The Texas Pandemic Liability Protection Act (PLPA) took effect on June 14, 2021 and provides retroactive protections to businesses against lawsuits alleging damages due to an exposure to COVID-19.  The general provisions of the Act are now codified at Section 148.003 of the Texas Civil Practice and Remedies Code.

It is important to note that the protection from liability for causing an exposure to COVID-19 (including liability for the death of the exposed person) is, however, not absolute.  Liability may still attach if the plaintiff can establish:

  1. The business knowingly failed to implement or comply with applicable government-promulgated standards, guidance, or protocols intended to lower the likelihood of exposure to the disease.

Note: Where state and local government authorities have issued conflicting standards, the protection from liability will remain intact so long as the business complied with one of the applicable, but conflicting, standards.

  1. Or, the business knowingly failed to warn the plaintiff of or remediate a condition within the business that it knew was likely to result in exposing plaintiff to the disease, provided that (a) the business had control over the threatening condition; (b) the business knew the plaintiff was more likely than not to come into contact with that condition; and (c) the business had a reasonable opportunity to remediate the condition or warn the individual of the condition before the individual came into contact with that condition.

If either circumstance (1) or circumstance (2) exists (potentially opening the business to liability), then the plaintiff still must also show by “reliable scientific evidence” that “the failure to warn the individual of the condition, remediate the condition, or implement or comply with the government-promulgated standards, guidance, or protocols was the cause in fact of the individual contracting the disease.”

The statute provides a specific deadline (120 days after the defendant files an answer to the lawsuit) for the plaintiff to provide an expert witness report(s) attesting to the factual and scientific grounds for the assertion that the defendant’s failure to act caused the plaintiff to contract the disease.  The statute further limits the discovery that can occur (specifically, no more than two depositions) before such expert analysis is provided by the plaintiff.  The defendant may object to the sufficiency of the expert report, with the court allowing the plaintiff an additional 30 days to cure any deficiencies.  If a sufficient expert report is not timely served, the court may then dismiss the plaintiff’s claims and the business “shall” be awarded its reasonable attorneys’ fees and costs incurred defending the action.

As noted above, the PLPA is retroactive and applies to all claims commenced on or after March 13, 2020 for which a judgment had not already been entered and become final as of June 21, 2021.

The protections provided by the PLPA will last so long as the COVID-19 “pandemic emergency” lasts, which term is defined to mean a state of disaster as declared by the governor in response to a pandemic disease.

Those businesses with COVID-related litigation now pending should consult with legal counsel concerning the application of this defense.  On a go forward basis, businesses should remain mindful of their duties to warn of and remediate threats, and to comply with government-promulgated safety measures, in order to take full advantage of the liability shields offered by the PLPA.

In addition to the more general protections from exposure-related liabilities, the PLPA provides various other statutory protections to businesses from liabilities arising out of COVID-19 and other future pandemics, including special protections for first responders, physicians, and other health care providers (codified at Section 74.155 of the Texas Civil Practice and Remedies Code), protections from products liability actions related to pandemic emergencies (codified at Section 148.002 of the same Code), and protections for educational institutions for certain actions during a pandemic (codified at Section 148.004 of the same Code).  The following is a link to the entire enrolled statute:  Bill Text: TX SB6 | 2021-2022 | 87th Legislature | Enrolled | LegiScan.

For further information on this topic, please reach out to blog author, April Walter, at april.walter@keanmiller.com

A significant amendment to the Texas statute that allows for recovery of attorneys’ fees by a prevailing plaintiff in an action for breach of contract will take effect on September 1, 2021.  Previously, Texas courts have interpreted Texas Civil Practice and Remedies Code section 38.001 to award attorney fees against only individuals and corporations, not limited liability companies, partnerships or other types of entities.

In three prior legislative sessions, unsuccessful attempts have been made to amend the statute to broaden its reach to other entity forms.  In May 2021, the Texas Legislature adopted House Bill 1578 (Bill Text: TX HB1578 | 2021-2022 | 87th Legislature | Enrolled | LegiScan), which finally amends section 38.001 to address other entities besides a corporation.

More specifically, the amendment adds a new subsection to section 38.001 defining an “organization” to mean the same as defined in section 1.002(62) of the Texas Business Organizations Code, which includes:  “a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign.”

The amended statute does, however, specifically exclude quasi-governmental entities authorized to perform a function by state law, religious organizations, charitable organizations, and charitable trusts.

Because the amendments explicitly apply only to new cases filed on or after September 1, 2021, a plaintiff who is about to file a claim for breach of contract should consider holding off until September 1 to file (barring any statute of limitations or other considerations that make immediate suit warranted).

Notably, section 38.001 does not allow for an award of attorneys’ fees to a defendant who successfully defends against a breach of contract claim, and the recent amendments do not change this.  Contracting parties should keep the parameters of section 38.001 in mind (especially in view of these recent amendments) when drafting or amending their contracts.  Under Texas law, a contract may provide that the prevailing party, whether the plaintiff or defendant, will recover its attorneys’ fees against the other party, or that the statutory right for a prevailing plaintiff to recover its fees under section 38.001 is waived leaving no party able to recover its fees.

Thus, besides effecting litigation after September 1, the recent amendments to section 38.001 may also weigh into decisions made when drafting and amending contracts to potentially provide for either mutual or no fee entitlement at all.

For further information on this topic, please reach out to blog author, April Walter, at april.walter@keanmiller.com

Several significant expansions of Texas sexual harassment law will take effect on September 1, 2021 (see Senate Bill 45 – TX SB45 | 2021-2022 | 87th Legislature | LegiScan).  These expansions make it critical for virtually all Texas businesses to adopt formal written policies and train workers on the prohibitions against sexual harassment.

First, any employer that employs only “one or more employees” will now be subject to sexual harassment claims under Texas law.  This new law is a substantial change from current law, which holds only those employers with fifteen or more employees can be held liable for such claims.

Second, as of September 1, Texas law will define a potentially liable “employer” to include any person who “acts directly in the interests of an employer in relation to an employee” – signaling the possibility for individual liability against members of company management and owners in addition to entity liability.

Third, Texas Labor Code section 21.141 will include an arguably heightened standard for an employer’s response to complaints of sexual harassment, requiring employers to take “immediate and appropriate corrective action” when the employer knows or should know about the harassment.  The legislature’s use of the word “immediate” differs from the widely accepted interpretations of federal and state equal employment opportunity statutes requiring “prompt” remedial action, and thus, it will remain to be seen whether the courts interpret this new language to impose a requirement for quicker action by employers upon their discovery of sexual harassment in their workplaces.

Fourth, the Texas legislature has also expanded the deadline for a claimant to file an administrative Charge of Discrimination from 180-days to 300-days from the alleged conduct (see House Bill 21 – TX HB21 | 2021-2022 | 87th Legislature | LegiScan).

Notably, these provisions for (1) small-employer liability, (2) potential individual liability, (3) a possible heightened standard for an employer’s response and (4) a longer statute of limitations have not been expanded to claims for other types of unlawful discrimination, such as, for example, racial harassment or retaliation claims, and instead are limited to claims for sexual harassment.

Now is a great time to adopt new or review and fortify existing corporate policies against sexual harassment and remind all employees of their duties to avoid and report this type of misconduct.

For further information on this topic, please reach out to blog author, April Walter, at april.walter@keanmiller.com

On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy While the Order is aspirational and a policy road map, it does not operate to ban, or otherwise restrict in any way, the enforcement of employee noncompete agreements.

In the week that followed, many news outlets published articles heralding a national demise of employee noncompete agreements.  But President Biden’s Order did not effectuate any change to the laws regarding the enforceability of covenants not to compete. The Order is, rather, a wide-sweeping directive to various federal agencies advising of the policy-making goals of the Biden Administration.

As the White House’s Fact Sheet describing the Order explained the July 9 Order “includes 72 initiatives by more than a dozen federal agencies” intended to promote competition and constrain big corporations from consolidating power in a broad array of business sectors ranging from airlines to chicken farmers. The topic of noncompete agreements is but one of myriads of topics addressed in the Order, and the Order is devoid of details on how or to what extent noncompete laws should be reformed.  In the Order, President Biden simply encourages the Federal Trade Commission (one of the federal agencies responsible for enforcing anti-trust laws) to “curtail” the “unfair use” of noncompete agreements, stating:  “To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to curtail the unfair use of non-compete clauses or other clauses or agreements that may unfairly limit worker mobility.”

It remains to be seen what, if any, action the FTC takes in response to the Order.  If the FTC does take up the invitation to act in this area, the agency’s rulemaking process is typically slow, with any rules it passes to bar or constrain noncompete agreements likely facing numerous legal challenges – especially since there is no body of federal noncompete law because this area has been the province of state law.

So, have noncompetes been banned in any material way? In short, the answer is, No. The President has not implemented any ban on employer use of noncompete agreements, or their close cousin, non-solicitation agreements that prohibit former employees from soliciting or doing business with a company’s customers or other employees.  Well-crafted noncompete and non-solicitation agreements can help protect a company’s trade secrets and other confidential information, investment in employee training, and business goodwill.  Texas has codified the enforceability of covenants not to compete at Texas Business and Commerce Code section 15.50, which generally allows for the enforcement of noncompete agreements to the extent they contain reasonable limitations as to time, geographical area, and scope of activity to be restrained.  The July 9 Executive Order does not alter the Texas legal landscape in this area.

For further information on this topic, please reach out to blog author, April Walter, at april.walter@keanmiller.com.

Effective today, July 1, the NCAA has officially suspended the organization’s rules prohibiting athletes from selling the rights to their names, images, and likenesses (“NIL”). Despite the NCAA’s longstanding principles that payments to athletes while attending college would undermine amateurism of college athletics, the organization’s Division I board of directors decided Wednesday that it would allow all athletes to earn money from their NIL.

The decision by the NCAA comes just one day before multiple states had NIL laws set to go into effect allowing athletes to profit from NIL. To prevent athletes at schools in those states (including Texas, Mississippi, and Alabama) from gaining an advantage, the NCAA has allowed students in all states to profit from NIL until a nation-wide NIL law is approved by Congress.

Starting today, players will be able to monetize their social media accounts, sign autographs, teach camps, start their own businesses, create intellectual property, and participate in advertising campaigns. One thing this does not do is grant schools the ability to pay athletes salaries for their athletic performance or use payments for recruiting purposes. Individual schools will be able to create their own guidelines and rules for their individual athletes. Athletes are also now allowed to sign with agents to help them negotiate and sign endorsement deals without risking their college eligibility.

Texas Tech QB, Tyler Shough, and University of Texas running back, Bijan Robinson, who is a top 10 Heisman trophy candidate, are both expected to profit from their NIL from social media engagement and recognition.

According to the Action Network, LSU gymnast, Olivia Dunne, and LSU basketball player, Shareef O’Neal, are 2 of the top 3 athletes who are favored to capitalize the most on NIL due to social media followings and name recognition. Derek Stingley, Jr., LSU defensive back, also projects to cash in from his NIL due to popularity.

NIL deals began rolling in as soon as the clock struck midnight, ushering in a whole new era of college athletics. Miami QB, D’Eriq King, has already signed an endorsement deal with “College Hunks Hauling Junk” which will reportedly net King $20,000.00. King’s deal was the first NIL deal that reported the monetary payout to the athlete. Wisconsin QB, Graham Mertz, has also already filed for a trademark for his personal brand logo. I expect players to get creative with their newfound freedoms as college athletics navigates these new waters.

Originally published in the Ark-La-Tex Association of Professional Landmen Register

Carbon capture and storage (“CCS”) is the process of capturing carbon dioxide emissions from large point sources, and then transporting it to a storage location for deposit in underground formations where it will not re-enter the atmosphere.  By returning CO2 emissions that resulted from the oxidation of carbon when fossil fuels are burned to the place where the fossil fuels were extracted, CCS can reduce the amount of pollutants released into the atmosphere, thus, potentially limiting climate change.  It is estimated that technologies for carbon capture, use, and storage may eventually be able to capture a vast majority of carbon dioxide emissions from power plants, refineries, petrochemical plants and other industrial facilities.  Optimistically, at least a portion of the carbon dioxide captured from this technology can be put to productive use in enhanced oil recovery or the manufacture of fuels, building materials, and more.  CCS is viewed as the primary practical way to achieve deep decarbonization in the industrial sector and could contribute 14 percent of the global greenhouse gas emissions reductions required under carbon neutral target goals and regulations by 2050.

Focusing on innovation, rather than elimination, this trend of development parallels the evolution of the oil and gas industry into an energy industry — one that invests in low-carbon and CCS technologies.

Notably, CCS technologies are being advanced out of the Natural Energy Technology Laboratory in West Virginia and other institutions. However, latent problems associated with global warming, including severe weather, that would be tackled by CCS aren’t always far from home.  While it can be debated whether climate change was a contributing cause, the State of Texas was ambushed by an unprecedented winter storm in February 2021, leaving almost the entire state with no power.  This prompted the new Energy Secretary Jennifer Granholm to advise the State of Texas to consider upgrading its connectivity to the national grid so that neighbors can help in times of crisis.

But the future need not be bleak. This April, Exxon called for expansive industry-government collaboration to develop large carbon capture and storage projects around Houston, Texas, namely, due to Houston’s footing as a home for major refining, petrochemical, manufacturing and power facilities. Exxon reported that it has already briefed government officials and industry groups, including Texas Governor Greg Abbott, Houston Mayor Sylvester Turner, U.S. Senator John Cornyn, House members in the Region, and the Greater Houston Partnership. Infrastructure estimates predict that facilities in Houston could capture and store 50 million metric tons of carbon dioxide annually by 2030 and 100 million by year 2040. The benefits of this project don’t end there, as Exxon’s proposal says the innovation in Houston could be deployed to other U.S. areas with heavy industry near storage sites, like the Midwest and the Gulf region.

British Petroleum also recently announced that it will spend $1.3 billion to build a network of pipelines and associated infrastructure to collect and capture natural gas produced as a byproduct from oil wells in the Permian Basin and in New Mexico.  Natural gas is a potent greenhouse gas, and this project sought to eliminate the routine flaring of natural gas by 2025.  This is viewed as a precedent setting carbon capture and reuse project.

Next door in Louisiana, U.S. Senator Bill Cassidy has joined a bipartisan group of lawmakers in introducing the nation’s first comprehensive carbon dioxide infrastructure package, namely, the Storing CO2 and Lowering Emissions (SCALE) Act, which could make Louisiana a national hub for carbon capture and sequestration. The bill would support the buildout of infrastructure to transport CO2 from the sites of capture to locations where it can be either used in manufacturing or sequestered safely and securely in underground formations. The legislation could also provide critical regional economic opportunities and create thousands of jobs. An analysis released by the Decarb America Project projects the possible effects as creating 13,000 direct and indirect jobs per year through the 5-year authorization. However, the Project acknowledged this estimate is conservative, as it does not include the thousands of jobs likely to be created by retrofitting energy-intensive facilities, such as cement and steel plants, or by building direct air capture plants.

The cost-benefit analysis of CCS technology is also improving daily. As part of a marathon research effort to lower the cost of carbon capture, chemists have demonstrated a way to seize carbon dioxide by using a different solvent (EEMPA) in the capture system that reduces costs by 19 percent compared to current technology. Notably, the U.S. Department of Energy’s Pacific Northwest National Laboratory (“PNNL”) plans to produce 4,000 gallons of EEMPA in 2022 at a 0.5-megawatt scale inside testing facilities at the National Carbon Capture Center in Shelby County, Alabama.  This project is led by the Electric Power Research Institute in partnership with Research Triangle Institute International and PNNL. The eventual goal is to reach the U.S. Department of Energy’s goal of deploying commercially available technology that can capture CO2 at a cost of $30 per metric ton or less by 2035.

CCS is a promising phoenix set to arise from the ashes of the world’s aging industrial practices, and America has a unique opportunity to emerge smarter and stronger than before as a leader in CCS technology. No matter the source, no matter the strategy, CCS is on the rise and evolving into an integral part of the energy industry.

This article was written and submitted by Hattie Guidry, Arielle Anderson, Jourdan Curet, and Kristi Obafunwa with Kean Miller LLP.  Kean Miller LLP is a full-service law firm located in Texas and Louisiana that counsels clients on a wide variety of substantive legal areas and state and federal laws, including a specialized practice in the energy and environmental industry.  Our attorneys are some of the leading practitioners in their field, including many who have helped shape the legal landscape.

In March 2021, Virginia’s Governor Ralph Northam signed the Consumer Data Protection Act (CDPA), making Virginia the second state to enact comprehensive data privacy protections for its residents. If you are feeling blindsided by this news, you are not alone.[1] Unlike California’s Consumer Privacy Act (CCPA) and Privacy Rights Act (CPRA) or the European Union’s General Data Protection Regulation (GDPR), which were heavily debated in both the legislature and public commentary for months on end, the Virginia legislature introduced this legislation in mid-January 2021, with Governor Northam signing the CDPA in less than two months’ time.

The CDPA will not go into effect until January 1, 2023 (ironically, the same day that most provisions of the CPRA also become effective). In the meantime, Virginia is assembling a working group to study the implementation of this act comprising “the Secretary of Commerce and Trade, the Secretary of Administration, the Attorney General, the Chairman of the Senate Committee on Transportation, representatives of businesses who control or process personal data of at least 100,000 persons, and consumer rights advocates … to review the provisions of this act and issues related to its implementation.” The findings of this work group are due on November 1, 2021, and that group’s notes will likely provide recommendations for compliance. While November may seem far away, businesses in Virginia or with significant Virginia consumer contacts may be wise to become familiar with the Act and the impending responsibilities.

Who must comply with the CDPA?

The first consideration before beginning compliance preparations is whether the CDPA will even apply to your business. The CDPA applies to persons that conduct business in Virginia or produce products or services that are targeted to Virginia residents and that either:

  • Control or process the personal data of at least 100,000 consumers during a calendar year; or
  • Control or process the personal data of at least 25,000 consumers and derive at least 50% of its gross revenue from the sale of personal data.[2]

For those familiar with California’s CCPA’s $25 million revenue threshold, the lack of a revenue threshold here is a notable omission. The result of that omission is that even large companies can be excused from compliance because they do not process the required amount of covered consumer data, while smaller companies (such as those offering low-cost direct-to-consumer products) will be required to comply regardless of revenue levels.

The definition of “sale of personal data” is also much more restrictive than the CCPA. The CCPA generally defines “sale” as exchange of information for monetary or other valuable consideration. Conversely, the Virginia definition of “sale of personal data” is only an exchange for monetary consideration, with some notable exceptions, such as exchange of personal data during a merger or acquisition.[3]

Do any exceptions exist for certain entity types?

Yes. The CDPA does not apply to the Virginia government, financial institutions subject to the Gramm-Leach-Bliley Act (GLBA), covered entities or business associates subject to the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health Act (HITECH), nonprofits, or “institutions of higher learning.” However, the CDPA does appear to apply to third-party processors of government entities, nonprofits, and institutions of higher learning that meet the required data processing thresholds. Broadly speaking, there also exist certain carve outs for data subject to GLBA, the Fair Credit Reporting Act, and the Family Educational Rights and Privacy Act (FERPA).

Who does the CDPA protect?

The CDPA protects the personal information of “consumers”, which are defined as natural persons who are residents of Virginia “acting only in an individual or household context.” The definition explicitly excludes individuals “acting in a commercial or employment context”, which has the effect of excluding business to business communications and large amounts of human resources data. Thus, companies that only collect and hold Virginia consumer data in an employment or business to business context may be able to avoid compliance.

What personal data is protected by the CDPA?

The CDPA defines “personal data” as “any information that is linked or reasonably linkable to an identified or identifiable natural person.” “Identified or identifiable natural person” is defined as “a person who can be readily identified, directly or indirectly.” Special protections are also included for “sensitive data”, which includes data revealing racial or ethnic origin, religious beliefs, mental or physical health diagnosis, sexual orientation, or citizenship or immigration status; genetic or biometric data for uniquely identifying a natural person, data collected from a person known to be a younger than 13 years old, and “precise” geolocation data (locating an individual within a radius of 1,750 feet). Collecting sensitive data will require the consumer’s consent (or the consent of a parent if the consumer is under 13 years old).

The CDPA also excludes “publicly available information” from compliance and defines “publicly available” more broadly than other existing regulations. Unlike California’s limitation on “publicly available” only data that is lawfully obtainable from a government entity, the CDPA constitutes “publicly available information” to include information that a business has “a reasonable basis to believe [that the information is] lawfully made publicly available to the general public through widely distributed media, by the consumer, or by a person to whom the consumer has disclosed the information, unless the consumer has restricted the information to a specific audience.” Information that could thus fall under “publicly available information” in Virginia would include personal information posted publicly on social media; for example, a picture of a COVID-19 vaccine card posted on a public Instagram page.

What rights are Virginia consumers granted in the CDPA?

The rights granted through the CDPA are like those in the CCPA and GDPR. Consumers will generally be granted rights to access, correct, delete or receive copies of the personal data held by applicable businesses. Consumers will be able to opt out of targeted advertising and sale of their personal data, and businesses will also be required to make additional disclosures surrounding their personal data processing activities, the rights, and how consumers may exercise their rights. The specific mechanisms through which customers are able to exercise these rights are detailed and extensive, so thorough review of the CDPA’s specific mechanisms for compliance are recommended for businesses beginning compliance preparations.

What are the penalties for non-compliance with the CDPA?

Virginia’s Attorney General will be the sole enforcement authority of the CDPA. If the Virginia AG provides notice of a violation and the non-compliant business does not cure the compliance issue within 30 days of notice, the Virginia AG can institute enforcement action which carries statutory damages of up to $7,500 per violation for intentional violations. Unlike the CCPA, there is no private right of action.

Conclusion

Much like the CCPA, businesses can expect that regulations will be generated by the Virginia AG that will provide more detail about the CDPA requirements. While the final texts of those regulations are far off, businesses that will need to comply should begin preparations now—especially if they are not currently compliant with the GDPR or CCPA. Consultation with experienced privacy counsel and consultants can provide significant assistance in compliance efforts.

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[1] Joseph Duball, “Challenge accepted: Initial Virginia CDPA Reactions, Considerations”, IAPP (Mar. 4, 2021) (https://iapp.org/news/a/challenge-accepted-initial-virginia-cdpa-reactions-considerations/?mkt_tok=MTM4LUVaTS0wNDIAAAF7nWl2kuMyzbn5dKcD8W3Y4fggbDxNg2PM84osNdKWpMvPYHWeJcjIqQy1i4dSpHpMQHLs0yruSK6OoqCCkkzJXqhhnHOByJMIE7AxjkbfRlLv).

[2] § 59.1-572(A).

[3] Other exceptions include disclosures: (1) to a processor; (2) to a third party for the purposes of providing a product or service requested by the consumer; (3) to a controller’s affiliate; or (4) of information generally made available by the data subject through a mass media channel that is not restricted to a particular audience. The CDPA’s definitions of “processor”, “controller”, and “third party” are virtually identical to the GDPR.

This post is also available as a podcast.

Whether or not the operator of an oil and gas well can deduct post-production costs (“PPC”) can significantly impact the economics of a well for both an operator and a royalty owner.  In BlueStone Natural Resources II, LLC v. Randle, — S.W.3d —-, 2020 WL 936175, 64 Tex. Sup. Ct. J. 450 (Tex. 2021), the Texas Supreme Court was called upon to determine whether or not an oil and gas lease permitted the deduction of PPC from sales proceeds before royalties are computed.

How to calculate the payment of royalty is a matter of contract.  The value of royalty can be computed at the wellhead or at any downstream point, depending on the terms of the particular oil and gas lease.  It is common for lease forms to provide that royalty is based on the market value at the wellhead.  Since oil and gas is typically not sold at the wellhead, but rather at a point further downstream, a common method to compute royalties payable based on market value at the wellhead is the “net-back” or “workback” method.  Using this method, a lessee estimates market value at the wellhead by starting with the proceeds of a downstream sale and subtracting PPC incurred between the wellhead and the point of sale.  This method is based on the premise that production is less valuable at the wellhead because a purchaser at the wellhead would be required to incur costs for things such as processing, compression, and transportation in order to prepare it for sale to a downstream market.  Therefore, with a lease that requires royalty to be computed at the well, the royalty will bear its share of PPC.

In contrast, a lease can provide for royalty computed on “proceeds” or “amount realized” by the lessee.  A “proceeds” or “amount realized” clause, standing alone, creates a royalty that is free from PPC.  In such a case, the lessee bears all costs downstream from the wellhead to the point of sale.

The oil and gas lease in BlueStone provides in paragraph 3 of the body that royalty on gas is based on the “market value at the well” of the gas sold or used off the premises.  The lease contains an addendum that provides in paragraph 26 that the lessee “agrees to compute and pay royalties on the gross value received.”  The addendum also contains language stating that it “supersedes any provisions to the contrary in the printed lease.”  Thus, the dispute was whether the phrase “gross value received” in the addendum conflicts with the phrase “at the mouth of the well” in the body of the lease, and, therefore, would supersede the language in the body of the lease.

BlueStone argued that there was no conflict between the “at the well” language in the body and the “gross value received” language in the addendum, because the terms can be read together to produce a net-proceeds calculation, permitting the deduction of PPC.  However, the Court disagreed, citing its prior decision in Judice v. Mewbourne Oil Co., 939 S.W.2d 133 (Tex. 1996), which found that the phrase “gross value received at the well” gave rise to an inherent conflict.  That language rendered the royalty clause ambiguous because “at the well” is a net-proceeds equivalent that contemplated the deduction of PPC, whereas “gross proceeds” indicates just the opposite.

BlueStone argued that the Court’s decision in Burlington Resources Oil & Gas Company, LP v. Texas Crude Energy, LLC, et al., 573 S.W.3d 198 (Tex. 2019) stood for the proposition that “at the well” language will always mean that a royalty clause allows for deduction of PPC.  Although there is language in Burlington stating that prior decisions held that when parties specify an “at the well” valuation point, the royalty owner must share in PPC, the Court said that it is a misreading of Burlington to suggest that “at the well” language supersedes all other language in the contract.  Rather, the Court said that the oil and gas lease in question should be read and interpreted in its entirety, and construed according to all of its terms.

Based on the foregoing, the Court found that the “at the well” language in the body of the lease was in conflict with the “gross value received” language in the addendum, so the language in the addendum controlled.  Since “gross value received” language clearly does not allow the deduction of PPC when calculating the royalty, the Court held that the lease did not allow BlueStone to deduct PPC when computing the royalty owed to its lessor.

Last month’s severe cold weather across the south, particularly Texas, while having immediate impacts on millions of Texas residents, are now beginning to show additional impacts to the energy industry. Millions of Texas residents suffered widespread, lasting power outages, burst water pipes, and other weather-related impacts from the icy weather. The impacts of the severe weather affected energy providers as well, who struggled to get electricity to their customers. Texas’ largest power generation and transmission cooperative, Brazos Electric Power Cooperative, Inc. (“Brazos”) filed for Chapter 11 bankruptcy Monday after it received an approximate $2.1 billion bill from the Electric Reliability Council of Texas (“ERCOT”) for seven (7) days of power during the deep freeze. This amount far exceeds the costs charged to Brazos’ members for all of 2020, which came in at approximately $774 million. Brazos is one of multiple providers facing billions in charges from the severe cold weather. When these providers could not provide their own generated power to the grid, they were required to buy replacement power – at extremely high rates. These energy rates were about 500 times the usual rate, topping out at the $9,000/MWh established by ERCOT.

And a protocol called “uplift” allows ERCOT to spread the cost of defaulted obligations among other providers. With so many electric providers unable to supply power to the grid during last month’s freeze, it appears ERCOT may use the “uplift” protocol to send invoices to other electric providers to recover unpaid charges for grid power.  The City of Denton has already sued ERCOT and others regarding this practice, which could cost the City millions. Other providers and analysts warn that the storm-related charges could exceed many providers’ available liquidity, making it likely Brazos will not be the only Texas provider seeking bankruptcy protection in the near future.

Brazos’ bankruptcy case is docketed before the Honorable David R. Jones (In re Brazos Electric Power Cooperative, Inc., No. 21-30725) in the United States Bankruptcy Court for the Southern District of Texas. The City of Denton’s suit against ERCOT is docketed in the District Court for the County of Denton, State of Texas, Cause No. 21-1421-16.

The Securities and Exchange Commission recently adopted amendments to facilitate the use of private, or “exempt,” offerings.  The changes will impact offerings structured pursuant to Section 4(a)(2), Regulation D and Regulation S, as well as offerings conducted under Regulation A and Regulation Crowdfunding. The purpose of the changes is to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses.   The new rules provide clear safe harbors from integration of separate exempt offerings, ease the determination of accredited investor status, and relax restrictions on communications made in connection with “testing the waters” for a contemplated private offering.  Highlights include:

Integration Safe Harbors in “New” Rule 152

Under certain circumstances, the Commission’s integration doctrine requires an issuer to treat two or more offerings that take place within the same general time-period as a single offering, which may have the effect of undermining reliance on private offering exemptions for one or more of the offerings.  For example, if an offering for which general solicitation is prohibited is combined with another where general solicitation is permitted and occurs, the first offering could lose its exempt status.  New Rule 152, which entirely replaces prior Rule 152, provides four distinct safe harbors that permit companies to conduct certain sequential or side-by-side offerings without integration concerns, as well as principles to apply in situations that do not fit any of the safe harbors.  Some elements of the new rule codify prior Commission interpretation. The new rule applies to all exempt offerings of securities, including offerings made in accordance with Regulation D and Regulation S, and will replace the traditional five-factor test in Rule 502.

Verification of “Accredited Investor” Status Under Rule 506(c)

Rule 506(c) permits the use of general solicitation in an exempt offering when the issuer takes reasonable steps to verify that purchasers in the offering are accredited investors.  The Commission amended Rule 506(c) to allow issuers to establish that an investor continues to be an accredited investor if the issuer, within the past five years, took reasonable steps to verify its accredited investor status in a previous offering under Rule 506(c), unless the issuer is aware of information to the contrary.  The investor must provide a written representation at the time of sale that the investor continues to qualify as an accredited investor. This change should simplify the verification process for issuers conducting continuous or multiple offerings under this exemption.

For issuers using the rule’s principles-based method to verify accredited investor status, the Commission reiterated previous guidance that issuers should continue to consider factors such as the following:

the nature of the purchaser and the type of accredited investor the purchaser claims to be;
the amount and type of information that the issuer has about the purchaser; and
the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering and the terms of the offering, such as a minimum investment amount.

The Commission also expressed its view that, in some circumstances, an issuer could satisfy the “reasonable steps” requirement in the first instance with a representation from an investor as to his or her accredited investor status, if the issuer “reasonably takes into consideration a prior substantive relationship with the investor or other facts that make apparent the accredited status of the investor.”  However, an investor representation alone would not be sufficient if the issuer has no other information about the investor.

“Testing the Waters”/Generic Solicitation

New Rule 241 permits an issuer, or any person authorized to act on behalf of the issuer, to use generic solicitation of interest materials for an offer of securities prior to making a determination as to the exemption under which the offering may be conducted, subject to certain conditions. These generic “testing-the-waters” materials must provide specific disclosures notifying potential investors about the limitations of the generic solicitation of interest. This exemption from registration applies only to the generic solicitation of interest, not to a subsequent offer or sale. Thus, if the issuer moves forward with an exempt offering following the generic solicitation of interest, the issuer needs to comply with an available exemption for the subsequent offering.

Generic solicitations of interest under Rule 241 are offers of a security for sale for purposes of the antifraud provisions of the Federal securities laws, and depending on how these materials are disseminated, they could be considered a general solicitation.  If a generic solicitation of interest constitutes a general solicitation, and the issuer proceeds with an exempt offering that does not permit general solicitation, such as an offering under Rule 506(b), the issuer will have to determine whether the generic solicitation of interest should be integrated with the subsequent offering, using the new Rule 152 integration provision.  If integration is required, the Rule 506(b) exemption would be unavailable because the issuer would have already engaged in a general solicitation for the same offering.

Other Changes

The Commission amended Regulation A, Regulation Crowdfunding and Rule 504 to increase the amounts that can be offered within a 12-month period as follows:

Tier 2 Regulation A offerings: from $50 million to $75 million;
Rule 504: from $5 million to $10 million; and
Regulation Crowdfunding: from $1.07 million to $5 million.
Commissioners’ Views

The Commission, recognizing that capital raising in the private markets has increased significantly in the past twenty-five years, attempted to even the playing field for small companies and smaller investors by reducing complexities in the exempt offering framework.

Conclusion

The new integration safe harbors should make it easier for companies to rely on the exemptions provided under Section 4(a)(2), Regulation D, and Regulation S in the context of multiple or concurrent offerings.  Moreover, allowing issuers to rely on past verification of an individual’s accredited investor status creates additional flexibility to use Rule 506(c) by reducing the compliance burden involved in multiple offerings to common investors. The additional flexibility to use generic solicitations of interest will allow issuers to test the waters for a private offering, but issuers must exercise caution to ensure that their use of these materials does not jeopardize the availability of relevant exemptions.

If you have questions about how these new rules apply to your business, please contact Dean Cazenave, Eric Thiergood, or Ben Jumonville.