litigation update: recent developments affecting oilfield ...‒ eighty of these were oilfield...

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Litigation Update: Recent Developments Affecting Oilfield Service Companies

Brendan D. Cook Cortlan H. Maddux

6th Oilfield Services Law Conference October 11, 2016

© 2016 Baker & McKenzie LLP 2

Introduction


Recent Trends and “Important” Cases ‒ Bankruptcy ‒ Employment – FLSA Cases ‒ Accidental Partnership – The ETP and Enterprise

battle ‒ Trade Secret Statutes and Cases ‒ Update – Indemnities ‒ Developments in the World of Arbitration. ‒ Commercial Disputes ‒ Royalty Disputes


Bankruptcy


Bankruptcy ‒ Per August 26, 2016, 175 North American oil

companies and service providers – half in Texas – have filed for bankruptcy since 2015.

‒ Eighty of these were oilfield service companies. ‒ The Houston Chronicle characterized oil service

companies plight to a “$110 billion wall of debt”. ‒ End game – restructure (debt for equity) or eliminate

debt, ‒ Billions of dollars in liquidity/market cap vaporized.


In Re: Sabine Oil & Gas


In Re: Sabine Oil & Gas U.S. Bankruptcy Court (SDNY) May 3, 2016

‒ Debtor permitted to reject gas-gathering and related agreements with two midstream companies.

‒ Agreements drafted with intention of creating a property right known as a “real covenant” that “runs with the land” which cannot (supposedly) be invalidated by the bankruptcy courts.

‒ Bankruptcy court held Texas property law requirements for creating real covenants were not satisfied by the contracts in question.


‒ Court found ambiguity in Texas law as requirements for a contract to run with land.

‒ Big Picture: Sabine cut debt from $350 million to $2.8 million (lenders wound up with stock).

‒ What message does Sabine send re: executory contracts?


Other Bankruptcy Considerations ‒ Restructuring work. ‒ Adversary proceedings. ‒ Inter-Creditor disputes. ‒ Rejection and re-negotiation of executory contracts.


The Employment Arena: FLSA Wage and Hour Cases


Wage and Hour Basics ‒ Fair Labor Standards Act, 29 U.S.C. 201, et seq.

Establishes minimum wage, overtime pay, recording keeping requirements, and child labor standards

Establishes exemptions from the overtime and/or minimum wage provisions (i.e. executives, professional employees, and others)

‒ Wage & Hour Division of the US Department of Labor administers and enforces Generally 2 year statute of limitation on back wages, 3 years if willful

violation Administrative procedures, litigation, and/or criminal prosecution


FLSA Wage & Hour Class Actions ‒ Economic Downturn Sees Rise in FLSA Actions Misclassification suits – exempt v. nonexempt

employees Contractors v. employees Overtime

‒ Damages Successful employees generally entitled to double the

amount of unpaid back wages


2016 Department of Labor Changes to FLSA Overtime Rules Key changes ‒ Salary Thresholds Increased ‒ Automatic Updates to Salary Requirements ‒ Bonuses and Incentives/Commissions can satisfy up to

10% of standard salary level ‒ No Changes to Duties Tests Set to take effect December 1, 2016


Wage & Hour Division Enforcement ‒ Oil & Gas Industry on Notice Nationwide approach targeting the oil and gas

industry 1000 investigations since 2012 $41.5 million recovered for 29,000 oil and gas

workers


Multimillion Dollar Settlements ‒ September 2016 – Chevron settles with DOL $1.5 million in overtime back wages and damages

to 750 field operators Mandatory meetings before shift started Damages accounted for 50% of settlement


Accidental Partnership: Energy Transfer Partners v. Enterprise Partners


Energy Transfer Partners v. Enterprise Products Partners ‒ Background Develop and build a crude pipeline Parties signed a letter of intent that could terminate

project at any time, no obligation unless signed definitive documents

2014 Dallas jury: conduct formed de facto partnership Jointly marketed product, referred to one another as JV

partners ETP awarded $535M, including $150M in disgorgement

of profits for breaching duty of loyalty


De Facto Partnership ‒ TBOC §152.052 – Factors Indicating Partnership

Receipt or right to receive a share of profits of the business Expression of an intent to be partners in the business Participation or right to participate in control of the business Agreement to share or sharing of (a) losses or (2) liability for claims

by third parties against the business Agreement to contribute or contributing money or property to the

business ‒ Ingram v. Deere (Tex. 2009): Partnership does not require every

statutory factor and parties’ conduct may form a partnership – regardless of whether parties intended to create a partnership

‒


De Facto Partnership ‒ Avoiding de facto partnerships Clear and specific disclaimers Including in letters of intent

Avoiding appearing/representing as a partnership to third parties

Conduct after the agreement Avoid the five factors in statutory test


Trade Secrets


The Defend Trade Secrets Act and Texas Uniform Trade Secrets Act


Defend Trade Secrets Act (“DTSA”) ‒ Amendment to the Economic Espionage Act of 1996. 18 U.S.C. §§ 1831-1839

‒ Effective May 11, 2016, and applies to any misappropriation occurring on or after the effective date.

‒ Intended to address the internationalization of trade secret theft.


Key Provisions of DTSA ‒ The DTSA creates a federal private cause of action for

trade secret misappropriation. ‒ The DTSA does not preempt state law. ‒ Allows trade secret owners to file sealed statements

with courts. ‒ The DTSA provides civil and criminal immunity for

whistleblowers who disclose trade secrets for the sole purpose of reporting suspected legal violations.


DTSA Notice Requirement ‒ “An employer shall provide notice of the [civil and

criminal immunity provisions] in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”

‒ Alternatively, cross-reference “a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”

‒ Failure to comply with the notice requirement precludes exemplary damages and attorney fees.


Remedies Under DTSA ‒ The DTSA’s remedies include: Damages for actual loss and unjust enrichment; Reasonable royalty; Increased criminal penalties; Injunctive relief across all states; Ex parte property seizure; Exemplary damages; Attorneys’ fees.


Texas Uniform Trade Secrets Act (“TX UTSA”) ‒ Tex. Civ. Prac. & Rem. Code §§ 134A.001-134A.008 ‒ Took effect on Sept. 1, 2013, and adopted the Uniform

Trade Secrets Act. ‒ TX UTSA was passed to “displace conflicting tort,

restitutionary, and other law of this state providing civil remedies for misappropriation of trade secret.”

‒ Replaced claims under Texas common law and the Texas Theft Liability Act, and created a single definition of trade secret.


Secrecy Preservation Under TX UTSA ‒ “[A] court shall preserve the secrecy of an alleged

trade secret by reasonable means. There is a presumption in favor of granting protective orders to preserve the secrecy of trade secrets. Protective orders may include provisions limiting access to confidential information to only the attorneys and their experts, holding in camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”


Remedies Under TX UTSA ‒ The TX UTSA’s remedies include: Damages for actual loss and unjust enrichment; Reasonable royalty; Injunctive relief; Exemplary damages; Attorneys’ fees.


Key Differences Between DTSA and the Texas Uniform Trade Secrets Act ‒ The TX UTSA definition of “trade secret” is more

expansive and specifically includes customer lists. ‒ DTSA does not allow injunctive relief to prevent a

person from entering into an employment relationship. ‒ DTSA allows a federal court to seize property in

“extraordinary circumstances.” ‒ DTSA requires notice of whistleblower immunity to

recover attorneys’ fees and exemplary damages.


Southwestern Energy Production Company v. Toby Berry-Helfand And Gery Muncey, 491 S.W.3d 699 (Tex. 2016) ‒ Trade secret misappropriation case – jury found oil and gas

operator misused proprietary information acquired under a confidentiality agreement.

‒ Jury valued trade secrets at $11.445 million and awarded $23.89 million in equitable disgorgement of past profits.

‒ Court of Appeals affirmed actual damages for misappropriation, but reversed on breach of contract and disgorgement awards.

‒ Supreme Court reversed and remanded the breach of contract and misappropriation of trade secret claims for new trial (did not alter equitable disgorgement claim).


Trade Secret ‒ Significance of the case: Damages model must prove an

appropriate compensation structure based on objective evidence to monetize the value (or use) of trade secret.

‒ Rules of the road. Flexible and imaginative approach is applied to calculation of

damages in misappropriation of trade secrets cases. In some cases, damage may be determined with precision but

lack of certainty does not preclude recovery. But damages can not be based on “sheer speculation”.


Indemnities


Post-Macondo Indemnity Provisions ‒ Own Negligence Texas: Fair Notice Test

1. Conspicuous 2. Expressly state intent to indemnify

‒ Gross Negligence & Willful Misconduct Texas law not clear whether indemnity provisions will be

upheld


Post-Macondo Indemnity Provisions ‒ In Re Deepwater Horizon, Texas Supreme Court, Cause

No. 13-0670 (Tex. Feb. 13, 2015) BP made claim as additional insured seeking coverage under

Transocean’s policy Transocean argued that BP not entitled to coverage broader

than Transocean’s limited indemnity obligations Court held:

Parties’ external drilling contract was incorporated into the insuring agreement, limiting BP’s coverage as an additional insured to above-surface pollution

Transocean only required to extend additional insured coverage for liabilities assumed by Transocean


Impact on Indemnity Considerations Other Cases: Ironshore Specialty Ins. Co. v. Aspen Underwriting Ltd., 788 F.3d 456 (5th Cir. 2015) ‒ Review risk allocation from global viewpoint (MSA’s)! ‒ Is there really anything new?


Recent Developments In The World of Arbitration


Increased Trend to Seek Interim Relief in Arbitration Domestic: JAMS, CPR, and AAA all adopted rules allowing parties to seek relief from specially designated arbitrations. ‒ To what extent does this impinge on rights of courts to

award injunctive or other interim relief? ‒ Yahoo, Inc. v. Microsoft Corp., 983 F.Supp. 2d 310

(S.D.N.Y. 2013) (court confirmed mandatory injunction by arbitration compelling performance of a contract). General Rule: Courts can provide injunctive/interim relief

pending arbitration.


‒ Benihana, Inc. v. Benihana of Tokyo, LLC, 784 F. 3d 887 (2d Cir. 2015) (Injunction limited to preserving status quo, not determination of merits). Where are the lines of demarcation drawn re: authority

of the court vis-à-vis the tribunal?


International Arbitration ‒ ICC (Article 28), LCIA (Article 25.3) and other major

arbitration institutions provide for interim relief. ‒ As of June 2016, ICDR-67emergemcy arbitrator

requests, SIAC-50, ICE-34, SCC-23, HILIAC-6. ‒ Query: What is your best option re: enforcement? Recent survey recognized voluntary compliance 62% of

the time. What does the contract say? Does local law recognize interim awards (i.e. – non-

judicial) of emergency relief?


Local Developments: Another Nail In The Coffin for Manifest Disregard Hoskins v. Hoskins, 2016 Tex. LEXIS 386 ‒ Key issue: Can a party seeking to vacate an arbitration

award under the Texas General Arbitration Act invoke extra-statutory, common law vacation grounds? Party sought to vacate award because arbitrator manifestly

disregarded the law. Court of Appeals held TAA’s vacation grounds are exclusive

and did not consider manifest disregard arguments. Supreme Court affirmed

– Arbitration agreement contained no restriction on arbitrator’s authority to issue a decision unsupported by the law.

– TAA’s vacation grounds are exclusive.


General Commercial Disputes


“Commercial Disputes” ‒ M&A Deals Gone Bad June 24, 2016, Delaware Court of Chancery ruled it

would not compel Energy Transfer Equity LP to complete its proposed acquisition of the Williams Cos., Inc. (failure of conditions precedent re: “Section 721” opinion).

June 6, 2016, Department of Justice lawsuit led to subsequent termination of Halliburton/Baker Hughes merger agreement.

‒ Purchase price adjustment and indemnity claims. ‒ Partnership disputes and divorce.


‒ Suits Involving Operators, Suppliers and Service Companies Breach of contract. Default and delay claims. Force majeure claims. Indemnity claims. Product liability.


Fraudulent Misrepresentation Samson Lone Star Ltd Partnership v. Hooks, 2016 Tex. App. LEXIS 2661 Court of Appeals reversed/remanded concluding that an imprecise calculation of a well’s location can be actionable as a fraudulent misrepresentation. The Court also concluded that individual protections to a lessor in a specific lease do not extend to an entire pooled unit.


Procedural Alert: Mandamus Relief In Re: J.B. Hunt Transport, Inc., 05-15-00808-CV (Tex. App. 2015) New ‘rules” re: availability of mandamus relief. In context of forum dispute court set out sliding scale balancing test where there had previously been a bright line rule.


National Pump Holdings L.P. v. Westergreen, 453 S.W.3d 419 (Tex. 2015) Court affirmed that a party to a written contract cannot justifiably rely on an oral representations regarding the contracts unambiguous terms.


Royalty Disputes


Royalty Fights ‒ Economic distress leading to closer scrutiny of royalty

payments Who pays for post-production costs

‒ Activity in several states including: Kansas Oklahoma Colorado Texas


Texas Royalty Fights ‒ Large number of cases against Chesapeake’s operations in the

Barnett Shale ‒ Chesapeake Exploration LLC v. Hyder, 427 S.W.3d 472 (Tex.

2015) Notable victory for royalty interest holders

Chesapeake improperly deducted postproduction costs from overriding royalty interest

Lease provided “cost-free overruding royalty” and Court agreed with royalty interest holders that “cost-free” is meant to exclude postproduction costs

Operators should be cautious with cost-free language in leases ‒ Now heating up: fights in the Eagle Ford Shale


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