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Ten Issues that Lawyers Can Help the Energy Industry Solve Bright Lights, Big Oil The Federal Government Seeks To Exert More Control Our Texas Heritage: The Summer of the No Deductions Clause 65th Harvest Celebration

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Volume 52 – Number 3

November/December 2014

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contents Volume 52 Number 3

November/December 2014

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16

FEATURES Hydrocarbon 10 Understanding Trends: Ten Issues that Lawyers

Can Help the Energy Industry Solve

By Bill Kroger and Jason Newman

Lights, Big Oil 16 Bright

By Liz Klingensmith

and Wolf A. McGavran

Federal Government Seeks 20 The To Exert More Control

By JOHN S. GRAY and CARLOS MORENO

20

32

Texas Heritage: The Summer 26 Our of the No Deductions Clause

By Robert Theriot and Josh Downer

Harvest Celebration Raises 32 65th Record $670,000 for Houston

The Houston Lawyer

Bar Foundation

The Houston Lawyer (ISSN 0439-660X, U.S.P.S 008-175) is published bimonTHLy by The Houston Bar Association, 1111 Bagby Street, FLB 200, Houston, TX 77002. Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1111 Bagby Street, FLB 200, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/SUR, 12818 Willow Centre Dr., Ste. B, Houston, TX 77066, 281-955-2449 ext 16, www.thehoustonlawyer.com, e-mail: leo@quantumsur.com Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. ŠThe Houston Bar Association, 2014. All rights reserved.

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November/December 2014

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contents Volume 52 Number 3

November/December 2014

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35

departments Message 6 President’s Thank You!

By M. carter crow the Editor 8 From Texas Leads the Way in Energy Law

By Robert Painter

Managing Internet Risks & Benefits

Internet Risks & Benefits 35 Managing Using Google and Social Media

to Help Clients Find, Like and Contact You – Part II

By Taunya Painter

36

37

Lawyers Who Made a Difference 36 Houston John B. Connally, Jr.

By The Hon. Mark Davidson

Profile in Professionalism 37 ADianne Ralston

Executive Vice President, General Counsel and Corporate Secretary, Weatherford International, PLC

THE RECORD 38 OFF Natara Williams and the Art

of Inspired Jewelry

By Nicole Bakare

SPOTLIGHT 39 COMMITTEE Law & the Media Committee

Bridges Professional Gaps

By Raymond Panneton

38

39

Trends 40 Legal Texas Supreme Court Finds Economic

Loss Rule Not a Bar to Suit Between Contractual Strangers

By Amy Hargis

Cross-Claimants and Third Party Plaintiffs Not Required to File Expert Affidavit with Original Petition in Arbitration

By Kelly L. Fritsch Reviews 42 Media The Boom: How Fracking Ignited

the American Energy Revolution and Changed the World Reviewed by Sammy Ford IV

Sharing the Common Pool: Water Rights in the Everyday Lives of Texans The Houston Lawyer

Reviewed by Polly Graham

Educator’s Guide to Texas School Law Reviewed by Miles Bradshaw

44 Litigation MarketPlace 4

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president’s message

By M. carter crow Norton Rose Fulbright

Thank You!

for supporting our November Harvest Celebration

I

One thing you may notice about the list of Harvest Celebrawant to express my sincere gratitude to all of you who suption underwriters is the number of law firms and corporations ported our November Harvest Celebration. Through your whose success is linked to the energy industry. We are fortunate generosity, we raised $670,000 for pro bono legal services to live in a state of great opportunity, and much of it is fueled through our Houston Volunteer Lawyers. Your donations by the energy business. The growth of the Houston Bar Associago to the heart of what we do—provide access to justice tion is directly tied to the energy industry. Our for people in Houston who cannot afford to hire Oil, Gas and Mineral Law Section, with nearly a lawyer.

Whether you 1,000 members, is one of our oldest and most We provide access to justice through the staff were a major active sections, providing education and netattorneys of the Houston Volunteer Lawyers working opportunities to keep its members on working hand in hand with our member volunderwriter or the cutting edge of the industry. Many other unteers. With the aid of your contributions, the sections, such as Real Estate, Litigation, Labor staff attorneys of the Houston Volunteer Lawyers purchased tickets for & Employment, and Mergers & Acquisitions, will provide case-management infrastructure, mentor volunteer lawyers and handle case emeran enjoyable evening are directly related to oil, gas and mineral law.

The Texas energy industry propels our real esgencies, as well as tackling all of the other day with your professional tate, our employment level, and many of the to day operations that make it possible for us, as things that make Houston a great place to live volunteer attorneys, to fulfill the responsibilities colleagues, thank you and work. that go with the privilege of practicing law.

Law firms across the nation have certainly In terms of our member volunteers, make no for supporting equal recognized this. According to Mark Curriden mistake about it, your donations of time make in Texas Law Book, “Since February 2010, a real difference in people’s lives. For example, access to justice. at least 30 out of state law firms have opened our volunteer lawyers recently made it possible I encourage you to shop in Texas, two-thirds of them in Houston.” for an elderly woman to stay living in the home The Houston Business Journal reports that over she made payments on over many years, when take a look at the the last decade, Houston has added more than she was in danger of losing it to foreclosure. As 400,000 jobs, with the majority of them coming another recent example, your donations made list of underwriters through the energy sector. it possible for a volunteer lawyer to ensure the We are fortunate that these law firms and coron page 34. safety of a child who is scared because he lives porations believe in supporting their communiin a violent household. In terms of our veterans’ ties and sharing their success. Throughout the 145-year history clinics, your donations ensure that we can continue to staff our of the HBA, energy-focused law firms and energy companies have clinics that assist veterans in getting their hard-earned medical been a key part our development into a premier metropolitan bar and retirement benefits. association. Our law firms and members are supported by the Whether you were a major underwriter or purchased tickets success of the energy industry, as well as the drive and spirit of for an enjoyable evening with your professional colleagues, thank its people. you for supporting equal access to justice. I encourage you to We are blessed to count you as a member of the Houston Bar take a look at the list of underwriters on page 34, and I urge you Association, and we wish you the best in 2015. to add your name to the list next year.

“

The Houston Lawyer

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Jan Clark, J.D. REALTOR®

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from the editor

By Robert Painter Painter Law Firm PLLC

Associate Editors

Angela L. Dixon Attorney at Law

Farrah Martinez Harris County District Clerk’s Office

Texas Leads the Way in Energy Law

A

gas activities do not really fit within existing legal t one time, if Rorschach had shown a concepts.

Texas-shaped ink blot to non-Texans, While some Texas lawyers specialize in energy law, I bet that most of them would say that many who practice in other arthey saw a horseeas see energy law issues come riding cowboy. As up from time to time. Transacour energy industry tional attorneys may be asked to has developed and expanded, review lease agreements. Estate though, I think the majority planning and probate lawyers would now see an oil well. There have to deal with the disposiis no doubt that Texas is the ention of royalty interests. Litigaergy state and Houston is its entors get involved when there are ergy capital. contractual disputes or disasters The advent of horizontal drillThe advent of occur. Regardless of our practice ing and hydraulic fracturing has horizontal drilling and areas, energy issues are relevant been a game-changer for the ento all Houston lawyers. ergy markets. Many credit it for hydraulic fracturing has In this issue, energy lawyers the low gas prices that we are been a game-changer have written about a variety of now enjoying. The OPEC olitopics impacting Texas pracgarchs are grappling with the for the energy markets. tice. Liz Klingensmith and Wolf new reality that they are no lonMany credit it for McGavran discuss how new oil ger the only show in town. For and gas technology, like frackthe first time in memory, some the low gas prices ing, has impacted lease and reAmerican politicians are talking that we are now enjoying. lated agreements. Bill Kroger about the possibility of energy The OPEC oligarchs and Jason Newman summarize independence.

10 issues that lawyers can help These new technologies have are grappling with the energy industry solve. John also generated some challenges the new reality that Gray and Carlos Moreno warn and excitement in Texas energy that the federal government is law. As a result of over a century they are no longer seeking more control under the of oil and gas activities in Texas, the only show Clean Water Act. And Robert we have a well-developed body Theriot and Josh Downer anaof law to interpret most issues in town. lyze the Texas Supreme Court’s that arise in the energy industry. opinion in Heritage Resources Inc. v. Nationsbank, Now, though, Texas courts are being called on to give and the status of no deduction clauses. guidance on issues where the new types of oil and

“

Jill Yaziji Yaziji Law Firm

The Houston Lawyer

Polly Graham Haynes and Boone, LLP

Taunya Painter Painter Law Firm PLLC

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November/December 2014

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BOARD OF DIRECTORS President

Secretary

M. Carter Crow

Alistair B. Dawson

President-Elect

Treasurer

Laura Gibson

Neil D. Kelly

First Vice President

Past President

Benny Agosto, Jr.

David A. Chaumette

Second Vice President

Todd M. Frankfort

DIRECTORS (2013-2015)

Hon. David O. Fraga Bill Kroger

Richard Burleson Warren W. Harris

Jennifer A. Hasley Daniella D. Landers

DIRECTORS (2014-2016) Diana Perez Gomez Greg Ulmer

editorial staff Editor in Chief

Robert Painter Associate Editors

Angela Dixon Farrah Martinez Jill Yaziji

Polly Graham Taunya Painter

Nicole Bakare Kimberly Chojnacki Sammy Ford Jason Goff Amy Hargis Matthew Heberlein Jason McLaurin Judy Ney Jeff Oldham Aaron Reimer Matthew Walker Hon. Jeff Work

Editorial Board

Yvette Cano Jonathan Day Kelly Fritsch John Gray Al Harrison Preston Hutson Chance McMillan Angie Olalde Raymond Panneton Hon. Josefina Rendon Zach Wolfe

Managing Editor

Tara Shockley

HBA office staff Executive Director

Director of Projects

Receptionist/ Resource Secretary

Project Assistants

Director of Education

Ashley G. Steininger

Membership and Technology Services Director

Continuing Legal Education Assistant

Membership Assistant

Kay Sim

Bonnie Simmons Rachel Mosley Amanda Pietsche

Lucia Valdez

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Communications Director

Communications Assistant /Web Manager

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By Bill Kroger and Jason Newman

Understanding Hydrocarbon Trends:

Ten Issues that Lawyers Can Help the Energy Industry Solve

O

il and gas exploration in Texas has changed dramatically because of rapid advances in technology that enables access to previously unrecoverable hydrocarbons trapped in tight shale formations. Directional drilling, 3-D seismography and hydraulic fracturing now allow energy companies to economically drill and produce hydrocarbons from shale formations with little to no risk of a dry hole. Because these wells drain relatively small areas, operators must make substantial capital investments to drill the number of wells needed to fully develop shale play acreage.

With these technological advancements come new legal issues that energy lawyers will need to solve in the coming years.

1. Title Dispute Increased leasing in places without historic leasing activity has resulted in a number of title disputes over the rights to minerals—including both the right to lease and the right to receive royalties.

In some of these disputes, operators can suspend royalties pending resolution of the underlying mineral dispute. In others, however, a competing landowner will challenge an operator’s lessor’s right to lease the minerals, forcing the operator to take an active role in the dispute.

Claims in the latter category can place the operator’s tremendous capital outlay at risk and stifle drilling operations pending the outcome of the dispute.

These title issues have placed a high demand on skilled title attorneys, and lawyers will be asked to refamiliarize themselves with many of the property law concepts they learned during law school, such as the Rule Against Perpetuities and the large canon of deed construction cases under Texas law.

2. Modern Lease Provisions Modern Texas oil and gas leases are less uniform than they were a generation ago. In the past, oil and gas operators

would typically work off one of several different standard lease forms, such as the “Producers 88” form. These forms were seldom more than a couple of pages long, and most of their key provisions had been construed by the courts, providing operators and lessors with certainty regarding lease operations.

Many of the leases taken in the shale plays, however, differ widely from these standard lease forms. Many are built from the ground up and include new or unique provisions that seek to apply additional obligations on the lessee.

For example, some leases may purport to impose fiduciary duties on operators, or provide that a material breach of a lease provision also constitutes a breach of a condition that terminates the lease.

Other leases contain three to five page royalty provisions with unique provisions for calculating royalties, or contain severe restrictions on use of the surface for oil and gas drilling activities (such as prohibiting drilling activity during hunting season).

These non-standard leases pose challenges for oil and gas operators who typically deal with large portfolios of leases and have difficulty tracking such leases with unique or special provisions when they are planning drilling programs or calculating royalties. In a growing number of lawsuits, lessors are claiming breaches of these newer lease forms, and the Texas courts will have to make decisions on how to construe or apply these new provisions to horizontal well operations. On the other hand, the trend toward customized oil and gas leases will make it even harder for a Texas court to certify a royalty class action.

3. Offset Wells Many oil and gas leases in Texas require the lessee to drill an offset well on the lease if a commercial well is drilled on adjacent acreage within a certain distance of the lease line. As mentioned above, some of the more traditional leases have provisions that were drafted with vertical wells in mind. More

modern lease forms are drafted with an expectation of horizontal drilling, and they contain offset well provisions that attempt to shift the threshold burden of proof to the lessee to show drainage or substantial drainage. Still other leases create the concept of “deemed drainage” that force an operator to drill an offset well, release acreage, or pay compensatory royalties if a well is drilled on an adjacent lease within a set distance of the lease line (regardless of whether actual drainage is occurring or not).

Historically, offset well clauses arose as an express manifestation of the lessee’s implied duty to protect the leasehold estate from drainage. As a result, the adjacent well was required to be substantially draining the leasehold before the lessee was required to drill an offset well. In the world of horizontal drilling, however, where fracturing creates the reservoir and drainage is minimal, many of these provisions amount to nothing more than a free well clause, because there is no common reservoir of freely migrating hydrocarbons to offset.

Lawsuits have been filed over the operator’s obligations under various offset well clauses, including suits over where to install an offset well and the amount of compensatory royalties owed in lieu of an offset well. We expect to see more of these lawsuits as courts grapple with how to apply offset well clauses based on drainage to horizontal drilling where little to no drainage exists.

4. Trucks and Roads In some areas of the state, oil and gas activity has placed stress on state roads, highways, and related infrastructure.1 There are two primary ways that these stresses occur.

First, there have been complaints that fracking trucks cause roadway damage. During drilling and completion, large amounts of water and sand are often trucked over rural roads to access a drill site. Tanker trucks carrying liquid hydrocarbons to market can also cause wear and tear to roads. Damage can be

especially acute on caliche roads during rainy or wet conditions. Oil and gas operators correctly observe that they are properly permitted to operate the trucks on the roadways, and they pay substantial taxes to the state that should be used to pay for road repair. Still, counties complain that they are not receiving enough proceeds to pay for maintenance on their roadways. In some instances, counties have asked oil companies to pay for improvements on particular roads or even filed suit over roadway damage.

The other issue concerns roadway safety. There has been an increase in the number of accidents involving tanker trucks, as well as those caused by oilfield workers dozing off to sleep while driving to and from a drill site.2 Some of these problems may be caused by the increased amount of oil and gas activity —more trucks and cars mean more accidents, even if driver safety remains the same. This problem should improve over time as more man camps, motels and hotels in the shale plays are constructed, and more products are moved by pipeline rather than by truck.

Plaintiffs are naming operators as defendants in cases involving accidents with oil and gas contractors. These cases focus on different theories that seek to impose liabilities on operators for the negligence of their contractors. These cases will also continue to raise legal issues involving indemnities and additional insured coverage provided for in the agreements with contractors.

5. The Tortification of Oil and Gas Operations Advances in horizontal drilling allow hydrocarbons to be produced from counties in the Eagle Ford or Barnett shale plays that do not have a history of oil and gas activity. Although many landowners have received huge windfalls from oil and gas leases, conflicts remain between the surface and the mineral rights holders over the uses and development of property.

Not surprisingly, these conflicts,

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when coupled with political activists, give rise to an increase in tort and other lawsuits filed against oil and gas operators, even for activity that is perfectly legal and safe. One such example is the case of Parr v. Aruba, in which a Dallas County jury found Aruba liable under a nuisance theory for its oil and gas operations in Wise County.3 The Parrs live on a 40-acre homestead located in the Barnett shale play. They claimed that Aruba’s activities caused them to suffer nose bleeds, rashes, breathing problems, property damage and other complaints, even though they did not have causation testimony as required under Havner and Borg-Warner.4 The court allowed the Parrs to submit their nuisance claim to the jury, which awarded them more than $3 million in damages.5 The verdict in Parr v. Aruba seems questionable.6 The case is on appeal, and there are substantial legal questions that need to be reviewed, such as the causation standard for a nuisance cause of action. Regardless, more Parr

v. Aruba type cases may be filed in the future. Plaintiffs’ lawyers find them attractive because they are relatively inexpensive to bring, attract publicity, can be asserted against solvent defendants and involve visual and emotional evidence using pictures or videos taken with smart phones, which are often posted on websites.

6. Fracking Bans and Moratoria Activists have also responded to growing oil and gas development by advocating for fracking bans and moratoria in cities and other communities across the country, including Texas. This issue attracts media attention, and advocates of such measures claim that hundreds of communities have passed such bans and moratoriums.7 Yet, many of the measures are in cities and states where there is little drilling activity and the ban is mainly a political statement.

In 2013, the City of Dallas passed an ordinance that prohibits the drilling of an oil well less than 1,500 feet from a home.8 Because of the relatively small size of THE POWER OF LEGAL EDUCATION many leases in AND THE LL.M. DEGREE the City of Dallas, the ordinance The University of Houston Law Center is home to effectively makes renowned LL.M. specialty programs with two (Health it impossible to Law and Intellectual Property) ranked in the Top Ten according to U.S. News & World Report.

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drill a well within Dallas city limits.

This ordinance is the subject of a pending lawsuit, Trinity East Energy v. City of Dallas9 in which Trinity makes a claim, among others, that the ordinance constitutes a taking of oil and gas leases granted by the City of Dallas shortly before the ordinance was passed.

Similarly, the City of Denton, which is near Dallas/Fort Worth and also located in the Barnett shale play, has enacted a moratorium on new drilling permits until at least January 20, 2015. This allows time for the citizens of Denton to vote on an ordinance that would ban all hydraulic fracturing in the city. Because nearly all of the newly drilled wells in Denton involve hydraulic fracturing, this measure also effectively acts as a ban on all new drilling within the city.

It is unlikely that other Texas cities with substantial oil and gas reserves will pass similar bans and moratoria. But it would be no big surprise to see community activists pushing for such measures on city ballots. Furthermore, city mayors and councils will continue to wrestle with complaints from citizens and measures that balance the needs of residents with the benefits of oil and gas drilling activities. In the future, some communities may consider measures that impose limits on hours for drilling activities, maximum noise levels, or setback limits,

similar to ordinances that impose limits on new construction activities. Energy lawyers will need to educate local government officials and other community leaders on such provisions so that reasonable measures are adopted to appropriately balance the needs and rights of parties and their property interests.

7. Royalty on Flared Gas Oil and gas flaring in the shale plays has been the source of attention and an increasing number of legal disputes.10 Flaring can give rise to a nuisance claim, such as in the Parr v. Aruba case, but it can also result in a claim for unpaid royalties on flared gas. The merits of the latter claims largely turn on the lease terms. Some leases have provisions that require royalty to be calculated based on oil and gas “produced and sold,” or “marketed.” These royalty provisions require a sale before royalty is owed, and therefore may not support a claim for royalty on flared gas. Other leases that do not tie the royalty to the actual sale of

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hydrocarbons, such as provisions based on gas “produced,” or those with objective pricing mechanisms, may result in claims that royalty is owed regardless of whether the gas is actually sold.

8. Rig Accidents The increase in drilling activity has given rise to an increase in oilfield injuries.

The Occupational Safety and Health Administration (OSHA) reports that in Region VI, which includes Texas, between the calendar years 2007 and 2012, OSHA investigated 162 fatalities among workers in the upstream oil and gas industry while performing activities including drilling, exploration, and workover.11 A separate OSHA report claims that the fatality rate for oil and gas extraction workers is seven times greater than the rate for all industries.12 OSHA may become more aggressive with investigating such accidents in the future. Furthermore, in subsequent litigation, many of these claims implicate the same liability, indemnity, and insurance issues men-

tioned above because of the large number of contractors on a drill site at any given time.

9. Marketing Getting hydrocarbons safely to markets with more favorable pricing raises another set of legal challenges. The increase in hydrocarbon production in the shale plays has caused an over-supply in some markets. For example, a large supply of condensates and natural gas liquids from the Eagle Ford shale has caused the price of those same hydrocarbons to fall within the Gulf Coast. Upstream operators are petitioning the federal government for approval to export United States hydrocarbons to overseas markets where the prices are better.13 Over time some of these marketing constraints should be resolved as new pipelines are constructed and/or export restrictions are loosened. However, the construction of new energy infrastructure, and changes to complex government regulation written when the

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United States was more dependent on imported oil, raise myriad legal issues that have yet to be resolved. In Texas, property rights advocates are making it harder and more expensive for pipeline companies to use the power of condemnation to build pipelines in new areas of the state. Existing utility rights of way are becoming crowded making it more difficult to add new pipelines in places where they already exist. There will be more regulatory and civil litigation between property owners and pipeline utilities over the location and cost of this new energy infrastructure.

10. Environmental Issues The large volumes of water and fracking fluids needed to drill and complete a well, and other aspects of horizontal drilling, have caused environmental activists to wage war on the industry in the press and other media outlets. As with nuisance claims based on drilling and flaring, activists rely on new technologies such as camera phones and blogs to bring their anti-fracking message to the public. In recent years, allegations that fracking has polluted a community’s water supply or caused earthquakes has captured the public’s attention. While most of these allegations are scientifically inaccurate, energy lawyers will be required to work with the industry to help educate the public regarding horizontal drilling and counteract the large volume of misinformation routinely broadcast by activists.

Conclusion There are many opportunities for Texas oil and gas operators in the years ahead.

These opportunities come with challenges that are solvable but will require the assistance of skilled, experienced energy lawyers who can solve problems across a variety of practice areas. It will be increasingly important for firms to have coordinated teams of lawyers with transactional, litigation, environmental and regulatory expertise who can work well together to solve complex

legal problems in the energy industry.

The firms that are good at doing this will have plenty of work for years to come.

Bill Kroger is co-chair of the Baker Botts Energy Litigation Practice.

Jason Newman is a partner at Baker Botts and a member of the Firm’s Energy Litigation Practice. Bill and Jason routinely advise clients on new legal issues arising out of horizontal drilling in the shale plays..

Endnotes 1. Scott Rachael Seeley, High cost of maintaining Eagle Ford roads strains Dewitt County, Aug. 13, 2014, available at http://www.ogj.com/articles/uogr/print/ volume-2/issue-4/high-cost-of-maintaining-eagleford-roads-strains-dewitt-county.html.

2. Lise Olsen, Fatal truck accidents have spiked during Texas’ ongoing fracking and drilling boom, Sept. 11, 2014, available at http://www.chron.com/news/article/Fracturing-and-hydraulic-drilling-have-broughta-5747432.php.

3. See Cause No. 11-01650-E, Lisa Parr, et al. v. Aruba Petroleum, Inc., et al.; In the County Court at Law Number Five of Dallas County, Texas.

4. Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706 (Tex. 1997); Borg-Warner Corp. v Flores, 232 S.W.3d

765 (Tex. 2007).

5. There are numerous articles available on-line about the Parr v. Aruba verdict. Most of them are written by groups with a political agenda or lawyer blogs.

This site, from one of the law firms that represented the Parrs, is interesting if only because it contains a poem about the case. http://www. dmlawfirm.com/3-million-verdict-fracturing-case.

6. For example, the court’s decision to submit the case to the jury without requiring the Parrs to meet the proximate cause standard required under Texas law for other tort claims seems to these authors to be inconsistent with Texas law.

7. See, e.g., http://www.fractracker.org/map/us/newyork/moratoria/.

8. Randy Lee Loftis, Dallas OKs gas drilling rules that are among the nation’s tightest, Dec.12, 2013, available at http://www.dallasnews.com/news/ metro/20131211-dallas-new-gas-drilling-rules-areamong-nations-tightest.ece.

9. Eric Neilson, Trinity East is Suing the City of Dallas for Reneging on Fracking Leases Feb. 13, 2014, available at http://blogs.dallasobserver.com/unfairpark/2014/02/trinity_east_is_suing_the_city.php.

10. See, e.g., http://stories.weather.com/fracturing 11. OSHA Regional Notice Directive No. CPL 2 02-00013 (October 1, 2013), at 4.

12. See https://www.osha.gov/SLTC/oilgaswelldrilling/.

13. Amy Harder, Oil Producers to Pump Up Lobbying to Remove U.S. Export Ban, Aug. 24, 2014, available at http://online.wsj.com/articles/oil-producers-to-pumpup-lobbying-to-remove-u-s-export-ban-1408920280.

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November/December 2014

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By Liz Klingensmith and Wolf A. McGavran

Bright Lights, Big Oil

I. Industry boom from horizontal drilling and hydraulic fracturing Advancements in “new” technologies like horizontal drilling and hydraulic fracturing have triggered an energy boom that was unimaginable decades ago, bringing with it the potential for price stability, energy independence and even a profitable export market.

In short, technologies now allow companies to drill vertically then horizontally, expanding greatly the reach

Geology.com, Oil Fields at Night, Eagle Ford Shale, Image from the NASA Suomi satellite in April and October 2012, available at geology.com/articles/eagle-ford (last visited Oct. 5, 2014).

The lights from oil and gas operations in the Eagle Ford Shale in South Texas shine brightly into space. This article provides a birds-eye view of the oil and gas boom that is transforming the nation’s energy landscape, highlights common litigation issues that are arising in proportion to skyrocketing oil and gas activity, examines emerging legal issues on the oil and gas legal frontier, and, finally, offers perspective on some tangential legal issues surrounding the energy boom.

to oil and gas sources, without having the extensive surface impact. Hydraulic fracturing (a/k/a “fracing” and “fracking”) unlocks these resources by pumping significant amounts of fluid and proppants (solid pebble-like materials used to keep a fracture open) into shale to create and maintain small fractures, which allow the oil or gas to be released from a rock formation. The pathways created through hydraulic fracturing significantly increase the rate at which hydrocarbons can be produced from the formation, allowing oil and gas producers to gain profits from their investments in low-permeable geological shale.

The boom in horizontal drilling and hydraulic fracturing has necessitated an investment surge in technology, equipment, personnel and the infrastructure necessary to take the oil and gas from deep underground to market. It is estimated that hundreds of billions of dollars in capital investment will surge into the economy as a result of the boom.

From coast to coast, shale plays, which are defined geographic areas targeted for their energy production potential, have now been identified.

As is the case with rapid market growth in any industry, there are new legal issues arising industry-wide and unique legal disputes arising based on the individual attributes of the shale play and the new drilling and fracturing technologies.

a number of potential benefits, such as sharing of risks and costs, but are also ripe for disputes. JOA litigation often centers around the propriety of joint operating expenses, the terms of the JOA, the conduct of the operator and nonoperators seeking to remove the operator. Since 1956, the American Association of Professional Landmen (“AAPL”) has promulgated a form JOA. The AAPL’s form JOA became an industry standard but, until relatively recently, was not U.S. Energy Information Administration, Map of Lower 48 States Shale Plays, available at II. Common oil and gas http://www.eia.gov/pub/oil_gas/natural_gas/analysis_publications/maps/maps.htm (last well-tailored for the drilling visited Oct. 5, 2014). legal issues as applied to of horizontal wells. This deing. As a result of these moratoria, lesnew drilling and fracturing ficiency required JOA parties sees cannot develop their leases, are at technologies to extensively modify the form to suit risk of losing them and have filed lawA. Oil and gas leases their purposes. In 2013, the AAPL upsuits claiming force majeure.

Conventional lease terms can include dated its form JOA to take into account Absent express written terms to the provisions related to deep rights, force changes necessitated by the boom in contrary, lessors may be bound by cermajeure and others. In the context of horizontal drilling. The revised form tain unwritten “implied covenants” to horizontal drilling, some of these proJOA will hopefully provide greater unireasonably develop, explore further visions may require rethinking. A soformity in JOAs and reduce the risk of and protect from drainage.

When adjucalled “Pugh clause” terminates an oil disputes that can give rise to litigation. dicating claims that a lessee breached and gas lease as to any acreage that has an implied covenant, courts typically not been developed during the term of C. Subsurface trespass apply a reasonably prudent operator the lease. Pugh clauses traditionally Subsurface trespass is a cause of acstandard.

In the context of horizontal apply to property or unit boundaries— tion meant to protect an interest owner drilling, questions arise as to whether a vertical boundaries from the sky to the whose minerals are being wrongfully reasonably prudent operator would decenter of the earth. Horizontal drilling depleted by a well drilled on a neighvelop deeper horizontal zones or proenables an operator to develop multiple bor’s property. Traditionally, subsurtect one zone from draining another. horizontal zones. In a stacked play, a face trespass may arise when a well Aggrieved lessors who believe they are Pugh clause may terminate the lease drilled on one tract of land “bottoms due greater royalties may assert breach as to any horizontal zone that has not out” underneath a non-unitized neighof an implied covenant, and pose a sigbeen developed during the lease term. boring owner’s property. With the innificant litigation risk where the lease Modern Pugh clauses may allow termicreased use of hydraulic fracturing, terms do not eliminate such implied nation of the lease as to both vertical courts have had to address whether covenants. and horizontal boundaries. subsurface trespass occurs when a Conventionally, a force majeure profracture caused by hydraulic fracturB. Joint operating agreements vision excuses a lessee’s failure to deing—but not the well bore—crosses A joint operating agreement (“JOA”) velop a lease as a result of any number property lines. Some courts, includis an agreement between producers, of disastrous events such as, among ing in Texas, have found that the rule generally lessees under leases with others, hurricanes, acts of God, or war. of capture precludes a cause of action mineral interest owners, to coordinate Public concerns over hydraulic fracin such circumstances, while others, their efforts to develop the leased oil turing and the resulting media frenzy including at least one court in the Marand gas.

One party usually agrees to have, at least in part, contributed to cellus shale area where hydraulic fracact as the “operator” and develop the significant action by local and state turing is common, have reached the property while the non-operators agree governments to outright ban oil and opposite conclusion. Another issue reto contribute financially. JOAs provide gas operations and hydraulic fracturlated to trespass is whether actionable thehoustonlawyer.com

November/December 2014

17

subsurface trespass occurs when fluids migrate under a landowner’s property from a disposal well drilled on a neighbor’s property. With an estimated four billion barrels of wastewater disposed of using disposal wells in Texas every year, this is not a merely academic question. The Texas Supreme Court is currently considering this issue in the case of FPL Farming, Ltd. v. Environmental Processing Systems, L.C. and will hopefully provide some much needed certainty in this area.

D. Pooling and unitization Pooling and unitization can be used to more efficiently develop mineral interests. Pooling describes the process of grouping two or more leaseholds so that operations on one leasehold satisfy the drilling requirements under each pooled lease. Pooling is often necessary when small tracts are involved or state law requires wells to be spaced certain distances from one another. Unitization is the combining of several wells

to produce from a specific geologic formation. Disputes can develop between lessors and lessees over whether pooling or unitization is done in bad faith, such as when a lessor includes unproductive acreage in a unit allowing him to hold more acreage through production at the expense of the lessor of the productive acreage. Disputes about pooling and unitization may be complicated in the case of horizontal drilling, where multiple wells draining several tracts might be drilled from one pad site, and hydraulic fracturing, where formations that do not normally allow the migration of oil and gas are made economically productive.

E. New jurisdictions Oil and gas laws have developed largely in the states that have a long history of intensive oil and gas operation, such as Texas. As a result, we have a well-developed jurisprudence when it comes to a wide range of oil and gas issues.

However, because hydraulic fracturing

Anchored from offices in Houston and Dallas, Ford+Bergner LLP has aggressively achieved results in complex estate, trust and guardianship litigation matters across Texas for 15+ years.

has expanded the potential of drilling and production in shale plays coast to coast, nearly all jurisdictions now are faced with the possibility of being an oil and gas jurisdiction. States lacking this history but currently experiencing the boom are being forced to play catch up. As a result, states with a bounty of oil and gas activity and the concomitant litigation, but little corresponding jurisprudence, often look to other states’ case law as a persuasive precedent.

For example, the Texas Supreme Court, in 1940, set down a rule designed to resolve a title dispute that often arises in the oil and gas context.

When the owner of a fractional mineral interest conveys her interest subject to a reservation, but does not reference a prior reservation of mineral interest in the chain of title, an over conveyance occurs. In Duhig v. Peavy-Moore Lumber Co., the Texas Supreme Court held that the grantor in such a circumstance is estopped from claiming the

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full fractional interest they purported to reserve for themselves. A number of other jurisdictions, such as Arkansas, North Dakota, Oklahoma and Wyoming, have specifically cited and applied the rule in Duhig.

III. Emerging legal issues from new drilling and fracturing technologies A. Man-made earthquakes In other cases, new technologies and development patterns are leading to new types of disputes. One novel breed of lawsuit born by the current boom is those alleging that oil and gas operations have caused damaging earthquakes. Hydraulic fracturing involves pumping large volumes of fluid underground to cause fractures and facilitate the production of oil and gas. Similarly, wastewater that is a byproduct of both traditional drilling and hydraulic fracturing must either be treated or disposed of deep underground in disposal wells. Both hydraulic fracturing and disposal wells involve injecting large volumes deep underground at high pressures, leading some to hypothesize that earthquakes in the vicinity of such operations are no coincidence. So far, the earthquakes allegedly related to oil and gas operations have been relatively minor. Nevertheless, lawsuits seeking compensation for these earthquakes have been filed that allege causes of action of, among others, public and private nuisance, absolute liability, negligence and trespass.

B. New potential contaminants With a significant uptick in oil and gas operations, public outcry against the oil and gas industry’s environmental footprint has reached a feverish timbre on the internet, blogosphere, social media, television and radio. The buzz has contributed to a rash of lawsuits filed by municipalities, environmentalists and concerned citizens alleging claims of trespass, nuisance, violations of federal environmental laws, strict liability, breach of contract, negligence,

of new pipeline infrastructure, crude oil is increasingly making its way from the oilfield to refineries by rail. In 2008, there were approximately 9,500 carloads of crude oil shipped by rail; by 2013, that number had spiked to 434,000. Unfortunately, spills resulting from rail shipments are also on the rise.

The scale and the geography of the boom are having many legal impacts.

The demand for equipment, supplies, C. New state and One novel breed of and personnel has local “NIMBY” lawsuit born by the challenged existing actions infrastructure, espeAs oil and gas decurrent boom is those cially transportation velopment in new funding and develtechnologies exalleging that oil opment, which may pands opportuniand gas operations trigger litigation. ties into new areas, Also, litigation could communities have have caused damaging increase concurrent responded in varywith oil spills, traffic ing ways. While earthquakes. accidents and other many areas have personal injury claims. embraced the development, some municipalities are trying to implement V. Conclusion the age-old “not in my back yard” reThe oil and gas boom has transformed the strictions. West Virginia and New York energy industry and, with it, large swathes have already banned certain types of the country. With bright lights and big of development. Such bans are being oil comes an equally large potential for challenged by oil and gas companies disputes. Texas has a solid base of jurisinvested in the areas, who have inprudence with which to address these disvoked constitutional concerns as well putes thanks to its long history of oil and as issues of preemption of local bans. gas development. Nevertheless, new issues As drilling continues to expend techwill continue to emerge as the industry nologically and geographically, these evolves and intense drilling in areas like types of high-stakes legal battles will the Eagle Ford Shale continues. Attorneys become more common. will have the opportunity to shape the legal contours of a new energy industry, but IV. Tangential legal impacts to do so, must be ready to adapt to this The sheer amounts of equipment and flurapidly evolving legal landscape. ids necessary to drill and hydraulically fracture a gas well is impressive and, in most places, must be trucked in. For exLiz Klingensmith is a partner at Haynes ample, to drill one gas well in the Barnett and Boone, LLP Houston, where she focuses Shale, it takes the estimated equivalent of on disputes arising from oil and gas projects. eight million cars to bring in and set up Her experience includes all aspect of litigaa well, and two million cars per year to tion from early case assessment through trial. maintain it. Consider this amount of trafWolf A. McGavran is an associate at Haynes fic, multiplied by the many thousands of and Boone, LLP Houston, where he regularly wells being drilled. assists energy clients involved in commercial In addition, because the pace of drilldisputes, including those for breach of coning has often outpaced the construction tract, warranty, and business torts. personal injury, medical monitoring, diminution in property value, remediation and restoration of property and punitive damages. Claimants in these cases tend to claim that the hydraulic fracturing fluids and proppants cause damage to their property or person by contaminating groundwater, soil and air in violation of state and federal environmental regulations.

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November/December 2014

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By JOHN S. GRAY and CARLOS MORENO

“America does not stand still—and neither will I. So wherever and whenever I can take steps without legislation... that’s what I am going to do.” 1

The Federal U Government Seeks To Exert More Control

—President Barack Obama nder our system of federalism, states generally take the lead role in regulating activities in the oil patch. Here in Texas, state agency employees who understand the oil industry do a very good job balancing the needs of industry with the needs of Texans and the environment. Nonetheless, the Obama Administration has been aggressively pursuing regulations to expand federal control over the oil patch activities. This article discusses five federal regulatory initiatives demonstrating some ways in which the federal government is seeking to expand its control and a synopsis of some important studies finding that hydraulic fracturing is not causing alleged environmental harms to our drinking water.

EPA’S PROPOSED DEFINITION OF “WATERS” IS BOTH EXPANSIVE AND VAGUE The Clean Water Act (“CWA”) prohibits the discharge of pollutants, including fill material, into “navigable waters” without a permit and defines “navigable waters” as “waters of the United States.”2 The Army Corps of Engineers and the Environmental Protection Agency (“EPA”) consistently interpret “navigable waters” broadly to cover virtually any area over which water flows, including shallow isolated “wetlands.” There is an old (but true) adage that EPA and the Army Corps would assert jurisdiction over a cup of tea if possible. This often leads to disputes over whether a jurisdiction belongs to the state instead of the federal government.

The last two times that the U.S. Supreme Court addressed the CWA’s jurisdiction, it found it to be less expansive than what EPA asserted.3 Currently, four justices believe in expansive jurisdiction.

Four would limit jurisdiction to relatively permanent or seasonal flowing water bodies and connected wetlands. And Justice Kennedy opined that it applies to all waters that possess a “significant nexus” to navigable-in-fact waters.4 Lower courts and the regulated community have sought additional guidance to determine the CWA’s jurisdictional boundaries ever since.

This past March, EPA and the Army Corps jointly released a proposed rule purporting to provide that guidance by clarifying the scope of the “waters of the United States.”5 Although they claim that this proposed rule does not expand jurisdiction, that is, at best, questionable. Relying solely on Justice Kennedy’s significant nexus test, the agencies have discovered new land features they claim are subject to jurisdiction. This includes any nonexempted feature6 that transports water where the water flow is ephemeral, intermittent or perennial, regardless of whether the land feature is natural, man-altered or man-made.7 Aggressively interpreted, entire river watersheds including isolated uplands, may be subject to CWA jurisdiction.

If it survives the inevitable legal challenges, the rule will cause many property developers, including those in the oil and gas industry, to prove that their property is not subject to CWA jurisdiction. Thus, developers will have to comply with additional spill reporting requirements and planning requirements if a release of oil could reasonably (or arguably) be discharged into “jurisdictional” waters.

EPA PROPOSES CLARIFICATIONS TO GREEN COMPLETION REQUIREMENTS Two years ago, EPA significantly changed the way flowback from hydraulically fractured natural gas wells is processed when it promulgated New Source Performance Standard (“NSPS”) OOOO.8 This standard requires gases coming to the surface

with flowback and during production to be controlled. Specifically, it requires operators to use a completion technique known as Reduced Emission Completions (“REC”, also known as “green completions”) by January 1, 2015, for most types of wells.9 After NSPS OOOO was issued, EPA received several petitions asking it to reconsider several aspects of the rule, including requirements for well completion operations.

In response to those petitions, EPA has proposed promulgating “updates and clarifications” to its NSPS OOOO, including how to handle flowback liquids and gases during hydraulically fractured or refractured well completion operations.10 In its proposal, EPA identified three distinct well completion stages and now proposes handling each differently.

The first stage, “initial flowback,” starts when liquids first return to the surface and continues until there is enough gas present to operate a separator. During this stage, the high volumes of water, fracturing liquid, sand, debris and some gas must be routed to a “well completion vessel” (e.g., open top frac tanks or lined pits).

There are no emission control requirements; therefore, any gas collected may be vented to the atmosphere.

The second stage, “separation flowback,” begins as soon as enough gas is present to operate the mandated separator. During this stage, the operator must control all recovered gas (i.e., flowback emissions) from wells subject to “green completion” requirements by either (1) routing them to a gas flow line or collection system, (2) using them as fuel or (3) reinjecting them into the well. Likewise, all recovered liquids must be routed to well completion vessels, storage vessels, or reinjected into the well. If, however, none of those options is feasible, then the operator is required to incinerate the gas using a combustion device. Wells subject to green completions requirements must start operation no later than January 1, 2015. Wells not subject to those requirements must still use a separator, but the flowback emissions can be flared.

The third and final stage, “production,” starts when the well is producing gas continuously to a flow line. During this stage, recovered gas cannot be vented or controlled by combustion, and all recovered liquids must be routed to storage tanks.

Thus, operators must begin estimating emissions of volatile organic compounds’ from those storage tanks because they must arrange to control those emissions within 60 days of the start of the final stage.

OSHA PROPOSES TO CUT ALLOWABLE SILICA EXPOSURE LEVELS IN HALF In 2012, OSHA issued a “Hazard Alert” warning that sand mover and blender operators at hydraulic fracking operations, and downwind workers (including workers inside truck cabs) are subject to exposures well above the agency’s “recommended” exposure level (“REL”) and exceeding OSHA’s silica permissible exposure level (“PEL”)11 about nine percent of the time.

Quickly thereafter, OSHA proposed to cut the PEL for respirable silica dust for general industry from 100 µg/m3 to 50 µg/m3 over an eight-hour period.12 OSHA also proposed creating a comprehensive health standard to better protect workers, including requirements for exposure assessment, preferred methods for controlling exposure, respiratory protection, medical surveillance, hazard communication and recordkeeping. OSHA justifies these regulations on the basis that the current PEL was adopted in 1971, using what are now considered obsolete methods and data.13 If adopted as is, the rule is expected to hit the fracking industry particularly hard with increased costs, from the mining of the sand to its use in oil and gas drilling sites. OSHA estimates the rule’s cost at $637 million annually.14 Industry, however, believes the cost is much higher. The American Chemistry Council estimated that OSHA’s proposed silica standard will cost $5.1 billion per year, eight times greater than OSHA’s estimate.15 Trade groups claim that the current

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PEL provide adequate protection but are inadequately enforced by OSHA.16 Nonetheless, industry is revising its best practices to better protect workers and guard against future litigation because plaintiffs’ firms have begun publishing informational warning sites and soliciting potential clients. While a new wave of toxic tort litigation is not expected for at least a decade, plaintiffs’ firms are closely tracking how fracking operations react to warnings about silica risks.17

EPA EXPANDS ITS USE OF THE GENERAL DUTY CLAUSE EPA added another enforcement tool in 2009, when it decided to apply the Clean Air Act (“CAA”) Section 112(r)(1) General Duty Clause to non-traditional situations. The General Duty Clause states that owners and operators have a general duty to “identify hazards” which may result from releases of chemicals identified in 40 C.F.R. part 68 or other “extremely hazardous substances.” They are also

required to prevent and minimize the consequences of accidental releases. The term “extremely hazardous substance” is not defined anywhere and EPA has taken the position that it is broader than the extremely hazardous substance list under Section 302 of the Emergency Planning and Community Right-to-Know Act.18 Additionally, EPA may invoke the General Duty Clause for any quantity of release and seeks penalties of up to $37,500 per day for each violation.

EPA Region 6 first applied the General Duty Clause in enforcement actions after using infrared cameras at oil and gas sites in the Barnett Shale to find unauthorized air emissions. Any emissions visible with the cameras automatically resulted in onthe-spot enforcement citations.19 The last few years has seen an increased use of this clause.

So far this year, EPA has reached settlement of general duty violations with three Texas facilities following chemical releases. Two of the cases also involved a fire. In one case, EPA sought enforcement under the clause even though the amount of chemical released was below the Comprehensive Environmental Response, Compensation, and Liability Act Reportable Quantity level. Owners and operators in the Texas oil patch should expect EPA to continue to assert the general duty clause whenever there is any kind of chemical release from their facility even if the release is quickly contained.

PROPOSED OIL TANK CAR RULES WILL IMPACT CRUDE OIL PRODUCERS Prompted by several recent high profile train derailments coupled with the boom in the number of oil-carrying trains, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has proposed new rules to strengthen the nation’s fleet of crude-carrying rail tank cars, particularly those transporting Bakken crude.20 Specifically, PHMSA seeks to phase-out tens of thousands of tank cars currently transporting crude oil within as little as two years, unless they are retrofitted to meet new safety standards.21 In addition,

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the rule would require some trains transporting crude oils to use lower speed limits, have better braking systems, and create a sampling and testing program for volatile liquids, including oil.22 Currently, most tank cars are owned or leased by the crude oil shippers who will likely charge their customers higher rates to pay to retrofit, repurpose or dispose of old tank cars, and/or the cost of new tank cars. Likewise, rail carriers will pass on additional fees due to increased fuel and track maintenance required by the added weight of new or retrofitted tank cars. Finally, oil and gas companies may incur additional costs due to potential delays and reduced tank car capacity.

One likely delay will be new speed limits: 40 mph for trains with non-compliant tank cars, 50 mph maximum for those with compliant tank cars, and a 30-mph restriction for those that do not comply with stricter braking requirements.23 If the tank car phase-out causes a shortage of transportation options before industry is able to meet the demand for new or ret-

rofitted tank cars, it will pose real problems for the industry.

FRACKING STUDIES DISPEL GROUNDWATER CONTAMINATION MYTHS A new study of hydraulic fracturing-related groundwater contamination in the Marcellus and Barnett shales by researchers from five universities points to well failures as the source of contamination and not hydraulic fracturing.24 Using modern testing technology to analyze hydrocarbon gases in groundwater near shale gas wells, the researchers were able to distinguish between hydrocarbons from natural sources and those from man-made contamination. Moreover, it allowed them to distinguish between contamination associated with fracture-related migration and contamination caused by faulty well casings or cement jobs at shallow depths.

Researchers focused their efforts on distinctive geochemical fingerprints of hydrocarbons. Based on their results, researchers concluded that horizontal

drilling or hydraulic fracturing did not create a conduit for hydrocarbon migration to shallow groundwater. Instead, the research suggested that gas contamination is related to well integrity problems; specifically, casing or cementing issues.

While this research supports arguments that hydraulic fracturing operations do not cause shallow groundwater contamination, it reinforces the importance of ensuring good well design practices and sound well construction.

Another study by the U.S. Department of Energy’s National Energy Technology Laboratory (“NETL”) also found no migration of fluids from fractured gas well zones in the Marcellus Shale to groundwater aquifers.25 This study consisted of monitoring for evidence of fluid and gas migration during and after the hydraulic fracturing of six horizontal gas wells. Researchers found that the impact of microseismic events during fracturing stayed well below the drinking water aquifers (more than 5,000 feet below the aquifers).

They also found no detectable migration

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Join the HBA 100 Club!

The Houston Bar Association 100 Club is a special category of membership that indicates a commitment to the advancement of the legal profession and the betterment of the community. The following law firms, governFirms of 5-24 Attorneys Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Adair & Myers PLLC Ajamie LLP Andrews Myers, P.C. Bair Hilty, P.C. Baker Williams Matthiesen LLP The Bale Law Firm, PLLC Barrett Daffin Frappier Turner & Engel, LLP Bateman | Pugh | Chambers, PLLC Berg & Androphy Bingham, Mann & House Blank Rome LLP Brewer & Pritchard PC Buck Keenan LLP Bush & Ramirez, P.L.L.C. Caddell & Chapman Cage Hill & Niehaus, L.L.P. Campbell Harrison & Dagley LLP Campbell & Riggs, P.C. Chernosky Smith Ressling & Smith PLLC Christian Smith & Jewell, L.L.P. Connelly • Baker • Wotring LLP Cozen O’Connor Crady, Jewett & McCulley, LLP Crinion Davis & Richardson LLP De Lange Hudspeth McConnell & Tibbets LLP Devlin Naylor & Turbyfill PLLC Dinkins Kelly Lenox Lamb & Walker, L.L.P. Dobrowski, Larkin & Johnson LLP Dow Golub Remels & Beverly, LLP Doyle Restrepo Harvin & Robbins, L.L.P. Ebanks Horne Rota Moos LLP Edison, McDowell & Hetherington LLP Ellis, Carstarphen, Dougherty & Griggs P.C. Ewing & Jones, PLLC Faubus Keller & Burford LLP Fernelius Alvarez PLLC Fibich Leebron Briggs Josephson, LLP Fisher, Boyd & Huguenard, LLP Fisher & Phillips LLP Fizer Beck Webster Bentley & Scroggins, P.C. Fleming, Nolen & Jez, L.L.P. Frank, Elmore, Lievens, Chesney & Turet, L.L.P. Fullenweider Wilhite PC Funderburk Funderburk Courtois, LLP Galloway Johnson Tompkins Burr & Smith Germer PLLC Givens & Johnston PLLC Godwin Lewis, P.C. Goldstein Law PLLC Gordon & Rees LLP Greer, Herz & Adams, L.L.P. Hagans Burdine Montgomery

& Rustay, P.C. Harberg Huvard Jacobs Wadler LLP Harris, Hilburn & Sherer Hartline Dacus Barger Dreyer LLP Henke Law Firm, LLP Hicks Thomas LLP Hirsch & Westheimer, P.C. Holm | Bambace LLP Hunton & Williams LLP Jackson Gilmour & Dobbs, PC Jackson Lewis LLP Jenkins Kamin, L.L.P. Johnson DeLuca Kurisky & Gould, P.C. Johnson, Trent, West & Taylor, L.L.P. Jones Walker LLP Joyce, McFarland + McFarland LLP Kane Russell Coleman & Logan PC Kelly, Sutter & Kendrick, P.C. KoonsFuller, PC Kroger | Burrus Lapidus Knudsen PC LeBlanc Bland P.L.L.C. LeClairRyan Legge Farrow Kimmitt McGrath & Brown, L.L.P. Linebarger Goggan Blair & Sampson LLP Liskow & Lewis Lorance & Thompson, PC MacIntyre, McCulloch, Stanfield & Young LLP McGinnis Lochridge McGuireWoods LLP McLeod Alexander Powel & Apffel PC MehaffyWeber PC Miller Scamardi & Carraba Mills Shirley L.L.P. Morris Lendais Hollrah & Snowden Murray | Lobb PLLC Nathan Sommers Jacobs Ogden, Gibson, Broocks, Longoria & Hall, LLP Ogletree, Deakins, Nash, Smoak & Stewart, P.C. Pagel Davis & Hill PC Parrott Sims & McInnis, PLLC Perdue Brandon Fielder Collins & Mott Perdue & Kidd LLP Phelps Dunbar LLP Phillips, Akers & Womac, PC Pillsbury Winthrop Shaw Pittman LLP Radcliffe Bobbitt Adams Polley PLLC Ramey, Chandler, McKinley & Zito Reynolds Frizzell LLP Roach & Newton, L.L.P. Roberts Markel Weinberg Butler Hailey PC Ross, Banks, May, Cron & Cavin, P.C. Royston, Rayzor, Vickery & Williams, L.L.P. Rusty Hardin & Associates, P.C. Rymer, Moore, Jackson & Echols, P.C. Schiffer Odom Hicks & Johnson PLLC

24

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ment agencies, law schools, and corporate legal departments with five or more attorneys have become members of the 100 Club by enrolling 100 percent of their attorneys as members of the HBA. Schirrmeister Diaz-Arrastia Brem LLP Schwartz, Junell, Greenberg & Oathout, LLP Schwartz, Page & Harding L.L.P. Shannon, Martin, Finkelstein & Alvarado, P.C. Shepherd, Scott, Clawater & Houston, L.L.P. Shipley Snell Montgomery LLP Short Carter Morris, LLP Singleton Cooksey PLLC Smith Adams Law Feehan LLP Smith Murdaugh Little & Bonham, L.L.P. Smyser Kaplan & Veselka, L.L.P. Sprott Newsom Lunceford Quattlebaum Messenger, P.C. Stevenson & Murray Strong Pipkin Bissell & Ledyard, L.L.P. Stuart & Associates P.C. Sutton McAughan Deaver, PLLC Tekell, Book, Allen & Morris, L.L.P. Thompson & Horton LLP Thompson, Coe, Cousins & Irons, LLP Taunton, Snyder & Slade, P.C. Tucker Vaughan Gardner & Barnes, P.C. The Ward Law Firm Ware, Jackson, Lee & Chambers, L.L.P. Watt Beckworth Thompson & Henneman, LLP Weinstein Tippetts & Little LLP Weycer Kaplan Pulaski & Zuber, P.C. Williams, Birnberg & Andersen, L.L.P. Williams Kherkher Hart Boundas LLP Williams Morgan P.C. Willingham, Fultz & Cougill, LLP Wilson, Cribbs & Goren, P.C. Wilson, Elser, Moskowitz, Edelman & Dicker Wright Abshire, Attorneys, PC Wright & Close, L.L.P. Yetter Coleman LLP Ytterberg Deery Knull LLP Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. Zimmermann, Lavine, Zimmermann, & Sampson, P.C. Zukowski, Bresenhan, Sinex & Petry LLP Firms of 25-49 Attorneys Adams & Reese LLP Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing P.C. Akin Gump Strauss Hauer & Feld LLP Beck I Redden LLP Beirne, Maynard & Parsons, L.L.P. BoyarMiller Chamberlain Hrdlicka White Williams & Aughtry Coats I Rose Cokinos Bosien & Young Gibbs & Bruns LLP Greenberg Traurig, LLP

Jones Day Littler Mendelson, PC Munsch Hardt Kopf & Harr, P.C. Olson & Olson LLP Seyfarth Shaw LLP Firms of 50-100 Attorneys Baker Hostetler LLP Gardere Wynne Sewell LLP Jackson Walker L.L.P. Martin, Disiere, Jefferson & Wisdom, L.L.P. Morgan, Lewis & Bockius LLP Porter Hedges LLP Thompson & Knight LLP Winstead PC Firms of 100+ Attorneys Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Norton Rose Fulbright Haynes and Boone LLP Locke Lord LLP Vinson & Elkins LLP Corporate Legal Departments Anadarko Petroleum Corporation AT&T Texas BP CenterPoint Energy El Paso Corporation Kellogg Brown & Root Inc LyondellBasell Industries MAXXAM Inc Newfield Exploration Company Petrobras America Inc. Plains Exploration & Production Co. Pride International Inc. Rice University S & B Engineers and Constructors, Ltd Sysco Corporation Texas Children’s Hospital Total E&P USA Inc. University of Houston System Law School Faculty South Texas College of Law Thurgood Marshall School of Law University of Houston Law Center Government Agencies City of Houston Legal Department Harris County Attorney’s Office Harris County District Attorney’s Office Harris County Domestic Relations Office Metropolitan Transit Authority of Harris County Texas Port of Houston Authority of Harris County Texas

of gas or aqueous fluids from the fractured interval to other gas producing zones 3,800 feet upward.

Meanwhile, a much-anticipated EPA study is still ongoing. That study’s stated goal is to “assess the potential impacts of hydraulic fracturing on drinking water resources, if any, and to identify the driving factors that may affect the severity and frequency of such impacts.”26 The last progress report was issued in December 2012.

Currently, there is no official deadline for publication of the final report.

John Gray and Carlos Moreno are environmental, health and safety attorneys in Liskow & Lewis’ Houston office where they counsel clients in the energy, chemical and manufacturing industries.

Endnotes 1. Full Transcript: Obama’s 2014 State of the Union Address, The Washington Post (Jan. 28, 2014).

2. 33 U.S.C. §§ 1362(7), (8) (defining “territorial seas” but not “waters of the United States”).

3. See Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers (“SWANCC”), 531 U.S. 159, 167 (2001) (the use of a pond by migratory birds does not

by itself provide CWA jurisdiction), Rapanos v. United States,547 U.S. 715 (2006) (agreeing that isolated wetlands were not subject to CWA jurisdiction but splitting over how to determine jurisdiction).

4. 547 U.S. at 733-42, 759.

5. 79 FED. REG. 22,188 (to be codified at 33 C.F.R. § 328, 40 C.F.R. §§ 110, 112, 116-17, 122, 130, 132, 300, 302, 401) (proposed Apr. 21, 2014).

6. The agencies felt compelled to specifically exempt many manmade features, such as stock ponds and rice paddies, because otherwise they would be subject to CWA jurisdiction. 79 FED. REG. at 22,193.

7. Lesley F. Pietras, EPA and Army Corps of Engineers Propose Significant Revisions to Definition (2014), available at http:// www.theenergylawblog.com/2014/04/articles/environmental/epa-and-army-corps-of-engineers-propose-significant-revisions-to-definition-of-waters-of-the-unitedstates/.

8. Oil and Natural Gas Sector: New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants Reviews, 77 FED. REG. 49,490 (Aug. 16, 2012).

9. Id. at p. 49,497. Gas wells that are low pressure wells, exploratory wells, or delineation wells, are not required to use REC. However, gas still has to be combusted (as opposed to venting).

10. Oil and Natural Gas Sector: Reconsideration of Additional Provisions of New Source Performance Standards, 79 FED. REG. 41,752 (Jul. 17, 2014).

11. OSHA-NIOSH Hazard Alert, Worker Exposure to Silica during Hydraulic Fracturing, U.S. Dept. of Labor (June 2012).

12. Table Z-1 of 29 C.F.R. 1910.1000 (current PEL); Occupational Exposure to Respirable Crystalline Silica, 78 Fed. Reg. 56273,(2013) (to be codified at 29 C.F.R. §§ 1910, 1915 & 1926) (proposed Sept. 12, 2013) (proposed PEL).

13. 78 Fed. Reg. at 56275.

14. Id. at 56276.

15. AM. CHEM. COUNS., Crystalline Silica Panel Statement on Proposed OSHA Silica Standard (Feb. 12, 2014).

16. Id. 17. Jess Davis, OSHA Silica Regs Herald Fracking Industry Headaches, Law 360 (Mar. 31, 2014).

18. 42 U.S.C. § 7412(r)(1).

19. See http://www.epa.gov/region6/6en/a/oil_and_gas.htm.

20. The “Bakken crude oil is on the high end of volatility compared to other crude oils, …[and] its production is skyrocketing, up from 9,500 rail car loads in 2008 to 415,000 last year, a more than 4,000 percent increase.” Brian Tumulty, 2-Year Phase-out Proposed for Older Oil Tank Cars, Democrat & Chronicle (July 23, 2014) (quoting Transportation Secretary Anthony Foxx).

21. Hazardous Materials: Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains, 79 FED. REG. 40,016 (to be codified at 49 C.F.R. §§ 171-74, 179) (proposed Aug. 1, 2014).

22. Id. at 45017-18.

23. Id. 24. Thomas H. Darrah et al., Noble Gases Identify the Mechanisms of Fugitive Gas Contamination in Drinking-Water Wells Overlying the Marcellus and Barnett Shales, PROC. NAT’L ACAD. SCI. (Sept. 15, 2014).

25. Richard W. Hammack et al., An Evaluation of Fracture Growth and Gas/Fluid Migration as Horizontal Marcellus Shale Gas Wells are Hydraulically Fractured in Green County, Pennsylvania, NETL-TRS-3-2014; EPAct Technical Report Series; U.S. Department of Energy, National Energy Technology Laboratory (Sept. 15, 2014).

26. Office of Research and Development, Study of the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources: Progress Report, EPA 601/R-12/011, 6 (Dec. 2012).

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25

By Robert Theriot and Josh Downer

Our Texas Heritage:

The Summer of the No Deductions Clause I. Introduction The dramatic rise in natural gas shale production has served as a catalyst for increased debate within and challenges to the oil and gas industry, both publicly and privately. One need only read the newspaper, attend a movie or watch television to become aware of increased environmental concerns, particularly with regards to hydraulic fracturing or “fracking.” Perhaps the most divisive issue between stakeholders in oil and gas properties and the companies producing them, however, continues to be the age old question of money.

While environmental concerns dominate the conversation in the media, the proper calculation and payment of royalties still gets the most ink in the courthouse.

While shale production has created a variety of new complications in the arena of proper royalty calculation, it has highlighted some longstanding ones as well.

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November/December 2014

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One that resurfaced with a vengeance this past year in Texas courts is the issue of “deductions” from royalty payments, particularly under leases that purport to prohibit such deductions. By definition, a “royalty” is paid free of the costs of “production,”1 which means that a royalty owner receives his or her royalty payment free of the costs of exploration such as drilling, surveying, reworking etc. As part of the royalty calculation process, however, lessees typically allocate costs that are incurred to process, treat and transport natural gas once it is already produced (referred to as “post-production” costs).

Understandably, royalty owners, hearing the reports of the booming oil and gas industry, often balk when their royalty check comes with an attached list of fees subtracted from their interests, leading many to attempt to contract out of this general rule. This article discusses three Texas cases decided this year that highlight the difficulties that parties often face in prohibiting deductions.

II. Deductions – The Fundamentals A. “At the Well” States Courts in producing states fall into two basic camps on the issue of deductions.

Some states, like Texas, follow the “at the well” rule. “At the well” states start with the general presumption that royalties are valued “at the well” free of the costs of production, but subject to any post-production costs that enhance the value of natural gas by moving, treating or processing it for sale in a market downstream from the wellhead. Although these jurisdictions sometimes disagree on the precise line between production and post-production activities, all agree that a lessee must generally deduct post-production costs from the price established downstream to properly calculate the upstream, wellhead value of the gas. These states include Texas, Louisiana, Montana, New Mexico, North Dakota and Pennsylvania.2 B. “First Marketable Product” States The “at the well” rule is sometimes referred to as the majority rule. This major-

ity is a slim one, however. A robust minority of jurisdictions, including Colorado, Kansas, Oklahoma and West Virginia, have adopted a contrary rule based upon the implied duty to market.3 These states hold that the lessee has an implied duty to make the natural gas marketable, which includes bearing all costs that are necessary to bring the gas into a marketable form. Other jurisdictions have reached the same result by statute.4 Like the “at the well” states, there is disagreement among these jurisdictions as to precisely when natural gas is “marketable,” which is typically treated as a fact question.5 Most states, however, will permit the deduction of post-production costs that are incurred after the production reaches the first “market,” such as interstate pipeline transportation costs.6 III. Contracting Out of the General Rules – the Heritage Debate A. The Heritage Rule All jurisdictions, whether they follow the “first marketable product” rule or the “at the well” rule, ostensibly recognize that an oil and gas lease is a contract and that the parties may alter the general rules by agreement. Actually accomplishing this result in practice, however, may be more difficult than one would expect. In Texas, the presumption that the general “at the well” rule applies is so strong that the Texas Supreme Court in Heritage Resources Inc. v. Nationsbank interpreted a lease as permitting the lessee to deduct transportation costs despite language in the lease specifically stating that there should be no deductions for transportation.7 In that case, the leases required that royalties be paid on “market value at the well,” but this language was immediately followed by clauses stating that “provided, however, there shall be no deductions from the value of Lessor’s royalty by reason of any required... transportation, or other matter to market such gas.”8 The Texas Supreme Court applied a narrow reading of this “no deductions” clause, first noting that it only prohibited deductions from the “value of the Lessor’s Royalty.”9 The court

then held that words such as “royalty” and “market value at the well” have generally understood meanings that permitted deductions to calculate wellhead value.

Thus, the court held, the no deductions clause only applied after the lessee determined the wellhead value of the gas by deducting transportation costs from the downstream sales price. The lessee could continue to deduct post-production costs in order to calculate this wellhead value, and the no deductions clause necessarily became “surplusage as a matter of law.”10 The Heritage opinion received harsh public criticism at the time it was decided.

The Texas Supreme Court received more than 20 amicus curiae briefs asking the court to rehear the case, including from such organizations such as the Texas Land Commissioner, University of Texas, and even the Boy Scouts of America.11 A motion for rehearing soon followed, and the majority opinion collapsed. One justice recused himself, two justices joined the dissent and another left the majority to join the concurrence. Thus, the motion for rehearing was denied by mere operation of law, with only its author continuing to adhere to the original majority opinion.

Justice Gonzalez cautioned in his dissent to the denial of rehearing that, “[b]ecause we are without majority agreement on the reasons supporting the judgment, ...the judgment itself has very limited precedential value and controls only this case” and that “[c]ases relying on the new rule of law pronounced in [the original majority opinion] are similarly restricted.”12 Despite this harsh criticism, the Heritage opinion appears to have stood the test of time, and ever since, parties on both sides of a lease have struggled to determine what language is sufficient to effectively prohibit deductions. That debate continues today and serves as the focal point for two recent Fifth Circuit decisions and a third case currently before the Texas Supreme Court.

B. Warren v. Chesapeake Exploration, L.L.C. On July 16, 2014, the Fifth Circuit is-

sued its opinion in Warren v. Chesapeake Exploration, L.L.C.13 Judge Priscilla R. Owen, the former Texas Supreme Court justice who authored the concurring opinion in Heritage, wrote for the court.

The Warren Court examined no deductions clauses similar to those addressed in Heritage that were contained in addenda to pre-printed lease forms. The court separated these leases into two groups for its analysis.

The first lease form provided for royalties based on “the amount realized... computed at the mouth of the well,” but then contained an addendum that stated “all royalty paid” would be “free of all costs and expenses... including... costs of compression, dehydration, treatment and transportation.”14 The addendum also contained a clause expressly stating that the addendum would supersede any inconsistent provisions in the pre-printed lease and that “all other printed provisions of this Lease... are in all other things subrogated to the express and implied terms... of this Addendum.”15 By including the no-deductions clause in an addendum to the lease that explicitly provides that the addendum controls, one could argue that the parties more clearly evidenced the intent to prohibit deductions than in Heritage, where the no deductions clause was part of the base royalty calculation provisions. The Fifth Circuit disagreed, however, and held that Heritage permitted the lessee to continue taking deductions to calculate the upstream wellhead value, despite the addendum. Judge Owen explained that Heritage “require[s] a careful examination of the various terms and phrases that the parties use.”16 After carefully construing the pre-printed lease with the addendum, the court ultimately concluded that the parties had failed to change the general rule.

Like the lease in Heritage, the lease in Warren explicitly required that royalties be calculated “at the mouth of the well.”

There was nothing in the addendum that changed this point of valuation. Therefore, the no deductions clause constituted surplusage.17 Importantly, the fact that

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November/December 2014

27

the no-deductions clause was contained in an addendum made no substantive difference because the addendum only controlled in the event of a conflict or inconsistency. Heritage required that the two clauses be harmonized and, thus, there was no conflict.18 The court stated that the second lease form “differed substantially” from the other, but, because the parties had not picked up on this fact until the reply briefs, the court was forced to dismiss the case without prejudice.19 Though the Fifth Circuit did not elaborate on how the second form differed, it is apparent that the addendum in the second form provided that royalties were based on “market value at the point of sale,” suggesting that a change to the point of valuation from the wellhead to the “point of sale” may have altered the result under the second lease form.20 This question would not remain unanswered for very long.

C. Potts v. Chesapeake Exploration, L.L.C. Less than two weeks later, in Potts v. Chesapeake Exploration, LLC,21 Judge Owen addressed this “market value at the point of sale” language in a case involving the same defendants and essentially the same facts. Like the second lease form at issue in Warren, the lease in Potts required royalties to be calculated as the “market value at the point of sale,” and contained a no deductions clause. Chesapeake argued that this language still did not prohibit deductions in this particular case because the wellhead and the “point of sale” were one and the same. Chesapeake, like many producers in the modern market, used a series of affiliates to market production.

The upstream producing entity sold gas in this area at the wellhead to a midstream affiliate. This affiliate then performed all of the post-production activities to process and deliver the gas to third- party purchasers at various downstream delivery points. Chesapeake’s midstream affiliate paid Chesapeake a weighted average of these downstream sales minus the postproduction costs and fees incurred between the wellhead and delivery.22 Thus, 28

November/December 2014

Chesapeake argued, the relevant “point of sale” was the wellhead, where Chesapeake transferred title to its midstream affiliate, and, therefore, Chesapeake was required to deduct post-production costs in order to properly calculate market value at this point.

The Fifth Circuit agreed and held that, since the sale factually took place at the wellhead, Chesapeake had properly deducted post-production costs to calculate the wellhead value of the natural gas.23 Quoting language from her Heritage concurrence, Judge Owen noted that the “concept of ‘deductions’... from the value of the gas is meaningless when gas is valued at the well. Value at the well is already net of reasonable marketing costs.”24 Because Chesapeake had not taken deductions from the value at the wellhead point of sale, Chesapeake did not violate the provisions of the lease.25 The plaintiffs in Potts argued strenuously, among other things, that this interpretation frustrated the intent of the parties because the plaintiffs specifically included the “point of sale” language in the leases to contract around the Heritage rule. The plaintiffs argued that they had relied on Judge Owen’s own guidance from her concurrence in Heritage in which then-Justice Owen stated that if the parties “had intended that the royalty owners would receive royalty based on the market value at the point of delivery or sale, they could have said so.”26 Judge Owen responded that the point of her concurrence was only to stress that parties may choose the point where royalties are valued, and that the court must apply the specific language chosen by the parties.27 Here, the plaintiffs had chosen to value royalties at the point of sale, which just happened to be at the wellhead where the affiliate sale took place.28 Perhaps the plaintiffs should have read the rest of the concurrence: “There is little doubt that at least some of the parties to these agreements subjectively intended the [no deductions clause] to have meaning,” but “[w]e cannot re-write the agreement for the parties.”29

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D. Chesapeake Exploration, L.L.C. v. Hyder The Warren court determined that merely including a no deductions clause in an addendum does not alter the general rule contained in Heritage. Meanwhile, the Potts decision demonstrates that even express changes to the point of valuation may not alter the “at the well” rule in every case. In what has the potential to be the finale to this 2014 Heritage trilogy, the Texas Supreme Court recently requested full briefing in Chesapake Exploration, L.L.C. v. Hyder,30 where the lessors took a different approach, expressly disclaiming Heritage altogether.

Hyder is interesting for a variety of reasons. The main focus before the Texas Supreme Court, however, is the proper interpretation of the overriding royalty clause (“ORRI”). The Hyder lease permitted Chesapeake to use existing well pads on the leased premises to produce from adjacent lands. In return, the Hyders received a “cost-free (except only its portion of production taxes) overriding royalty of... (5.0%) of gross production obtained from each such well[.]”31 The landowner royalty clause, contained in a separate section of the lease, broadly disclaimed Heritage, stating that the parties agreed “that the holding in the case of [Heritage Resources v. Nationsbank] shall have no application to the terms and provisions of this Lease.”32 The plaintiffs argued that the “costfree” language, when paired with the express disclaimer of Heritage, prohibited Chesapeake from deducting post-production costs from payments under the ORRI. Chesapeake argued, in turn, that the word “cost-free” did nothing more than restate the general rule that an overriding royalty is free of the costs of production, but subject to post-production costs. The San Antonio Court of Appeals held for the plaintiffs, interpreting the words “cost free” as prohibiting both production and post-production costs.

The opinion has caused somewhat of a stir within the industry. Although the lease arguably contains unique language

due to the Heritage disclaimer, the opinion does not appear to rest on this fact.

The decision contains very little discussion of Heritage at all, stating only that Chesapeake’s citations to Heritage were “unpersuasive” because of the disclaimer in the landowner royalty clause.33 Instead, the appellate court’s decision states that the words “cost free” are sufficient to contract out of Texas’s general “at the well” rule and to prohibit deductions expressly. A contrary result, the court explained, would fail to give effect to the terms “cost free” and render this language meaningless.34 Chesapeake filed a petition for review, which is supported by an amicus brief filed by the Texas Oil and Gas Association (“TXOGA”). Chesapeake and TXOGA primarily argue that the appellate court failed to address the words “gross production” in the ORRI clause and to acknowledge that an ORRI, by its very nature, is an “in-kind” interest that must be valued at the wellhead at the time of production. When the words “cost free” are construed with this wellhead point of valuation, Chesapeake argues, the clause clearly refers only to the costs of production.35 The Heritage disclaimer presents the most obvious wrinkle to this argument.

Chesapeake’s position depends to some degree on the same “cost free” versus point of valuation matchup at issue in the Heritage decision. In the most recent briefing, the plaintiffs appear to rely primarily on the uniqueness of their lease in including the express reference to Heritage rather than a broad interpretation of the words “cost free” in general.36 If the Supreme Court grants the petition for review, it could potentially decide the issue on the “no Heritage” clause alone without even having to address the general meaning of the words “cost free.” Though a narrow approach, the enforceability of these types of clauses would still have far reaching implications as landowners increasingly include express references to Heritage in royalty clauses.

Chesapeake’s brief on the merits was

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due on October 22, 2014, with the plaintiffs’ due on November 11, 2014. With the recent decisions in Warren and Potts, there is a strong chance that the court will grant review. While unlikely, it is possible that the Supreme Court could review the Heritage decision altogether, perhaps even vindicating Justice Gonzalez’s predictions regarding the limited precedential value of the decision. Either way, the resurgence of the Heritage issue this summer clearly suggests the need for more judicial guidance.

Robert Theriot, managing partner of Liskow & Lewis’ Houston office, is board certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization, and is licensed in both Texas and Louisiana. He served as editor-inchief of the Tulane Law Review and clerked for the Hon. John Minor Wisdom of the Fifth Circuit Court of Appeals.

Josh Downer is an associate in Liskow & Lewis’ Houston office and practices oil and gas law.

He worked as a landman prior to law school and received his Juris Doctorate, summa cum laude, from Louisiana State University in 2012.

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Endnotes 1. French v. Occidental Permian Ltd., ___ S.W.3d ____ (Tex. 2014), Tex. LEXIS 533, at *4-5 (Tex. June 27, 2014).

2. Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996); Culpepper v. EOG Res., Inc., 47,154-CA (La. App. 2 Cir. 05/16/12), 92 So.3d 1141; Montana Power Co. v. Kravik, 586 P.2d 298 (Mont. 1978); ConocoPhillips Co. v. Lyons, 299 P.3d 844 (N.M. 2012); Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496 (N.D. 2009); Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147 (Pa. 2010).

3. Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994); Gilmore v.

Superior Oil Co., 192 Kan. 388, 388 P.2d 602 (Kan. 1964); Wood v. TXO Prod. Corp., 854 P.2d 880 (Okla. 1992); Estate of Tawney v. Columbia Natural Res., LLC, 633 S.E.2d 22 (W. Va. 2006).

4. See, e.g., Mich. Comp. Laws § 324.61503b.

5. See Coulter v. Andarko Petroleum Corp., 292 P.3d 289, 305-06 (Kan. 2013) (discussing the potential differences between the Colorado and Kansas versions of the first marketable product doctrine).

6. See, e.g., W.W. McDonald Land Co. v. EQT Prod. Co., 983 F. Supp.2d 790, 2013 U.S. Dist. LEXIS 165427 (S.D. W.Va. 2013).

7. Heritage Res., Inc. v. Nationsbank, 939 S.W.2d 118, 120-21, (Tex. 1996).

8. Id. 9. Id. at 122.

10. Id. at 123.

11. Heritage Res., Inc. v. Nationsbank, 960 S.W.2d 619 (Tex. 1997) (Gonzalez, J., dissenting on rehearing).

12. Id. at 620.

13. Warren v. Chesapeake Exploration, L.L.C., No. 13-10619, 2014 U.S. App. LEXIS 13562 (July 16, 2014).

14. Id. at 7-8.

15. Id. at 8.

16. Id. at 10.

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17. Id. at 13-14.

18. Id. at 13.

19. Id. at 19-20.

20. Id. at 19.

21. Potts v. Chesapeake Exploration, L.L.C., No. 13-10601, 2014 U.S. App. LEXIS 14448 (5th Cir. July 29, 2014).

22. Id. at 3.

23. Id. at 8-12.

24. Id. at 12 (quoting Heritage, 939 S.W.2d at 130 (Owen, J., concurring).

25. Id. at 9.

26. Heritage, 939 S.W.2d at 131 (Owen, J., concurring) (emphasis original).

27. Potts, 2014 U.S. App. LEXIS 14448, at *14-15.

28. Id. at 14-15.

29. Heritage, 939 S.W.2d at 130-31 (Owen, J., concurring).

30. Chesapeake Exploration, L.L.C. v. Hyder, 427 S.W.3d 472 (Tex. App. –San Antonio 2014, pet. filed.).

31. Response to Petition for Review, at *2, available at http:// www.search.txcourts.gov/SearchMedia.aspx?MediaVersion ID=2682cb83-c014-4ea4-9229-2428896b1144&coa=cossup& DT=BRIEFS&MediaID=5f609e08-20d3-41bb-9be0-f486589d d7232 (Case No. 14-0302).

32. Hyder, 427 S.W.3d at 477.

33. Id. at 479.

34. Id. at 479-80.

35. See, e.g., Pet. for Review, at 5-11, available at http://www.search. txcourts.gov/SearchMedia.aspx?MediaVersionID=df4d9a3513f3-4fc7-b1ca-2b63d4016ffb&coa=cossup&DT=BRIEFS& MediaID=15722779-4efa-440c-9052-89263a7017b2Case No. 14-0302).

36. Response to Petition for Review, at 5, available at http://www. search.txcourts.gov/SearchMedia.aspx?MediaVersionID =2682cb83-c014-4ea4-9229-2428896b1144&coa=cossup&D T=BRIEFS&MediaID=5f609e08-20d3-41bb-9be0-f486589dd723Case No. 14-0302).

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Morgan, Lewis & Bockius LLP Sidley Austin LLP Strasburger & Price, L.L.P. Sutherland Asbill & Brennan LLP Winstead PC

Boutique Firm Champions

Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Blank Rome LLP Connelly • Baker • Wotring LLP Edison, McDowell & Hetherington LLP Fullenweider Wilhite PC Hicks Thomas LLP Hogan Lovells US LLP Hughes Watters Askanase LLP Jenkins & Kamin, L.L.P. Johnson DeLuca Kurisky & Gould, P.C. McGuireWoods LLP Ogden, Gibson, Broocks, Longoria & Hall, L.L.P. Ogletree, Deakins, Nash, Smoak & Stewart P.C. ReedSmith LLP Schwartz, Junell, Greenberg & Oathout, L.L.P Sutton McAughan Deaver LLP Weil, Gotshal & Manges LLP Weycer, Kaplan, Pulaski & Zuber, P.C. Wilson, Cribbs & Goren, P.C. Yetter Coleman LLP

Individual Champions

Brian Albrecht Peter J. Bennett Law Office of J. Thomas Black, P.C. Law Office of Robbie Gail Charette Chaumette, PLLC Coane & Associates Damani Law Firm Helene Dang Law Office of Papa M. Dieye

The Ericksen Law Firm Flowers & Frankfort Frye, Steidley, Oaks & Benavidez, PLLC Funderburk Funderburk & Courtois LLP Fuqua & Associates, P.C. David Hsu Hunton & Williams LLP Law Office of James and Stagg, PLLC The Jurek Law Group, PLLC Katine & Nechman L.L.P. Katten Muchin Rosenman LLP KimLy Law Firm PLLC KoonsFuller, P.C. Kroger | Burrus Gregory S. Lindley Law Office of Maria S. Lowry Alejandro Macias Martin R.G. Marasigan Law Offices Danielle H. Maya The Law Office of Evangeline Mitchell, PLLC Bertrand C. Moser Patel Ervin Dinn PLLC Law Office of Brent C. Perry, P.C. Pilgrim Law Office Robert E. Price Cindi L. Robison Scardino & Fazel Shortt & Nguyen, P.C. Jeff Skarda Strong Pipkin Bissell & Ledyard, L.L.P. Thompson, Coe, Cousins & Irons, L.L.P. Tindall & England, P.C. Travis Torrence Diane C. Treich Norma Levine Trusch Clinton Yu

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th 65 Harvest Celebration

Raises Record $670,000 for Houston Bar Foundation

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he 65th Harvest Celebration honored Houston law firms, corporate legal departments and individuals who are committed to providing pro bono legal services to low income Houstonians. The event, which raised $670,000 for pro bono, is sponsored by the Houston Bar Association, Houston Bar Foundation and Houston Bar Association Auxiliary.

HBA President Carter Crow, Meredith Crow, HBA Auxiliary President Hazel Donato, HBF Chair Nearly 1,000 Houston Bar Associa- John Eddie Williams, Jr. and Sheridan Williams. tion (HBA) members and guests filled River Oaks Country Club on Monday, November 17. HBA Treasurer Neil Kelly and Houston Bar Foundation Chair John Eddie Williams, Jr. served as event co-chairs.

A reception prior to the Harvest Celebration honored over 100 law firms, corporate legal departments and individuals who are “Equal Access Champions,” committed to helping those who do not have the means to pay for basic civil legal services.

The Houston Bar Foundation is the primary support of the HBA’s Houston Volunteer Lawyers, which provides pro bono legal services for low-income families including veterans, the elderly, those with disabilities, and other low-income Houstonians with family law, consumer law, probate and other legal problems.

Although the Harvest Celebration has been the social event of the year for the legal community since 1949, it was designated a fundraiser 15 years ago and has raised more than $6 million for the Foundation and pro bono legal services in Harris County.

Photos by David Bates, Bates Photographic Studio

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HBA Ambassadors Sammy Ford IV, Travis Torrence, Anna Archer, Nicole Voyles, Brian Albrecht and Ashish Mahendru.

Dana Kelly and Harvest Celebration Co-chair Neil Kelly

Sandy and Travis Sales

HBF Chair-elect Bill Buck and Leslie Buck

Annsley and Chris Popov

Richard Burleson, HBA president-elect Laura Gibson and Bill Ogden

Penny and Craig Glidden

Meredith Clark, Sherrie Evans and Ike Vanden Eykel

Stephanie Bundage, Monica Karuturi, Dana O’Brien and Daniella Landers

Attorneys from Norton Rose Fulbright

Attorneys from Williams Kherkher Hart Boundas LLP

Attorneys from Kirkland & Ellis thehoustonlawyer.com

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By Taunya Painter

Managing Internet Risks & Benefits

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his is Part 2 of a column that encourages you to engage online efficiently to get clients. A law firm’s online presence must help people: (1) find you, (2) like you and (3) contact you. The last column (Sept/Oct issue) talked about helping clients find you based on the most common way someone will search for a lawyer—Google search.

You should have a solid firm site with content and video that places you at the top of an organic Google search. Part 2 continues the discussion of helping clients find you through social media and directories, and it covers helping them like you and contact you.

Once you have a firm site that Google bots will love, there are other ways that you can build on that foundation.

Use social media to point people to your site.

Another way for people to find you (in addition to a Google search), is for them to ask those on social media sites or search these sites directly. This is where they will search for authentic feedback and comments if they don’t want to rely on Google’s algorithm ranking.

Join and learn. If you aren’t active on social media platforms, you’re already late to the party (Active users for Facebook, 1 billion; Twitter, 560 million; Google+, 400 million; LinkedIn, 240 million). But don’t bust the door down. Instead, join, watch, learn... then watch and learn some more.

Make an informed decision about who you are. For all social networking sites, you have to decide—are you “the firm,” or are you “yourself,” or will you be both?

You can do any combination, but you do need to pick wisely. On most social media sites, I am “myself” (@TaunyaPainter), and our small law firm doesn’t have its own firm account (e.g., no @PainterLawFirm).

This works well for us on Twitter, LinkedIn, and Google+ because we are a small firm named after us, we have personal profiles that are completely open to the public that link back to our own firm, and we share mostly professional and non-private infor-

mation. Also, it’s convenient being myself on these sites because it is more natural to talk in the first person for posts and be more personable to engage people. One challenge is Facebook, where I am myself and have a closed account. The result is that our firm is not represented to the one billion Facebook users. A place it clearly makes sense to be yourself is on a site where professional discussion is almost low, such as Instagram, Tumblr and Pinterest.

Engage. For social media platforms think “social,” not “advertising” or “marketing.” Engage by asking questions and providing positive comments for others.

Share information others will find useful or interesting. A good way to start is to update your accounts with useful and original content from your firm site articles, as long as they are not self-promoting. You can link posts through the social media sites, so that when you post in one forum, it will automatically post in the others. But once you start, don’t ignore or miss someone’s comment or question.

App up. Getting all the apps to social media sites on your mobile device will allow you to post at peak times and engage on a real-time basis. You can’t delegate to a tech or PR team the job of writing, posting or responding. You need to take control of posting, and do it when the experts suggest or close to it. Also, responses should be done in a short window; know the standards for different social media and try to stick to them. Using the apps will also allow you to view your content how most others will see it.

Use directories to point people to your site.

At a minimum, use Avvo, Martindale Hubble, Justia, and the Texas Bar. If you are reading this article, and have not claimed your profiles, stop and do it now. It takes just minutes. For example, Avvo is a top originating source of clients for many attorneys. I spoke with Avvo and got these tips: Add a photo. According to Avvo, profiles with a photo are clicked on seven times more often than those without one.

Focus your practice areas. Avvo provides a “pie graph” of practice areas for each lawyer. Don’t slice the pie so thin that you minimize your specialty; the pie doesn’t have to reflect how you spend your time. Having 1-3 specialties listed is ideal, because it helps with how Avvo lists you against other lawyers. Focus the pie on practice areas where you are most likely to attract the business you want.

Get your rating up. The Avvo rating is 1-10, in tenth of a point increments. The Avvo bot looks at years of experience, work history, association leadership, legal publishing, legal speaking and awards, and peer feedback and endorsements. Use the “drop-down menus” provided so the site will map and weight your experience, and always include dates when asked because the site authenticates your information.

Also, Avvo likes to see you keeping your profile updated.

Pay attention to client comments... because the public certainly is. While these comments from the public don’t directly impact your Avvo rating, this comment area is like “Yelp” for lawyers. Client comments on third-party sites are considered authentic, and they carry more weight than testimonials on your own firm site.

Engage. Check out Avvo’s Q&A forum.

Avvo gets 10,000+ legal questions a week from consumers, and attorneys answer them for free. While you will certainly see some crazy questions, be patient. It’s a great place to potentially get clients and boosts your visibility on the site.

Get others to link back to your firm site.

Whenever you do an interview with any media, try to mention your site. I was interviewed once by Business Week. They wanted to incorporate biographical information, but instead, they let me include my firm site. This link has generated a lot of click-throughs from www.businessweek. com to www.painterfirm.com, and I have signed up clients as a result. This is a perfectly legitimate way to get site visibility, as long as the person interviewing you or giving you the air time agrees in advance.

Don’t fall for gimmicks.

There are numerous gimmicks and supposed tricks to gaming Google and social media sites. Don’t fall for them. You may be “found” by clients in the short term, but Google will punish you and potential clients will ignore you.

Help clients like you and contact you.

Boost interest with style. People want to

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hire a firm or attorney that looks good. Your site needs curb appeal. It needs to look like one of the big dogs... or like it can take on the big dogs. A canned page with stock photos is not credible or authentic. But don’t be so authentic that you appear too casual or inattentive to detail or style.

Boost credibility with your bio page. Your content, videos, or social media likely got someone to your page, but an attorney’s bio statistically is the most clicked-on link on a law firm site. Make sure your bio page is complete, updated, and user friendly, with concise headings and statements of your credentials, accomplishments and accolades. Presume that a potential client won’t go through your whole webpage. Independent of the rest of your site, your bio page must say enough about you that it will compel someone to call your office.

Boost likability through video and pictures. If clients see you in multiple pictures and videos, they will feel like they know you.

Boost accessibility through a mobile friendly site. Test run your firm site, articles, and especially contact information on mobile devices. Don’t make a potential client fill out a form to contact you.

That can be an option, but some people will want to call and get a live person. Put contact information on the top banner of all site pages (not hidden in small print at the bottom or in a pull down menu). Also, make the listing of your phone, address and email as a single click on a mobile device (make them device clickable).

These are some ideas that have helped us engage potential clients. Hopefully, the information can be of use to you.

Taunya Painter is a member of Painter Law Firm PLLC, where she specializes in business, contract and international law. She is an associate editor for The Houston Lawyer.

Houston Lawyers Who Made a Difference

John B. Connally, Jr.

By The Hon. Mark Davidson

J

ohn Connally was a University of Texas student body president, a highly decorated Naval Lieutenant Commander, a very successful businessman, the Secretary of the Navy, and one of the best Governors in the history of the State of Texas. As Governor, he led the greatest expansion of higher education in Texas history, and there were more highways built on his watch than any prior governor. And then he became a Houston lawyer.

Governor Connally agreed, upon leaving the Governor’s mansion, to move to Houston, and join the newly renamed firm of Vinson, Elkins, Searls & Connally. He brought numerous clients to the firm, and made Houston a place where governments and international businesses came to seek legal counsel. In the years 36

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to Houston and the practice of law. Connally would continue a career as a lawyer, a businessman, a Presidential candidate. He would dazzle everyone he worked with as one of the most charismatic and intelligent people they had ever known. Near the end of his life, he would fly to Iraq and persuade Saddam Hussein to free a number of American oil field workers held hostage by the dictator.

John Connally led a life in which he took on a broad variety of tasks, and he succeeded at each. At every step of his life, he made a difference for the state and nation he loved.

before the first OPEC oil embargo, he helped create contacts between Middle Eastern entities and the business community of Houston that would make our city an economic world center for decades to follow.

After two years with the firm, Connally was appointed Secretary of the Treasury by President Richard M. Nixon.

He became one of three Houston lawyers ever to serve in a Presidential Cabinet. DurThe Hon. Mark Davidson ing his time, he led efforts to is an MDL judge and judge stimulate the economy in an John B. Connally, Jr. (retired) of the 11th District administration inclined to be Court. His column for The Houston Lawrestrictive in spending. He stopped a run on the yer focuses on Houston attorneys who have strength of the value of the American dollar by had significant impact on the law, the legal ending its ties to the gold standard. profession and those served by the law.

After leaving public service, he returned

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A Profile

in pro f e s s io n ali s m

was recently reminded by a young lawyer I hired several years ago that I included “fearless” among the list of attributes I gave the recruiter. I recalled I was looking for a lawyer that was smart and confident enough to be a business enabler but also, when required, courageous enough to ensure the business always operated within appropriate boundaries. I was lucky enough to find such a candidate then, and I have continued to look for those qualities in the lawyers with whom I work since.

Those who are not a part of our profession may not always think “courage” is synonymous with “lawyer,” but I believe for those who exemplify the best in our profession it is an essential ingredient. Whether it is the public defender who zealously represents a client accused of even the most heinous crime because of her belief in the integrity of our judicial system or the civil defense counsel who puts a client’s interest ahead of the interest of his firm, the law often requires

courage of its practitioners.

I have spent the majority of my career as in-house counsel where the breadth of the role coupled with the proximity to your client requires many different types of courage. It may be the courage to admit that you are not the smartest person in the room coupled with the intellectual curiosity and humility necessary to learn the technical or commercial aspects of your business from the internal experts. It could be the courage to trust your judgment when confronted with an issue of first impression. It may be the courage to oppose a direct supervisor when it is in the best interest of the company. But it may simply be the courage to say “I don’t know.”

I have been blessed by an interesting and diverse legal career that has allowed me to continue to grow and learn as a lawyer. But perhaps equally important, it has given me the chance on occasion to be courageous. What more could you ask for!

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The Houston Lawyer

I

Dianne Ralston Executive Vice President, General Counsel and Corporate Secretary, Weatherford International, plc

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OFF THE RECORD

Natara Williams and the Art of Inspired Jewelry

Who Said Lawyers Can’t Have Style?

By Nicole Bakare

The Houston Lawyer

C

oco Chanel once said, “Dress shabbily and they remember the dress; dress impeccably and they remember the woman.” Well, if that’s true, then anyone who meets Natara Williams most certainly remembers the woman.

Williams, in-house counsel at Oasis Petroleum, Inc., has been practicing corporate law for almost ten years, but she has always had an interest in fashion. In 2010, she and a friend, who works as an accountant, were “both looking for something else” and decided to turn their passion for fashion into a business. The result was Purple Aura Jewels.

Originally, Purple Aura Jewels started as an online platform for established jewelry designers to sell their pieces.

Williams and her partner, Cynthia Whiting, soon asked, “Why not do this ourselves?”

In 2011, they started designing, producing, and selling their own jewelry—jewelry that is “so different,” Williams explains, that it enjoys immediate brand recognition.

Although her partner had some experience designing and marketing jewelry, it was a first for Williams. She was undeterred, however, and now contributes to the design and production of two collections of earrings, bracelets and necklaces each year.

The popularity of their designs quickly took off. Their jewelry has been featured in national magazines, including Elle and Star Magazine, and seen on several celebrities, including Sarah Michelle Gellar and Kerry Washington.

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Not content to stop there, Williams and her business partner recently launched a second business, The Reign Effect. But where Purple Aura jewelry is for the woman who is “edgy” and “rocker chic,” The Reign Effect is for busy professionals—both men and women—looking to streamline their morning routine.

The idea for The Reign Effect began when Williams and her business partner were complaining to each other about how chaotic their mornings are before work and “how great it would be to wake up and not have to figure out what to wear each morning,” she says. So they decided to start The Reign Effect, an online service selling downloadable style sets. Each style set is tailored to a specific type of corporate work environment and contains 20 styled looks for a month of Monday through Friday wear that “streamlines your morning routine, saves time and alleviates stress while ensuring you still look fashionable for the office.”

Although they employ stylists to create the style sets, Williams and Whiting have the final word. “The most fun part of our job is assisting in the process of creating the style sets,” says Williams. “We both love fashion and styling, so coming up with creative ways to allow people to express their personalities and style in a way that is appropriate for the corporate environment has been a gratifying experience.”

Nicole Bakare is an associate in the Global Insurance Department at Cozen O’Connor and a member of The Houston Lawyer editorial board.

COMMITTEE SPOTLIGHT

Law & the Media Committee Bridges Professional Gaps

By Raymond Panneton

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The Law & the Media Seminar is tradiracing its roots to 1986, the Houston Bar Association, as well as tionally held on a Saturday in late January Houston Bar Association’s Law non-attorney journalists. Membership or early February, and focuses on current & the Media Committee has a on the Law & the Media Committee legal trends that are of great interest to long history of cultivating and for the 2014-2015 bar year consists of collaborating with 19 attorney-members and 10 journalism professionals in journalist-members. This year’s Harris County to create a deep Law & the Media Committee is inter-professional relationship. co-chaired by attorney Benny The mission of what is now Agosto, Jr. of Abraham, Watknown as the Law & the Mekins, Nichols, Sorrels, Agosto dia Committee was established & Friend and Laura Tolley, by then-president John Eikenwho is a former journalist and burg, who sought to encourcurrent manager of public relaage dialogue and education betions at South Texas College of tween the legal profession and Law. local media outlets. Eikenburg The 29th annual Law & the asked the CLE Committee to Media Seminar will be held on The January 2014 Law & the Media Seminar featured a panel of work with the Society of ProJanuary 31, 2015 at 9:00 a.m, attorneys, judges, journalists, educators and parents discussing fessional Journalists and The “Campus Crises: Balancing Safety, Privacy, Due Process and the at the Emilie Slohm ConferPress Club of Houston to create Public’s Right to Know.” ence Center at the South Texas legal and media professionals alike. In an informative program that was relevant College of Law. The topic will focus on the past, the conference has touched on to both professions. The collaboration of Grand Juries. Speakers confirmed as topics from “Crime, Punishment & the these professional organizations created of press time include Tom DeLay, Lisa Press: Legal and Ethical Pitfalls in Cova highly acclaimed seminar on March 1, Falkenberg, Hon. Murry Cohen, Rusty ering the Criminal Justice System” to 1986 covering the issue of “Libel.”

Hardin, Phil Archer, Clay Conrad, Larry “The WikiLeaks Debate.” The seminars During the 1991-1992 bar year, thenKarson and Melanie Lawson. generally feature a number of speakers president Ben Aderholt established an For more information about attending who provide insight on issues from a leofficial committee to ensure Eikenburg’s the program, contact Tara Shockley, HBA gal, journalistic, and community point of vision continued. Originally established communications director, at (713) 759view. The seminar is free of charge for as the Interprofessional Relations-Media 1133 or taras@hba.org, or visit the HBA journalists, communication professionCommittee, Aderholt moved the comwebsite, hba.org. als, law students, and journalism stumittee under the direction of the HBA dents. Attorneys are welcome to attend Communications Department, renamed Raymond Panneton practices medical for a nominal fee and will receive MCLE it the Law & the Media Committee, and device and pharmaceutical litigation with credit for attending. charged this new committee with the the Talaska Law Firm, PLLC. He is a The Law & the Media Committee is planning an annual Law & the Media member of the Law & the Media Committee comprised of attorney members of the Seminar. and The Houston Lawyer Editorial Board thehoustonlawyer.com

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LEGAL TRENDS

Texas Supreme Court Finds Economic Loss Rule Not a Bar to Suit Between Contractual Strangers

By Amy Hargis

The Houston Lawyer

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n August 22, 2014, the Texas Supreme Court decided Chapman Custom Homes, Inc. v. Dallas Plumbing Company, providing much-needed clarity on the ability of a homeowner to bring an action against a subcontractor for faulty work.1 While Texas homeowners have historically had no contractual causes of action against a subcontractor with whom they are not in privity, the Chapman opinion defines when a homeowner may nevertheless recover from a subcontractor. In a departure from the lack-of-privity obstacle which has dominated homeowner-subcontractor litigation in Texas, the court focused on the economic loss rule, explaining how the rule does not bar all claims arising out of negligent performance of a contract. Concluding that both the trial court and the Fifth Court of Appeals improperly dismissed the homeowner’s claims, the Texas Supreme Court’s Chapman opinion pierces the liability shield which previously protected subcontractors from direct liability to a homeowner.

In Chapman, the homeowner hired Chapman Custom Homes, Inc. as the general contractor to build a home. In turn, Chapman subcontracted plumbing installation to Dallas Plumbing Company. Once the home was completed, the plumber’s faulty installation caused flooding and substantial damage to the home. The homeowner brought suit against the plumber alleging breach of contract, breach of express warranty, and negligence. Affirming the trial court’s grant of summary judgment, the Fifth Court of Appeals foreclosed the home-

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owner’s claims against the plumber. In line with prior cases, the contract claim failed because the homeowner was not a party to the plumbing subcontract. With respect to the negligence claim, the court explained that a duty must exist independent of the contract in order for a tort claim to survive the economic loss rule. Concluding that the way in which the plumber completed his work did not give rise to an independent duty outside of the subcontract, the court found no viable basis for a tort claim against the plumber.

While the appellate court’s opinion suggests a categorical bar of tort claims by homeowners against subcontractors vis a vis the economic loss rule, the Texas Supreme Court clarified that this is not always the case. A tort claim surpasses the economic loss rule when “[1] the duty allegedly breached is independent of the contractual undertaking and [2] the harm suffered is not merely the economic loss of a contractual benefit .”2 Citing its 1947 opinion, Montgomery Ward & Co. v. Scharrenbeck, the court reiterated that a party to a contract has an implied duty to perform their work with care and skill.3 However, that duty is not restricted to parties in direct contractual relationships.4 Indeed, the Chapman plumber’s duty to not negligently perform his subcontract extended to the homeowner. In speaking to the economic loss rule and rejecting the appellate court’s conclusion, the court defined the implied duty as one that exists independent of the subject of the contract.

Accordingly, if damages caused by a party’s negligent performance of a contract extend beyond the loss of the anticipated economic benefit, then the economic loss rule is not a bar to a party’s claim. With respect to the Chapman homeowner, flooding to the home caused by negligent installation of plumbing lines constituted additional damages beyond the subject of the plumbing subcontract. Therefore, the homeowner’s negligence claim against the plumber was proper.

Roughly 60 days prior to the Chapman opinion, the Texas Supreme Court applied the same economic loss standard and reached a different result. In LAN/STV,

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the court applied the rule to bar a contractor’s claim for negligent misrepresentation against an architect with whom the contractor was not in privity.5 Unlike Chapman which involved the homeowner-consumer as a plaintiff, the parties in LAN/STV were hired to perform work in some capacity by the owner on a construction project. Highlighting the parties’ ability to allocate risk among their contracts, the court declined to impose an independent tort duty on the architect so as to overcome the economic loss rule. Additionally, LAN/STV addressed economic delay damages to the contractor caused by the architect’s alleged negligence whereas Chapman dealt with the homeowner’s property damage caused by faulty subcontracting work. The factual differences, party relationships, and damages incurred in LAN/STV make the opinion easily reconcilable with Chapman.

On the heels of the LAN/STV opinion which might be interpreted quite broadly, Chapman makes clear that the economic loss rule does not immunize all contractual strangers from tort liability in every situation. Rather, the duty to carry out contractual obligations with appropriate care and skill is an independent tort duty which may extend to parties who are strangers to the contract. Chapman provides clarity that, at least in the homeowner-subcontractor scenario, a subcontractor must answer for faulty work that damages the homeowner’s property. Ultimately, in light of Chapman, a subcontractor’s failure to perform work with appropriate care and skill opens the door to a potential contract claim by the party with whom he is in privity in addition to a tort claim by the person harmed by the negligent work.

Amy Hargis practices with Doyle Raizner L.L.P. and is a member of The Houston Lawyer editorial board.

Endnotes

1. See Chapman Custom Homes, Inc. v. Dallas Plumbing Co., No. 13-0776, 2014 WL 4116839, (Tex. Aug. 22, 2014).

2. See id. at *2.

3. See. (citing Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508, 510 (Tex. 1947)).

4. The parties in Scharrenbeck, the homeowner and the contractor, were parties to the same contract. See id.

5. See LAN/STV v. Martin K. Eby Construction Co., 435 S.W.3d 234 (Tex. 2014).

LEGAL TRENDS

Cross-Claimants and Third Party Plaintiffs Not Required to File Expert Affidavit with Original Petition in Arbitration

By Kelly L. Fritsch

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n October 9, 2013, the Texas Supreme Court heard oral arguments in Gary Wayne Jaster v. Comet II Construction, Inc., Joe H. Schneider, Laura H. Schneider, and Austin Design Group.1 Nine months later, the Court delivered an opinion clarifying whether the requirements set forth in Chapter 150 of the Texas Civil Practice and Remedies Code apply to defendants or third party defendants who file a claim or cross-claim against a licensed or registered professional. The Court concluded that cross-claimants and third party plaintiffs are not “the plaintiff” in an arbitration proceeding and as such, the requirement of filing an expert affidavit with the original petition, as required by Chapter 150, does not apply to them.

Mahmoud Dawoud purchased a home from Comet II Construction, Inc. Ten years later, Dawoud sued Comet for negligence, negligent misrepresentations, fraud deceptive trade practices, and breach of contract alleging that Comet defectively designed and constructed the home’s foundation.

Comet denied liability and asserted third party claims against Austin Design Group, from whom Comet had purchased the foundation plans, and Gary Wayne Jaster,

the licensed professional engineer who had prepared the plans. Comet sought contribution and indemnity against the thirdparty defendants, alleging that they were or may be liable to Comet for all or part of Mahmoud’s complaint. Austin Design Group filed a counterclaim against Comet and a cross-claim against Jaster, seeking contribution and indemnity and asserted that to the extent there is any defect in the foundation, it is the fault of Jaster or Comet and not the fault of Austin Design Group.

After all claims had been filed, Jaster filed a motion to dismiss Comet’s thirdparty claim and Austin Design Group’s cross claim arguing that they were each “the plaintiff” as to those claims, that he was a licensed professional engineer, and that they had failed to file an expert affidavit ( “certificate of merit”) as required by Chapter 150. In response to the motion to dismiss, Comet amended their petition and included a certificate of merit as an attachment. Jaster, in turn, amended his motion to dismiss stating that the certificate of merit must be attached to the original petition to comply with Chapter 150. The trial court denied Jaster’s motion to dismiss.

Thereafter, Jaster filed an interlocutory appeal. The court of appeals affirmed the trial court by concluding that Chapter 150 does not require third-party plaintiffs or crossclaimants to file a certificate of merit. Jaster then filed a petition for review which the Texas Supreme Court granted.

What does Chapter 150 of the Texas Civil Practice and Remedies Code require?

In 2005, the statutory language which governed this case, provided: In any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional, the plaintiff shall be required to file with the complaint an affidavit of a third-party licensed architect, registered professional land surveyor, or licensed professional engineer competent to testify, holding the same professional license as, and practicing in the same area of practice as the defendant, which affidavit shall set forth specifically at least one negligent act, er-

ror, or omission claimed to exist and the factual basis for each such claim.

Further, if a plaintiff fails to file the required affidavit in accordance with Chapter 150, dismissal with prejudice may result.

In Jaster, the Court found that the requirements of Chapter 150 applied only to plaintiffs and not cross-claimants or third party plaintiffs. The Court, in part, relied upon judicial construction in its decision. Three Texas courts of appeals have reviewed Chapter 150. The Dallas court of appeals applied Chapter 150 to a defendant, although neither party in that case raised any objection to that application. Next, the Fort Worth court of appeals found that the statute did not apply to a third party plaintiff because there would already be a certificate on file by the plaintiff. Here, the Austin court of appeals held that the Chapter 150 requirements did not apply to thirdparty plaintiffs or cross-claimants because the statute did not expressly address third party plaintiffs or cross-claimants. Given the differing views from the courts of appeals, further analysis was required. The Jaster Court then reviewed the plain language of the statute to complete its analysis. Essentially, the Court distinguished between a “plaintiff” and a “claimant” with the plaintiff being the party who initiates the suit. The plain language of Chapter 150 requires a plaintiff to attach the certificate of merit upon commencement of the suit.

It is silent as to defendants and third party defendants who do not commence litigation but rather “assert claims within the litigation.” As a result, the Court reasoned that the plain language of the statute did not apply to cross-claimants or third party plaintiffs.

Kelly L. Fritsch is the owner of Kelly L. Fritsch, P.C. Her practice is dedicated to divorce litigation and family law matters.

She is a member of The Houston Lawyer editorial board.

Endnotes 1. Gary Wayne Jaster v. Comet II Construction, Inc., Joe H. Schneider, Laura H. Schneider, and Austin Design Group, No. 12-0804, slip. op. (Tex. July 3, 2014).

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Media Reviews

The Boom: How Fracking Ignited the American Energy Revolution and Changed the World

By Russell Gold Simon & Schuster 2014

The Houston Lawyer

S

Reviewed by Sammy Ford IV o why all the fuss about fracking?

America’s future energy independence appears to depend upon it.

Houston’s economy is exploding due in large part to it. And some think our nation and the world’s water supply may be destroyed by it.

Gold offers up fracking 101, what it is and how it differs from conventional drilling, but as an investigative journalist, he goes far beyond. The controversies surrounding this energy extraction method are so pervasive, that those for and against it can’t even agree on the name.

“Hydraulic fracturing” is descriptive of the process to extract oil and natural gas from shale rock layers that are fractured by pressurized water, but whether you call it “fracing” or “fracking” is a good indicator of which side of the debate you are on. The former implies you see it in a positive light, and the latter has been used by critics.

Gold himself uses “fracking” because it’s the preferred spelling in the news industry, which he calls home as the Senior Energy Reporter for the Wall Street Journal.

The confusion and rancor over the name 42

November/December 2014

point to the same issues over fracking’s status, which in turn points to the confusion and zigzags that gave rise to the technique in the first place.

While commercially viable fracking is still relatively new, its broad success began with a single drill, a single well, and a single engineer. Nick Steinsberger, an employee of George Mitchell’s Mitchell Energy, oversaw the company’s Barnett Shale fracking operations near Fort Worth, which had never been profitable.

But in 1998, he developed a mix of water and chemicals that produced an astounding amount of natural gas at a remarkable pace in the S.H. Griffin well, No. 4. Unlike earlier fracked wells, which would produce and fall off shortly thereafter, the S.H. Griffin produced gas at rates more commonly seen in top tier conventional wells.

There remained a problem, however. The Barnett is approximately 350 feet thick and sits upon the Ellensberger formation, which contains rocks riddled with salty water. Drilling too deep into the Barnett Shale had the distinct possibility of turning a productive gas well into an unintended salt water well. Mitchell Energy had mostly drilled and fracked vertical wells.

It was up to Devon Energy, which bought out Mitchell Energy in 2001, to experiment with drilling and fracking horizontal wells.

The story of fracking’s rise and fall thereafter is in many ways the story of Chesapeake Energy and its leader Aubrey McClendon, of whom Gold wondered… “Is he a huckster, a dynamic salesman, a visionary, a fool? I can’t tell.”

But what emerges is that according to Gold, McClendon may be all of the above. It was likely due to his monomaniacal focus on developing shale production throughout the country (along with a fortuitous boost to the natural gas industry given by the California energy crisis) that he is almost singlehandedly credited with the modern fracking boom.

Gold also tells the story of fracking’s impact beyond the stories of the energy producers. On the one hand, between 2007 and 2012, due to the increased usage of natural gas, the

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United States’ carbon dioxide consumption fell from 543 to 479 million metric tons in only a month. This reduction means that though it is not a signatory of the Kyoto Protocol, the US is on pace to exceed its targets. But there are still critics of the increased reliance on natural gas because it is still a fossil fuel, still produces climate changing pollutants, and crowds out the development of alternative energy sources.

Gold brings the story home, literally, with the story of his parents’ home, which sits on Pennsylvania’s Marcellus Shale. Though the book’s historical focus is on the Barnett, in many ways its human focus sits squarely with the Marcellus. Tales of polluted water wells and dairy farmers fighting with oil companies provide a counter balance to the stories of success. According to Gold, the battles among oil companies, land owners, and environmentalists are fundamental to our economy’s appetite for cheap energy.

Gold is a master at showing the global issues on fracking and bringing them home to something which every person can relate, and for all his skills, he won the Gerald Loeb Award, and was a finalist for the Pulitzer Prize.

Sammy Ford IV is an associate with Abraham, Watkins, Nichols, Sorrels, Agosto & Friend and a member of The Houston Lawyer editorial board.

Sharing the Common Pool: Water Rights in the Everyday Lives of Texans

By Charles R. Porter Texas A&M University Press, 2014

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Reviewed by Polly Graham n his new book on water rights in Texas, Charles R. Porter, an assistant professor of history at St. Edward’s University, warns: The Texas Water Development Board’s

Media Reviews

State Water Plan for 2012 posed this primary question: “Do we have enough water for the future?” The answer was unequivocally that we do not.

Porter explores this issue and many others by blending science, history, law and public policy into easy and informative reading on a topic relevant to every Texan. Porter begins with the basics of the hydrologic cycle, discussing Texas’s drought riddled weather patterns. He then moves to the fundamentals of water ownership and usage, outlines the basic structure of groundwater regulation, and discusses four major disputes in the water rights arena that have dramatically shaped our current water policies in Texas.

Consider what Porter calls “The Case of the Biggest Pump.”

The story begins in Denison, Texas when the first railroad train passed through the city on Christmas Eve in 1892. Over the years, the railroad decided that it needed to build a maintenance yard for its steam-powered locomotives. So the railroad drilled a well and started pumping 25,000 gallons of fresh water a day. Within a few months, the neighboring wells ran dry and their owners filed suit.

The landowners in Denison argued that the railroad’s water usage was vastly out of proportion to any reasonable or legitimate use of the land and, instead, was being used to supply steam engines over several hundred miles of tracks. The judge accepted all facts stated in the petition as true, but nonetheless held that landowners do not have correlative rights to groundwater and that the railroad had the right to use the water for its steam engines. The Texas Supreme Court affirmed and the “rule of capture” was established in the area of groundwater rights.

Legal history is just one of the many topics Porter covers in his new book. Porter also places an emphasis on practical problems Texans face every day. He discusses the consequences of water rights issues when buying or selling land. He also touches on solutions for addressing future water shortages, includ-

ing pipelines and desalination plants.

In Houston, it is easy to take water supplies for granted. After all, cheap and plentiful water is available with only the twist of a knob.

But if the flow from the spigot begins to slow, it will impact us all.

If you want to learn more, Sharing the Common Pool: Water Rights in the Everyday Lives of Texans is the perfect place to begin.

Polly Graham is an appellate lawyers at Haynes and Boone, LLP and a member of The Houston Lawyer editorial board.

The Educator’s Guide to Texas School Law (8th ed.)

By Jim Walsh, Frank Kemerer and Laurie Maniotis University of Texas Press, September 15, 2014

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Reviewed by Miles Bradshaw he eighth edition of The Educator’s Guide to Texas School Law, gives educators, administrators, parents and attorneys an excellent desktop resource for Texas school law, with

updates from the Texas State Legislature.

One of the most daunting tasks for a new school lawyer is to know what are the controlling authorities and where to find them.

Any given circumstance may involve many levels—a constitutional provision, federal statute, state regulation, or even a local policy. This concept is more prevalent in school law than most other areas of practice. The authors include a description of the types of controlling authorities and case law, where to find them, and other authoritative resources for Texas school law. Chapter one provides a thorough overview of the interplay of the wide variety of laws applicable to school districts, setting the backdrop for the more detailed chapters to come.

Special education law, covered in chapter three, is truly a specialty area within the specialty of school law. Dedicating almost 40 pages to special education might seem unusual—but there is a reason. Author Jim Walsh is considered by many as the guru of special education law in Texas and around the country. The authors do an outstanding job of describing the most important aspects of special education law, in an authoritative manner. The chapter would be useful for a parent or an attorney preparing for any number of procedural hearings or meetings.

Even though the book, The Educator’s Guide to Texas School Law, is true to its title as an “educator’s guide” to school law, as a practicing school lawyer, I recommend that it appear in the library or on the desktop of every school administrator and school lawyer in Texas.

Miles Bradshaw is a partner at Karczewski|Bradshaw LLP. The firm, with offices in Houston, Beaumont and Nacogdoches, primarily represents school districts, community colleges and other governmental entities.

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November/December 2014

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