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Drill Deeper

News and Updates on Oil & Gas Legal Issues

Fifth Circuit Pumps Brakes on Royalty Owner Class Certification

Posted in Class Action, Federal Rules of Civil Procedure, Leasehold Interest, Oil and Gas Operations

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.

FCC Removes Regulatory Barriers to 5G Wireless Deployment

Posted in Telecommunications

On September 27, 2018, the FCC released its Declaratory Ruling and Third Report and Order, which is expected to help accelerate the deployment of 5G cellular service. In the Matter of Accelerating Wireless Broadband Deployment by Removing Barriers to Infrastructure Inv., WT Docket No. 17-79, WC Docket No. 17-84. To support the rollout of 5G service, the wireless industry is turning to small cell devices, a new technology designed to expand network coverage and capacity. Small cell devices are typically affixed to public rights-of-way and provide a shorter range of cellular service, thus more devices are needed in a given service area to meet user demand. But the attachment of small cells to public rights-of-way has presented a number of regulatory issues that have inhibited the deployment of small cell infrastructure across the country.

As FCC Chairman Ajit Pai has commented:

Installing small cells isn’t easy, too often because of regulations. There are layers of (sometimes unnecessary and unreasonable) rules that can prevent widespread deployment.”

The first part of the FCC’s decision addresses a number of issues wireless providers and government authorities have faced in deploying small cell infrastructure in local communities. For instance, in noting that the Telecommunications Act of 1996 allows state and local governments to charge fees only “to the extent that they represent a reasonable approximation of the local government’s objectively reasonable costs,” the FCC fixed the following fees: “(a) $500 for a single up-front application that includes up to five Small Wireless Facilities, with an additional $100 for each Small Wireless Facility beyond five, or $1,000 for non-recurring fees for a new pole (i.e., not a colocation) intended to support one or more Small Wireless Facilities; and (b) $270 per Small Wireless Facility per year for all recurring fees, including any possible ROW access fee or fee for attachment to municipally-owned structures in the ROW.”

The ruling also addresses two new “shot clocks” that give local government authorities 60 days to approve or deny the deployment of small cell devices on existing structures or 90 days to approve or deny the deployment of small cell devices on new structures.

This ruling is the second set of small cell regulations following a March 2018 decision to exclude small cell deployment from federal review procedures designed for traditional cell towers. It remains to be seen whether these efforts will help accelerate the anticipated widespread deployment of small cell infrastructure.

U.S. Fifth Circuit Holds Tug to be “Operator” of Dumb Barges under OPA 90

Posted in Louisiana Waterways, Maritime, Oil and Gas Operations

In United States v. Nature’s Way Marine, L.L.C., 904 F.3d 416 (5th Cir. 2018), the Fifth Circuit held that a tug owner fit the definition of “operator” of an oil-spilling barge and consequently was ineligible under the Oil Pollution Act of 1990 (OPA 90) for reimbursement of cleanup costs in excess of the share allocated to the tonnage of the tug.

In January 2013, a tug owned by Nature’s Way Marine, L.L.C. was moving two dumb barges owned by Third Coast Towing, LLC when the barges allided with a bridge near Vicksburg, Mississippi, and one of the barges discharged over 7,000 gallons of oil into the Mississippi River.  The Coast Guard designated both Nature’s Way and Third Coast as “responsible parties” under OPA 90.  Nature’s Way paid nearly $3 million in cleanup costs, and the government entities subsequently spent over $792,000 and sought recovery from Nature’s Way.

Following settlement of ancillary disputes, Nature’s Way sought to have the National Pollution Funds Center (NPFC) reimburse it approximately $2.l3 million; Nature’s Way claimed that its liability should be limited based upon the tonnage of the tug, alone, and not the tonnage of the barges.  Its argument hinged on whether it was “operating” the dumb barges, which by their nature lacked the ability for self-propulsion or navigation and were reliant on the propulsion and navigation provided by Nature’s Way’s tug.  If Nature’s Way were deemed to be operating just the tug and not the barges, then it would benefit from the tug’s (lower) limitation of liability level and thus be entitled to a substantial reimbursement from the NPFC.  Conversely, if Nature’s Way were deemed to be operating both the tug and the barges, the NPFC would owe no reimbursement.

Nature’s Way argued that Third Coast was the offending barge’s “operator” because Third Coast was responsible for instructing when the barge would be loaded, unloaded, and moved and thus had operational control over the barge.  The district court disagreed, finding instead that, by towing the barge, thus controlling the barge’s speed, direction, and minute-by-minute navigational decisions, Nature’s Way was “operating” the barge and was liable for the barge under OPA 90.

On appeal, Nature’s Way again argued that the term “operator” should be limited to the person or company with managerial and financial control over the barges, namely, Third Coast.  The Fifth Circuit disagreed.  It observed that although OPA 90 does not define “operating”, it does define “responsible party” as “any person owning, operating, or demise chartering the vessel.”  The court also relied on United States v. Bestfoods, 524 U.S. 51 (1998), a CERCLA case that analyzed the definition of “operator” under that statute as “someone who directs the workings of, manages, or conducts the affairs of a facility.”  Relying on this analysis, the court concluded that the ordinary and natural meaning of an “operator” of a vessel under OPA 90 includes someone who directs, manages, or conducts the affairs of the vessel and that the ordinary and natural meaning of “operating” a vessel under OPA 90 thus includes the act of piloting or moving a vessel.  The Fifth Circuit noted that Nature’s Way “directed precisely the activity that caused the pollution—it was the very party that crashed the barges into the bridge”—and that to hold that Nature’s Way was not “operating” the barge at the time of the collision “would be to strain beyond the ordinary and natural meaning of the word.”

In sum, the Fifth Circuit refused to parse words to let the tug owner off the hook.  Although the court did not directly address the issue, its ruling does not appear to foreclose the argument that the barge owner might also be considered an operator under OPA 90, under certain circumstances.

Tariffic! Will Force Majeure Let Us Escape Our Contractual Obligations?

Posted in Louisiana Corporate Law, Tariffs, Transactions

The continuous reciprocation of tariffs between the United States and China could leave businesses and suppliers in a bind.  With rising costs of supplies, contracts that once appeared lucrative for a business could soon become a financial liability.  As there appears to be no end in sight to the tariffs, can a company claim force majeure or seek to pass on the burden of the tariffs to the other party?

Generally speaking, force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract.  As with almost any legal question, whether force majeure excuses contract performance will depend on the circumstances.

A company should first look to the terms of its agreement to determine if the parties contemplated the fortuitous event.  Frequently an agreement will have an express force majeure clause.  Unfortunately, agreements all too often use a general, standardized force majeure clause that is not tailored to the specific agreement.  Further, some standard force majeure clauses provide no more protections to the parties than what the applicable law already provides.

If the force majeure clause does not cover the fortuitous event, or the agreement does not contain any force majeure provision, the next step is to see if the controlling law provides relief.  For agreements governed by Louisiana law, that’s Louisiana Civil Code article 1873.

Louisiana Civil Code article 1873 provides relief to a party when 1) there is a fortuitous event and 2) the event makes the performance impossible.

Courts generally take a strict interpretation to “impossible.”  In Payne v. Hurwitz, 2007-0081 (La. App. 1 Cir. 1/16/08), 978 So.2d 1000, the Louisiana First Circuit explained that even though Hurricane Katrina was undoubtedly a force majeure, that fact satisfied only one part of the contractual defense.  The court continued, “under settled Louisiana jurisprudence, a party is obliged to perform a contract entered into by him if performance be possible at all, and regardless of any difficulty he might experience in performing it.”

Rising costs due to tariffs, while arguably fortuitous, will not make a performance impossible.  Thus, a company will not likely find relief under Civil Code article 1873.

Mitigating Future Risks:

 In drafting new agreements, parties must pay close attention to each and every provision.  Just as important, parties must be proactive instead of reactive in their drafting.  While a fortuitous event, by its own definition, is hard to predict, companies should attempt to identify all potential future and uncontrollable risks to the agreement.  They must then identify how the event may affect the specific agreement and provide for contingencies if certain conditions are met.  This may include outside factors that, while not making the performance impossible, make the performance impracticable or unprofitable.

A key to success in this endeavor is to engage knowledgeable counsel who understand the specific industry from the bottom-up and how outside factors, such as the current global economic and political environment, may affect future operations in the industry.

Your non-compete agreement is probably not enforceable. Here’s why.

Posted in Employment Law

Non-compete agreements have come under increased scrutiny.  This is especially true in employment contracts for laborers and other non-managerial employees who do not have access to trade secrets or intellectual property.  In Louisiana, a non-compete agreement must meet strict requirements to be enforceable.  If you’ve been using the same non-compete agreement for years or for employees in different states, chances are your contract isn’t enforceable in Louisiana.  Here’s why.

 Your agreement is geographically vague.  Louisiana requires that a restriction on the lawful exercise of a business must be limited to a “specified parish or parishes, or municipality or municipalities.”  This means that your non-compete agreement must list the specific cities or parishes where your non-compete is effective.  An agreement that covers “the entire state” or “everywhere we do business” will likely have only limited enforceability, if at all.

The term of your non-compete is too long—or not long enough.  Non-compete agreements in Louisiana can be in effect for up to two years from the date of severance of employment, last work performed under a contract, or sale of a business.  As a result, your three or five-year non-compete agreement will be ineffective after year two.  If your non-compete does not include a specific duration, a court will likely find that it may be terminated at any time by either party.

Louisiana presumes that your non-compete is invalid.  The presumption in Louisiana is that all non-compete agreements are invalid—unless they meet the strict statutory requirements.  If you’re using a template or boiler plate provisions to draft an agreement for employees in different states, you may find that your generic non-compete doesn’t meet the specific requirements of Louisiana law.  And if you’re thinking about applying the law of another state to your non-compete with your Louisiana employee—think again.  Louisiana invalidates all choice-of-law and choice-of-forum clauses in employment agreements unless the employee agrees to it after an alleged breach of the non-compete.

For more information on drafting or enforcing a non-compete agreement or confidentially agreement in Louisiana, please contact Donna Phillips Currault or Micah Zeno.

Reading, Writing and Retainage

Posted in Legal Updates

A recent Louisiana Fourth Circuit decision has clarified what is prompt payment of obligations due under a public works contract.  In Woodrow Wilson Construction LLC v. Orleans Parish School Board, 245 So.3d 1 (4/18/18), rehearing denied (5/15/18) the Fourth Circuit reinforced a public entity’s duty to promptly pay sums due and payable under contract, or be subjected under La. R.S. 38:2191 to a writ of mandamus compelling payment of the sums due under the contract plus attorney fees.

The Orleans Parish School Board had awarded Woodrow Wilson Construction LLC a contract for constructing a new school. The contract required the entire project to be substantially completed within a certain amount of days and imposed liquidated damages of $5,000 per day for every day the project was late.

The project was late.

Upon substantial completion of the project, and fully satisfying all requirements to payment under the contract, Woodrow submitted its application for final retainage payment; however, the school board refused to pay and asserted its entitlement to withhold the final retainage under the contract to satisfy the liquidated damages from Woodrow’s delay. The school board further alleged that because completion of the project was delayed over a year, the amount of liquidated damages for the delay exceeded the final retainage under the contract.

The pertinent contract provisions of when payment is due read:

“[P]ayment for “normal retainage” is due upon the following having occurred:

(1)        Substantial Completion is achieved;

(2)        the Architect and the Owner approve and accept the Certificate of Substantial Completion, including an attached punchlist;

(3)        the Contractor submits an application for payment for retainage;

(4)        the Contractor submits the lien waivers to accompany the application for payment;

(5)        the 45–day lien period in La. R.S. 38:2242 has expired; and

(6)        the Contractor provides the Owner and the Architect with a clear lien and privilege certificate.”

In reading these contract provisions, along with La. R.S. 38:2191, the Fourth Circuit ruled that the parties’ contract replicated the statutory requirements for prompt payment.  The statute provides:

  1. All public entities shall promptly pay all obligations arising under public contracts when the obligations become due and payable under the contract. All progressive stage payments and final payments shall be paid when they respectively become due and payable under the contract.
  2. Any public entity failing to make any progressive stage payment within forty-five days following receipt of a certified request for payment by the public entity without reasonable cause shall be liable for reasonable attorney fees. Any public entity failing to make any final payments after formal final acceptance and within forty-five days following receipt of a clear lien certificate by the public entity shall be liable for reasonable attorney fees.
  3. The provisions of this Section shall not be subject to waiver by contract.
  4. Any public entity failing to make any progressive stage payments arbitrarily or without reasonable cause, or any final payment when due as provided in this Section, shall be subject to mandamus to compel the payment of the sums due under the contract up to the amount of the appropriation made for the award and execution of the contract, including any authorized change orders.

(emphasis added).

After analyzing the contract as a whole, in light of La. R.S. 38:2191, the Fourth Circuit ruled that because Woodrow’s liability for delays had yet to be judicially determined, the school board did not have the right to withhold the retainage amount it owed to Woodrow.  Instead, the Fourth Circuit explained, the school board had only a “claim” for alleged liquidated damages, which must be tried in a separate ordinary proceeding.  Accordingly, the Fourth Circuit ruled that the school board’s separate claim for delay-damages could not defeat Woodrow’s mandamus action, holding that a public entity’s delay-damage claims against a contractor are secondary to the contractor’s right to prompt payment under La. R.S. 38:2191, and distinct from whether a writ of mandamus should issue under the statute.  The Louisiana Public Works Act (La. R.S. 38:2243(B)) echoes a similar legislative intent: the “claims of the claimants shall be paid in preference to the claims of the public entity.”

The Fourth Circuit held that once Woodrow satisfied the requirements to payment under the contract and La. R.S. 38:2191, the school board was imputed a non-waivable, ministerial duty to tender prompt payment. Consequently, the school board had no discretionary authority to withhold payment based on a separate claim against Woodrow.  Therefore, once final retainage payment became due under the contract, no other contract provision may serve to waive the contractor’s right to prompt payment. The Fourth Circuit further opined that, where a public entity does have a right to unilaterally withhold final retainage under a public works contract, La. R.S. 38:2191 limits that right to 45 days.

Other recent Fourth Circuit cases support this same outcome.  St. Bernard Port, Harbor and Terminal District v. Guy Hopkins Construction Co., 220 So.3d 6 (4/05/17) recognized that “a public entity’s separate claims against a contractor are distinct from the issue of whether a writ of mandamus should issue.”

In Hopkins, a construction company sought a writ of mandamus to compel the St. Bernard Port, Harbor and Terminal District to pay a judgment awarded in a breach of contract case against the Port.  The trial court granted the requested mandamus. The Port appealed, claiming that La. R.S. 38:2191 did not apply to a pre-existing money judgment and that the requirements for obtaining a writ of mandamus under the statute were not satisfied.  Particularly, the Port argued that it was justified in withholding any balance claimed to be due to the construction company after it had abandoned the project, leaving portions of the project incomplete.  In affirming the trial court’s grant of the writ of mandamus, the Fourth Circuit found La. R.S. 38:2191 applicable in holding that a public entity cannot refuse to make a final retainage payment under a public works contract on the basis that it possesses reasonable cause to withhold the payment; the court further explained that, by amending La. R.S. 38:2191 to provide for mandamus relief, the Louisiana Legislature intended to avoid the protracted nature ordinary proceedings to remove the element of discretion from a public entity or officer rendering a progressive or final payment, due under contract, by requiring that the amount at issue was already appropriated.

The trial court in Woodrow distinguished Hopkins because the contractor in Hopkins sought to retroactively apply the mandamus remedy to collect a previously awarded ordinary money judgment that the public entity refused to pay; whereas Woodrow sought the issuance of a writ of mandamus prospectively, without a pre-existing judgment or the delays that accompany ordinary relief.  On appeal, the Fourth Circuit found this distinction insignificant, reasoning that whether the amount due was adjudicated before the grant of a writ of mandamus is irrelevant to the Legislature’s purpose under La. R.S. 38:2191 to ensure the prompt payment of obligations arising under public contracts.

Ultimately, the Fourth Circuit’s holding in Woodrow reinforces a public entity’s duty under La. R.S. 38:2191 to fulfill its contractual obligations as they become due, ensuring that private entities contracting with public entities receive monies due if the other statutory requirements are met. Should a public entity fail or otherwise refuse to fulfill its mandatory duty to promptly pay sums due under contract, La. R.S. 38:2191 subjects the public entity to a mandamus action compelling payment of the sums due, thus providing a procedural mechanism for forcing public entities to promptly pay monies owed under public contracts.  Lastly, La. R.S. 38:2191 imposes an award of attorney fees in favor of the contractor should a public entity fail to make all final payments under contract within 45 days of becoming due and payable.

Notably, the Fourth Circuit did not address the constitutional prohibition against compelling public entities to make payments.  Under article XII, section 10 of the Louisiana Constitution of 1974, “[n]o judgment against the state, a state agency, or a political subdivision shall be exigible, payable, or paid except from funds appropriated therefor by the legislature or by the political subdivision against which the judgment is rendered.”  It is difficult to reconcile these statutory provisions for mandamus relief for payment with this constitutional prohibition, if the school board had in fact not already appropriated funds for these payments.  The Fourth Circuit’s opinion is unclear on this point.  Presumably, the school board either already appropriated the funds at issue or else did not raise this constitutional argument, so it remains to be seen how courts will react if and when a public entity ever raises that defense in an instance where it had not already appropriated the necessary funds.

Industry Expects US Shale Growth to Offset Global Production Problems

Posted in Energy Costs, News, Oil and Gas Operations, Oil Prices

As a sustained upward trend in U.S. shale growth continues, industry analysts predict it will offset the current production problems in the near future.  In recent months the energy market has been heavily influenced by a series of demand-side developments, and investors are continuing to monitor the escalating trade conflicts between the United States and China, as well as the financial crisis in Turkey coupled with the strong U.S. dollar for their effect on the market.  Turkey’s problems, while important globally, have perhaps not received the coverage they deserve.  In the last few months the Turkish lira has plummeted in value against the U.S. dollar.  This makes Turkey’s loans (which are often paid in U.S. dollars) more expensive to pay back; if the lender banks don’t receive their money, their balance sheets become stressed and they lose the ability to continue to lend which increases the interest rates in countries beyond Turkey.

With all these developments, industry insiders believe that the U.S. shale boom is possibly the most notable supply consideration that is going underreported in the news.  As one oil analyst stated,

“The explosion in U.S. tight oil production has long been the dominant supply catalyst within the energy complex but now finds itself at the tail end of concerns. Even so, its ascent continues apace.”

In addition, the American Petroleum Institute (API) reported that U.S. crude stocks rose by nearly 4 million barrels per day in the week to August 10, reaching approximately 410.8 million barrels.  While many have been skeptical of U.S. shale in recent months, insiders stress that the U.S. shale patch is in its best economic shape ever, and the trend is still very much is the upward direction.

Back in 2014, oil was selling at near $120 per barrel, but started to decline due to weak demand, the strong dollar, and increased U.S. shale production.  Additionally, OPEC had been reluctant to reduce output which further lowered prices by flooding the market.  But in late 2016, OPEC began to curtail production.

Investors are keeping an eye on several factors that they believe could affect pricing, such as potential supply disruptions to Iranian crude exports and a ramp up in production by OPEC members and partners.  A key question facing the market in the medium term is how much longer the United States oil supply growth can continue to offset weaker production outcomes throughout the rest of the world.  At least one analyst estimates that without the U.S. crude production, the world’s supply deficit would likely increase to approximately 5.3 million barrels per day over the next five years.  But, because the U.S. crude supply is not significantly affected by politics or ageing oil fields—issues that often plague other major producers—many are optimistic that the Unites States’ supply will fill the supply gap.  Needless to say, all of this presents great opportunities to U.S. players in the industry that hopefully we all can take advantage of.

Take Heed to Avoid Being Cast a Single Business Enterprise

Posted in Legal Updates, Louisiana Corporate Law, Oil and Gas Operations

The Louisiana Third Circuit’s recent decision in Duhon v. Petro “E,” LLC, 2018-57 (La.App. 3 Cir. 7/11/18), stands as a reminder to companies of the exposure to liability they may face under the single business enterprise (SBE) theory.  Reversing a summary judgment dismissal, the court ruled that the plaintiff, an aggrieved landowner, presented facts sufficient enough to support her position that two energy companies were engaged in a single business enterprise, such that one should be held liable for the obligations of the other.

Simply stated, the SBE theory allows for one company to be held liable for the obligations of another company under certain conditions – generally when the two companies are being operated as one.  This form of veil piercing goes both horizontally and vertically, in other words between sister companies and also between a subsidiary and its parent.  However, the SBE theory allows for veil piercing solely among companies, not among individuals.

Louisiana courts analyzing an SBE allegation have applied an 18-factor test, originally set forth by the Louisiana First Circuit in Green v. Champion Ins. Co., 577 So.2d 249 (La. Ct. App.), writ denied, 580 So.2d 668 (La.1991):

  1. corporations with identity or substantial identity of ownership, that is, ownership of sufficient stock to give actual working control;
  2. common directors or officers;
  3. unified administrative control of corporations whose business functions are similar or supplementary;
  4. directors and officers of one corporation act independently in the interest of that corporation;
  5. corporation financing another corporation;
  6. inadequate capitalization (“thin incorporation”);
  7. corporation causing the incorporation of another affiliated corporation;
  8. corporation paying the salaries and other expenses or losses of another corporation;
  9. receiving no business other than that given to it by its affiliated corporations;
  10. corporation using the property of another corporation as its own;
  11. noncompliance with corporate formalities;
  12. common employees;
  13. services rendered by the employees of one corporation on behalf of another corporation;
  14. common offices;
  15. centralized accounting;
  16. undocumented transfers of funds between corporations;
  17. unclear allocation of profits and losses between corporations; and
  18. excessive fragmentation of a single enterprise into separate corporations.

This list of factors is not exhaustive, nor is any one factor dispositive in determining whether a single business enterprise exists.  Instead, courts look at the totality of facts to see if the companies are being operated as separate entities.  If a court finds that multiple entities constitute a single business enterprise, the court may disregard the concept of separateness and extend liability to each affiliated entity.

In reversing the district court’s summary judgment dismissal, the Third Circuit in Duhon noted several factors suggestive of a single business enterprise:

  1. the companies had common ownership and permitted the transfer of funds between themselves without any documentation, interest charges, or efforts made to collect unpaid loans;
  2. the loans between the companies were not “arms-length” transactions;
  3. the companies shared office space without one company paying rent to the other;
  4. the companies shared the same phone and fax numbers;
  5. the work performed by one company for the other was governed by a one-page agreement, which was different from all other contracts with other companies;
  6. the companies participated together in acquiring the lease at issue; and
  7. the contracted company never attempted to collect amounts due under the contract from the other company.

As noted previously, not all 18 factors need be met for a court to find a single business enterprise exists.  Instead a court will perform a fact intensive analysis, guided by the factors set forth in Green, to determine whether two separate legal entities are in fact operating as one, or close enough, such that each separate company should be held liable for the actions of the other.

It is important for energy companies to take note of the single business enterprise theory, as it is fairly common in today’s oil and gas industry to see related entities owned or operated by the same person(s) or entity.  For example, the same person(s) or entity may own and control both Leasing, LLC and Operating, LLC.  The owner may utilize Leasing, LLC to acquire oil and gas leases or other mineral rights and then use Operating, LLC to develop the minerals.

To mitigate liability for each company, it is imperative for each to have structures and systems in place that are independent from the other.  Further, the related entities should separate their accounting and contract with one another as they would with any other, unrelated entity.  Not doing so could expose, for example, Leasing, LLC to liability for damages caused by Operating, LLC.

Therefore, companies operating in this manner should always seek the advice of counsel regarding their exposure to liability under the single business enterprise theory.

Enforcement of Non-Compete Agreements in Louisiana Still an Uphill Battle

Posted in Employment Law, Legal Updates

Under Louisiana law, “[e]very contact or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession trade, or business of any kind, except as [otherwise] provided [by law], shall be null and void.”  See La. R.S. 23:921(A)(1).  The Louisiana First Circuit’s recent decision in Envirozone, LLC v. The Tarp Depot, Inc., No. 2016 CA 0015, 2016 WL 7444091 (La. App. 1 Cir. 12/22/16), cert. denied, 17-0308 (La. 4/7/17); 218 So.3d 11, highlights the difficulty of enforcing non-compete agreements in Louisiana.  The court’s opinion is also a poignant reminder of the presumption against the enforceability of non-compete agreements in Louisiana.

Envirozone and Tarp Depot are competitors in the hazardous waste disposal business.  Envirozone is located in south Louisiana, while Tarp Depot is located in Houston, Texas.  Despite their competition, the two companies regularly purchased products from one another, particularly when one could produce the item at a lower cost.

Envirozone was concerned that public knowledge of its purchase of products from a competitor might erode its customer base in Texas.  In October 2007, Envirozone and Tarp Depot entered into reciprocal confidentiality agreements.  Thereafter, Envirozone began sharing detailed information on its sales volume and cost structure with Tarp Depot to further develop their business relationship.  Envirozone later discovered that Tarp Depot had disclosed to an Envirozone customer that Tarp Depot was manufacturing filter bags for Envirozone (although it is not clear whether this disclosure occurred before or after the parties entered their non-compete agreement).  As a condition of maintaining their relationship, Envirozone demanded that Tarp Depot enter into a separate, non-compete agreement.  In December 2007, the parties executed such an agreement prohibiting Tarp Depot from selling products to Envirozone customers in Texas.

In 2015, Tarp Depot sent a letter to Envirozone terminating both the confidentiality and non-compete agreements.  Tarp Depot then solicited Envirozone customers in Texas.  In response, Envirozone sued Tarp Depot in Louisiana state court for 1) a declaration that Tarp Depot had not properly terminated the agreements and 2) a preliminary injunction preventing Tarp Depot from selling products to Envirozone’s customers.

The trial court ruled against Envirozone on two separate grounds.  First, it ruled that Tarp Depot had validly terminated their agreements.  Second, it concluded that the non-compete agreement was invalid because Envirozone and Tarp Depot were not on “equal footing.”  As a result, the trial court denied Envirozone injunctive relief.

On appeal, the Louisiana First Circuit affirmed the trial court’s denial of injunctive relief to Envirozone.  Under Louisiana Revised Statute §23:921 any contract or agreement that restrains someone from exercising a lawful profession, trade, or business of any kind is presumed to be “null and void,” except where specifically provided by law.  Even where the law would allow two corporations to enter into such an agreement the companies must be on equal footing.

In La. Smoked Prod., Inc. v. Savoie’s Sausage & Food Prod., Inc., 696 So.2d 1373 (La. 1997), the Louisiana Supreme Court held the parties to a non-compete agreement are on equal footing when 1) both parties are equally bound to the contract, 2) the terms are fair to each party in all respects, 3) there is no disparity in the parties’ bargaining power, and 4) the prohibitions on competition are reasonable.  The First Circuit did not address the trial court’s ruling on this point, but concluded that Tarp Depot had effectively canceled the non-compete agreement pursuant to a clause in the agreement that allowed its termination when “‘in writing and signed by the party or parties affected.’”  Under Louisiana Civil Code article 2024, “[a] contract of unspecified duration may be terminated at the will of either party by giving notice, reasonable in time and form, to the other party.”  Because the non-compete agreement had no specific duration, the court reasoned that either party had the right to terminate the agreement by giving notice “reasonable in time and form.”  The court determined that Tarp Depot’s termination letter satisfied the reasonableness requirements of article 2024.

Regarding the confidentiality agreement, the court stated that under Louisiana jurisprudence an agreement not to use confidential information was enforceable only if the information used was, in fact, confidential.  In this case, Envirozone had failed to indicate what specific confidential information, if any, Tarp Depot had in its possession that would give Tarp Depot a competitive advantage.

Yet the court was not unanimous in its decision.  In a concise dissent, Chief Judge Vanessa Whipple suggested that the majority had overlooked obvious facts in favor of the injunctive relief requested by Envirozone.  For example, Judge Whipple found that the parties were on equal footing because although Tarp Depot was a new and relatively small company, its founder had over twenty-six years of experience that included the recent sale of another hazardous waste disposal company for three million dollars.  From that prior company Tarp Depot had a built-in customer base.  As such, Judge Whipple would have confirmed the validity of the non-compete agreement.

Judge Whipple also concluded that Tarp Depot had not validly terminated the non-compete agreement because the terms of the agreement required any cancellation to be signed by the party or “parties affected” (emphasis added).  Judge Whipple reasoned that “[c]ertainly, the termination of the non-compete agreement herein affects both parties . . . .  Accordingly, to terminate the agreement both parties had to sign, which undisputedly was not done.”  Judge Whipple further suggested that the majority’s rationale based on the notice requirements of article 2024 of the Civil Code was flawed.  Envirozone received Tarp Depot’s letter the day before the purported cancellation of the non-compete agreement.  “I am unable to find that this constitutes ‘reasonable advance notice,’” Judge Whipple stated.

Judge Whipple did not agree that Envirozone had failed to indicate what confidential information Tarp Depot had in its possession.  Both parties testified that the purpose of the confidentiality agreement was to ensure Envirozone’s customers would not learn that Envirozone was purchasing products from Tarp Depot.  Tarp Depot had acknowledged that it learned about Envirozone information that Tarp Depot would not have shared with a competitor without a confidentiality agreement.  This admission combined with the parties’ purpose for entering into the confidentiality agreement was sufficient to support Envirozone’s request for an injunction, Judge Whipple concluded.

The Envirozone case demonstrates the uphill battle in enforcing non-compete agreements in Louisiana even when facts supporting injunctive relief may be “readily apparent from the record.”  As Judge Whipple observed, “the rationale for the confidentiality agreement is readily apparent from the record.”  A company hoping to protect its customer base through a non-compete agreement must not only be concerned about its competitors, but must also be familiar with Louisiana’s non-compete laws.

For more information on enforcing a non-compete agreement or confidentially agreement in Louisiana, please contact Donna Currault or Micah Zeno.

22 GORDON ARATA MONTGOMERY BARNETT Lawyers Selected for Inclusion in The Best Lawyers in America® 2019 Edition, Two Named Lawyer of the Year

Posted in Firm Announcements

In the past 35 years, Best Lawyers has become universally regarded as the definitive guide to legal excellence.  Because Best Lawyers is based on an exhaustive peer-review survey in which more than 36,000 leading attorneys cast almost 4.4 million votes on the legal abilities of other lawyers in their practice areas, and because lawyers are not required or allowed to pay a fee to be listed, inclusion in Best Lawyers is considered a singular honor.  Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

A total of 22 Gordon Arata Montgomery Barnett lawyers representing 24 diverse practice areas have been selected for inclusion in The Best Lawyers in America® 2019 edition.  New Orleans lawyer Donna Phillips Currault has been named “Lawyer of the Year” for her work in Employment Law.  New Orleans lawyer Tim Eagan has been named “Lawyer of the Year” for his work in Energy Law.  Best Lawyers limits the honor of “Lawyer of the Year” to one attorney in each practice area for a particular city.

The named honorees include:

 
Admiralty and Maritime Law
Philip Brooks, Jr. – New Orleans, LA
Gordon Grant, Jr. – New Orleans, LA

Bankruptcy and Creditor Debtor Rights
Insolvency and Reorganization Law
Gerald Schiff – Lafayette, LA

Bet-the-Company Litigation
Tim Eagan – New Orleans, LA
Daniel Lund – New Orleans, LA

Commercial Litigation
Steve Copley – New Orleans, LA
Donna Phillips Currault – New Orleans, LA
Tim Eagan – New Orleans, LA
Greg Grimsal – New Orleans, LA
Martin Landrieu – New Orleans, LA
Daniel Lund – New Orleans, LA
Howard Sinor – New Orleans, LA

Construction Law
Michael Botnick – New Orleans, LA
Howard Sinor – New Orleans, LA

Employment Law – Individuals
Donna Phillips Currault – New Orleans, LA – Also named Lawyer of the Year in New Orleans

Employment Law – Management
Donna Phillips Currault – New Orleans, LA – Also named Lawyer of the Year in New Orleans

Energy Law
Bob Duplantis – Lafayette, LA
Tim Eagan – New Orleans, LA
Peck Hayne – New Orleans, LA
Sam Masur – Lafayette, LA
Cynthia Nicholson – New Orleans, LA

Environmental Law
Terry Knister – New Orleans, LA

Labor Law – Management
Donna Phillips Currault – New Orleans, LA

Legal Malpractice Law – Defendants
Daniel Lund – New Orleans, LA

Litigation – Banking & Finance
Greg Grimsal – New Orleans, LA

Litigation – Construction
Howard Sinor – New Orleans, LA

Litigation – Environmental
Howard Sinor – New Orleans, LA

Litigation – Labor & Employment
Donna Phillips Currault – New Orleans, LA

Litigation – Real Estate
Greg Grimsal – New Orleans, LA

Mining Law
John Y. Pearce – New Orleans, LA

Natural Resource Law
John Y. Pearce – New Orleans, LA

Oil & Gas Law
Bob Duplantis – Lafayette, LA
Greg Duplantis – Lafayette, LA
Peck Hayne – New Orleans, LA
Sam Masur – Lafayette, LA
Cynthia Nicholson – New Orleans, LA
Scott O’Connor – New Orleans, LA
John Y. Pearce – New Orleans, LA
Paul Simon – Lafayette, LA

Personal Injury Litigation – Defendants
Tim Eagan – New Orleans, LA
Daniel Lund – New Orleans, LA

Product Liability Litigation – Defendants
Steve Copley – New Orleans, LA

Securitization and Structured Finance Law
Marion Welborn Weinstock – New Orleans, LA

Tax Law
Caroline Lafourcade – New Orleans, LA

About Gordon Arata Montgomery Barnett

Gordon, Arata, Montgomery, Barnett, McCollam, Duplantis & Eagan, LLC has attorneys in offices in New Orleans, Lafayette, and Baton Rouge, Louisiana and Houston, Texas.  Whether in litigation or transactions or dealing with regulators, the Firm’s lawyers serve clients locally, regionally, and nationally and provide services across a wide range of industries aligned with the Firm’s offices along the Gulf Coast.  The Firm is committed to achieving the best possible results and to fostering relationships with clients. For contact information, please visit our webpage at www.gamb.law.