Brief Introduction:

On July 1, 2024, the Western District of Louisiana ruled in favor of the plaintiffs in the case, State of Louisiana et al. v. Joseph R. Biden Jr. et al. No. 2:24-CV-00406 (W.D. La. July 1, 2024), ordering that the Biden Administration’s ban on the export of liquified natural gas (LNG) be stayed in its entirety, effective immediately. Plaintiffs in this case are sixteen (16) states (Louisiana, Alabama, Alaska, Arkansas, Florida, Georgia, Kansas, Mississippi, Montana, Nebraska, Oklahoma, South Carolina, Texas, Utah, West Virginia, and Wyoming) who jointly filed to challenge the Biden Administration’s LNG export ban to countries without a free trade agreement (“non-FTA countries”) in violation of the Administrative Procedure Act (“APA”), Congressional Review Act, and the United States Constitution. Under this ban, the Department of Energy (“DOE”) halted permit approvals to export LNG to non-PTA countries while the agency reviewed how the shipments affect climate change, the economy, and national security.  The Court granted the plaintiffs’ request for a preliminary injunction, which will freeze the Biden Administration’s LNG ban in its entirety while litigation is pending and will stop the Administration’s delay of consideration of projects aimed at the exportation of LNG. This ruling has nationwide impacts.  

Top 2 Takeaways:

  1. The Biden Administration’s ban departs from historical precedent and the legal requirements for the approval process of LNG export licenses, especially considering the DOE’s relatively recent dismissal of a similar petition, stating that there is “no factual or legal basis” for “halt[ing] approval of pending applications to export LNG.” DOE, Order Denying Petition for Rulemaking on Exports of Liquified Natural Gas at 27 (July 18, 2023), https://perma.cc/TB8Y-56TV.
  • While the instant decision is a major win for the LNG industry, given the DOE can continue scrutinizing proposals for new LNG exports, the short-term practical effects of the ruling are likely to be minimal. This ban creates uncertainty for American citizens employed in LNG production and exportation and likely discourages new investments.

Substantive Content:

            The United States is the largest producer and largest exporter of LNG in the world. In 2023, it was reported that 88.9% of the total U.S. LNG exports were to non-Free Trade Agreement countries, and the remaining 11.1% went to Free Trade Agreement countries. Natural Gas Imports and Exports Monthly February 2024.pdf (energy.gov). The domestic LNG market is not only crucial to the United States’ capital expenditures and job markets, but also critical to global energy markets.  

In January of 2024, President Joe Biden and his administration announced a temporary and possibly indefinite hold on pending decisions of LNG exports. The DOE also announced that it was pausing determinations of applications to export LNG exports to all but eighteen (18) countries to “update the assessments used to inform whether additional LNG export authorization requests to non-FTA countries are in the public interest.”

Leading foreign and domestic business groups seeking to quash their dependence on Russian natural gas have expressed concern. In a letter dated January 26, 2024, the U.S. Chamber of Commerce, Business Europe and Keidanren (Japan Business Federation) wrote to President Biden expressing concern with the pause on new LNG export license applications. https://www.keidanren.or.jp/en/policy/2024/011.pdf.  The groups noted their dependence on U.S. LNG imports for energy security and urged President Biden to reconsider his decision “in light of the unique and vital role of American natural gas in meeting the critical energy security and Paris Agreement objectives that our nations share.” Id. Similarly, on March 18, 2024, nearly 150 state and local chambers from thirty-five states joined the U.S. Chamber of Commerce in a letter to the DOE expressing their concerns about the recent moratorium on LNG export license applications. https://www.uschamber.com/assets/documents/240318_Coalition_LNGExports_Sec.-Granholm.pdf. Sixteen states – including Louisiana, Texas, and West Virginia – took matters a step further and filed a civil action in the United States District Court for the Western District of Louisiana.

These sixteen states filed suit against President Biden and the DOE moving for a preliminary injunction on the Biden Administration’s LNG export ban. The states argued that the ban exceeded statutory authority, abused the federal government’s discretionary authority, posed significant harm to the economy, and violated the Natural Gas Act (NGA), which governs LNG exports and strives to “encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices.” More importantly for purposes of the injunction, Plaintiffs argued that the LNG ban inflicted significant harms to each individual state, including loss of jobs and revenue streams. Louisiana, for example, is home to 18,000 jobs rooted in LNG production and export. LNG production has contributed to more than $175 million in state tax revenue and had over $4.4 billion in statewide economic impact. Thus, the LNG export ban could cost Louisiana thousands of jobs and deprive the state of weighty revenues.

The Biden Administration responded to plaintiffs’ Complaint and Motion for Preliminary Injunction with a Motion to Dismiss for Failure to State a Claim and a Motion to Dismiss for Lack of Jurisdiction. Defendants contended (1) that the Western District of Louisiana did not have jurisdiction, (2) Plaintiffs failed to establish standing, (3) Plaintiffs did not challenge a final agency action under the APA, and (4) Plaintiffs failed to state a claim for relief.  

Less than two weeks after the hearing, on July 1, 2024, U.S. District Judge James Cain, Jr. ruled in favor of the plaintiffs, granting the preliminary injunction and finding that the states demonstrated there was “evidence of harm” caused by the ban “specifically to Louisiana, Texas, and West Virginia in the loss of revenues, market share, and deprivation of a procedural right.” DOE, Order Denying Petition for Rulemaking on Exports of Liquified Natural Gas at 46 (July 18, 2023), https://perma.cc/TB8Y-56TV. In temporarily blocking the ban on new LNG approvals, Judge Cain stated that the states will likely succeed in their case, citing the evidence the states presented showing loss of revenues and deferred investments in LNG projects due to the Biden Administration’s actions and noting that the DOE had failed to provide a “detailed justification” for stopping the permit approval process when it had continued to process applications during previous updates to the agency’s analyses. The Court also noted its confusion with the Biden Administration’s decision to halt the LNG approval process in the first place, given the Natural Gas Act’s “express language that applications are to be processed expeditiously” and the DOE’s July 2023 decision on essentially the same topic. The Court was of course referring to the DOE’s July 2023 order denying a petition for rulemaking on LNG exports, in which the DOE acknowledged that “there is no factual or legal basis” to “halt approval of pending applications to export LNG.” DOE, Order Denying Petition for Rulemaking on Exports of Liquified Natural Gas at 27 (July 18, 2023), https://perma.cc/TB8Y-56TV. The Court had strong words regarding the DOE’s decision to halt the permit approval process for LNG exports to non-FTA countries stating that it is “completely without reason or logic and is perhaps the epiphany of ideocracy.”

The Biden Administration, fighting to uphold the ban, filed an appeal to the Fifth Circuit Court of Appeals on August 5, 2024.  

Conclusion:

This victory for the energy industry may be short-lived as everyday Americans, business groups, and global energy markets await the Fifth Circuit Court of Appeals decision on whether to permanently strike down the LNG ban. The potential implications of this ruling on the global natural gas supply are significant, as countries in Europe and Asia, in need of a reliable natural gas supply, may now be forced to seek natural gas from sources other than the United States.

Kean Miller will continue to monitor these developments and the pending appeal. For questions or to discuss any of the foregoing, please contact Kean Miller’s Energy/Environmental Team.

As previously reported, on April 23, 2024, by a vote of 3-2 along party lines, the Federal Trade Commission (FTC) voted to approve a final rule effectively banning employers from entering into non-compete agreements with their workers, with few limited exceptions (the “Rule”). The Rule was set to go into effect on September 4, 2024.

But, on August 20, 2024, the federal district court for the Northern District of Texas entered a Memorandum Opinion and Order and a Final Judgment in the Ryan LLC v. Federal Trade Commission case, holding that the Rule is unlawful and setting it aside. Pursuant to the court’s order, the Rule shall not be enforced or otherwise take effect on September 4, 2024, or thereafter. And although the FTC sought to limit the application of the court’s order to the named plaintiffs in the lawsuit only, the court confirmed the relevant law did not contemplate party-specific relief, that setting aside agency action has nationwide effect, and the ruling affects persons in all judicial districts equally.

Although the FTC will likely appeal the district court’s ruling, for the time being, all employers can halt any preparations they were taking and/or planning to take in anticipation of the Rule’s September 4, 2024 effective date. As a result of the district court’s ruling, employers: (1) may continue drafting and entering into non-compete agreements with their workers consistent with applicable state and other laws; (2) will no longer be required to rescind existing non-compete agreements that otherwise comply with applicable laws; and (3) are no longer required to provide individualized notice of rescission to current and former workers bound by non-compete agreements.

On May 1, 2024, the U.S. 5th Circuit reversed an Eastern District of Louisiana decision based on a differing interpretation and application of the Supreme Court’s Lauritzen-Rhoditis factors; holding that the law of the flag state governed the injured mariner’s maritime law claims against the vessel operator.

In Ganpat v. Eastern Pacific Shipping PTE, Ltd., Kholkar Ganpat, an Indian citizen and seaman, contracted malaria while aboard the M/V STARGATE due to the ship’s alleged failure to stock enough anti-malaria medicine when it stopped at Savannah, Georgia. Ganpat became symptomatic, however, during the ship’s voyage from Savannah to Brazil. Upon reaching Brazil, Ganpat was hospitalized and had to have his toes amputated.

During Ganpat’s ordeal, the ship’s operator was Eastern Pacific Shipping (“EPS”), a Singaporean company, and the ship flew under the flag of Liberia. Ganpat was employed by a Liberian corporation, and his employment contract contained a clause providing that the agreement would be governed by and interpreted in accordance with the laws of the ship’s flag. A collective bargaining agreement was also incorporated into Ganpat’s employment contract. The ship was owned by a Liberian company.

In December 2018, Ganpat sued EPS in the Eastern District of Louisiana (“EDLA”) asserting Jones Act and U.S. General Maritime Law tort claims, as well as a claim for breach of his collective bargaining agreement. Notably, Ganpat did not sue the owner of the ship or his own employer. After consenting to jurisdiction in the EDLA, EPS sued Ganpat in India seeking an anti-suit injunction preventing the U.S. litigation. In turn, Ganpat sought his own anti-suit injunction against EPS’ suit in India. The EDLA granted Ganpat’s injunction, which EPS appealed. However, the 5th Circuit affirmed the decision, holding that EPS’ lawsuit in India was vexatious and oppressive enough to outweigh any comity concerns. EPS then sought writs with the U.S. Supreme Court, which was ultimately denied.

The EDLA was tasked next with determining what substantive law applied to Ganpat’s maritime claims. The district court concluded that U.S. law applied after analyzing the Lauritzen-Rhoditis factors. These factors include: (1) the place of the wrongful act; (2) the law of the flag; (3) the allegiance or domicile of the injured worker; (4) the allegiance of the defendant shipowner; (5) the place of the contract; (6) the inaccessibility of the foreign forum; (7) the law of the forum; and (8) the shipowner’s base of operations. The district court concluded that factors two, four, and eight pertained to the ship’s owner who was not sued, so they were inapplicable, while factors three and five favored Indian law. However, the latter factors traditionally do not carry much weight because a seaman’s work is transient and his place of contract fortuitous. Factor six was found to only be relevant in a forum non conveniens determination, which would not appear here. Finally, the district court found that factor seven favored U.S. law. Similarly, the district court concluded that this same analysis would apply to Ganpat’s collective bargaining agreement.

Thereafter, the EDLA’s ruling was appealed and Ganpat found himself back in the 5th Circuit. With respect to governing choice of law, the 5th Circuit held that “the only Lauritzen-Rhoditis factor that favored an application of U.S. law is the seventh factor—the law of the forum,” but noted that this factor is typically given “little weight” in choice of law determinations. The 5th Circuit also disagreed with the district court’s assessment that the “law of the flag” and the “base of operations” factors lack choice-of-law significance in cases where the shipowner is not a defendant because another party can act in place of the shipowner—like EPS. The fact that the allegedly tortious conduct occurred in Savannah, Georgia was also held to be fortuitous as EPS was visiting many other countries throughout the voyage as well. Lastly, the Court held that Liberian law applied to Ganpat’s breach of contract claim because his claim for disability was based on his employment contract, which contained a clear choice-of-law provision.

Thus, the 5th Circuit remanded the case back to the EDLA with instruction to apply Liberian law to Ganpat’s maritime tort and contract claims. Given the history of this case, it would not be surprising if Ganpat sought writs with the U.S. Supreme Court as EPS did after the last 5th Circuit decision.

An estimated 32 million companies are now facing new compliance obligations due to the Corporate Transparency Act (“CTA”), which aims to enhance transparency in corporate ownership and curb money laundering, terrorism financing and other financial crimes. The CTA, which took effect on January 1, 2024, represents a significant shift in the ownership information reporting obligations of corporations, limited liability companies and other business entities covered by the CTA. Companies subject to the CTA must report personal information about their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”). By strategically revising its organizational documents, a company can help itself avoid pitfalls related to CTA compliance and the associated penalties for noncompliance.

Updating Organizational Documents

To comply with the CTA, reporting companies are required to collect personal information from persons deemed to be “beneficial owners” under the CTA, which could include shareholders, members, managers, directors, officers and other key employees, and then file with FinCEN an initial report with that information, known as a Benefit Ownership Information Report (“BOI Report”). Reporting companies must thereafter continuously report any changes to reported information within the relatively stringent deadlines imposed under the CTA. Although much of the information required under the CTA would need to be provided to the reporting company by the beneficial owners, it is the reporting company’s responsibility to report the information to FinCEN and the reporting company is ultimately liable for any failure to comply.

The collection of personal information from beneficial owners to comply with CTA reporting obligations could present challenges to reporting companies with numerous or reluctant beneficial owners. In order to prevent the risk of beneficial owners failing or refusing to provide the required information, companies should review and potentially revise their organizational documents to include protective language requiring beneficial owners to provide their information. Companies should consider adding CTA-specific provisions to any organizational document or agreement between the company and persons who could be deemed to be beneficial owners, including: (i) agreements governing the rights and obligations of equity owners of the reporting company, such as operating agreements, shareholder agreements and subscription agreements, and (ii) agreements that provide for the services and responsibilities of senior officers and key employees of the reporting company, including employment agreements, offer letters and executive services agreements.

These documents should include explicit provisions imposing an obligation on the beneficial owner to provide accurate beneficial ownership information and to timely advise the reporting company of any changes to such information, as required by the CTA. Specifically, CTA provisions should include: (i) an acknowledgment by the beneficial owner of the company’s obligation to report certain beneficial ownership information as a result of such person being deemed a beneficial owner under the CTA, (ii) a covenant that the beneficial owner will provide all requested information to the reporting company, as well as any changes to such information, and (iii) a representation and warranty by the beneficial owner as to the accuracy and completeness of the information provided to the company.

An individual may obtain a FinCEN Identifier (“FinCEN ID”) by providing, directly to FinCEN, the same information as the reporting company is required to provide regarding its beneficial owners in its BOI Report. The reporting company may then report the individual’s FinCEN ID on its BOI Report in lieu of listing specific information for that individual. Companies may consider including provisions recommending or requiring beneficial owners to obtain a FinCEN ID and that the beneficial owner’s obligations can be satisfied by providing their FinCEN ID to the company. Such provisions should also include an acknowledgment by the beneficial owner that they would be responsible for updating their FinCEN ID with any changes to their personal information.

Companies should also review and potentially revise confidentiality provisions in their organizational documents to permit disclosures required by law, including those mandated by the CTA.

Conclusion

Integrating these types of provisions in organizational documents can be a useful tool for companies that need to navigate these regulatory changes and mitigate the risk of noncompliance. For more information on the CTA and related compliance tips, see How Your Company Can Prepare for the Corporate Transparency Act.

Business owners can utilize Kean Miller’s CTA compliance evaluation and reporting platform to determine if their companies are required to comply with the CTA. The platform offers a compliance screening questionnaire and, if necessary, guides users through the collection and filing process.

On April 23, 2024, by a vote of 3-2 along party lines, the Federal Trade Commission (FTC) voted to approve a final rule effectively banning employers from using non-compete agreements, with a few limited exceptions. The measure reflects an unprecedented effort by the FTC to expand its rule-making authority. The final rule “shall supersede” all state laws, regulations, orders, and interpretations regarding non-competes, unless the state laws afford more protection to employees. Whether the rule will survive legal challenges remains unclear, but as the legal landscape concerning non-competes continues to shift, employers should cautiously review any non-compete clauses going forward and not make any major changes to their current practices just yet.

The rule is a sweeping ban on all new non-competes with workers of all levels. A non-compete clause is broadly defined by the FTC as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from

1. seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The FTC stated that whether a prohibition constitutes a “non-compete clause” is a “fact-specific inquiry.” For example, a non-solicitation clause, if sufficiently broad, could fall under the FTC’s definition of a prohibited non-compete clause. The FTC did clarify, however, that a “garden leave” provision, where an employee receives the same total annual compensation while employed by the employer, is not considered a non-compete.

The application of this prohibition extends to all “workers,” which the FTC broadly defined as including employees, independent contractors, interns, and volunteers. The rule excluded from this prohibition non-competes between franchisors and franchisees, non-competes related to the sale of a business, as well as workers for non-profits, including many workers in the healthcare industry.

The FTC’s rule is scheduled to go into effect 120 days after the rule is published in the Federal Register, so the rule is not yet effective. As written, the rule allows existing non-competes to remain in place only for senior executives; however, The FTC narrowly defined a “senior executive” as a worker in a “policy-making position” earning more than $151,164 annually. Those identified in “policy-making positions” include a company’s president, CEO, or a similarly situated individual. Other officers, such as vice presidents, must hold responsibilities that afford them the final authority to make policy decisions that control significant aspects of the business. The FTC excluded from this definition individuals who have the final authority to make decisions over subsidiaries of the business but not over the business as a whole.

Should the rule become final and effective, most notably, employers will be required to provide notice to non-senior executive workers with existing non-competes stating that the non-compete agreement will no longer be enforced. This notice must be provided to both current and former workers by the effective date of the final rule.

The FTC received over 26,000 public comments when it first proposed this rule in January of 2023. So, unsurprisingly, legal challenges immediately began following the FTC’s 3-2 vote in favor of the rule. Ryan LLC, a tax service firm, filed the first legal challenge to the FTC rule on the same day it was announced, arguing the FTC lacked the authority to enact the rule. The US Chamber of Commerce, a critic of the rule from its initial proposal, filed a lawsuit the following day in Federal District Court in Tyler, Texas, along with the Business Roundtable, and other trade groups.

Employers should adopt a wait-and-see approach until there is further clarity on the rule’s legal challenges. And even if the FTC’s rule survives legal challenge, the rule’s scope will inevitably be subject to litigation that tests the contours of the rule.

Today, April 30, 2024, the U.S. Department of Energy (DOE) revised its National Environmental Policy Act (NEPA) implementing procedures to revise categorical exclusions for upgrading and rebuilding powerlines and for solar photovoltaic systems. Under the new rulemaking, environmental reviews will not automatically be required for projects related to solar installations. The rulemaking also adds a categorical exclusion for certain energy storage systems and adds flexibility for power grid powerline relocation.

A categorical exemption (“CX”) is applicable where a federal agency, including the DOE, has concluded that a proposed project or action does not have a significant effect on the human environment and for which neither an environmental assessment (EA) nor an environmental impact statement (EIS) is required.[1] Once a CX is promulgated through notice and comment rulemaking, it is added to an Appendix that includes the relevant requirements for the specific CX and other requirements applicable to all CXs.

One of the primary changes made by the rulemaking is the removal of a land area limitation currently in place for solar projects. The current CX for solar projects excludes the installation, modification, operation, and removal of solar photovoltaic (PV) systems, but only if the project is located within a previously disturbed or developed area comprising less than 10 acres.[2] However, the new rule removes this 10-acre limit, making the exclusion available to larger projects.

DOE regulations also require that projects comply with additional requirements, known as “integral elements,” in order to be eligible for a CX. These conditions apply to any CX, including the CX for solar projects. Under these additional requirements, projects must not:

  • threaten a violation of applicable environment, safety, and health requirements;
  • require siting and construction or major expansion of waste storage, disposal, recovery, or treatment facilities;
  • disturb hazardous substances, pollutants, or contaminants that preexist in the environment such that there would be uncontrolled or unpermitted releases;
  • have the potential to cause significant impacts on environmentally sensitive resources [1]; or
  • involve governmentally designated noxious weeds or invasive species, unless certain conditions are met.[3]

DOE received comments to the proposed rule raising concerns about impacts of solar projects on wildlife and habitat. In response to those concerns, DOE added a condition that a proposed project must be “consistent with applicable plans for the management of wildlife and habitat, including plans to maintain habitat connectivity” in order to qualify for a CX.

The final rule will go into effect on May 30. The full version of the final rule can be viewed here.

[1] See 40 C.F.R. § 1508.1(d).

[2] 10 C.F.R. Part 1021, Appx. B, at § B5.16, available at https://www.ecfr.gov/current/title-10/chapter-X/part-1021.

[3] 10 C.F.R. Part 1021, Appx. B.

Back in March of 2023, the U.S. Supreme Court granted cert in the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (find our coverage of that grant here). Last week, the Court released its opinion in that case, a 9-0 decision in favor of the insurer-appellant. In short, the Court put the presumption back into the presumptive enforceability of choice-of-law clauses in maritime contracts.

To briefly recap the case, Great Lakes Insurance issued a maritime insurance contract for a yacht owned by Raiders Retreat Realty Co., which has its headquarters in Pennsylvania. The parties’ insurance policy had a choice-of-law clause that selected New York law to govern any disputes arising under said contract.

Subsequently, Raiders’ yacht ran aground near Fort Lauderdale, Florida, sustaining significant damage. Great Lakes denied Raiders’ insurance claim on the grounds that the yacht’s fire-extinguishing equipment was not timely recertified or inspected and that Raiders had misrepresented the state of this equipment in the past, thereby voiding the policy.

After denying the claim, Great Lakes filed a related declaratory judgment action in federal court in Pennsylvania. In response, Raiders asserted contractual counterclaims against Great Lakes under Pennsylvania law. Great Lakes then moved to dismiss the Pennsylvania-based counterclaims because they violated the policy’s New York choice-of-law clause.

The district court agreed with Great Lakes and rejected Raiders’ counterclaims. But the Third Circuit reversed, holding that the presumptive enforceability of choice-of-law clauses must yield to a strong public policy of the state where a suit is brought.

With Justice Kavanaugh delivering the opinion, the Court reversed the Third Circuit and held that choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law, with a few narrow exceptions that did not apply to this case.

The Court drew support for this rule of presumptive enforceability from its jurisprudence regarding forum-selection clauses, such as the classic case of The Bremen v. Zapata Off-Shore Co. Ironically, Raiders had relied on The Bremen for support based on a statement from the case that a “contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought.” But as the Supreme Court pointed out, that sentence referred to a conflict between federal maritime law and a foreign country’s law.

Raiders further argued that the Court’s decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co. precluded any uniform federal presumption of enforceability for choice-of-law provisions in maritime contracts. But, as the Court pointed out, Wilburn Boat was not about a choice-of-law clause; it only determined what substantive rule applied to a party’s breach of a warranty in a marine insurance policy.

The Wilburn Boat Court held that no established federal admiralty rule controlled because states historically regulated insurance and federal courts were in no position to set a nationwide standard for insurance law. Instead, the Court determined that state law governed the warranty issue.

Distinguishing Wilburn Boat, the Court explained that here, state law had no gap to fill, because there is already a uniform federal rule on the enforceability of choice-of-law provisions. And even though states primarily regulate insurance, that responsibility does not resolve which state law applies in a case.

Finally, the Court did recognize a few instances where otherwise valid choice-of-law clauses would be disregarded, such as when the chosen law contravened a federal statute on point or an established federal maritime policy. Also, there must be a reasonable basis for the chosen jurisdiction in any choice-of-law provision, though a body of law being “well developed, well known, and well regarded” is good enough.

Justice Thomas issued a concurring opinion to further highlight how Wilburn Boat “rests on flawed premises and, more broadly, how the decision is at odds with the fundamental precept of admiralty law.” He explained that the Supreme Court has retreated from Wilburn Boat and that “[l]itigants and courts applying Wilburn Boat in the future should not ignore these developments.”

Baseball superstar Shohei Ohtani recently agreed to a 10-year, $700 million contract with the Los Angeles Dodgers.  While the headline number came as a shock to even sports business nerds like us, as always, the devil was in the details: $680 million of Ohtani’s contract is deferred until after Ohtani is no longer obligated to play for the Dodgers.    

Our last post contemplated what might happen to Ohtani’s $680 million in deferred compensation if the Dodgers filed bankruptcy in 2034 (i.e., after Ohtani no longer has to play for the Dodgers, but before Ohtani’s deferred compensation kicked in) and ways Ohtani might protect himself.  If you loved that post but were left wondering “what might happen if the Dodgers filed bankruptcy before the end of the 2033 baseball season? (i.e., while Ohtani is still required to suit up under the contract),” today is your lucky day because we take that issue head on.

Ohtani’s contract provides a unique illustration of an “executory contract,” a key term in most Chapter 11 bankruptcy cases. In essence, an executory contract is one where performance remains due on both sides of the contract.  During the contract’s first 10 years (2024-2033), Ohtani’s contract is executory because both Ohtani and the Dodgers owe performance to each other – Ohtani is obligated to play baseball for the Dodgers and the Dodgers are obligated to pay Ohtani.  After that, Ohtani’s contract is not executory because only the Dodgers owe performance to Ohtani – the Dodgers must pay Ohtani $680 million, but Ohtani owes no obligation to the Dodgers.

Thus, as discussed in our earlier post, if the Dodgers were to file bankruptcy after the 2033 season (i.e., once Ohtani’s contract is no longer executory), Ohtani would be like any other creditor to whom the Dodgers owed money.  If the Dodgers were to file bankruptcy before then, however, Ohtani is a counterparty to an executory contract with a bankrupt debtor and the Dodgers (not Ohtani) would have the option to assume-and-assign, assume, or reject Ohtani’s contract.  We will discuss those in reverse order.

Rejection: When a debtor rejects a contract, the rejection serves as a material breach of the contract by the debtor that occurred immediately before the debtor filed for bankruptcy. The debtor is no longer required to perform under the contract and the non-debtor counterparty receives a claim against the debtor’s estate for its damages from that breach.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, a rejection would mean that Ohtani would become a free agent because he would have no further obligation to play for the Dodgers.  Additionally, Ohtani would have a claim against the Dodgers’ estate for the entire amount of his contract that had not yet been paid to him ($680 million-plus).[1]

Assumption: If a debtor assumes a contract, the contract continues just as it did before bankruptcy.  A debtor must take the entire contract it is assuming — it cannot pick and choose which parts of the contract it wants and which parts it does not want.  In addition, a debtor cannot assume a contract unless it promises to promptly cure any defaults under the contract (i.e., if the debtor is two months behind on payments, it must either make those payments or promise to make them promptly before it can assume the contract).  Finally, a debtor must be able to give adequate assurance that it can promptly cure and continue to perform the contract going forward.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, to assume the contract, the Dodgers would have to: (1) agree to pay all its future obligations to Ohtani ($680 million-plus); (2) provide adequate assurance to Ohtani that it could meet all its future obligations; and (3) promptly cure any payment defaults to Ohtani under the contract.  On the other hand, if the Dodgers chose to assume the contract, Ohtani would have to continue playing for the Dodgers – he cannot get out of his contract just because the Dodgers file for bankruptcy.[2]

Assumption and Assignment: In certain circumstances, a debtor can assume a contract and assign it to another party.  This is particularly common with bankruptcy sales, where a debtor will sell its assets (instead of trying to reorganize).  Since the assets might not be worth much without the executory contracts supporting them, the Bankruptcy Code authorizes debtors to assume the executory contracts and then assign them to a third-party (usually the purchaser of the assets).  Certain contracts, including most personal service contracts, cannot be assigned without the consent of the counterparty.[3]

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, the Dodgers possibly could not assign Ohtani’s contract without his consent because it is a personal services contract.[4]  Thus, if the Dodgers were sold to a third-party through bankruptcy, Ohtani would have to consent to that sale before the new Dodgers owner could guarantee fans that Ohtani would play.

At this point you might be thinking, “great summary Eric and Mack, but what happens before a debtor decides to assume or reject the contract?”  Excellent question! 

The short answer is that the debtor has no obligation to perform, but the counterparty to the executory contract must continue performing.  Although the debtor has no obligation to perform, counterparties to executory contracts are entitled to compensation from the debtor for the reasonable value of the goods and services they provide during the debtor’s bankruptcy case.  Moreover, their compensation is entitled to an “administrative priority” claim against the debtor, which means their compensation will be paid ahead of most other creditors.  In a recent bankruptcy case concerning baseball,[5] a bankruptcy judge ruled (as have most bankruptcy judges that have faced similar issues) that the “reasonable value” of the services provided by MLB teams to a media company that licensed the MLB team’s rights to broadcast MLB games was the rate provided for in the contract. 

Going back to our scenario of a Dodgers bankruptcy while Ohtani is still playing; Ohtani would be required to play for the Dodgers while they decided whether to assume or reject his contract.  That said, while the Dodgers would not have any “formal” obligation to pay Ohtani his contract rate during this time, the Dodgers would have to pay Ohtani the “reasonable value” of the services he provided, which most courts would say is his “contract rate” (circular, we know).

If you find yourself as a party to an executory contract with a bankruptcy debtor, you should contact counsel.  Team Shohei – give us a shout if the front office starts to use words like “restructuring” or “right-sizing the balance sheet” in the future.  We’d love to help you out!

[1] It is worth noting that since 1993, four MLB franchises have filed bankruptcy (the Baltimore Orioles in 1993, the Chicago Cubs in 2009, the Texas Rangers in 2010, and the Los Angeles Dodgers in 2011) and not a single player contract was rejected. 

[2] Even if his contract says he can walk away if the Dodgers file for bankruptcy, federal law says that provision in the contract is void and unenforceable.

[3] See 11 U.S.C. § 365(c)(1).  This exception is one of the many arcane nuances to executory contracts in bankruptcy, which is partly why, despite their outsize importance in bankruptcy, executory contracts have been called the most “psychedelic” area of bankruptcy law.  See Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989). 

[4] We say possibly because most MLB contracts explicitly require the player to agree that the contract can be freely assigned (without such a clause, trades would be impossible).  Ohtani, however, has a full “no-trade” (i.e., no assignment) clause in his contract. 

[5] In re Diamond Sports Group, LLC, et al. (Bankr. S.D. Tex. 23-90116). 

The sports world is buzzing about Shohei Ohtani’s record-setting $700 million dollar contract with the Los Angeles Dodgers.  As bankruptcy lawyers, we are abuzz thinking about the bankruptcy implications of Ohtani’s contract.  Today’s blog post will discuss what type of claim Ohtani might have if the Dodgers file for bankruptcy (again).  In the near future, another blog will discuss how contracts like Ohtani’s are treated by the Bankruptcy Code.  

In case you haven’t seen the specifics of Ohtani’s contract with the Dodgers, it obligates Ohtani to play baseball for the Dodgers for the next 10 years (2024-2033).  Over the 10 years Ohtani plays for the Dodgers, the Dodgers will pay Ohtani $2 million per year.  The Dodgers are then supposed to pay Ohtani $68 million per year for the 10 years after he’s turned 40 and has no further obligation to show up and play for the Dodgers (2034-2043).[1]   

We say he is supposed to continue receiving $68 million per year through his 40’s because things to do not always work out as planned.  Serious Dodger fans and sports-business nerds will remember that the Los Angeles Dodgers filed a chapter 11 bankruptcy petition in June 2011.  The Dodgers filed because they were on the verge of running out of cash to pay salaries. According to court filings, the three biggest drivers to the Dodgers’ 2011 bankruptcy were: (1) a decline in attendance, (2) Major League Baseball rejecting a proposed media deal with Fox Sports, and (3) a mere $20 million in deferred compensation owed to players.  In 2034, the Dodgers will owe $832 million in deferred compensation (more than 40 times the number they owed when they filed in 2011): $680 million just to Ohtani and another $152 million to other players.[2] That deferred compensation number is expected to increase as the Dodgers try to attract more high-quality players with deferred-compensation-heavy contracts to help them win now and pay later.

So, what happens if the Dodgers organization finds itself in a cash crunch again in a few years and has to file bankruptcy in 2034?  Do they have to keep paying $68 million per year to a 40-year old, presumably retired Ohtani?

Not necessarily. If the Dodgers file bankruptcy in 2034 (or later years), Ohtani will have the right to file a claim in the bankruptcy case for the amount that he is due, just like all other creditors.  In most bankruptcy cases, secured claims (i.e., claims backed by collateral) get paid in full, and unsecured claims (i.e., claims by creditors who do not have collateral) get whatever is left over.  Sometimes unsecured claims are paid in full, but more often they are paid pennies on the dollar of what the creditor is owed.

Thus, from the bankruptcy lawyer’s perspective, we are particularly interested in what collateral, if any, Ohani received to secure his deferred compensation. Ohtani and the Dodgers have been quiet about the details of the contract other than the headline dollar amounts, leaving us to wonder whether Ohtani got a mortgage on Dodger Stadium (or some other real estate)[3] to secure his $700 million dollar contract?  And if he did get a mortgage, did the current mortgage holders agree to subordinate to Ohtani?  Unlikely!  Did Ohtani get personal guarantees from each member of the Dodgers’ owner, Guggenheim Baseball Partners, for his pro-rata share of the $680 million to be paid to Ohtani during his 40s?  Again, unlikely!  Did he get any collateral, or is he at risk of having an unsecured claim for $680 million dollars after spending ten years as the anchor of the Dodgers’ line up (and maybe rotation)?  And if he didn’t get collateral, did he get a very clear memo from his agent/legal team explaining the payment risk that he accepted in his contract? (Their malpractice carriers certainly hope so!)

Ohtani could also reduce payment risk by means other than getting a security interest in the Dodgers’ property.  For example, according to Forbes, the Dodgers are required to fund the “present value” of their deferred compensation obligations to Ohtani by July 1, 2026.  Forbes estimates that would require the Dodgers to fork over $297 million today.  If the Dodgers were to put that $297 million into an annuity to be paid directly to Ohtani, the annuity would likely belong to Ohtani – no matter whether the Dodgers filed bankruptcy and even though the Dodgers funded the annuity.  On the other hand, if the Dodgers simply bought treasury bonds or an annuity for themselves, Ohtani would be like every other unsecured creditor with payment risk – potentially left holding an empty bag in the event of a bankruptcy.  

[1] Shohei Ohtani’s Dodgers deal and deferred money, explained (mlb.com). 

[2] The Dodgers owe two of their other superstars –Mookie Betts and Freddie Freeman –significant deferred compensation.  The Dodgers owe Betts $120 million in deferred compensation starting in 2034 (the same year as Ohtani) and owe Freeman $57 million in deferred compensation starting in 2028. 

[3] The Dodgers’ owner – Guggenheim Baseball Management LLC – owns hundreds of acres of prime Los Angeles real estate surrounding Dodger Stadium. 

In today’s legal landscape, jury awards to personal injury plaintiffs are trending upwards.  Studies show that “nuclear verdicts” are increasing in prevalence as jurors grow more critical of corporate defendants and are increasingly persuaded by provocative trial tactics from plaintiff attorneys.  However, recent decisions from Louisiana and Texas show that some courts are bucking the trend by scrutinizing and, in some instances, curtailing these excessive awards.  The analysis below examines three such cases—Gregory v. Chohan (Texas Supreme Court),[1] Warner v. Talos ERT LLC (Western District of Louisiana),[2] and Henry Pete v. Boland Marine and Manufacturing Company, LLC (Louisiana Supreme Court)[3]—and focuses on the courts’ rationales for reducing the award of damages in each case.

I. Texas Supreme Court: Gregory v. Chohan (2023)

At the outset, it is important to note that the Chohan case is an important development in the law on awards of noneconomic damages, but it does not have the same precedential effect of decisions from a majority of the Texas Supreme Court.  This is because three justices did not participate in the decision, and as a result no more than four justices joined in any section of the lead opinion.  Thus, the requisite five justices did not join to deliver a majority opinion of the court.  Instead, Chohan represents a plurality opinion whose rationale will no doubt prove persuasive to lower courts throughout Texas, but the decision is not technically binding.

The main issue discussed in Chohan was whether the evidence presented at trial was legally sufficient to support the award of noneconomic damages, such as mental anguish or loss of companionship.  Because there was no majority on this question, the kind of proof and the amount needed to support an award of noneconomic damages remain partially undetermined.  But the judgment reached in Chohan—reversing an award of $15 million in noneconomic damages—is one lower courts will no doubt keep in mind when faced with similar awards.

The Chohan case arose from a fatal accident on an icy, unlit stretch of Interstate 40 near Amarillo, Texas.  An 18-wheeler driven by Sarah Gregory for her employer New Prime, Inc. jackknifed across multiple lanes of traffic.  Afterwards, six tractor-trailers and two passenger vehicles crashed into Gregory’s truck or each other, causing four fatalities and numerous injuries.

Gregory and New Prime settled with all the plaintiffs except the wife and family of Bhupinder Deol, one of the drivers killed in the accident. At trial, the jury awarded just over $15 million to Deol’s wife and family for mental anguish and loss of companionship.

The defendants appealed the size of the noneconomic damages award to the Dallas Court of Appeals.  The court decided the case en banc and affirmed the jury’s award, holding that the award was not “flagrantly outrageous, extravagant, and so excessive that it shocks the judicial conscience.”  The defendants then raised the same issue before the Texas Supreme Court.

Justice Blacklock announced the Texas Supreme Court’s plurality opinion, joined by Chief Justice Hecht and Justice Busby, and by Justice Bland in part.  The key issue before the court was whether the plaintiffs had demonstrated a rational connection, grounded in the evidence, between the injuries suffered and the dollar amount awarded. This rational connection had to support not only the existence of a compensable injury, but also the amount awarded in compensation.

The court held that the plaintiffs had not provided such connection as to the amount of the damages awarded, namely, $15 million.  The court explained that counsel for plaintiffs had not presented any evidence that would justify the amount awarded, and instead provided arguments to the jury that had nothing to do with how to calculate the proper amount of compensation.

For example, counsel referred to the value of a Boeing F-18 fighter jet ($71 million) and a Mark Rothko painting ($186 million).  Another argument presented to the jury was to give the defendants their “two cents worth” for every one of the 650 million miles that New Prime’s trucks drove during the year of the accident.

The court noted that these arguments had nothing to do with compensating the plaintiffs for their injuries, and instead spoke more to punitive concerns than compensatory ones.  The kind of evidence that is relevant on this point is “direct evidence supporting quantification of an amount of damages, such as evidence of the likely financial consequences of severe emotional disruption in the plaintiff’s life.” Direct evidence is not required, and precise, mathematical certainty is not possible.  Nevertheless, some rational basis must underly the amount of damages, the court noted.

At trial, Deol’s wife testified extensively as to the effect of her husband’s death on herself, her three children, and Deol’s parents.  The court determined that this testimony no doubt gave the jury ample evidence regarding the existence of compensable mental anguish, but it did not serve as evidence to justify the amount awarded.

The Dallas Court of Appeals erred by simply reviewing whether the amount awarded “shocked the conscience” or arose from bias or prejudice.  “Passion, prejudice, or improper motive” remains an independent basis for reversal, as does the “shock the conscience” standard.  But an appellate court must also determine whether there is a rational connection between the amount awarded and the injuries suffered.  Because no such rational connection existed in this case, the Texas Supreme Court reversed the award of noneconomic damages.

While the Chohan court did not reach a majority opinion, a majority of the justices appeared to agree that the arguments presented by plaintiffs’ counsel at trial were improper and could support reversal of the damages award.  This suggests that lower courts will be more willing to scrutinize arguments that have improper or ulterior motives besides helping the jury arrive at a proper figure for compensation.  Defendants should be ready to move for a new trial and/or a remittitur in the event plaintiffs fail to provide some rational connection between the injuries and damages requested.

II. Western District of Louisiana: Warner v. Talos ERT LLC (2023)

On the topic of courts reversing excessive damages awards, the Western District of Louisiana recently did just that in the case of Warner v. Talos ERT LLC.  The case involved a 2018 workplace accident on an oil and gas production platform operated by Talos ERT, LLC in the Gulf of Mexico.  The plaintiffs were the family members of an offshore worker who suffered fatal injuries when the rope he was using to move heavy pipe failed and caused the pipe to fall.

After trial, the jury awarded $20 million in general damages to the decedent’s minor son, and Talos filed multiple post-trial motions, including a motion seeking a remittitur on the issue of general damages.  Under Louisiana law, a court may intrude into the province of a jury “only when the award is, in either direction, beyond that which a reasonable trier of fact could assess for the effects of the particular injury to the particular plaintiff under the particular circumstances.”

The court held that the evidence did not substantiate an award of $20 million.  Under the Seventh Amendment, the court had to offer the plaintiff the alternative of a lower award or a new trial.  In trying to determine the proper amount of damages, the court applied the Fifth Circuit’s “maximum recovery rule,” under which verdicts are permitted so long as they are 150% of the highest inflation-adjusted recovery in an analogous, published decision. 

The court identified a case from 2013 in which a child living with the non-decedent custodial parent won $2,500,000 in wrongful death damages.  Applying the maximum recovery rule, the court adjusted this award for inflation and then multiplied it by 150%. Thus, the figure came out to $4,955,350.67. Because Talos was allocated 88% fault, the final award was $4,360,708.59.

The Warner decision reveals that the Western District of Louisiana is not reluctant to enforce Louisiana law prohibiting awards “beyond that which a reasonable trier of fact could assess.”  This is a promising trend as plaintiffs’ attorneys seek higher and higher jury awards.

III. Louisiana Supreme Court: Henry Pete v. Boland Marine and Manufacturing Company, LLC, et al. (2023)

Like in Chohan and Warner, the Louisiana Supreme Court recently reduced an alarming general damages award in Henry Pete v. Boland Marine and Manufacturing Company, LLC, et al.  

The plaintiff, Henry Pete, worked as a longshoreman in the Port of New Orleans from 1964 to 1968 before eventually becoming a practicing chiropractor.  After being diagnosed with mesothelioma in 2019, he filed suit against his former shoreside employers in the Civil District Court in New Orleans.  The jury rendered a verdict in favor of the plaintiff against one of the defendants, Ports America Gulfport, Inc., awarding the plaintiff $9.8 million in general damages.

The Louisiana Fourth Circuit Court of Appeal upheld the verdict, rejecting Ports America’s assignment of error as to the excessiveness of the general damage award.  In its decision, the Fourth Circuit noted that Ports America failed to make a showing that the $9.8 million general damages award “shocked the conscience” when considering the pain and suffering caused by the plaintiff’s condition.  Therefore, the court noted, the evidence did not support a finding that the jury abused its discretion.

The Louisiana Supreme Court granted certiorari to weigh in on the quantum issue.  Like the Chohan and Warner courts, the Boland Marine court found the general damages award excessive. But the Boland Marine court’s analysis was distinguishable and is thus noteworthy.  Writing for the majority, Justice McCallum noted that Louisiana Civil Code article 2324.1 vests the jury with “much discretion” in determining the amount of general damages, an inquiry which is speculative in nature and contingent on the facts and circumstances of each particular case. 

Justice McCallum then questioned the effectiveness of Louisiana’s “clear abuse of discretion” standard of appellate review for general damages, dubbing it “redundant and unnecessary” for courts to scrutinize the fact finder’s seemingly boundless discretion.  In other words, appellate judges speculating on top of the jury’s speculation only compounded the issue. 

The Boland Marine court then announced its solution: appellate courts must consider awards of general damages in similar, prior cases to add objectivity to the “abuse of discretion” analysis.  If an abuse of discretion is found, the court must use the prior awards as guideposts and amend the general damages award to the highest point that is reasonably within the trial court’s discretion.  The court cautioned that its revised standard of review did not displace the prior analysis; courts must still consider the facts and circumstances unique to each particular case.  The additional consideration of precedent cases serves to add much-needed objectivity and neutrality to the review process.  

The Boland Marine court applied its new analysis to the facts before it.  It first reviewed the record evidence and testimony about the plaintiff’s condition, then surveyed nine Louisiana state court mesothelioma cases dating back to 2015, in which awards of general damages ranged from $1.5 million to $3.8 million.  The court noted that the plaintiff’s significant mental and physical trauma warranted a substantial general damages award, but it could not reconcile the trial court’s $9.8 million award with those from prior cases—noting that “the record evidence of Mr. Pete’s injuries is not so dissimilar to these other cases to warrant an award so greatly exceeding the range of these cases.”  Thus, the court found that the trial court abused its discretion and reduced the $9.8 million general damages award to $5.0 million, which it found to be the highest reasonable award within the jury’s discretion.

It is said that two’s a coincidence, three’s a trend.  Chohan, Warner, and Boland Marine exemplify a discernable pattern in which recent Louisiana and Texas courts have scrutinized and reduced excessive damages awarded to personal injury plaintiffs.  These cases mark a positive development in today’s climate, in which “nuclear verdicts” are becoming increasingly prevalent. 

[1] 670 S.W.3d 546 (Tex. 2023).

[2] No. 18-CV-01435, 2023 WL 6340422 (W.D. La. Sept. 28, 2023).

[3] 2023-00170 (La. 4/18/23); 359 So. 3d 498.