It has long been established that the Outer Continental Shelf (OCS) is under federal jurisdiction.  To this end, in 1953, Congress enacted the Outer Continental Shelf Lands Act (OCSLA) to govern activities on the OCS.  A key provision of the OCSLA provides that, while federal law generally applies, the adjacent State’s laws shall apply “[t]o the extent they are applicable and not inconsistent with” OCSLA or other federal law.  43 U.S.C. § 1333(a)(2)(A).  Yet district and circuit courts have differed on when exactly state law should apply on the OCS.  In Parker Drilling Management Services, Ltd. v. Newton, 139 S.Ct. 1881 (2019), the Supreme Court finally provided an answer.

The dispute that brought the issue before the Court arose from Brian Newton’s employment with Parker Drilling on OCS platforms off the coast of California.  Newton’s shifts involved 12 hours per day on duty and 12 hours per day on standby, during which he was not permitted to leave the platform.  Although he was paid above both the federal and California minimum wages, he was not separately paid for his standby time.  Newton filed a class action alleging violation of several California wage-and-hour laws.  In short, Newton claimed that California’s minimum-wage and overtime laws required Parker Drilling to compensate him additional amounts for his standby time.

Both parties agreed that the platforms were subject to the OCSLA.  However, Parker Drilling claimed that under the OCSLA the California laws complained of by Newton did not apply.  Relying on precedent from the Fifth Circuit, the district court held that “state law only applies to the extent it is necessary to fill a significant gap in federal law.”  Because the Fair Labor Standards Act (FLSA) constituted a comprehensive federal wage-and-hour scheme, the district court held that there was no significant gap for state law to fill, and thus rendered judgment in Parker Drilling’s favor.

On appeal, the Ninth Circuit vacated and remanded.  It held that state law is “applicable” under the OCSLA whenever it “pertains to the subject matter at hand.”  According to the Ninth Circuit, if state law is applicable, it governs unless it is “inconsistent,” which the Ninth Circuit interpreted as meaning that the OCSLA and state law were “mutually incompatible, incongruous, [or] inharmonious.”  Under this legal framework, the Ninth Circuit found no inconsistency between the FLSA and the relevant California laws because the FLSA has a savings clause that explicitly permits more protective state wage and hour laws.  With the split between the Fifth and Ninth Circuits, the Supreme Court granted certiorari.

Justice Thomas, writing for a unanimous court, acknowledged that this case presented a “close question of statutory interpretation,” but ultimately found the Fifth Circuit’s approach more persuasive.  This conclusion hinged on a hornbook rule of statutory interpretation that “the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”  The Court found that under the Ninth Circuit’s approach, if the word “applicable” in the OCSLA meant merely relevant to the subject matter, “then the word adds nothing to the statute, for an irrelevant law would never be ‘applicable’ in that sense.”  The Court held that if federal law addresses the issue at hand, then state law cannot be adopted as federal law on the OCS.  Under this standard, the Court held that Newton’s claims under California law failed because federal law already addresses the issue.  See 29 C.F.R. § 785.23 (“An employee who resides on his employer’s premises on a permanent basis or for extended periods of time is not considered as working all the time he is on the premises.”).

The Supreme Court’s unanimous decision provides significant clarity on when state law applies to disputes arising on the OCS.  This decision should create more predictability about how lower courts will consider OCS disputes in the future; that predictability creates efficiencies that, let’s hope, can benefit all parties.

On May 7, 2019, the Bureau of Safety and Environmental Enforcement (BSEE) issued a Notice to Lessees and Operators (NTL No. 2019-G01) regarding Suspensions of Production (SOPs) and Suspensions of Operations (SOOs).  This new NTL supersedes NTLs No. 2000-G17 and No. 2011-N10 and includes additional clarification on what lessees can and should do to help ensure a suspension is granted in their favor.

In general, lessees and operators are expected to explore, develop and commence production within the primary term of their offshore Federal leases.  A lease may be maintained beyond its primary term through lease-holding operations including drilling, well re-working, or production in paying quantities (30 C.F.R. § 250.180(a)(2)).

If these lease-holding operations are halted, or if a lease is at the end of its primary term with no operations, the lease will expire within one year of the last operation unless either of two things occurs.  (As discussed in an earlier DrillDeeper blog post, this grace period was increased from 180 days to one year in 2017).  First, if lease-holding operations are resumed within one year, the lease will not expire.  Second, if an application for an SOP or SOO is sent to the BSEE Regional Supervisor within that year, and the SOP or SOO is granted, the lease will still be in effect for the time granted (30 C.F.R. § 250.180(d)).

Just as in prior NTLs, BSEE prefers to receive the SOP request approximately three weeks before the scheduled lease expiration date (SOO requests may be received later because the request is based upon unforeseen circumstances beyond a lessee’s control).  The three week rule is not a hard requirement, however.  Under 30 C.F.R. § 250.171, the lessee simply needs to submit the request before the expiration of the lease.  However, if a lease expires while the request is under consideration, a lessee cannot perform any operations on the lease until the suspension is granted.  Therefore, it is wise to submit the request sooner than later to ensure certainty for the future.

To a greater extent than prior versions, NTL No. 2019-G01 gives detailed explanations of what should be included in an SOP request.  It discusses the necessity of demonstrating a firm commitment to production (CTP).  It is absolutely essential to make a commitment to production before the time the lease would otherwise expire.  Under this NTL, a commitment is firm if it is “based on a definitive decision by the operator to bring the discovered hydrocarbons to production.”  Additionally, exploration and delineation drilling must be completed, and the operator must be able to show that the project is an economic venture.  When a CTP relies upon the use of another entity’s production facility, the relevant parties must have committed to such use before the date the lease would otherwise expire.

Although essential, a firm CTP alone is not enough to ensure the SOP is granted.  A request must also justify the need for the suspension by summarizing how the suspension will lead to production and explaining how much additional time is being requested.  This should include a reasonable schedule of work with measureable milestones leading to the commencement or restoration of production.  The NTL provides an example of what such a timeline might look like.

Additional requirements include the identification of a well drilled on the lease that has been determined to be producible, an explanation of the regulatory basis for granting a suspension under 30 C.F.R. §§ 250.172-250.174, and payment of the service fee.  Not submitting the service fee before the lease expires will mean that the suspension request was not timely submitted.  BSEE has no authority to grant late requests so it is imperative that the fee is paid on time.  If a request is the first one for a particular lease, there is the additional requirement of including reservoir structure map(s), isopach map(s), and a reserve estimate.

In the 2011 Statoil (or Julia) decision, the Director of the Department of the Interior’s Office of Hearings and Appeals made it clear that BSEE’s grant an SOP or SOO is discretionary (Statoil Gulf of Mexico LLC, 42 OHA 267).  Thus, even if a lessee technically meets all the requirements for the granting of an SOP or SOO, BSEE could still deny the request.  This is so because such decisions must always consider the national interest using “a balancing of factors according to the circumstances of the case” (Id. at 308). The Statoil decision can be found at, by searching for DIR-2010-0027 in Directors Decisions (1996-Present).

If the SOP is granted, its duration will depend on the circumstances of the individual case.  NTL No. 2019-G01 differs from the 2000 version regarding duration.  Under 30 C.F.R. § 250.170, no single suspension may be granted for more than five years.  Although NTL 2000-G17 explicitly mentioned this cap, the new NTL does not.  As the 2000 version noted, even with the five year cap, most suspensions are granted for one year or less. The lack of mention of the five year cap is unlikely to be an indication of a shift in BSEE’s policies to allow for longer suspensions.

In addition, NTL No. 2019-G01 provides a much more expansive look at what is required to obtain an SOP for phased development.  Phased development occurs when hydrocarbons have been discovered by wellbore penetration but the operator is waiting for production capacity at the host facility to become available.

Generally, BSEE does not approve suspensions for phased development, but exceptional circumstances may move BSEE to grant one.  In addition to everything needed for a normal SOP, the applicant must also demonstrate, to the Regional Supervisor’s satisfaction, that the project has unique or unusual circumstances, phased development is appropriate, and phased development would not harm ultimate recovery or cause waste.  The NTL enumerates various elements that, if proven, would help to demonstrate these requirements.  There is an important potential economic consequence that any lessee seeking an SOP for phased development should consider: BSEE may require a lessee to execute an agreement that would compensate the federal government should the lease fail to produce as proposed.

The new NTL also provides guidance on SOPs for technology development.  At this time, a request for an SOP (or SOO) solely to provide time for technology to be developed is unlikely to be granted.  Nonetheless, time for technology development can be a factor for granting an SOP where all of the normal requirements for an SOP are met.

Although the requirements for granting SOPs and SOOs have significant crossover, they are two distinct things.  SOOs are granted because of reasons beyond the control of the lessee or operator.  If a lessee has not scheduled operations before the lease is to expire, BSEE will almost certainly deny an SOO request.  More specific requirements for SOOs are set forth in 30 C.F.R. § 250.171 et seq.

With these recent clarifications, it is perhaps easier to know when you might qualify for  and what information you need to provide to receive a suspension on offshore leases.  Nevertheless, the new NTL should not be read in isolation.  When requesting an SOP or SOO, it is important to verify that all of the requirements of 30 CFR 250.169 et seq. are satisfied before lease expiration.

Avanti Exploration, LLC v. Kimberly Robinson, Secretary, Louisiana Department of Revenue, (La 3rd Cir Court of Appeal)

The Louisiana Third Circuit Court of Appeal ruled that an oil producer, Avanti Exploration, LLC, properly remitted severance tax based on the full amounts of its gross receipts received from its first purchasers for crude oil sold at its leases and thus that no severance tax was due on the downward price adjustments in its crude oil sales contracts.  Avanti has served as a test case for dozens of similar cases currently pending before the Louisiana Board of Tax Appeals.

The issue before the Court was the proper application of La. R.S. 47:633(7)(a), which requires that the higher of either gross receipts or posted field price be used to calculate severance tax.  The Court noted throughout its decision that there was no traditional posted price in the field, “which is apparently a practice that has been in disuse for many years,” and thus, Avanti’s gross receipts are determinative of the severance tax.

At issue were Avanti’s contracts with two of its first crude oil purchasers.  Each contract contained a negotiated price formula to establish the sales price to be paid to Avanti for the oil it sold to the purchaser at the lease site. The price formulas began with published, oil market center prices for the month of production and made various positive and negative adjustments, including a final price differential, to arrive at a lower price to be paid for the crude oil being sold at the lease.

Following an audit, the Louisiana Department of Revenue took issue with the “adjustments” to price in Avanti’s sales contracts, specifically the final price differential, and contended that Avanti had impermissibly reduced its gross receipts, and thus its severance tax liabilities, by subtracting transportation costs that were not allowed since it sold its oil on the lease and did not itself transport the oil.   In other words, the Department asserted that Avanti improperly took a transportation deduction by hiding it in the pricing formula as an un-named deduction.  According to the Department, “Avanti and its purchasers conspired to manipulate Avanti’s tax liability by taking a producer’s transportation deduction and hiding it in the pricing formula.”

The Third Circuit rejected the Department’s position.  The court held that Avanti did not take a deduction for the transportation costs paid by its first purchaser to move the oil from the lease.  Rather, the costs of transportation incurred by the oil purchasers were an element of the negotiated price in an arms-length transaction between Avanti and its first purchasers and thus just another fluctuating overhead expense in the cost of doing business.

In so holding, the Court also rejected as “illogical” the Department’s attenuated argument that the differential for transportation or other costs used in the pricing formula was a “thing of value” to Avanti that could be added back to the gross receipts from its sales of oil for the purpose of determining severance tax due.

The court upheld the use of the price formula in the contracts between Avanti and its first purchasers for determining the sales price subject to severance tax (i.e., “the taxable value of oil”) and also ruled that the contracts constituted arms-length transactions.  Moreover, the court seemed to reject the Department’s de facto use of market center index prices without adjustment to calculate severance tax.  In addressing this issue, the court first concluded that, in unilaterally adding back the pricing differentials/deductions from the pricing formulas, the Department did in fact “use the large market center indices to calculate the severance tax owed.”  In rejecting the Department’s method for calculating price, the court relied heavily on Robinson v Mantle Oil & Gas, where the First Circuit held that “a market center price for a field 130 miles away could not be used as a posted field price.”

Ultimately, Avanti was able to show in this case that it paid severance tax on the full amount of its gross receipts in sales to the first purchasers of its oil, and that there were no material issues of fact or law preventing summary judgment in Avanti’s favor.  This decision is helpful to oil producers in Louisiana not only on severance tax issues, but also on royalty issues under State Leases, where the Office of Natural Resources has been taking the same position as the Department in these tax cases.

If you have any questions about this decision or about severance taxes in Louisiana, please contact Martin Landrieu or Caroline Lafourcade.

In Randle v. Crosby Tugs, L.L.C. (5th Cir. 2018), the Fifth Circuit affirmed that a tug owner was neither negligent in providing medical care to an injured seaman nor vicariously liable for the alleged medical malpractice committed by the seaman’s treating physicians.

In September 2014, the plaintiff seaman, Randle, fell ill while working aboard a tug owned by Crosby Tugs, L.L.C.  Upon learning about his illness, the ship’s personnel immediately called 911.  The 911 operator dispatched Acadian Ambulance Service to the vessel, and the Louisiana Emergency Response Network directed Acadian to transport Randle to Teche Regional Medical Center (TRMC).  Although Acadian’s paramedics correctly suspected Randle was suffering from a stroke, the TRMC physicians failed to diagnose his condition as a stroke and instead diagnosed him with a brain mass and transferred him to another facility.  As a result of his stroke, Randle was left permanently disabled and required constant custodial care.

Randle then sued Crosby.  He alleged that, if TRMC had properly diagnosed his condition as a stroke, the TRMC physicians would have administered a medication that would have improved his post-stroke recovery.  Randle alleged that Crosby was directly liable for the crew’s alleged failure to get him prompt medical care and was vicariously liable for TRMC’s alleged medical malpractice.

A shipowner has a nondelegable duty to provide prompt and adequate medical care to its crew.  The degree of this duty depends upon the circumstances of each case, including the seriousness of the injury or illness and the availability of aid.  A shipowner can breach this duty two ways: directly, such as when the shipowner fails to get the seaman to a doctor when it is reasonably necessary and the ship is reasonably able to do so; and vicariously, when the shipowner selects a doctor who acts negligently in treating the seaman for his injuries.

On appeal, the Fifth Circuit affirmed the district court’s partial summary judgment in favor of Crosby.  The court distinguished Randle’s case from prior cases where the shipowner was held to have breached the duty to provide prompt and adequate medical care, such as where the shipowner procured initial treatment and then did nothing as the seaman’s condition continued to deteriorate, or where the shipowner provided an incorrect or an insufficient type of care.  In Randle’s case, the tug owner fulfilled its direct duty to provide medical care under the circumstances by selecting a course of action reasonably calculated to get Randle to a medical facility that would be able to treat him, more specifically, by immediately dialing 911.  The court also affirmed that Crosby was not vicariously liable for TRMC’s alleged medical malpractice, noting that the shipowner’s duty is based upon agency principles, and the case law regarding same is limited to instances where the medical malpractice was attributable to an on-board physician in the hire of the shipowner or onshore physician selected by the shipowner.

Although it was not an issue in the Randle case, it is important to remember that the breach of the duty to provide prompt and adequate medical care is not the sole basis for holding a defendant liable for the negligent medical treatment of a Jones Act seaman.  On the contrary, under a general proximate cause theory under the Jones Act, the seaman’s employer can be held liable for all subsequent injuries stemming from the employer’s negligence, including injuries created or exacerbated by subsequent medical malpractice.  Under the Jones Act’s relaxed causation standard, the employer can be held liable for the full amount of a seaman’s damages, regardless of third-party fault, if the employer’s negligence contributed “in whole or in part” to the seaman’s injury.  Of course, the superseding cause doctrine can apply to insulate or partially insulate the employer, where the employer’s negligence, in fact, substantially contributed to the plaintiff’s injury, but the injury was actually brought about by a later, unforeseeable cause of independent origin.  However, even where the seaman’s damages predominantly stem from the subsequent medical malpractice rather than the employer’s negligence, an employer may nevertheless be responsible for the entire amount of the plaintiff’s damages under the doctrine of joint and several liability.

In sum, determining whether and under what circumstances a Jones Act employer or shipowner can be held liable for the medical malpractice of a doctor, particularly where the treating physician is chosen by someone other than the shipowner, requires an in-depth analysis of the applicable facts and legal theories of recovery.  The analysis is further complicated by issues arising out of state medical malpractice statutes limiting physician liability and federal maritime statutes limiting the liability of shipowners.  When a Jones Act employer potentially faces such issues, it is crucial that the employer promptly retain knowledgeable counsel to assist in its defense.

The Texas Supreme Court has yet to determine whether a party may contract for indemnification against its own gross negligence, and the Court has noted that this issue raises public policy concerns.  The Texas Courts of Appeals are split on this issue.

On the one hand, in Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App. 1986), the court refused to honor a provision in a release agreement purporting to release a party from liability for its own gross negligence against an individual.  In Smith, the plaintiff was injured while in the pit area of Golden Triangle Raceway.  Before entering the pit, he signed a release agreeing to indemnify the track owner and operator “from any loss, liability, damage, or cost that they may incur due to the presence of the undersigned in or upon the restricted area . . . whether caused by the negligence of the releasees or otherwise.”  Although the trial court upheld the release, the appellate court threw it out on public policy grounds.  The court acknowledged that it could not find any binding Texas cases on point.  But citing treatises and case law from other states suggesting that indemnity or release for gross negligence would violate public policy, the court concluded that “[t]he rule adopted by the other jurisdictions and supported by the treatises should be the rule in Texas.”  Although the court’s opinion did not indicate that it turned on this point, there is no indication that the release expressly mentioned “gross” negligence.

On the other hand, in Valero Energy Corporation v. M.W. Kellogg Construction Company, 866 S.W.2d 252 (Tex. App. 1993), the court upheld a waiver of liability for gross negligence in an instance when the parties are private entities with relatively equal bargaining power.  Valero Energy hired Ingersoll-Rand, a subcontractor of M.W. Kellogg Construction Company, to supply machinery for the expansion of a Valero refinery.  When the machinery exploded and caused damage to the refinery, Valero filed suit against Kellogg and Ingersoll-Rand for gross negligence.  Like the indemnity provision in Smith, the indemnity provision here did not expressly reference “gross” negligence.  The trial court granted summary judgment in favor of the defendants based upon waiver, indemnity, and hold-harmless provisions of their contract with Valero.

On appeal, Valero argued that a waiver of liability for gross negligence offended Texas public policy.  The court disagreed and noted that when the parties to a contract are private entities with relatively equal bargaining strength, the agreement is usually enforced.

Valero and Kellogg are sophisticated entities, replete with learned counsel and a familiarity with the oil refinery industry. They negotiated their working relationship over the course of almost three years, with Kellogg submitting several proposals for Valero’s review. . . . Valero, having a bargaining power equal to Kellogg’s, agreed to the exculpatory clause in this contract. Valero possessed the resources necessary to ascertain and understand the rights it held on the date of the signing of the contract, and those it would hold in the future. Nevertheless, Valero, of its own accord, negotiated those rights away.

The waiver and indemnity provision absolving Kellogg of all liability sounding in products liability and gross negligence does not offend public policy.

The court likewise found that Ingersoll-Rand, as a Kellogg subcontractor, was also entitled to release under the contract between Valero and Kellogg.

So a clear split still persists in Texas.  And it remains unclear whether all Texas courts would focus on the “relatively equal bargaining power” issue in determining whether to uphold or reject an indemnity or release provision.

Extending the definition of negligence to include gross negligence

In Crown Central Petroleum Corporation v. Jennings, 727 S.W.2d 739 (Tex. App. 1987), the court made the unremarkable holding that a provision in an indemnity agreement excluding negligence of the indemnitee from the scope of the indemnity also excluded its gross negligence

However, in Webb v. Lawson-Avila Construction, Inc., 911 S.W.2d 457 (Tex. App. 1995), the court used the logic from Crown to include indemnification for gross negligence.  In Webb, Lawson-Avila contracted with Palmer Steel to provide raw materials to build a high school.  During construction of the school, a crane lifting steel joists tipped over and dropped its load, resulting in an injury and one fatality.  The family of the injured and the survivors of the deceased filed suit against Lawson-Avila.  A jury found that Lawson-Avila was grossly negligent and awarded the plaintiffs actual and punitive damages.

Based on an indemnity provision in the contract between Lawson-Avila and Palmer, Palmer’s insurer, Employers Casualty Company, paid the actual damage award assessed against Lawson-Avila.  However, Employers refused to pay the punitive damages award, arguing that the indemnity agreement did not specifically obligate Palmer to indemnify Lawson-Avila against its own gross negligence.

On appeal, the court in Webb described the issue before it as “[w]hether an indemnitee is entitled to contractual indemnification for exemplary damages assessed as the consequence of its own gross negligence where the indemnity contract specifically expresses an obligation to indemnify the indemnitee for its own negligence, but is silent about gross negligence.”  The clause at issue required Palmer:

to indemnify and hold harmless [Lawson-Avila] . . . from any and all liability . . . resulting directly or indirectly from or connected with the performance of this agreement, irrespective of whether such liability . . . actually or allegedly, caused wholly or in part through the negligence of [Lawson-Avila] . . . .

(emphasis added).

Palmer argued that since the parties had not expressed any intent to provide indemnification for gross negligence, Palmer was not required to indemnify Lawson-Avila for damages caused by its own gross negligence.  But the court rejected this argument, stating that “when the parties used the term ‘negligence,’ they indicated their intent to indemnify Lawson–Avila from the consequences of all shades and degrees of its own negligence, including gross negligence.” (emphasis added).  This conclusion is consistent with the similar, even if implicit, holding in Valero.

Furthermore, the court was not persuaded by arguments from Palmer that indemnification for one’s own gross negligence violated public policy.  Noting that the Texas Supreme Court had yet to rule on this point, the court distinguished its holding from Crown by noting that at issue in Crown was language governing what was excluded from indemnification, not what was included.

If the Texas Supreme Court determines that indemnification for gross negligence is permissible, then the Court will likely also apply the fair notice requirements.

If the Texas Supreme Court determines that a provision exculpating a party from its own gross negligence is not offensive to public policy, then the Court may nonetheless require such provisions to meet the fair notice requirements applied to indemnification for simple negligence.  In a matter involving a claim for simple negligence, the Court has already acknowledged that indemnification of a party for its own negligence is an “extraordinary shifting of risk” to which the fair notice requirements apply.  Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 2015).

The fair notice requirement has two components: 1) the express negligence doctrine and 2) the conspicuousness requirement.

The express negligence doctrine states that a party seeking indemnity from the consequences of that party’s own negligence must express that intent in specific terms within the four corners of the contract. The conspicuous requirement mandates “that something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.”

Dresser, 853 S.W.2d at 508 (citations omitted).

The Texas Supreme Court has adopted the definition of conspicuousness stated in the Uniform Commercial Code.

A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it.  A printed heading in capitals (as: NON–NEGOTIABLE BILL OF LADING) is conspicuous.  Language in the body of a form is ‘conspicuous’ if it is in larger or other contrasting type or color.  But in a telegram any stated term is ‘conspicuous.’”

. . . .

For example language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous.

Dresser, 853 S.W.2d at 511 (citing Tex. Bus. & Com. Code Ann. § 1.201(10) (West 2015)).

Whether an agreement provides fair notice of a release provision should be immaterial if the releasing party has actual knowledge of the provision.  “[E]vidence that a party had read a contract constitutes evidence of actual knowledge of any indemnity provisions.”  RLI Ins. Co. v. Union Pac. R.R., Co., 463 F.Supp.2d 646, 650 (S.D. Tex. 2006) (citations omitted).

To be sure, in discussing indemnification for gross negligence, one Texas court declared:

Because gross negligence involves conduct that poses an extreme risk of harm to others and an actor that proceeds with conscious indifference to the rights, safety, or welfare of others, it is difficult to imagine that Texas’s strong public policy against pre-injury releases of negligence would not apply to gross negligence. Accordingly, we conclude the State’s public policy against pre-injury releases of liability for one’s own negligence applies, at a minimum, equally to gross negligence . . . .

Van Voris v. Team Chop Shop, LLC, 402 S.W.3d 915, 924 (Tex. App. 2013).

Although it is unclear whether under Texas law a party may be indemnified against its own gross negligence, there are circumstances where such contracts are more likely to be upheld.  When the parties to an indemnity agreement are corporate entities with relatively equal negotiating power, a court is more likely to find that the indemnitee permissibly renounced obligation for its own gross negligence.  Where an indemnification agreement addresses the negligence of the indemnitee, whether to include or exclude it from under the umbrella of indemnification, a court may find that the indemnitee’s gross negligence is also thereby encompassed.  However, this subsuming of gross negligence is far more likely to be upheld when it is explicitly stated.

If the Texas Supreme Court determines that indemnification of gross negligence is consistent with Texas public policy (or, at least, not inconsistent with Texas public policy), then the Court will probably limit its application to those agreements that satisfy the fair notice requirements.  This is especially likely in pre-injury releases and when there may be an imbalance of information or negotiating strength between the parties to the agreement.

In January, the Louisiana Fifth Circuit Court of Appeal reinstated a permit issued by the Department of Natural Resources (DNR) back in April 3, 2017 to allow a new pipeline, reversing the district court that ordered the DNR to reevaluate the possible environmental effects.  Joseph v. Sec’y, La. Dep’t of Nat. Res., 18-414 (La. App. 5 Cir. 1/30/19); 2019 WL 364466.  This decision clears the way for the proposed pipeline to advance.

On February 22, 2016, Bayou Bridge Pipeline, LLC submitted an application to DNR to construct and operate a new pipeline, which was designed to carry 280,000 barrels or more of light or heavy crude oil per day from the existing Clifton Ridge Terminal in Lake Charles, Louisiana to various crude oil terminals in St. James, Louisiana.  During the evaluation period, DNR made nine different requests on Bayou Bridge for additional information before holding a public hearing.  Based on comments it received after the public hearing, DNR made three additional requests for information.  After completing an analysis of the proposed pipeline and finding that Bayou Bridge had “modified, avoided or reduced all adverse environmental impacts to the maximum extent practical,” DNR issued the permit for the proposed pipeline.

The plaintiffs, several individuals and environmental groups, filed petitions for reconsideration, which the Secretary denied after addressing the concerns in a written response.  The plaintiffs then filed suit for judicial review and alleged that DNR “violated the Louisiana Constitution and its own Guidelines by issuing the proposed permit to Bayou Bridge.”  Specifically, the plaintiffs asserted that DNR (1) did not consider potential adverse environmental impacts of the pipeline; (2) did not consider the cumulative impact of the pipeline; (3) ignored evidence that the people of St. James Parish may be trapped in the event of an emergency; and (4) misapplied its own guidelines.

The district court ruled in favor of the plaintiffs.  The district court found that DNR did not apply Costal Use Guidelines 711(A) and 719(K), and ordered Bayou Bridge “to develop effective environmental protection and emergency or contingency plans relative to evacuation in the event of a spill or other disaster, in accordance with guideline 719(K), PRIOR to the continued issuance of said permit.”  Both DNR and Bayou Bridge appealed.

In analyzing the district court’s judgment, the court of appeal first noted that because the district court was acting as an appellate court in reviewing the decision of DNR, it “was constrained to afford considerable weight to DNR’s reasonable construction and interpretation of its rules and regulations adopted pursuant to the Administrative Procedures Act.”  This set the bar high for the plaintiffs to prevail on appeal.

In granting the permit, DNR found that Guidelines 711(A) and 719(K) were not applicable.  Because those determinations were not unreasonable, the court of appeal held that the district court erred in substituting its own judgment and ruling otherwise.  The court similarly found that “DNR made a reasonable determination, within the permissible scope of its authority, that the submitted emergency response and contingency plan overview constitutes effective environmental protection and emergency or contingency plans for the proposed pipeline,” and that therefore “the district court erred in remanding this matter to DNR for development of further environmental protection and emergency or contingency plans.”

The majority’s decision prompted a dissent from Judge Johnson.  Aside from questioning the court’s appellate jurisdiction, Judge Johnson was concerned that that DNR’s analysis did not adequately consider the overall welfare of the public, as required by the Louisiana Constitution.  Specifically, DNR’s review of alternative sites/methods was based solely on an analysis provided by Bayou Pipeline, which it adopted as its own conclusions.  There was no independent verification of Bayou Pipeline’s submission.  Judge Johnson believed this violated DNR’s duty of public trust, and would have vacated the coastal use permit remanded the matter to DNR for consideration of the public welfare.

The Louisiana Fifth Circuit’s decision indicates that the courts should not get into the business of micromanaging or second-guessing DNR decisions, so long as they are in some way supported by the record.  There is an obvious wisdom to this deference, as DNR officials are arguably better positioned and trained to make such determinations, and almost every pipeline of this magnitude will garner some objection; in fact, environmental groups tried, unsuccessfully, to stop Bayou Bridge’s efforts to construct this pipeline in federal court last summer.  See Atchafalaya Basinkeeper v. United States Army Corps of Eng’rs, 984 F.3d 692 (5th Cir. 2018).   However, Judge Johnson’s dissent raises a valid concern.  When DNR adopts in full the submissions and conclusions of an interested party, without the benefit of other sources, it is only fair to be skeptical.  While the permitting process should not be unduly burdensome, it should not be a rubber stamp either.  But of course the plaintiffs were free to submit their own analyses, so perhaps Judge Johnson’s concern was overblown.  We shall see if the Louisiana Supreme Court decides to take this case up and have the final say on the issue.

Although Louisiana courts routinely decline to find oil and gas defendants strictly liable under the pre-1996 version of Louisiana Civil Code article 667, plaintiffs continue to plead a cause of action under article 667 for alleged property damage caused by oil and gas exploration and production.  Like many other landowners in legacy lawsuits, the plaintiffs in Watson v. Arkoma Development claimed that defendants were strictly liable for damages caused by contamination to their property before the 1996 amendment of article 667.

The pre-1996 version of article 667 imposes strict liability on proprietors for damage caused by ultrahazardous activities.  To constitute an ultrahazardous activity within this context, the activity (1) must relate to an immovable, (2) must cause the injury, and (3) must not require the substandard conduct of a third party to cause the injury.  An ultrahazardous activity is thus limited to those activities that cause injury even when conducted with the greatest prudence and care.

The Watson plaintiffs specifically alleged that the defendants’ predecessors contaminated their property by storing and disposing toxic and hazardous oilfield waste.  Although Magistrate Judge Karen L. Hayes of the Western District Court of Louisiana was unconvinced that the defendants engaged in any ultrahazardous activity, the claim survived the defendants’ motion to dismiss.  In her report and recommendation to presiding Judge Terry A. Doughty, Judge Hayes concluded that the record was not developed enough to make an ultimate determination on the issue and acknowledged that the courts were at odds as to whether the disposal of hazardous waste constitutes ultrahazardous activity.

Plaintiffs relied on Updike v. Browning-Ferris, Inc., which found that the storage of hazardous waste in pits was an ultrahazardous activity.  Defendants alternatively relied on Bartlett v. Browning-Ferris Indust., Chem. Servs. Inc., which held that the operation of a hazardous disposal facility was not an ultrahazardous activity because the facility could be safely operated with due care.  The Louisiana Third Circuit Court of Appeal in Bartlett clearly stated: “In fact, all the testimony on both sides suggests that a hazardous waste disposal facility, properly operated according to the rules and regulations propounded by the state and federal government, will not cause harm to the residents of the area in which it is situated.”

While this issue has been brought before Louisiana courts numerous times, no other court has found the storage or disposal of hazardous oilfield waste to be an ultrahazardous activity since Updike.  Nonetheless, plaintiffs in Watson v. Arkoma Development will have the opportunity to request the court to revisit the issue and determine whether the storage and disposal of toxic and hazardous oilfield waste qualifies as an ultrahazardous activity.

In Louisiana, the owner of a mineral servitude is under no obligation to exercise it.  However, a mineral servitude will prescribe from ten years of nonuse.  To interrupt the running of prescription, the owner of a mineral servitude may undertake “good faith operations for the discovery and production of minerals.”  Article 29 of the Mineral Code defines “good faith operations” as those:

  1. Commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth,
  2. Continued at the site chosen to that point or depth, and
  3. Conducted in such a manner that they constitute a single operation although actual drilling or mining is not conducted at all times.

Notably absent from these requirements is the actual production of oil or gas.  Under the Mineral Code and Louisiana jurisprudence, a “dry hole” is sufficient to interrupt the prescription of nonuse as long as these requirements are met.  See Union Oil & Gas Corp. of La. v. Broussard, 237 La. 660, 112 So.2d 96 (1958); Reeves v. Reeves, 607 So.2d 626 (La. App. 2d Cir. 1992).

Surface owners, or other parties who may benefit from the termination of the mineral servitude, most often challenge the servitude owner under the first two prongs of Article 29.  That is, they argue that the operations were not conducted with a reasonable expectation to discover and produce minerals in paying quantities.  Courts conduct both a subjective and objective fact based inquiry to determine whether “good faith operations” were conducted.  Two cases from the Second Circuit illustrate this type of analysis.

In Matlock Oil Corp. v. Gerard, 263 So.2d 413 (La. App. 2d Cir.1972), the Louisiana Second Circuit ruled that the mere act of drilling through a shallower formation, without any intent to obtain production from the formation, was not “good faith operations” sufficient to interrupt the running of prescription of nonuse.  The court noted three particular factors for its conclusion: 1) contrary to industry standards, the mud logging unit was not installed until drilling operations had almost passed through the particular formation at issue; 2) the petroleum geologist assisting in the drilling operations never requested information from nearby well operators that had produced in the same formation; and 3) the drilling permit obtained by the operator was for oil in a deeper formation than the formation at issue.  The court concluded that the drilling through the shallower formation did not interrupt the running of prescription as the operator never intended to produce minerals in paying quantities from the shallower formation.

By contrast, in Bass Enterprises Prod. Co. v. Kiene, 437 So.2d 940 (La. App. 2d Cir.1983), the prescription of nonuse was interrupted by good faith operations even though the well was unproductive.  In Bass the operator obtained a permit to drill to a formation at a proposed total depth of 11,500 feet.  During drilling operations, as the drilling depth passed through a shallower formation at approximately 9,000 feet, several drilling logs were run to gain information as it related to the shallower formation.  The logs included 1) dual induction lateral log; 2) density neutron log; 3) micro log; and 4) mud logs.  When the well reached the deeper formation and was tested, it was determined that the well, in that formation, was not capable of commercially producing minerals.  The well was then plugged back to a depth of approximately 9,000 feet—to the shallower formation.  The operator had further analysis done on the logs for the shallower formation and then sought and obtained a permit to perforate and acidize the shallower formation.  After obtaining a subsequent permit to frac the sand for further testing, it was determined that the well was commercially unproductive and it was plugged.  The Second Circuit held that the actions, as they related to the shallower formation, were good faith operations with a reasonable expectation of discovering and producing minerals.  Thus, the running of prescription of nonuse was interrupted by the operations conducted at the shallower depths.

The above cases illustrate the necessity for operators to take all prudent measures and to follow all industry standards as to each targeted formation to ensure interruption of prescription through good faith operations.

Earlier this month, the Louisiana Supreme Court struck down a Louisiana law limiting tax credits for Louisiana taxpayers who pay taxes in other states; thus these taxpayers may now have refund opportunities.  The law at issue is Act 109 of the 2015 Regular Legislative Session.  Act 109 amended Louisiana Revised Statute 47:33 to disallow credits for taxes imposed on net income tax paid to other states that do not offer reciprocal tax credits to those states’ own residents transacting business in Louisiana.  Under Act 109, some Louisiana residents who own business interests in both Louisiana and a state that does not offer reciprocal credits are doubly taxed on the same income.  The Supreme Court decision, issued December 5, 2018, is Smith v. Robinson, Docket No. 2018-CA-0728.  It held Act 109 unconstitutional for impermissibly discriminating against interstate commerce.  The Department of Revenue could still ask for a rehearing by the Louisiana Supreme Court or seek further review by the U.S. Supreme Court.

Smith involved Louisiana residents subject to taxes in both Louisiana and Texas.  The taxpayers held interests in several flow-through entities (limited liability companies and subchapter S corporations) with operations in Texas, Arkansas, and Louisiana.  Although Texas has no state income tax, it does have an entity-level franchise tax (also known as the “Texas margins tax”) based on gross receipts and business profits.  While the entities were subject to the Texas margins tax based on their Texas-sourced income, the individual taxpayers were also, under Act 109, subject to the Louisiana income tax on all of their income whether derived outside or inside Louisiana.  Because Texas does not offer a reciprocal credit for taxes paid to Louisiana, the Louisiana Department of Revenue denied the taxpayers’ credit claim for the franchise taxes they paid to Texas.  Asserting that the reciprocal credit requirement of Act 109 is unconstitutional, the taxpayers sued the Louisiana Department of Revenue to recover the taxes paid.

Texas Franchise Tax is Net Income Tax under La. Rev. Stat. 47:33

The Supreme Court first held that the Texas franchise tax is a “net income tax” paid to another state under La. Rev. Stat. 47:33.  Relying on an earlier Louisiana appellate court decision, the Court reasoned that the calculation of taxable margin is essentially an income tax.

Act 109 Held Unconstitutional

The Court next agreed with the taxpayers that the amendments made by Act 109 were unconstitutional.  Before these amendments, La. Rev. Stat. 47:33 allowed a credit against Louisiana tax for “net income tax” paid to another state and thus prevented Louisiana taxpayers from being subject to income tax more than once on the same income.  Act 109 would limit the credit by providing that the credit is available against taxes paid to another state only if the other state offers a reciprocal credit to that state’s own residents transacting business in Louisiana; Act 109 would also cap the credit so that it cannot exceed Louisiana income taxes paid.  The Court in Smith held that Act 109 violates the dormant Commerce Clause of the U.S. Constitution because it results in a double tax on interstate income but not intrastate income.  Applying the four-part test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) to evaluate whether Act 109 creates a constitutional tax on interstate commerce, the Court held that Act 109 violates the fair apportionment and discrimination prongs of that test.  Act 109 violates the external consistency test developed to analyze fair apportionment because, the Court held, Act 109 does not reasonably reflect how and where a taxpayer’s income is generated and fails to fairly apportion the tax according to each state’s relation to the income.  In addition, the Court held that Act 109 discriminates against interstate commerce because it exposes one hundred percent of the interstate income of Louisiana residents to double taxation and because, according to the Court, a cap on the credit would cause a portion of the taxpayer’s out-of-state income to be subject to double taxation.

Refund Potential

Louisiana resident individuals who were previously subject to the limitations on the credit for taxes paid to other states should consider filing refund claims with the Louisiana Department of Revenue.  Likewise, Louisiana resident individuals doing business in Texas through a limited liability company, S corporation or a partnership who paid Texas margins tax should review their income tax returns and explore whether a claim for refund of income tax overpayment is available.

But beware!  Last month’s decision in Bannister Properties, Inc. v. State of Louisiana, Dkt. No. 2018-CA-0030 (La. App., 1st Cir., Nov. 2, 2018) suggests a refund claim may fail if a court concludes that the Department’s interpretation that the Texas margins tax is a net income tax constitutes a mistake of law arising from a misinterpretation by the Department.  Although the Bannister Properties decision is not final as of the date of this post (we anticipate the taxpayer will seek review by the Louisiana Supreme Court) and, to us, seems wrongly decided, it is possible that the ruling in that case could limit a taxpayer’s ability to pursue a refund claim should a court determine that the tax overpayments resulted from a mistake of law arising from the misinterpretation of the law by the Department of Revenue.

The Department of Revenue has indicated that it will not issue refund claims to taxpayers whose credits for taxes paid to other states were limited by the provisions of Act 109 if the taxes were not paid under protest, and that such taxpayers would have to file a claim at the Louisiana Board of Tax Appeals.  Thus, a taxpayer filing a refund claim for a tax that was not paid under protest should consider filing a protective claim against the State with the Louisiana Board of Tax Appeals in addition to an administrative claim for refund.  If successful, such claim against the State may be paid only by legislative appropriation and there are no rights to further appeal if the Board of Tax Appeals denies such a claim.

Please call Caroline Lafourcade or Ted Fenasci at 504-582-1111 or email or with questions regarding refund opportunities from the Louisiana Supreme Court’s decision in Smith.

The federal Fifth Circuit recently signaled its continued skepticism of permitting class certification for royalty owners.  In Seeligson v. Devon Energy Production Company, L.P., No. 17-10320, 2018 WL 5045671 (5th Cir. Oct. 16, 2018), a group of royalty owners in the Barnett Shale in Texas alleged that Devon Energy Production Company, L.P. breached its royalty obligations “by selling the raw, unprocessed gas to its corporate affiliate at the wellheads at a price artificially reduced by an unreasonably high processing fee, and then passing this processing fee on to the royalty owners.”

The plaintiffs convinced the trial court to certify a class comprised of royalty owners who claimed that their royalty payments under their individual leases with Devon were reduced by Devon’s pricing scheme.  But the Fifth Circuit was not convinced.

On appeal, the Fifth Circuit first considered the district court’s findings regarding ascertainability (the ability to know the members of the class) and commonality (whether common issues of law and fact apply to individual members).  The Fifth Circuit held that the district court did not abuse its discretion on ascertainability because public records could provide sufficient objective criteria to identity individual class members.  The Fifth Circuit also rejected Devon’s argument as to commonality (namely, that each individual lease must be reviewed before determining whether Devon violated any duty to the class members).  The Fifth Circuit held that the district court did not abuse its discretion “in ruling that Plaintiffs could demonstrate that Devon breached its implied duty to market by basing its price on a higher processing fee than the fee that a ‘reasonably prudent operator would have received at the wellhead.’”

However, the royalty owners’ request for class certification hit a snag when the Fifth Circuit turned to predominance.  Under Federal Rule of Civil Procedure 23, it is not enough that there are common issues of law and fact; those common issues must also “predominate over any questions affecting only individual members.”  Devon argued that predominance did not exist because each lease raised individual issues about tolling and the applicable statute of limitations.  Plaintiffs tried to counter by arguing that limitations periods were tolled by the discovery rule (the clock does not begin to run until one discovers his injury) and fraudulent concealment, but Devon persuasively contended that issues of tolling and fraudulent concealment raise individualized fact questions that would themselves require thousands of mini-trials to resolve.  The Fifth Circuit stopped short of fully resolving the issue and instead noted that the trial court had failed to analyze the role, if any, that tolling or limitations issues would play in the class action.  Without such an analysis, the Fifth Circuit stated that it was “impossible to know” if predominance existed here.  Accordingly, it found that by failing to consider such issues the trial court abused its discretion, and the Fifth Circuit ultimately reversed and sent the case back to the trial court for further proceedings.

Over the last few years, various federal court decisions have made class certification increasingly difficult.  The decision here is consistent with the trend of limiting the instances when class resolution will be allowed.  Although the Fifth Circuit’s decision does not necessarily eliminate Plaintiffs’ attempts to certify a class, it certainly makes their position more precarious.  We shall see if on remand Plaintiffs are able to salvage their class action in the district court and withstand further Fifth Circuit scrutiny.  Stay tuned.