How Texas oil company won $319 million ‘common law’ partnership verdict
The oil and gas industry was stunned this week a $319 million verdict for Energy Transfer Partners, courtesy of a state court jury in Dallas, Texas. Jurors agreed with ETP’s lawyers at Lynn Tillotson Pinker & Cox that ETP and Enterprise Products had a binding agreement to develop a pipeline to carry crude oil from Oklahoma to refineries on the Gulf of Mexico, and that Enterprise breached the agreement when it decided instead to hook up with a Canadian pipeline company called Enbridge.
That might seem like a straightforward determination – except that the letter of intent between ETP and Enterprise included language that specifically said their deal wasn’t binding unless there was a formal term sheet and their respective boards approved the agreement. Neither of those things happened.
So how did Enterprise and its lawyers at Beck Redden and Sayles Werbner wind up on the wrong side of a $319 million verdict? Because the judge in the case, Emily Tobolowsky, rejected their summary judgment argument that as a matter of Texas contract law, preconditions must be satisfied to create binding partnership obligations. Judge Tobolowsky’s denial of Enterprise’s summary judgment motion, which was not accompanied by an opinion, meant that ETP and lead trial counsel Michael Lynn could ask jurors to judge the relationship between ETP and Enterprise just as they’d judge a common law marriage. ETP told jurors that it didn’t matter what the formal paperwork said if Enterprise acted as though it were partnered with ETP. To emphasize his client’s “if it walks like a duck” theme, Lynn even showed the jury a poster of a duck holding a sign that said, “I am not a partner.”
That invocation of common law – and common sense – clearly resonated with jurors, who found for ETP on a 10-2 vote. (They did not, however, award the more than $1 billion in punitive damages ETP asked for, and they completely exonerated Enterprise’s back-up suitor, Enbridge, which was represented by Michael Steinberg and Robert Giuffra of Sullivan & Cromwell). Since the verdict, there’s been quite a hue and cry among oil industry lawyers. Sidley Austin quickly produced a presentation warning that companies shouldn’t rely on industry-standard non-binding provisions in letters of intent, lest they be caught in “The Partner Trap.” DLA Piper issued a client alert advising Texas companies specifically to disavow partnership obligations in informal agreements, instead of assuming that unsatisfied pre-conditions will excuse them from partnership obligations. Enbridge’s lawyers from Sullivan & Cromwell, who are now out of the case, told me in an email that the verdict “raises troubling questions about the value of written contracts in supposedly business-friendly Texas.”
Enterprise has already said it will appeal, but unless and until an appeals court overturns ETP’s verdict, Texas companies should obviously be mindful of what they say and do with prospective business partners. In the meantime, though, it’s instructive to take a look at how ETP overcame contract language that might have doomed its claims. There are lessons in ETP’s success not just for Texas oil and gas companies but for all businesses that rely on Texas courts to define their obligations.
Here’s a quick version of the busted relationship between Enterprise and ETP. In early 2011, Enterprise approached ETP about repurposing and extending an ETP natural gas pipeline to transport crude oil instead. That April, the two companies signed a two-page non-binding term sheet that said, among other things, “No binding or enforceable obligations shall exist between the parties with respect to the transaction unless and until the parties have received their respective board approvals and definitive agreements memorializing the terms and conditions of the transaction have been negotiated, executed and delivered by both of the parties.” Until those conditions were met, the agreement said, “either EPD or ETP, for any reason, may depart from or terminate the negotiations without any liability or obligation to the other.”
Despite the hedging language in the agreement, Enterprise and ETP proceeded to announce their joint venture in a press release and to begin joint operations to explore the billion-dollar prospect of a pipeline. They set up an engineering team, solicited preliminary bids, and together attended dozens of meetings with prospective customers for the pipeline, which they dubbed the Double E. When it became clear that it would be more expensive to convert ETP’s natural gas pipeline than to build a new pipeline from scratch, the companies shifted discussions to that option. At a meeting in June 2011, Enterprise offered ETP the option of withdrawing from the joint venture because it had become a bigger expense. After the June meeting, according to ETP, the two companies continued to represent themselves to potential shippers as joint venture partners.
But Enterprise was increasingly concerned that shippers were not committing to use the prospective Double E pipeline. Only one oil company, Chesapeake, signed up, and, according to Enterprise, pipeline development wasn’t economically feasible for ETP with only one shipper on board. In August 2011, Enterprise informed ETP that it was withdrawing from the project under the terms of the non-binding agreement.
Is that a partnership? Not according to Enterprise, which cited a 1998 Texas Supreme Court case called Associated Indem. Corporation v. CAT Contracting for the proposition that, as a matter of law, a contract is not binding unless pre-conditions are satisfied. Here, Enterprise said, not only the preliminary term sheet but also a confidentiality agreement and a reimbursement agreement all said that Enterprise and ETF had no obligations to one other unless their boards approved a binding partnership agreement. Since that never happened, Enterprise argued, ETP has no case.
ETP said Enterprise was plain wrong. Its opposition to Enterprise’s motion for summary judgment contended that under the Texas business organizations code and the Texas Supreme Court’s 2009 decision in Ingram v. Deere, the parties’ intent is only one of five considerations that govern the determination of partnership. If both sides act like they’re partners through their speech, writing and conduct, according to ETP, those actions trump contract language.
“Enterprise relies on inapplicable contract law and virtually ignores the unique and well-defined body of partnership law that determines whether a partnership or joint venture has arisen between two parties,” ETP’s brief said. “It simply cannot win its motion when the correct law is applied to ETP’s real evidence and legal theories.”
The judge, as I mentioned, didn’t write an opinion explaining her decision to deny summary judgment to Enterprise, but the jury charge reflects ETP’s interpretation of partnership requirements. It spells out the five factors ETP cites, then reminds jurors that “not all of these factors must be established for a partnership to exist. The issue of whether a partnership exists should be decided considering all of the evidence that bears on these factors. No single fact may be stated as a complete and final test of partnership.” The second of the five listed factors is the parties’ intent to be considered partners, as expressed, in this case, by Enterprise’s insistence that contractual partnership conditions weren’t met. But jurors were explicitly told that one factor doesn’t decide the case. (It also didn’t hurt ETP that jurors were apparently quite taken with CEO Kelcy Warren; one juror told Texas Lawbook, a publication that focuses on business law in the state, that when Warren said, “Go to frickin’ church,” he convinced her.
ETP’s brief portrayed Enterprise’s position on partnership under Texas law as an outlier view, but reactions since the verdict sure seem to indicate that Enterprise wasn’t alone. The Texas Lawbook, for one, said that the verdict set precedent in the “relatively undefined” body of Texas partnership law. Even ETP’s lawyer, Michael Lynn of Lynn Tillotson, told the publication that the case “would be cited for a long time on the issue of when a relationship becomes a partnership.” Of course, we’ll have to see whether the judge and jury’s reasoning holds up on appeal.
Lynn declined my request for comment. David Beck of Beck Redden didn’t respond to my email.
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