1982 form, the harm to the plaintiff does not relate to the operator’s “operations on the Contract Area” or its behavior “as Operator”; and

• Big damages.

Looking ahead, and back

We have two more topics to cover yet. For those who missed the first four parts, you can check them out here:

• Hottest Oil & Gas Claims, Part 1: Busting Leases

• Hottest Oil & Gas Claims, Part 2: New Drilling Technology

• Hottest Oil & Gas Claims, Part 3: What Counts as a Well?

• Hottest Oil & Gas Claims, Part 4: Flaring Gas

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¹ For a brief history of the Form 610 JOA since its advent in 1956, see “The 1989 JOA: Horizontal Modifications and Other Crucial Updates”, Oil and Gas Law Digest, Sept. 17, 2014 (available as of Jan. 21, 2015 at http://www.oilandgaslawdigest.com/newscaselawupdate/the-1989-joa-horizontal-modifications-and-other-crucial-updates/).

² The 1989 clause (with our emphasis) speaks of “activities” rather than only “operations”, as follows:

Operator shall conduct its activities under this agreement as a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.

³ The 1977 and 1982 clause provided as follows (with our emphasis):

[Operator] ... shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of, this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.

⁴ The Fifth Circuit ruled that the 1977 and 1982 language applied to contract claims in Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5th Cir. 1992) (applying Texas law). At least one court has noted the split between the Fifth and Tenth Circuits on the issue. See Forest Oil Corp. v. Union Oil Co. of Am., No. 3:05-cv-0078, 2006 WL 905345, at *3 (D. Alaska Apr. 7, 2006) (adopting Ultra Resources holding and rejecting Stine’s) (applying Alaska law).

⁵ The court cited its decision in Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 923 (10^th Cir. 1993) (noting that clause may cover “tortious acts related to the performance of the contract” but did not apply to “actions taken deliberately and . . . in breach of the contract involving shifting costs between the contracting” working interest owners) (applying Colorado law).

 

Hottest Oil & Gas Claims, Part 4: Flaring Gas

Blawgletter offers the fourth installment in the seven-part series on the Hottest Oil & Gas Claims for 2015. This time, we address whether flaring gas qualifies as "use" on which the operator must pay royalties.

Legal backdrop

Royalty clauses typically require payment of royalty for oil and gas “produced from the Leased Premises and sold or used on or off the Leased Premises”. Chesapeake Expl., L.L.C. v. Hyder, 427 S.W.3d 472, 481 (Tex. App. – San Antonio 2014, pet. granted) (emphasis added).* A compensable “use” includes burning “gas for fuel or other operations”. Id. at 482.

In the Bakken shale area (and other “new” production areas that may lack gathering lines and other infrastructure), “the oil contains significant amounts of natural gas, and because of the geological manner in which the gas is commingled with oil in deposits, operators cannot produce the oil without releasing the gas simultaneously.” Kelly A. Williams and Joshua B. Cannon, Frontier Flaring: Science & Economics, Politics & Regulation – the Future of Flaring, 60 RMMLF-INST 5 at 3-4 (2014).** Does the need to produce gas in order to get oil to the surface make flaring the gas “use” of it for purposes of the royalty clause?

Claim economics

A viable claim for royalties arising from flaring of gas will likely include these traits:

• Physical necessity of extracting gas to produce oil from the formation;
• Loss of substantial quantities of gas through flaring;
• Absence of contractual, regulatory, or statutory language authorizing gas-flaring or restricting remedies; and
• High wellhead prices during the relevant look-back period (e.g., the length of the statute of limitations) and into the future.

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^* On January 30, 2015, the Supreme Court of Texas granted review in Hyder and set the appeal for argument on March 24, 2015. See Chesapeake Expl., L.L.C. v. Hyder, No. 14-302 (Tex. Jan. 30, 2015).

^** A flaring claim under a standard royalty clause may exist apart from other theories. North Dakota law, for instance, requires a producer that flares gas without an exemption to “pay royalties to royalty owners upon the value of the flared gas”, N.D.C.C. § 38-08-06.4, but the statute grants a right only to pursue relief before the North Dakota Industrial Commission, Hansen v. Hunt Oil Co., No. 1:14-cv-00021 (D.N.D. May 14, 2014), aff’d sub nom. Sorenson v. Burlington Resources Oil & Gas Co., L.P., No. 14-2407 (8^th Cir. Aug. 19, 2014).  The Louisiana Department of Natural Resources takes the view that “[r]oyalty must still be paid upon the flared/vented gas even with the  Dept. of Conservation approval for flaring.” Royalty Payments Frequently Asked Questions, La. Dept. of Nat. Resources (available at http://dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&pid=406) (as of Jan. 20, 2015). “Not surprisingly, the states have adopted differing approaches to assessing royalties on flared gas, and state policies fall somewhere on the continuum between charging royalties for all gas flared on state leases (e.g., Texas) and charging no royalties for gas legally flared (e.g., Utah).” Frontier Flaring, 60 RMMLF-INST at 10.

 

Hottest Oil & Gas Claims, Part 3: What Counts as a Well?

Short-payment of royalties

Today we come to number three in Blawgletter's seven-part series on The Hottest Oil & Gas Claims for 2015, a paper that we presented at the 66th Annual Oil & Gas Conference in Houston. The third topic describes an area of legal uncertainty around a common oil and gas term -- "well" -- that no longer means a vertical hole in the ground.

Legal backdrop

New techniques for drilling, completion, and conducting other operations have the potential for disrupting oil and gas law. Horizontal drilling offers a case in point.

With conventional (vertical) drilling, “well” more or less refers to the wellhead, the place where the basically up-and-down wellbore connects to the surface. Drilling sideways, by contrast, typically taps into oil and gas deposits at multiple “takepoints” or “drain holes”.  See Springer Ranch, Ltd. v. Jones, 421 S.W.3d 273, 289 (Tex. App. – San Antonio 2013, no pet.) (holding that contract between adjoining landowners required apportionment of royalties according to “the ratio of the productive portions of the SR2 well on [the landowners’] respective properties to the entire length of the well, multiplied by the one-eighth lease royalty”); Browning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App. – Austin 2000, pet. denied) (discussing allocation of production for purposes of computing royalty under lease that restricted pooling).

The definition of “well” may thus blur. What consequences follow?

Plaintiff's perspective 

A claim over what constitutes a “well” will likely (if not necessarily) involve a contractual relationship, as in the Springer Ranch case, between the plaintiff and the defendant. But that may not present much of a barrier; relationships like that abound in the oil and gas industry.

The standard-form joint operating agreement, for instance, uses “well” dozens of times but does not define it. Oil and gas leases also speak of “wells” but seldom give the word a specific meaning. Landowners or lessees whose tracts adjoin may also work out supplemental lease terms that allow pooling or enter into “production sharing agreements” that provide for horizontal wells crossing two or more tracts. See Clifton A. Squibb, The Age of Allocation: The End of Pooling as We Know It?, 45 Tex. Tech. L. Rev. 929, 940-41 (2013).

What would a good claim over what constitutes a well look like? The factual setting may include these features:

• Large production from and reserves in actual or potential communication with the horizontal wellbore (enhancing the value of any "well" that lies along the wellbore);

• Absence of contractual language defining “well” (making its meaning debatable);

• Contractual language that bars or limits pooling, entitles the mineral owner to royalties or other payments with respect to production from any “well”, or otherwise bases payments on the existence or number of "wells"; and

• High wellhead prices during the relevant look-back period (e.g., the length of the statute of limitations) and into the future.

Enough value?

Recall that the basic economics of pursuing claims (whether in a lawsuit, arbitration, or otherwise) will make some claims more viable than others. In general, the same traits that render a claim attractive to a contingent-fee lawyer will determine whether the potential gain supports risking your own resources (e.g., hourly fees plus expenses) in the endeavor -- a good liability case, provable damages, and a wrong-doer that can afford to pay.

The series

You can see the first two posts at Hottest Oil & Gas Claims, Part 1: Busting Leases and Hottest Oil & Gas Claims, Part 2: New Drilling Technology.

Next time, we'll look at whether flaring gas qualifies as "use" for purposes of computing royalties.