By Jessica C. Engler, CIPP/US [1]

In the wake of sweeping privacy law reforms both in and outside of the United States, Texas has become the latest state of many to makes changes to its existing data privacy laws. This summer, Texas Governor Greg Abbott signed into law HB 4390, christened the Texas Privacy Protection Act, which amendments the Texas Identity Theft Enforcement and Protection Act (“TITEPA”), Tex. Bus. & Com. Code § 521.002, 521.053.[2] Though significantly rewritten since its introduction, HB 4390 amends the data breach notification statute and creates a privacy council to advise the Texas legislature regarding potential future privacy legislation.

New Breach Notification Requirements

HB 4390’s amendments of the data breach notification requirements are common to those found elsewhere in the United States, bringing Texas more in-line with other states’ requirements. These changes will go into effect on January 1, 2020.

First, HB 4390 adds a deadline for notification of the breach to individuals affected by the breach. Currently, the TITEPA requires that notifications be made “as quickly as possible.” The amendments will now require that the notification be made “without unreasonable delay” and in any case no later than 60 days from the date of discovery of the breach.

Second, once in effect in 2020, the TITEPA will require that notification of the breach also be made to the Attorney General of Texas if the breach affected 250 or more Texas residents. This notification must be made within the 60 day period for reporting to affected individuals, and must contain the following information:

  1. a detailed description of the nature and circumstances of the breach, or the use of sensitive personal information acquired as a result of the breach;
  2. the number of Texas residents affected by the breach at the time of notification;
  3. any measures taken by the reporting party as a result of the breach;
  4. any measure that the reporting party intends to take regarding the breach after notification; and
  5. information as to whether law enforcement is involved in investigation of the breach.

Both of these updates are similar to those found in other states. At least 17 other states currently require notification within a specific time frame, ranging from 30 to 90 days from discovery of the breach. Several states—including the neighboring states of Louisiana and New Mexico—similarly require notification to state authorities when notification is made to a threshold number of state residents.

CREATION OF THE TEXAS PRIVACY PROTECTION ADVISORY COUNCIL

As originally filed in the beginning of the 86th Texas Legislative Session, HB 4390 was a comprehensive consumer privacy bill. During the session, it was amended and diluted multiple times. Rather than pass comprehensive privacy legislation, the legislature passed the amended HB 4390 including the creation of the Texas Privacy Protection Advisory Council (“TPPAC”) to study data privacy laws in advance of the next legislative session. As a result of the study, the TPPAC will make recommendations to the Texas legislature on specific statutory changes regarding data privacy, including necessary further amendments to the TITEPA or to the Texas Penal Code.

The Council will be composed of 15 Texas residents who are appointed by the Speaker of the House, Lieutenant Governor, and Governor no later than November 1, 2019. Of those 15 members:

  • Three members will be members of the Texas House of Representatives;
  • Three members will be Texas senators;
  • Nine members will be industry representatives from several industries, including the medical profession, technology, internet, retail and electronic transactions, consumer banking, telecommunications, consumer data analytics, advertising, internet service providers, social media platforms, cloud data storage, virtual private networks, or retail electric; and
  • Two members comprising either: (i) a representative of a nonprofit organization that studies or evaluates data privacy laws from a consumer perspective; or (ii) a professor who teaches at a Texas law school or other higher education institution who has been published on the subject of data privacy.

The Council will meet on a regular basis until it reports its findings and makes recommendations to the Texas legislature no later than September 1, 2020. It is anticipated that the Council’s recommendations will form the basis for comprehensive consumer privacy legislation when the Texas Legislature reconvenes in January 2021.

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[1] Special thanks to Dara Mouhot, Tulane University Law School Class of 2021, for her assistance with this article.

[2] House Bill 4390 is available at https://capitol.texas.gov/tlodocs/86R/billtext/html/HB04390E.htm.

By Royce Lanning

Many people complete their estate planning documents, place them in a safe/drawer, and never think about them again. It’s an understandable pattern, but estate planning requires maintenance just like your house, your car, and the rest of your valuable assets.  So when should you review and update your will or trust?

In a perfect world, people would review their estate planning documents annually but a more attainable goal is to review your documents every 3-5 years (regardless of life events), or earlier if there is a significant change in your circumstances.  The most apparent reasons to revisit your estate plan is when you change your mind about the gifts being made, the people receiving gifts, or the people you appointed to make decisions (e.g. power of attorney or trustee).  Some less obvious life changes that may warrant a review of your estate planning include:

    1. Marriage, remarriage or divorce: Marriage changes just about everything in your life. Your estate plan is no exception. Whether your marriage is beginning or ending, you should review your documents to ensure your existing plan still meets your goals.
    2. Birth or adoption: Like marriage, kids change our lives and often change our ideas about what is important. Even documents that plan forward for the possibility of future kids should be reviewed to confirm that a new addition to the family does not modify your ideas or plans.
    3. Empty nest: As our children grow and mature our ideas about what gifts we want to leave them or how we want to leave those gifts often change.
    4. Change in tax laws:Tax laws change over time. An estate plan that had proper tax planning in 2009 may be unduly complex and burdensome under 2019’s higher exemption amount, and may even result in worse tax treatment than if you had no tax planning.
    5. Living in a new state: On the bright side, most wills/trusts that are properly executed in one state will be honored when you move to a new state. Unfortunately, out-of-state documents rarely capitalize on the planning benefits available in your new state, and may result in unnecessary costs and delays after your passing. Worse still, private institutions in the new state may hesitate or even refuse to honor your financial power of attorney or medical power of attorney because they look different than what they are used to seeing.
    6. Buying land: Land ownership can have a major impact on your plan. A plan that is properly tailored when you only owned your home in The Woodlands may prove woefully inadequate after you purchase an out-of state vacation house.
    7. Significant changes in the value or complexity of your assets: Buying, selling or changing the structure of your business, making significant changes in your investment assets, and/or increased or decreased risk of legal liabilities are all issues that should be contemplated in your estate plan. Consequently, significant changes in those variables may warrant changes to your plan.

If your life has undergone a significant change since the last time you reviewed your estate planning documents then it’s time to dust them off and look them over. If your review raises questions about how your plan works or how one of these issues might impact your plan, then you should get in touch with your estate planning attorney to make sure your plan is properly suited to your life as it exists today.

By Royce Lanning

Despite most people believing it’s important to have an estate plan, only about 40% of people actually get one.[1]  There are a number of reasons that someone may not have gotten an estate plan but the idea that you do not need one because you do not have kids should not be one of those reasons.  In fact, it could be argued that not having kids actually increases your need for a well-crafted estate plan.  If you do not chose who receives your property and who is in charge of managing your property, then the state of Texas will decide for you.  Without kids, Texas’ default rules often produce results that are dramatically different than you might think.

Decide Who Makes Decisions.

A complete estate plan should include powers of attorney allowing you to designate who will make financial and medical decisions while you are alive but incapable of making decisions for yourself (i.e. incapacitated).  Using a power of attorney for this purpose allows you to pick who will be making those decisions on your behalf, and allows your chosen agent to make those decisions without the need to open a guardianship proceeding with the court.  That is a two-fold benefit.  First, managing your affairs through a guardianship is costly and slow.  Second, you will have no control over who the court appoints as your guardian, and it may prove to be the last person you would have chosen.  Similarly, your will or trust can be used to decide who will control the process of distributing your property after your passing.

Settle who gets the property and how it is used.

Every state has default rules that determine where property goes if someone dies without a valid plan distributing their property. In many cases your spouse will receive all or the bulk of your property but not always.  In certain cases, a property interest will bypass your spouse and end up in the hands of a parent, sibling, niece or nephew that you had no plan to benefit.  By completing your estate plan complete you can take control of who gets your property and how it is used.  For instance, you may direct that the funds be held in trust to care for your parents, if they survive you, and then pass to your chosen family members or charities.  Texas also allows you to create a trust that is used to care for your pets during their life and then leave the funds to a person or charity after the pet passes.  If you do leave a gift to a charity your plan can include directions (or in some cases strict conditions) regarding how the funds may or may not be used.

With or without kids there are decisions to be made about your property when you are incapacitated or dead. A well-crafted estate plan can make sure that your wishes and desires are carried out by someone that you trust instead of a court appointee applying Texas’ default rules.

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[1] https://www.caring.com/caregivers/estate-planning/wills-survey/

By Michael S. Sankey

The drafters of an Assignment of Overriding Royalty Interest in Burlington Resources Oil & Gas Company, L. P. v. Texas Crude Energy, LLC did not “say what they meant to say” and received an admonition from the Texas Supreme Court. In Burlington, the Court determined a royalty interest owned by Texas Crude was subject to post-production costs. Burlington reinforces the holding in Heritage Resources, Inc. v. NationsBank, that a royalty is valued where the agreement states it will be valued.

First, what are post-production costs and what effect do they have on a royalty interest? Post-production costs are the costs of processing, compression, transportation, and other costs expended to prepare raw oil or gas for sale at a downstream location. Generally, royalty interests are subject to post-production costs, however, parties may modify this rule by agreement.

The point at which parties agree to value oil and gas production from a well is called the “valuation point.” The valuation point determines what costs are attributable to the royalty interest absent clear provisions stating otherwise. For example, if the royalty is valued at the well but the sale takes place after the product has been processed and transported, the product sold is generally of greater value than the product in which the royalty owner has an interest, and therefore, the sales price must be adjusted to properly calculate the royalty payment. A way to calculate the royalty payment of a valuation point at the well is to subtract the post-production costs from the market price.

Conversely, if the parties agree that the valuation point is at the point of sale, the royalty interest owner would generally not be responsible for post-production costs since those costs would have already been expended prior to the sale. Naturally, a royalty owner would want a valuation free of all costs and an operator would want to share as much of these costs as possible with a royalty owner.

In Burlington, the Court determined the royalty owner, Texas Crude, was subject to post-production costs because the Assignment stated the royalty interest was to be “delivered to Assignee into the pipelines,” which the Court decided created an “at the well” valuation point because, in theory, production from a well goes directly into a pipeline to be transported to a point for processing or sale.

The Assignment also contained a clause that stated the value of the royalty is “the amount realized from such sale of such production,” which Texas Crude argued created a royalty interest free of post-production costs. The Court agreed with Texas Crude that “in isolation,” an amount realized valuation creates a royalty interest free of post-production costs. However, that is not the case when accompanied by an “at the well” valuation point, as was determined in this case.  Therefore, the Court held that Texas Crude’s royalty interest was subject to post-production costs.

Pro-Tip from the Texas Supreme Court: If you find yourself drafting an oil and gas contract, agreement, or assignment in Texas, by this case, you have free reign and are encouraged to clearly state the agreement between the parties, especially the valuation point and which costs can be deducted from a royalty interest. Accordingly, in Burlington, the Court said what it meant to say about the Assignment:

But the parties could have saved considerable time, money, and heartache if their cryptic language had truly been “delivered … into the … receptacle [ ].” It could then have been re-written to say exactly what the parties intend, without resort to industry jargon, outdated legalese, or tenuous assumptions about how judges will interpret industry jargon or outdated legalese. If you can’t understand what your contract means without asking the lawyer who wrote it, you should not be surprised later if judges—who can’t just take your lawyer’s word for it—also have trouble understanding what it means.

 

 

By Judith Meyer

The Texas Supreme Court has ruled that Chapter 95, a statute that protects property owners from personal injury suits by employees of contractors and subcontractors, applies to claims against property owners for the negligent hiring of the contractor or subcontractor.

In certain circumstances, Chapter 95 of the Texas Civil Practice and Remedies Code protects property owners from liability for personal injury to the employee of a contractor or subcontractor who constructs, repairs, renovates, or modifies an improvement to real property when the claims arise from the condition or use of that improvement. Tex Civ. Prac. & Rem. Code §§ 95.002 – .003.

In Cuevas v. Endeavor Energy Res., L.P., 531 S.W.3d 375, 378 (Tex.App.–Eastland 2017, pet. granted), an employee of an independent contractor who was hired by the property owner to drill a well was killed while preparing the rig for drilling operations. The employee’s family sued the property owner, asserting various claims, including the owner’s negligent hiring, training, supervision and retention of the contractor. Id. The trial court granted the owner’s motion for summary judgment under Chapter 95 on all of the plaintiffs’ claims. Id. The appellate court reversed on the claim of negligent hiring, holding that Chapter 95 applies to contemporaneous negligent acts of the property owner, which it defined as acts that occur on the premises at the time the claimant is injured. Id. at 382. The appellate court held that negligent supervision and retention were such contemporaneous acts, but negligent hiring presented a claim for acts that occurred prior to injury, and thus were not covered by Chapter 95. Id.

In Endeavor v. Cuevas, ___ S.W.3d ___, 2019 WL 1966625, *3 (Tex. May 3, 2019), the Texas Supreme Court explained that a claim for negligent hiring arises from, and is caused by, a combination of two separate negligent acts, the negligent hiring and the negligence that causes the injury. The “plain language” of Chapter 95

requires only that the claim arise from the use of an improvement to the property, not that the property owner’s negligence involve the use of the improvement, or that the use of the improvement be the only cause of the injury. When one of the negligent acts involves the contemporaneous use of an improvement to real property, the claim arises from that act, regardless of when the other negligent act occurred or whether it involved the use of an improvement.

Id. (emphasis in the original).   Since the plaintiff’s claim of negligent hiring depended, in part, on proof that the contemporaneous use an improvement caused his injury, the claim arose from the use of an improvement, and Chapter 95 applied. Summary judgment for the property owner was rendered.

For more information, please contact Judith Meyer.

 

By Judith A. Meyer

Texas law protects property owners from personal injury suits by the employees of independent contractors and subcontractors hired by the property owner to work on an improvement on their property. The Texas Supreme Court is considering whether this protection includes claims for the property owner’s negligent hiring of the contractor or subcontractor.

In certain circumstances, Chapter 95 of the Texas Civil Practice and Remedies Code Texas law protects property owners from liability for personal injury to the employee of a contractor or subcontractor who constructs, repairs, renovates, or modifies an improvement to real property when the claims arise from the condition or use of that improvement. Tex Civ. Prac. & Rem. Code §§ 95.002 – .003.  Currently before the Texas Supreme Court is the question of whether Chapter 95 covers the property owner’s negligent hiring of the contractor or subcontractor.

In Cuevas v. Endeavor Energy Res., L.P., 531 S.W.3d 375, 378 (Tex.App.–Eastland 2017, pet. granted), an employee of an independent contractor who was hired by the property owner to drill a well was killed while preparing the rig for drilling operations. The employee’s family sued the property owner, asserting a premises liability claim and adding claims for the owner’s negligent hiring, training, supervision and retention of the contractor. Id. The trial court granted the owner’s motion for summary judgment under Chapter 95 on all of the plaintiffs’ claims. Id. The appellate court reversed on the claim of negligent hiring. The court held that Chapter 95 applies to contemporaneous negligent acts of the property owner, which it defined as acts that occur on the premises at the time the claimant is injured. Id. at 382. The appellate court held that negligent supervision and retention were such contemporaneous acts, but negligent hiring presented a claim for acts that occurred prior to injury, and thus were not covered by Chapter 95. Id.

The appellate court cited the Texas Supreme Court decision in Abutahoun v. Dow Chemical, 463 S.W.3d 42 (Tex. 2015), as support for its decision. Abutahoun did use the word “contemporaneous” in holding that Chapter 95 covers two different types of claims, claims based on a premises defect, which “encompass[s] a nonfeasance theory based on the owner’s failure to take measures to make the property safe, and claims based on negligent activities, which “encompass[s] a malfeasance theory based on affirmative, contemporaneous conduct by the owner that caused the injury.” Abutahoun, 463 S.W.3d at 50 (citation omitted). The appellate court did not examine the “arising from” language of Chapter 95, which Abutahoun stated “captured causation,” 463 S.W.3d at 48, or how this affects the analysis of a negligent hiring claim.

The property owner appealed. The case has been briefed, and oral argument was heard by the Texas Supreme Court last month. This case presents the Supreme Court with the opportunity to decide an important issue—Can a plaintiff evade the protection provided by Chapter 95 by pleading the property owner’s negligent hiring?—and to provide further analysis of the language and intent of Chapter 95.   Watch this space for an update.

By Tod J. Everage

The modern day contract is a direct result of trial and error. Generally speaking, transactional lawyers try to negotiate “bulletproof” contracts providing exactly what their client wants or needs. Despite their best efforts, litigators in later disputes try their level best to find the “errors” in those contracts that could benefit their client. Then the pattern repeats. Take Seismic Wells, LLC v. Sinclair Oil and Gas Co., 2018 WL 43377234 (5th Cir. 9/13/2018), for example. In that dispute, the parties had included a “prevailing party” fee provision in their Joint Operating Agreement (JOA): “In the event any party is required to bring legal proceedings to enforce any financial obligation of a party hereunder, the prevailing party in such action shall be entitled to recover … a reasonable attorneys’ fees.” At first blush, this provision appears fairly standard and innocuous. But, with over $1 million at stake in attorneys’ fees, the meaning of every word in that provision is fair game.

The facts leading up to the dispute aren’t relevant here, other than Seismic sued Sinclair under various agreements when it was concerned that Sinclair would not be holding up their end of the bargain. Seismic’s amended complaint included 17 counts, including claims of fraud, breach of contract, conspiracy, tortious interference, defamation/libel, and business disparagement. At the end of Seismic’s case at trial, the court granted Sinclair’s motion for judgment as a matter of law. Sinclair then moved for over $1 million in attorneys’ fees incurred in defending itself, citing specifically to the prevailing party provision in the JOA. The district court denied the motion for three reasons: (1) failure to properly plead under RFCP 9(g) (failure to plead special damages); (2) the provision did not apply because Seismic’s suit was not a legal proceeding brought to enforce a “financial obligation under the JOA”; and (3) Sinclair did not adequately segregate its fee to isolate the work performed defending fee-eligible claims. The Fifth Circuit only addressed the second issue.

The Fifth Circuit agreed that Sinclair was obviously the “prevailing party,” a decision the Court had previously affirmed. The operative question though was whether Sinclair was the prevailing party in a lawsuit “to enforce any financial obligation of a party” under the JOA. The first issue was one of context. How was the dispute brought? The prevailing party provision applies when a party brings a legal proceeding to enforce a financial obligation. The Court noted that many of the claims Seismic brought against Sinclair alleged fraud that induced Seismic to sign the contracts; those claims sought to void the contracts, not enforce them. In other words, those claims sought to render the contract unenforceable and therefore would not satisfy the fee provision.

Two other claims though asserted breach of contract allegations; however, only one of those claims was grounded in the JOA, so the Court focused in there. Count 12 provided that Sinclair breached the JOA by refusing to assign Seismic a leaky well or operate that well on its terms. So, it appeared that this provision did seek to enforce the JOA. But, that was not enough because the legal proceeding must be brought to enforce a financial obligation under the JOA. The Fifth Circuit noted that “financial obligation” is synonymous with “monetary obligation,” and was not persuaded that Seismic’s claim seeking monetary damages made this claim a financial one. Rather, this claim was to turn over a leaky well, which the Court held was not a financial obligation. As such, the prevailing party fee provision was not triggered.

Seismic filed this lawsuit, lost, then got away without having to pay for Sinclair’s attorneys’ fees under a provision that Seismic probably would have sought to enforce itself if it had won at trial. Without knowing anything about the negotiations, including the term “financial obligation” in the JOA’s prevailing party provision narrowed the remedies available to either party in this dispute. Using the term “enforce” arguably did as well given Seismic’s attempts to invalidate the contract. Whereas, had the parties used the more boilerplate language awarding attorneys’ fees to the prevailing party in any legal proceeding brought by “any party arising under this Agreement,” Sinclair may have recovered. Well, assuming that was their original intent.

This case presents a good example of the interplay between the words used in the contract, and the words used in the complaint filed to enforce/or invalidate that same contract. Both transactional lawyers and litigators should take note.

By Hattie Guidry

On October 1, 2018, the U.S. Supreme Court declined to review a Texas Supreme Court’s ruling finding Noble Energy Inc. (“Noble”) liable for cleanup costs paid by ConocoPhillips Co. (“ConocoPhillips”) to settle a separate Louisiana oilfield legacy case. The Texas Supreme Court ruled that Noble inherited the indemnity obligation to ConocoPhillips from its predecessor, which bought oil and gas assets from Alma Energy Corp. (“Alma”) at an auction sale through a Chapter 11 bankruptcy reorganization. Noble Energy, Inc. v. ConocoPhillips Co., 532 S.W.3d 771 (Tex. 2017).  View the document here.

The underlying oilfield legacy case was filed in 2010 in the 38th Judicial District Court, Cameron Parish, Louisiana, by the State of Louisiana and the Cameron Parish School Board against ConocoPhillips and other oil and gas companies for environmental damage and contamination of the Johnson Bayou Oil and Gas Field.

Based on the indemnity language, ConocoPhillips made demands for defense and indemnity, but they were denied. ConocoPhillips filed suit in Harris County, TX district court in 2011 for breach of the defense and indemnity provisions, as well as the provisions concerning environmental cleanup.

While this matter had unique issues related to bankruptcy law, it is consistent with a growing trend of oil company defendants in Louisiana legacy cases making indemnity demands based upon provisions in purchase and sales agreements.

By Tod J. Everage

Contractual indemnities are important and valuable in the oil patch. When they are enforceable, they have the potential to end litigation completely or at least the financial burden for a particularly well-positioned indemnitee. But, with “anti-indemnity” statutes in play in several jurisdictions (including Louisiana), the enforceability of these indemnity provisions rely (barring exceptions) on the application of general maritime law.

It is a common practice to select general maritime law as the governing law in any oilfield MSA – at least within the Fifth Circuit – but simply saying it applies doesn’t actually make it so. As a result, jurisprudential tests have emerged to determine what law actually applies to torts depending on where the incident occurred, as well as to the contracts themselves. When the services provided under the contract are obviously maritime in nature, such as a contract for vessel support services, there is little to dispute. But, especially when there is a high-dollar potential exposure riding on the enforceability of an indemnity obligation, there have been persuasive arguments made on both sides of the maritime vs. state law debate governing contracts for other, less obvious, oilfield services.

Most recently, the US Fifth Circuit addressed this dispute over plugging and abandoning services (“P&A work”) on three wells in coastal Louisiana waters in In re: Crescent Energy Services, No. 16-31214 (5th Cir. July 13, 2018). Crescent agreed, amongst other things, to provide three vessels to perform the work and to indemnify Carrizo against any claims for bodily injury, death, or damage to property. One of Crescent’s employees was injured on one of Carrizo’s fixed platforms during the P&A work, and unsurprisingly, Carrizo’s indemnity demand from the resulting claim was denied by Crescent under the Louisiana Oilfield Indemnity Act. The district court, applying the former Davis & Sons test, found the contract between Carrizo and Crescent to be a maritime contract and granted summary judgment in favor of Carrizo on its indemnity claim.

In January, the US Fifth Circuit pared down its maritime contract test (from Davis & Sons) to focus on only two factors: (1) “is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?” and (2) “does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?” In re Larry Doiron, Inc., 879 F.3d 568, 576 (5th Cir. 2018). Both factors must be affirmed before maritime law may be applied to the contract.

On the first factor, Carrizo asserted a creative and ultimately successful argument that P&A work is “part of the total life cycle of oil and gas drilling.” Because plugging and abandoning a drilled well is part of the agreement with the State of Louisiana to get an initial permit to drill, the US Fifth Circuit was persuaded that the contract for P&A work involved “the drilling and production of oil and gas.” The Court then re-iterated its departure from Davis & Sons and its concern about where the incident occurred. In Doiron, the US Fifth Circuit stated: “The facts surrounding the accident are relevant to whether the worker was injured in a maritime tort, but they are immaterial in determining whether the workers’ employer entered into a maritime contract.” Doiron, 879 F.3d at 573-74. The US Fifth Circuit is “no longer concerned about whether the worker was on a platform or vessel.” Rather, the question is whether the contract concerned the drilling and production of oil and gas on navigable waters.

On this point, Crescent’s insurers argued that Doiron’s analysis on the P&A work resulted in inconsistencies with other Fifth Circuit precedents finding that torts occurring on and during the construction of fixed, offshore production platforms on the OCS are generally not governed by maritime law. Also, wireline work – which comprises much of the P&A work – had also traditionally been found to not be a maritime activity. The Court declined the invitation to review those OCSLA cases: “We are not concerned here with those OCSLA issues of whether to borrow state law as surrogate federal law, which leads to analyzing whether maritime law applies of its own force, which requires determining the historical treatment of certain contracts. We do need to analyze, though, whether this is a maritime contract. Doiron now controls that endeavor.” But these statements do not make clear whether the rejection of the OCSLA cases was because Crescent Energy Services is not an OCSLA case itself, or whether that distinction no longer has a difference in oil and gas contract review.

The Fifth Circuit then quoted commentary from Professor David W. Robertson discussing contract disputes on the OCS: “If the contract is a maritime contract, federal maritime law applies of its own force, and state law does not apply. If the contract calling for indemnity is not a maritime contract, the governing law will be adjacent-state law made surrogate federal law by OCSLA § 1333(a)(2)(A).” Why bring this up if the Court is ignoring OCSLA cases on the grounds of distinction? The Court doesn’t directly clarify. Instead, it said the reference was “to show that Davis previously and Doiron now are performing the task of determining how to classify contracts.” It further stated that Davis (a Louisiana waters case) did not offend OCSLA cases, so neither does Doiron.

The Fifth Circuit seemed concerned about this argument though and the perception of the Court’s abandonment of long-standing precedent. Surely, this will be the continued topic of attack from potential indemnitors. In addressing those criticisms, the Court stuck with its more back-to-basics theme: “We are here classifying a contract for a certain purpose, a juridical activity that has been done consistently with the 1969 Rodrigue decision at least since our 1990 Davis decision. We en banc eliminated most of the factors, narrowing our focus, but we did not fundamentally change the task. Doiron is the law we must apply.” On the one hand, the Court’s statements seem to firmly reiterate that Doiron is the law going forward when analyzing the maritime nature of a contract regardless of the location of the work. But, the Court’s avoidance of the OCSLA issues and the narrowed “certain purpose” of their decision begs for more direct guidance from the Fifth Circuit on Doiron’s geographic reach.

The Fifth Circuit could have unequivocally proclaimed that the breadth of Doiron extended to OCSLA cases, in whatever capacity, if that were its intent; but it did not. So then, what is the expected effect of Doiron on those contract cases involving a controversy on the OCS, where OCSLA statutorily provides its own choice-of-law provision? Does Doiron actually supplant Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009), since it called the case “un-useful” to its task? If the situs of the controversy is no longer appropriate, then it seems that Doiron may be the answer.

Grand Isle was a contractual application of test articulated in Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043 (5th Cir. 1990) which starts by finding that the dispute arises on the OCS; otherwise, now, Doiron surely is the test. The second PLT factor determines whether the OCSLA choice-of-law provision applies by looking to see if federal maritime law applies of its own force. This is where Crescent’s insurers’ historical argument would come into play. To determine whether federal maritime law applies of its own force, the US Fifth Circuit: (1) identified the historical treatment of contracts such as the one at issue, and (2) applied Davis & Sons. It seems obvious that this factor will likely at least be revised to substitute Doiron for Davis & Sons. The less obvious question is whether the historical treatment factor is relevant at all going forward.

In Doiron, the Fifth Circuit criticized those “historical” opinions that “improperly focus[ed] on whether the services were inherently maritime as opposed to whether a substantial amount of the work was to be performed from a vessel.” Thus, it is possible that the second PLT factor simply becomes the Doiron test. But, if so, then that would effectively eliminate the necessity of the PLT test for OCS contract law disputes, because the Courts have long since acknowledged that the relevant application of Louisiana law to the contract does not conflict with federal law. If this analysis is correct then Doiron should be the standing legal test for the determination of applicable law in an oilfield contract regardless of the location of the work (OCS vs. State waters).

A comment the Fifth Circuit made in its analysis of another earlier issue seems to bolster that conclusion: “If the contract here is maritime, the fact that it was to be performed in the territorial waters of Louisiana does not justify causing the outcome of this lawsuit to be different than if the contract was for work on the high seas. Consistency and predictability are hard enough to come by in maritime jurisprudence, but we at least should not intentionally create distortions.” After lauding the directness of its new test in Doiron (notwithstanding their use of the unpredictably applied term “substantial role”), the Fifth Circuit could have assisted practitioners with a bit more directness in Crescent Energy Services.

Despite the historically non-maritime nature of P&A work in the Fifth Circuit, the outcome of Crescent Energy Services is not surprising given the necessity of the vessels used for the work. In that respect, this decision is consistent with the Fifth Circuit’s continued primacy – now, by way of the Doiron test highlighting its importance – of the “substantial role” that a vessel will play in the work being done under the contract. While the Fifth Circuit may have left a gap in its recent holdings for the next OCSLA-based contract dispute, we see no reason why Doiron would not be at least a part of that new analysis.

By statute, royalties on oil and gas production are due on or before 120 days after the end of the month of first sale of production from the well. This gives operators about four months after a well begins producing to obtain title curative, set up a pay deck for the well, issue division orders to the various owners, and start paying royalties. Thereafter, royalties are payable 60 days (for oil) and 90 days (for gas) after the end of the calendar month in which subsequent production is sold. Please note that these time periods may be modified by the lease form.

Notwithstanding the foregoing time periods, operators do not have to make timely royalty payments if a royalty owner refuses to sign a division order or if the royalty owner’s interest is subject to a title defect.

Section 91.402(c)(1) of the Natural Resources Code states that as a condition to payment, an operator is entitled to receive a signed division order (that contains only the statutory provisions) from the royalty owner. By implication, an operator must actually send a division order to the royalty owner and have it rejected in order to rely on the statute. And, also implied by the statute, operators should (but don’t always) send out division orders before the date the first royalty payment is due. Note, however, that it is becoming more common to see leases that expressly negate the statute by stating that a lessee does not have the right to condition payment upon receipt of a signed division order – in other words, the royalty owner does not have to sign a division order to receive royalties.

Section 91.402(b) of the Natural Resources Code also authorizes an operator to withhold royalty payments when there is either (i) a title dispute, (ii) a reasonable doubt that the payee has clear title to his interest, or (iii) an unsatisfied title opinion requirement that pertains to the payee’s title, identity, or whereabouts. Additionally, effective September 1, 2017, Section 91.402(b)(2) allows an operator to withhold royalties from a payee when the payee’s interest is subject to a child support lien or order of withholding under the Family Code.

If a royalty owner believes its royalties are being unlawfully withheld (in “suspense”) by the operator, it must contact the operator and request an explanation/demand payment as a prerequisite to filing suit. The operator then has 30 days to respond with a reasonable cause for maintaining the royalties in suspense or pay over the undisputed royalties. If the operator fails to do so (or the royalty owner believes the operator’s explanation is not legally justified), the royalty owner can then file suit against the operator. If the royalty owner obtains a favorable judgment, it is entitled to statutory interest on the withheld royalties in addition to a mandatory award of attorney’s fees.