Opinion

Alison Frankel

BP oil spill class deal faces constitutional challenge – from BP

By Alison Frankel
October 22, 2013

Everyone with an interest in the future of class action settlements ought to be paying close attention to arguments slated to take place at the 5th Circuit Court of Appeals on Nov. 4. Objectors to BP’s multibillion-dollar settlement with victims of the 2010 Deepwater Horizon oil spill will tell a three-judge appellate panel why, in their view, U.S. District Judge Carl Barbier improperly approved a class settlement in which similarly situated claimants are treated differently. The plaintiffs steering committee that reached the agreement with BP will argue that the intricate 1,000-page settlement, painstakingly negotiated over several months, meets all of the requirements for class certification. And BP? Well, that’s where this appeal gets complicated – and fascinating.

You probably remember that last month BP won a big ruling from a different 5th Circuit panel in a separate, but related, appeal. In that case, BP challenged Barbier’s order interpreting the settlement agreement’s provisions for calculating business and economic losses. The trial judge had held that claimants could establish losses based on “cash in, cash out” records. BP argued that Barbier’s approved methodology had resulted in billions of dollars of claims by uninjured businesses that just happened to fit the accounting criteria. A split 5th Circuit panel agreed with BP that the settlement agreement cannot be interpreted to define monthly revenue as cash received and variable expenses as cash paid out, and the majority ordered Judge Barbier to reconsider his approval of those definitions.

The panel judges – Edith Clement, Leslie Southwick and James Dennis – also engaged in a very unusual intra-opinion debate about the use of class action settlements to achieve global resolutions of sweeping claims. Judge Clement took a hard line, asserting that judges may not approve class action settlements that permit recoveries by uninjured claimants. If the BP class includes members who haven’t sustained losses attributable to the oil spill, she said, “The settlement is unlawful.”

Those had to be chilling words to settlement proponents, but they were words without much direct impact: In the appeal before them, Judge Clement and her panel colleagues were not being asked to opine on the legality of the settlement, but only to consider BP’s argument that Barbier misinterpreted the terms of the agreement. Judge Southwick, who joined Clement’s holding that Barbier must reconsider his order on accounting terms, shied away from the portion of her opinion on potential constitutional problems with the agreement (though he said he found her analysis “logical” and agreed that class actions should not sweep in illegitimate claims in the name of global peace). Southwick said there was no need for Clement to question the deal’s legitimacy because no one had asked the panel for such a ruling and the issue hadn’t been briefed.

But the as yet unnamed 5th Circuit panel that will hear next month’s appeal by objectors to the deal will have to address the constitutionality of the settlement – and in an Oct. 11 brief, BP’s lawyers at Gibson, Dunn & Crutcher used two of Judge Clement’s points to argue against the legality of the settlement it agreed to just nine months ago. I’ve previously told you about BP’s unprecedented position in this 5th Circuit appeal, in which the oil company said in a brief filed in September that Judge Barbier’s erroneous interpretation of accounting terms had rendered the settlement illegal under the federal rules for class actions and the U.S. Supreme Court’s decision last term in Comcast v. Behrend. BP’s latest brief, filed in response to a 5th Circuit directive that all of the parties in the objectors’ case address the impact of the ruling by Judge Clement’s panel, indicates that the oil company still isn’t sure it’s going to get what it wants from Judge Barbier, who won’t have issued his new policy on business loss claims before the Nov. 4 arguments in the objectors’ 5th Circuit appeal.

That timing means that BP will probably be arguing against the constitutionality of its own settlement, albeit on the contingency that Barbier’s new interpretation permits claims by businesses that have either suffered no actual losses or no losses attributable to the oil spill. “Unless the remand proceedings now pending before the district court result in the rejection of the causation policy and the imposition of a causation requirement that excludes from the class all claimants that have no colorable claim of causation, the settlement agreement and class certification would be unable to survive scrutiny,” the brief said, pointing to Judge Clement’s cautionary words about the lack of standing for uninjured claimants and the illegality of using a class action to create a right of action that otherwise wouldn’t exist.

In an email statement, BP spokesman Geoff Morrell emphasized that the oil company’s goal is not to scuttle the deal but to make sure Judge Barbier and claims administrator Patrick Juneau adjust their policies to exclude unqualified claimants from cashing in. “If the claims administrator’s policies with respect to the issues of loss calculation and causation under the business economic loss framework are properly revised, the settlement agreement could be returned to its original, intended and lawful function,” the statement said. In a separate statement, Morrell said that an injunction entered Friday by Barbier, which temporarily halts certain payments to claimants while the judge addresses the 5th Circuit’s remand order, is “a step forward” but not a guarantee. “Payments to claimants who suffered no losses due to the spill are at odds with the 5th Circuit’s decision and threaten to derail a settlement that once held great promise,” the statement said.

The plaintiffs lawyers who negotiated the settlement with BP are, as you might imagine, not happy that BP seems to be gearing up to argue the deal’s constitutional deficiencies. BP signed a settlement agreement, wrote lead class counsel from Domengeaux Wright Roy & Edwards and Herman, Herman & Katz in a 5th Circuit brief submitted Friday. The company wholeheartedly supported the deal in settlement approval proceedings last year before Barbier, even submitting a declaration on the settlement’s compliance with class action requirements from its class certification expert, New York University Law School professor Geoffrey Miller. As a matter of procedure, the class contends, BP cannot now use the vehicle of an appeal by objectors to the settlement to raise issues that neither it nor the objectors brought up at the approval hearings.

“If BP believes that postapproval implementation renders the continued operation of the settlement inequitable or legally deficient, the correct procedural vehicle is a motion for relief from the judgment under Rule 60(b),” the class brief said. And particularly because Judge Barbier hasn’t yet issued a reconsideration of the accounting methodology for business and economic losses – and may actually give BP everything that it wants when he does – BP should not be permitted to violate its contractual duty to defend the settlement by arguing against its legality, the brief said. In a subsequent filing Monday, the class asked the 5th Circuit to grant its appellate counsel, New York University law professor Samuel Issacharoff, 20 minutes of oral argument since the class is likely to be the only party supporting affirmation of the settlement approval. “BP equivocates,” the brief said. “While BP exhausts its time explaining why it should have won bigger before the (other 5th Circuit) panel, Plaintiffs-Appellees will alone be left addressing the separate issues raised by the four separate groups” of objectors.

The class still seems aghast that BP would even toy with the prospect of cratering the all-encompassing settlement because it’s dissatisfied with the interpretation of one piece of it – an interpretation that, according to the class, is entirely permissible under the agreement BP signed and defended in approval proceedings last year. But Judge Clement’s take-no-prisoners opinion in the other 5th Circuit appeal and the adoption of her reasoning by BP lawyers who are as well versed in class actions and the Constitution as any you’ll find make for a scary combination. Issacharoff is also a great lawyer, of course, and the dissenting judge in the other BP appeal, James Dennis, matched Clement with his own powerful defense of the class action vehicle.

But that time, their debate was more theoretical than practical, since, as Judge Southwick pointed out, the legality of the settlement wasn’t before the 5th Circuit. On Nov. 4 it will be.

(This story has been corrected. A previous version incorrectly identified BP’s expert on class certification.)

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