The oil and gas industry was stunned this week a $319 million verdict for Energy Transfer Partners, courtesy of a state court jury in Dallas, Texas. Jurors agreed with ETP’s lawyers at Lynn Tillotson Pinker & Cox that ETP and Enterprise Products had a binding agreement to develop a pipeline to carry crude oil from Oklahoma to refineries on the Gulf of Mexico, and that Enterprise breached the agreement when it decided instead to hook up with a Canadian pipeline company called Enbridge.
That might seem like a straightforward determination – except that the letter of intent between ETP and Enterprise included language that specifically said their deal wasn’t binding unless there was a formal term sheet and their respective boards approved the agreement. Neither of those things happened.
So how did Enterprise and its lawyers at Beck Redden and Sayles Werbner wind up on the wrong side of a $319 million verdict? Because the judge in the case, Emily Tobolowsky, rejected their summary judgment argument that as a matter of Texas contract law, preconditions must be satisfied to create binding partnership obligations. Judge Tobolowsky’s denial of Enterprise’s summary judgment motion, which was not accompanied by an opinion, meant that ETP and lead trial counsel Michael Lynn could ask jurors to judge the relationship between ETP and Enterprise just as they’d judge a common law marriage. ETP told jurors that it didn’t matter what the formal paperwork said if Enterprise acted as though it were partnered with ETP. To emphasize his client’s “if it walks like a duck” theme, Lynn even showed the jury a poster of a duck holding a sign that said, “I am not a partner.”
That invocation of common law – and common sense – clearly resonated with jurors, who found for ETP on a 10-2 vote. (They did not, however, award the more than $1 billion in punitive damages ETP asked for, and they completely exonerated Enterprise’s back-up suitor, Enbridge, which was represented by Michael Steinberg and Robert Giuffra of Sullivan & Cromwell.) Since the verdict, there’s been quite a hue and cry among oil industry lawyers. Sidley Austin quickly produced a presentation warning that companies shouldn’t rely on industry-standard non-binding provisions in letters of intent, lest they be caught in “The Partner Trap.” DLA Piper issued a client alert advising Texas companies specifically to disavow partnership obligations in informal agreements, instead of assuming that unsatisfied pre-conditions will excuse them from partnership obligations. Enbridge’s lawyers from Sullivan & Cromwell, who are now out of the case, told me in an email that the verdict “raises troubling questions about the value of written contracts in supposedly business-friendly Texas.”
Enterprise has already said it will appeal, but unless and until an appeals court overturns ETP’s verdict, Texas companies should obviously be mindful of what they say and do with prospective business partners. In the meantime, though, it’s instructive to take a look at how ETP overcame contract language that might have doomed its claims. There are lessons in ETP’s success not just for Texas oil and gas companies but for all businesses that rely on Texas courts to define their obligations.