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.

The U.S. Supreme Court offered some good news to secured lenders last week, tempered with words of caution.  In Chicago v. Fulton, the Court held that a secured creditor does not violate Section 362(a)(3) of the Bankruptcy Code by merely continuing to hold property of its debtor after that debtor files a bankruptcy petition.  The 8-0 opinion written by Justice Alito, and particularly the separate concurring opinion written by Justice Sotomayor, cautioned that a creditor holding a bankrupt debtor’s property could easily run afoul of Section 362(a)(4) or (6) (prohibiting acts to enforce liens and to collect a claim, respectively), or of Section 542(a)’s obligation to deliver property to the debtor or trustee.  But at least there is nationwide clarity on one issue: merely continuing to hold a debtor’s property that was lawfully seized prepetition is not a violation of 11 U.S.C. § 362(a)(3).

This decision arises from several Chapter 13 bankruptcy cases where individuals filed bankruptcy and then demanded that the City of Chicago release their vehicles, which had been impounded for past-due parking fines.  The City refused.  The Bankruptcy Court found that the City’s refusal violated the automatic stay created by 11 U.S.C. § 362(a).  The Seventh Circuit Court of Appeals agreed that by retaining the debtors’ cars, the City had acted “to exercise control over” their property, in violation of the automatic stay.  Decisions from the Second, Eighth, Ninth, and Eleventh Circuits also imposed an affirmative duty on creditors to return seized property once a bankruptcy petition is filed; failure to do so was a violation of the automatic stay in those Circuits.  The Third, Tenth, and District of Columbia Circuits held that merely retaining property was not a violation of the automatic stay.   The Supreme Court resolved the circuit split by holding that simply holding property lawfully seized prepetition (i.e., before the debtor filed its petition for relief in bankruptcy court) and maintaining the status quo is not a violation of the automatic stay.

One interesting effect of this decision is that lenders now have even more incentive to move quickly to seize their collateral.  In commercial cases, the fact that a debtor cannot get its property back by simply filing bankruptcy will affect negotiations between borrowers and lenders, both in and out of a bankruptcy courtroom.  Justice Sotomayor’s concurring opinion notes that where the debtor is an individual, he or she may not be able to get to work to earn money to pay any creditors if his or her car is impounded for parking fines the debtor cannot afford to pay . . . effectively undermining the debtor’s bankruptcy case before it gets underway.  Her opinion suggests some ways that Congress could improve the Bankruptcy Code to give working debtors a better chance at a successful outcome for their case and unsecured creditors a better chance of getting paid something on their claims.  Perhaps the incoming Congress will accept her invitation to make some changes to the Bankruptcy Code.

On January 12, 2021, the U.S. Court of Appeals for the Fifth Circuit vastly changed the landscape for collective action wage and hour claims under the federal Fair Labor Standards Act.

In Swales v. KLLM Transport Services, L.L.C., the Fifth Circuit rejected the lenient standard typically employed by federal district courts for “conditionally certifying” collective actions and ruled that courts must, instead, do the difficult work to rigorously scrutinize whether workers are similarly situated to the named plaintiff before sending notice to potential opt-in plaintiffs.  According to the Court, the importance of the collective action certification issue “cannot be overstated.”

Background: FLSA Collective Actions

The FLSA allows plaintiffs to proceed collectively in litigation, but only when the plaintiffs can show that they and the members of the proposed collective are “similarly situated.”

Group litigation under the FLSA is different from class actions under Federal Rule of Civil Procedure 23. Whereas Rule 23 provides an “opt out” mechanism for class action members to avoid being bound by any judgment, the FLSA requires that similarly situated individuals file written consents to “opt-in” to the collective action.  But, the FLSA does not define what it means to be “similarly situated.”

Lusardi Two-Step Process

There has been much confusion and a lack of uniformity among district courts over how collective actions should proceed.  District courts are required to ensure that notice of the litigation is sent to those who are similarly situated to the named plaintiff, but they must do so in a way that scrupulously avoids endorsing the merits of the case.  Most district courts within the Fifth Circuit applied a “two-step” process to determine (1) who should receive notice of the potential collective action, and then (2) who should be allowed to proceed to trial as a collective.  This method comes from a New Jersey district court case, Lusardi v. Xerox Corp.  Under Lusardi, district courts utilize the two-step process to determine whether other employees or former employees of the defendant are “similarly situated” to the named plaintiff.

In the first step of Lusardi, the district court determines whether the proposed members are similar enough to the named plaintiff to receive notice of the lawsuit. This step is referred to as “conditional certification” of the putative class.  Typically, it is a lenient standard and a relatively low hurdle for the plaintiff to satisfy.

The second step occurs at the end of discovery.  At that time, the district court makes a second and final determination (utilizing a stricter standard) of whether the named plaintiff and opt-in plaintiffs are “similarly situated,” such that they may proceed to trial collectively.  If the court determines that the opt-ins are not sufficiently similar to the named plaintiff, then the opt-ins are dismissed from the lawsuit, and the named plaintiff proceeds to trial.  This step is referred to as “decertification.”

The Swales Court Rejected Lusardi; New Standard Announced

Last week, in Swales, the Fifth Circuit expressly rejected Lusardi. The Court found that the FLSA does not support Lusardi’s lenient conditional certification of a collective. Instead, the Court instructed district courts to “rigorously scrutinize” whether workers are similarly situated at the outset of the case.

Specifically, the district courts are to identify, before sending notice to any potential opt-ins, what facts and legal considerations will be material to determining whether a group of employees is similarly situated.  Then, the district court should authorize preliminary discovery specifically tailored to those facts and legal considerations.  The Fifth Circuit recognized that the amount of discovery necessary to make the determination will vary case-by-case; but the Court made clear that the determination “must be made, and as early as possible.”  As a result, notices of the lawsuit will only be sent to the individuals who actually are similarly situated to the named plaintiff.

Impact on Employers

Swales is a positive development for employers who face the potentially grueling and costly collective action process. Under Swales, threshold and potentially dispositive issues must be addressed early in the case. While the Swales framework may require more discovery at the beginning of the case, it also limits the scope of potential opt-in plaintiffs and number of individuals receiving notice to only those who truly have an interest in the outcome of the case.  The Fifth Circuit’s new standard also provides litigants with more certainty regarding the issues and parties in the case.

Buried in the 5,500-page Consolidated Appropriations Act for 2021 among various COVID-19 relief was the Trademark Modernization Act of 2020 (“TMA”). The TMA, which will become effective on December 27, 2021, makes several important amendments to federal trademark law (the Lanham Act) intended to modernize trademark application examinations and clean house of trademark registrations for marks not used in commerce. For litigants, the TMA also adds important clarity to the Lanham Act’s standard for obtaining injunctive relief by restoring the rebuttable presumption of irreparable harm called into question by the Supreme Court’s decision in eBay v. MercExchange, LLC, 547 U.S. 388 (2006). A summary of these key changes for trademark registrations and trademark litigation follows.

Ex Parte Challenges to Current Trademark Registrations

A significant impetus for the TMA was comments during a 2019 hearing before the House Subcommittee on Courts, Intellectual Property, and the Internet concerning “clutter” and “deadwood” on the United States Patent and Trademark Office (“USPTO”) trademark registers. As of July 18, 2019, the USPTO trademark register comprised approximately 2.4 million registrations.[1]  As testified by Commissioner for Trademarks Mary Boney Denison, the USPTO had seen an increase in trademark applications or registration maintenance filings that contained false or misleading claims and information, particularly with regard to specimens of use.[2] Trademark applicants are required to submit evidence with their applications that the applied-for trademark is actually being used in commerce in the class of goods or services listed on their respective application. Trademark owners are required to regularly submit similar evidence to maintain their registrations. Commissioner Denison testified that the USPTO has increasingly received fake or digitally altered specimens that do not actually show use of the mark in commerce as required by the Lanham Act.[3] These false submissions, as well as excessive registrations for marks no longer in use, limit the usefulness of Trademark Register and significantly increase trademark clearance costs.

The TMA seeks to address these issues through two new ex parte proceedings. The first mechanism, an ex parte reexamination, permits third parties to challenge use-based registrations where the trademark owner swore that the marks were used in commerce, either in the application itself or in a statement of use. This mechanism allows the USPTO to reexamine the accuracy of the applicant’s claim of use at the time the averment was made. The second mechanism primarily targets foreign applications that claim use under Lanham Act section 44(e) or 66(a)—which allows foreign applicants to bypass submitting a statement of use in lieu of providing evidence of trademark registration in another country—and allows challenges to marks that have never been used in commerce. These proceedings can each be initiated by submitting testimony or evidence establishing a prima facie case of non-use, or the Director of the USPTO may determine on his or her own initiative that a prima facie case of nonuse exists. The registrant will then have the opportunity to respond to the alleged prima facie case. The registration will then either be cancelled, subject to the registrant’s right of appeal to the Trademark Trial and Appeal Board, or confirmed valid. A validity decision will preclude all further ex parte challenges to the registration.

These ex parte mechanisms add renewed focus to the Lanham Act’s requirement of “use” for trademark rights. The Lanham Act requires “bona fide use of a trademark in the ordinary course of trade.” For goods, that can include consistently placing the trademark on the product or its packaging, labels, or tags or, if it is impractical to use on the product itself, invoices and documents associated with the sale of the goods. For services, use can include advertising in connection with actual offers for the services.[4] Given these new mechanisms and an increase in fraudulent applications, USPTO trademark examiners may more strictly scrutinize specimens of use for compliance with trademark use requirements. To avoid unnecessary delays in trademark applications, applicants should take care to ensure specimens meet the requirements of the Trademark Manual of Examining Procedure (“TMEP”) and that their use actually qualifies as trademark use. Experience intellectual property counsel can help clients navigate the TMEP and trademark application procedures.

Changes to Trademark Registration Examination Procedures

The Lanham Act currently requires trademark applicants to respond to office actions issued during the examination within 6 months. The TMA now allows the USPTO increased flexibility to set shorter response deadlines. Specifically, the USPTO can, through regulations, set shorter response periods between 60 days to 6 months, provided applicants can receive extensions of time to respond up to the standard 6 months. Much like extensions of time granted by the USPTO for patent applications, any such extension requests will incur additional fees.

Formalization of the Informal Protest Procedure

Though not a formal process, the USPTO has long allowed third parties to submit evidence regarding registrability of a mark during examination of a trademark application. Section 3 of the TMA now formalizes that process by: (1) expressly allowing third party evidence submissions; (2) setting requirements that the submission include identification of the grounds for refusal to which the submission relates; and (3) authorizing the USPTO to charge a fee for the submission. The USPTO is required to act on that submission within two months of its filing. The decision on the submission is final, but the applicant may raise any issue regarding the grounds for refusal in the application or any other proceeding.

Presumption of Irreparable Harm for Trademark Infringement Plaintiffs

The primary goal of most trademark infringement litigation is to stop the infringing behavior, typically through injunctions. Section 6 of the TMA provides that a “plaintiff seeking an injunction shall be entitled to a rebuttable presumption of irreparable harm.” This language codifies a standard that most courts had applied to establish harm before the U.S. Supreme Court’s 2006 decision in eBay v. MercExchange, LLC.[5] In eBay, the Supreme Court held that patent owners were no different than any other litigant seeking equitable relief, so those owners must demonstrate irreparable harm to be entitled to a permanent injunction. Several courts then applied eBay’s holding by extension to trademark owners, finding they also must demonstrate irreparable harm for an injunction to be warranted.[6] Some courts, like the Fifth Circuit, have struggled in their application of eBay to trademark infringement disputes, leading to confusion and disagreement among lower district courts.[7] The eBay decision thus ultimately led to a circuit split on whether the rule presuming irreparable harm remained valid in Lanham Act cases.[8]

The TMA makes clear that trademark infringement plaintiffs are entitled to the presumption that they will be irreparably harmed if the infringer is allowed to continue use of the infringing trademark. Section 6(b) further confirms the retroactivity of this presumption, stating that Section 6’s amendment “shall not be construed to mean that a plaintiff seeking an injunction was not entitled to a presumption of irreparable harm before the date of enactment of this Act.” This change increases the likelihood that trademark infringement plaintiffs will be awarded preliminary and permanent injunctive relief, decreasing overall litigation costs and evidentiary burdens on plaintiffs.

The Trademark Modernization Act of 2020 addresses a grab-bag of challenging trademark issues that together provide additional protections for trademark owners and, ultimately, consumers. Trademark owners seeking to register their marks will soon have expedited procedures to tackle fraudulent or “deadwood” registrations that block their trademark applications. The Act further resolves a circuit split for awarding an injunction, easing the burden on trademark owners to show harm. While the ultimate effect of the TMA remains to be seen, these changes should empower trademark holders with additional tools to combat problematic registrations and ease litigation burdens.

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[1] Statement of the Commissioner for Trademarks Mary Boney Denison before the United States House Subcommittee on Courts, Intellectual Property, and the Internet Committee on the Judiciary, Jul. 18, 2019 (available at https://www.uspto.gov/about-us/news-updates/statement-commissioner-trademarks-mary-boney-denison-united-states-house_).

[2] Id.

[3] Id.

[4] Services must actually be offered in connection with the advertisement to qualify as “use.” Couture v. Playdom, Inc., 778 F.3d 1379 (Fed. Cir. 2015).

[5] 547 U.S. 388 (2006).

[6] See Peter J. Karol, Trademark’s eBay Problem, 26 Fordham Intell. Prop. Media & Ent. L.J. 625, 636–653 (2016) (available at https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1623&context=iplj); Mark A. Lemley, Did eBay Irreparably Injury Trademark Law?, 92 Notre Dame L. Rev. 1795 (2017) . See also Gene Quinn, “Why eBay v. MercExchange Should, But Won’t, Be Overruled”, IPWatchdog.com (Feb. 16, 2020) (https://www.ipwatchdog.com/2020/02/16/ebay-v-mercexchange-wont-overruled/id=118929/).

[7] See Karol, supra n. 5 at 646–47.

[8] Testimony of Douglas A. Rettew, “Fraudulent Trademarks: How They Undermine the Trademark System and Harm American Consumers and Businesses” at p. 13, Hearing Before the Senate Committee on the Judiciary, Subcommittee on Intellectual Property (Dec. 3, 2019) (available at https://www.judiciary.senate.gov/imo/media/doc/Rettew%20Testimony.pdf).

Unlike many states on the Pacific and Atlantic costs, Texas’ probate process is quicker and comparatively cost efficient.  In fact, Texas offers a several abbreviated probate process (e.g. independent administration, muniment of title, small estate affidavits) that require only limited filings and usually a single brief hearing in order to transfer the property to the decedent’s beneficiaries or heirs.

Despite the efficiency of its process, Texas does not offer a “do it yourself” probate.  An individual looking to probate an estate must use a licensed attorney “because in this role [the applicant] is litigating rights in a representative capacity rather than on his [or her] own behalf.”[1]  In Texas, as with other states, only a licensed attorney may represent someone else in court.  Therefore, an attorney is required in all probate proceedings because the person applying to open the decedent’s estate is not actually representing themselves.  Instead, the applicant is representing the estate of the person that died and the applicant’s actions can impact the rights of others (e.g. other heirs or creditors).

In short, this requirement is intended to offer each heir and creditor a fair opportunity to claim their interest in each estate probated.  It also offers executors with professional assistance in their role since they are have a duty to operate as a fiduciary.

Since the court will require you to obtain counsel it is best to meet with counsel before taking any action with the court.  There are a number of different options that may fit your circumstance and it is important to start the process with good advice from knowledgeable counsel to avoid wasting time, money, and effort.

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[1] Steele v. McDonald, 202 S.W.3d 926 (Tex. App. — Waco 2006).

The “accommodation doctrine” is a judicially created doctrine that governs the manner in which a mineral owner and surface owner may use the surface of a tract of land for their respective purposes.  The mineral estate is considered the “dominant” estate, and is permitted to use so much of the surface as is reasonably necessary for exploration and development of the minerals.  However, the mineral estate owner’s rights are not absolute.  The accommodation doctrine was adopted in Getty Oil Co. v. Jones, 470 S.W.2d 618 (Tex. 1971) to balance the rights of the surface and mineral owners, and it requires them to exercise their respective rights with due regard for the other’s.

Lyle v. Midway Solar, LLC — S.W.3d —-, 2020 WL 7769632, (Tex.App. – El Paso [83rd Dist.] 2020) deals with the question of whether the accommodation doctrine applies to a tract of land upon which the mineral estate is undeveloped and the majority of the surface is being used as a solar facility.  The El Paso Court of Appeals held that the accommodation doctrine could apply to the dispute, but that its application was premature until the mineral owner actually seeks to develop its minerals.

The Lyles own 27.5% of the mineral estate in a 315-acre tract in Pecos County, Texas.  No mineral development has occurred on the tract, and the Lyles have never executed an oil and gas lease on the tract.

Midway Solar, LLC (“Midway”) is the lessee of a solar lease executed by the owners of the surface estate in the 315-acre tract.  The solar lease allows Midway to build a solar facility on the tract, and grants the right to place solar panels, transmission lines, and cable lines anywhere on the tract.  It expressly recognized that the surface owner did not own the mineral estate in the tract, and that ownership of minerals in third parties constituted a title encumbrance.  The solar lease was subsequently amended to provide “Designated Drill Site Tracts” on the property.  Specifically, the amendment designated an 80-acre tract at the north end of the tract, and a 17-acre tract on the south end of the tract, which were stated to be for the benefit of any present or future operator.  Midway then placed solar panels on that part of the tract not designated as “Designated Drill Site Tracts.”

Prior to constructing the solar facility, which was located on the 315-acre tract as well as adjacent lands, Midway obtained waiver agreements from mineral owners in adjacent tracts, as is customary.  Although the opinion does not state whether it attempted to obtain such an agreement from the Lyles, one would presume that it attempted to do so but was unsuccessful.  Some of the waivers from the adjacent mineral owners erroneously purported to waive surface rights on the 315-acre tract.  Some were subsequently amended, and Midway filed a “Disclaimer of Interest” in which it states that the waivers did not grant any rights to Midway on the 315-acre tract.

After Midway constructed its solar facility, the Lyles sued Midway, the surface owners, and the parties who signed the mineral waiver agreements on the adjacent lands.  There are several claims asserted by the plaintiffs, but the focus of this comment is whether the accommodation doctrine applies to the claim that Midway and the surface owners denied the Lyles reasonable access to their minerals by covering 70% of the surface with solar panels and transmission lines.

The Lyles argued that the accommodation doctrine did not apply because the deed in which the mineral estate was severed expressly describes the rights of the parties, which makes application of the doctrine unnecessary and inappropriate.  They point to the language in the deed wherein the grantor reserved the minerals and the right to use the surface “as may be usual, necessary, and convenient” in the use and enjoyment of the mineral estate.  Specifically, they argued that the use of the term “usual” expressed the intent to reserve the right to use vertical drilling, which was the “usual” method of development when the minerals were severed in 1948.  At that time, directional drilling was at best unusual, and horizontal drilling had not been invented.  It follows that if the deed allowed vertical drilling to develop the mineral estate, eliminating 70% of the surface acreage from possible development would be a violation of its rights as mineral owner.

The Court acknowledged that Texas public policy strongly favors freedom of contract, and if the express terms of a deed determines the parties’ rights with respect to surface use, then the accommodation doctrine would not apply.  However, the Court disagreed with the Lyles’ argument that the quoted language was intended to determine the rights of the parties and supplant the application of the accommodation doctrine.  It found that the deed did not use the term “usual” in the context of drilling methods, but used it instead in a more general sense.  Had the grantor in the deed intended to specify a particular drilling method, it should have simply said that it could drill a vertical well anywhere it wanted to.

The Lyles also argued that the following “elimination of liability provision” dictates how this dispute should be governed:

And neither Grantors herein nor their heirs, assigns, successors in title, nor any persons holding or claiming under them shall ever be liable to Grantees herein, their heirs, assigns, and successors in title for any damage or injury to the surface estate by reason of such use or for any damage or injury or for any damage or injury resulting from or claimed to have resulted from the exercise of the rights and privileges hereinabove reserved in connection with the reservation of the oil, gas, and general mineral estate.

The Lyles’ argument goes that because this clause provides that they can destroy any surface obstruction without liability, this negates any basis for accommodating competing surface uses.  However, the Court disagreed, stating that the clause relieves the Lyles from liability only from exercising “the rights and privileges hereinabove reserved[.]”  Therefore the language does not define the scope of rights and privileges, but simply states only what the common law requires.

Given that the 1948 deed does not preclude application of the accommodation doctrine, Midway argued that the Lyles must be either using the mineral estate or planning to use the mineral estate in order for the doctrine to apply.  In response, the Lyles argued that they have already suffered damages because they cannot realistically pursue mineral development when the solar facility covers 70% of the surface of the tract.  The Court resolved the dispute by stating that the answer lies in a proposition of logic as much as one of law.  If the Lyles exercise their right to use the surface in connection with their mineral estate, Midway must yield to the extent required by the accommodation doctrine.  However, because the Lyles are not using their rights, there is nothing to be accommodated.  Accordingly, the Court concluded that the Lyles’ claims are premature until the Lyles actually seek to develop their mineral estate.

The author finds this case noteworthy and interesting for several reasons.  First, it adds to the caselaw on the accommodation doctrine, particularly in terms of when these kinds of controversies become ripe and warrant judicial intervention.  Also important is the identity of the parties and the broader implications of this kind of dispute.  The Court was keenly aware that this case was between a mineral owner and the owner of a solar facility.  It began the opinion by recognizing that Texas is a leader in energy, producing more oil and gas than any other state.  However, it stated that Texas public policy “favors adding renewable energy sources into the State’s energy portfolio.” (Id. at 1).  As renewable energy grows in the coming years, there will no doubt be more disputes between mineral owners and solar developers.

One of the most common and difficult questions asked of oil and gas attorneys concerns maintenance of oil and gas leases that are beyond their primary terms.  Most modern-day lease forms contain a continuous development clause, which requires the lessee to drill multiple wells within specified time periods in order to maintain the entire leased premises in the secondary term.  If the lessee does not comply with the drilling requirements, the lease will automatically terminate as to the portions of the lease premises that have not been developed.

Although there are some commonalities among continuous development clauses in various lease forms, they differ in subtle but important ways, which makes interpreting them with a high degree of confidence especially challenging.  An example of this difficulty was the subject of Endeavor Energy Resources, LP vs. Energen Resources Corporation, — S.W.3d —, 2020 WL 7413727, 64 Tex. Sup. Ct. J. 230 (Tex. 2020).

The lease in this case allowed Endeavor to perpetuate its lease, which affected approximately 11,300 acres in Howard County, Texas, if it drilled a new well every 150 days.  It also contained the following provision that allowed Endeavor to accumulate unused days if a well was drilled in less than 150 days:

Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.

Endeavor drilled 12 wells on the lease without controversy.  The 13th well was drilled 320 days after the 12th was completed.  The parties disagreed about whether Endeavor could accumulate unused days and use them for only the immediately following term (i.e., use them in the next term or lose them), or whether it could accumulate unused days across multiple terms (i.e., use accumulated days in any future term).  Endeavor argued that because many of the first 12 wells were drilled before the 150-day deadline, it had accumulated a total of 337 days to begin the 13th well.  In contrast, Energen, who obtained a new oil and gas lease covering the non-developed portions of the original leased premises, argued that because Endeavor drilled its 12th well 36 days before the deadline, it was required to drill the 13th well no later than 186 days (150 plus 36) after completion of the 12th.

The trial court agreed with Energen and granted its motion for summary judgment, holding that the lease terminated as to the non-developed portions of the leased premises 186 days after completion of the 12th well.  The court of appeals affirmed.

The Supreme Court engaged in a lengthy analysis of the arguments put forth by both sides, and discussed the operative text in great detail.  It found that the clause was ambiguous, so it analyzed the relevant extrinsic evidence, but found that it was not “sufficient to break the tie created by the Lease’s ambiguous language.” Id. at 8.

Having found that the language was ambiguous even after taking into account extrinsic evidence, the Court then turned to a longstanding rule of contractual interpretation applicable in the context of real property interests, which is that language will not be held to automatically terminate a leasehold estate unless that language is clear, precise and unequivocal, and cannot be given any other reasonable construction.  If all other available means of interpreting contractual language are exhausted, the remaining ambiguity will be resolved against the imposition of a special limitation.

Using this rule, the result is obvious.  Because the language was held to be ambiguous, it cannot act as a special limitation.  The Court held, therefore, that the lease did not terminate before Endeavor drilled its 13th well.

On December 27th, the President signed into law a second pandemic relief package as part of a larger government funding bill passed by Congress entitled The Consolidated Appropriations Act, 2021 (“CAA”). In March of this year, President Trump signed the first pandemic-related stimulus bill: H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (Public Law No: 116-136, the “CARES Act”). The tax provisions in the CAA, are numerous, but for the most part, extend certain tax relief provided in the CARES Act and resolve the controversy regarding Congress’ intent related to certain CARES Act relief provisions.  The CAA also contains several important federal income tax changes, as set out below.

Tax Treatment of PPP Loans

The CAA clarifies that otherwise-deductible expenses funded by loans received under the Paycheck Protection Program (PPP), which was created by the CARES Act, will be deductible under Internal Revenue Code (“IRC”) Section 163. While Congress made clear in the CARES Act that the loans made under PPP were not taxable, it was not clear whether expenses funded by PPP loans would be deductible.  Confusion arose regarding deductibility of the expenses when the Internal Revenue Service (the “IRS”) issued guidance that expenses funded by PPP loans would not be deductible.  However, the new legislation clarifies that it was Congress’ intent that such expenses be fully deductible.

Retention Credit Expanded

One of the major business policies behind the CARES Act was to encourage businesses to retain their employees during the economic turmoil caused by the lockdowns. To that end, the CARES Act provided an employee retention credit to employers, based on wages (and a proportionate amount of qualified health plan expenses) paid to employees.  The CAA  increases the credit percentage to 70 percent of qualified wages and expands the wage base to $10,000 per employee per quarter (as opposed to per year in the CARES Act). The CAA  also reduces the amount of losses that a business must incur to be eligible for the credit.  In addition, the CAA revises the credit to allow a business that received a PPP loan to claim the credit to cover payroll expenses not covered by PPP. The credit expires four quarters after June 30, 2021.

Business Meals Deduction

In an effort to help restaurants that have suffered substantial economic losses during the pandemic, the CAA  increases the deduction for business related meals to 100 percent through December 31, 2022.  Under current federal income tax law, a business may only deduct 50 percent of the cost of business-related meals.

Again, these are just a few of the many tax provisions proposed in the CAA.  Businesses and individuals will be analyzing the impacts of the new law for quite some time.

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Willie Kolarik at (225) 382-3441, or Michael McLoughlin at (504) 620-3351.

On December 21, 2020 Congress passed the lengthiest piece of legislation in its history—nearly 5600 pages. While most Americans are focused on the provisions of the “Consolidated Appropriations Act, 2021” related to coronavirus response and recovery, it also included provisions that will directly impact pipeline operators.

The “Protecting Our Infrastructure of Pipelines and Enhancing Safety Act of 2020” appears at page 2634. The Act contains two provisions which will expand federal regulation of the natural gas pipeline industry.

First, the Act requires PHMSA to, “Not later than 90 days after date of enactment of this Act… issue a final rule with respect to the proposed rule issued on April 8, 2016 …that relates to consideration of gathering pipelines.” The proposed rule published in 2016 changed the existing definition of gathering lines to remove the reference to the API RP 80 definition of gathering lines and replace it with a definition drafted by PHMSA. It also expanded regulation of rural gathering to all lines  more than 8.625 inches in outside diameter. Although recent information from PHMSA shows that it may reconsider some of the provisions of the proposed rule before adoption, industry representatives should pay attention to this issue.

Second, the Act requires PHMSA to adopt, within the next year, regulations that require operators of certain regulated gathering lines to conduct leak detection and repair programs. Once again, industry representatives will want to follow PHMSA’s efforts on this topic.

On Monday, December 21, 2020, Congress passed another stimulus package to provide certain coronavirus relief for individuals and businesses, among other things.  One looming question was whether Congress would extend the emergency paid sick leave (EPSL) and emergency paid family leave (EFMLA) provisions of the Families First Coronavirus Response Act (FFCRA) into next year?

The answer is  – no.  The FFCRA paid leave laws have not been extended, and thus the paid leave law mandates for employers who have fewer than 500 employees expire at 11:59pm on December 31, 2020.

However, Congress’s latest package does allow qualifying employers to voluntarily extend those benefits to employees during the period January 1, 2021 through March 31, 2021 if the employer so chooses, and the employer can continue to receive a credit against payroll taxes as before, with one caveat.  In order to claim the payroll tax credits, the employer must comply with the requirements of the EPSL and/or EFMLA as if they were so extended through March 31, 2021.

Importantly, employers cannot claim payroll tax credits for any such paid leave in the first quarter of 2021 if the employee already used up his/her allotment of FFCRA emergency paid sick or family leave in 2020.  There may be an exception to this for those employers who use the calendar year for determining the FMLA 12-month period, and hopefully the DOL or the IRS will provide some clarity through regulation, answers to FAQs, or other agency guidance.  The new package also does not appear to prohibit an employer from choosing to continue the EPSL through March 31, 2020 but not the EFMLA, or vice versa.  The best advice is to talk with your counsel if you have questions or if you are weighing whether to extend such paid leave benefits into the new year.