How BP Decided to Fight the Deepwater Settlement

How BP Decided to Fight the Deepwater Settlement Neil Webb

Correction, 3/2/2014, 8:00 a.m. EST: An earlier version of this article incorrectly stated that BP tried to decertify the class of plaintiffs covered by the settlement of economic and property damages claims. Instead, the company has argued that if the district court continues to reject BP’s position on the settlement terms, then the class must be decertified.

Update: On March 3, the U.S. Court of Appeals for the Fifth Circuit rejected BP’s appeal of the causation issue.

At first, everyone seemed so happy.

When BP reached a settlement to compensate people who were financially harmed by the Deepwater Horizon disaster in the Gulf of Mexico, the two sides could barely contain their glee. At a November 8, 2012, hearing before New Orleans U.S. District Judge Carl Barbier, lawyers for BP Exploration & Production Inc. and for the plaintiffs extolled the class action settlement as a shining landmark in mass torts resolutions.

BP’s lead lawyer, Richard Godfrey of Kirkland & Ellis, boasted how the parties were determined not to let this litigation turn into another Exxon Valdez quagmire, where the oil company is still fighting claims after two decades. Instead, he said, two years after the 2010 Deepwater disaster the two sides had crafted a creative solution that would streamline the processing of claims.

James Roy, one of the lead plaintiffs lawyers, gushed over BP’s generosity. “There is no cap on the amount BP will have to pay under this settlement,” he said. BP had valued this deal at $7.8 billion, but would pay much more if it had to, he added. “The truth of the matter, Your Honor, is that if it ends up paying 20, 25, 30 billion, BP has agreed to do that.”

A year and a half later, no one is smiling. After paying $3.84 billion in claims so far, BP has declared war against plaintiffs, their lawyers, and Judge Barbier. It loudly insists that the settlement agreement has been misinterpreted to allow claims by people and businesses whose losses weren’t caused by the Deepwater disaster. In a highly unusual move, it has even threatened to try to undo the settlement.

The plaintiffs lawyers maintain that BP is twisting the facts and has turned its back on a deal it now regrets. The company says that it is simply determined to have the settlement agreement applied correctly. “BP and its counsel have consistently maintained that the settlement agreement was designed to fairly and adequately compensate those who were injured as a result of the spill, and we have consistently sought enforcement of this requirement for class membership,” said BP group general counsel Rupert Bondy in a statement.

BP, however, is in an awkward, if not dangerous, position. The controversy over the settlement raises two basic questions. Did the oil giant’s top in-house attorneys and its outside counsel at Kirkland & Ellis—one of the world’s most sophisticated litigation firms—draft an imprecise settlement agreement that exposed the company to claims it didn’t intend to pay? Or, as Barbier would later contend, have BP and its lawyers changed their story about this settlement?

• For a timeline of key events in the BP litigation, see ” Milestones in the Deepwater Horizon Settlement.”

On April 20, 2010, an explosion on BP’s Deepwater Horizon drilling rig off the coast of Louisiana killed 11 men and triggered a gusher of oil for 87 days that polluted the Gulf of Mexico and its coastline.

Two months after the explosion, facing a furious public backlash and the threat of crippling litigation, BP agreed to fund the Gulf Coast Claims Facility, led by Kenneth Feinberg, to reimburse people and businesses who were financially harmed by the spill. In evaluating claims, the GCCF considered a range of financial data—but also required claimants to show that the Deepwater spill was the proximate cause of their loss, which often involved some subjective analysis. If an ice cream stand 20 miles inland did poorly in the summer of 2010, how much could be attributed to a drop in tourism caused by the spill?

Although the GCCF would eventually pay out $6.2 billion, it still denied 60 percent of the claims. Some claimants criticized this process for being inconsistent, too subjective, and lacking in transparency. (Feinberg declined to comment.)

At the same time, lawsuits flooded the courts, including suits by the affected states and the federal government, as well as claims by individuals and businesses bypassing Feinberg’s process. They targeted BP, Halliburton Energy Services Inc. (which made the cement mixture intended to seal the well) and others connected to the oil rig and the cleanup response. Those companies sued each other, too. And most treacherous for BP, it faced the very real prospect of criminal charges by the U.S. Department of Justice.

In August 2010, the Judicial Panel on Multidistrict Litigation consolidated all the civil litigation before Barbier. The judge quickly devised a plan to handle the sprawling litigation in three trials to determine responsibility for the disaster, the amount of oil released and, finally, penalties and damages.

Of all the companies sued over the Deepwater disaster, only BP was willing to talk settlement with private plaintiffs early on. Near the start of 2011 the two sides began serious talks. On the plaintiffs side was Joseph Rice of Motley Rice in Mount Pleasant, S.C. Even though Barbier didn’t appoint Rice to the influential plaintiffs steering committee, the committee still chose him to be their negotiator. “He is, in my view, the best strategic thinker on the end stages of litigation that I’ve ever seen.” says Samuel Issacharoff, a professor at New York University School of Law who has played a lead role on the plaintiffs team.

BP turned to Kirkland’s Godfrey, a no-nonsense veteran of complex litigation who had represented BP in other major matters. When BP chose Kirkland to lead its Deepwater litigation response, it was a coup for the firm, and the assignment became the biggest in Kirkland’s history. (Kirkland referred all questions to BP.) BP also used other firms for more limited Deepwater-related assignments, including SNR Denton, Arnold & Porter and Covington & Burling.

After 145 face-to-face negotiating sessions, the two sides reached a settlement on March 3, 2012, shortly before the start of the first trial. The far-reaching agreement covered all private economic and property loss claims—including claims by the seafood industry—and other business economic loss claims, called BEL claims. Not included, though, were massive claims brought by the federal and state governments, and by BP’s codefendants, which would continue to be litigated in the trials.

In a highly unusual concession, BP agreed not to cap its liability for nonseafood claims: It would pay as much as it needed to satisfy its obligations to the plaintiffs—the point that Roy would later extol to Barbier at the November 2012 hearing. (The seafood fund was capped at $2.3 billion, and BP promised to pay out the entire amount.) BP was eager to resolve these claims, and by eliminating questions about the size of the settlement fund, the oil company raised its chances of winning Barbier’s approval. At this point, the company estimated that the settlement would cost it a total of $7.8 billion.

BP and the plaintiffs also sought to avoid the criticisms that had dogged Feinberg’s process, by creating a claims system that was more transparent and objective. Rice and Godfrey crafted a novel set of objective “causation” tests to determine if a business qualified for an award. These tests looked at how much a business’s revenue dropped in the months after the spill. To administer what promised to be a massive claims process, BP and the plaintiffs jointly recommended Patrick Juneau of Juneau David in Lafayette, La. A former president of the Louisiana Association of Defense Counsel, Juneau had served as a court-appointed special master for the Merck Vioxx cases, the Toyota sudden acceleration lawsuits, and the Guidant medical device litigation.

Soon after the deal was announced, one of the other corporate defendants raised concerns about the settlement’s causation tests. In April 2012 Halliburton, represented by Donald Godwin of Dallas’ Godwin Lewis, filed an objection to the settlement, worried that it might later be forced to contribute to these payments. Halliburton described the settlement as too generous and pointed out that the causation tests would let plaintiffs recover for losses that weren’t caused by the spill. BP didn’t contest this point, instead successfully arguing that Halliburton lacked standing to object.

To show its commitment to paying claims quickly, BP agreed to let the new claims process begin before Barbier gave his final approval. In early June 2012 Juneau began running the Deepwater Horizon Court Supervised Settlement Program.

Halliburton continued to raise red flags about the causation tests. This time, BP responded that it could be as generous as it wanted to be. On August 12, 2012, Godfrey wrote a letter to the magistrate judge overseeing the settlement in which he objected that Halliburton wanted to take discovery on “individual causation—the extent to which any individual’s damages were caused by the spill.” Godfrey stated: “Halliburton clearly wishes to ensure that the causation presumptions are not too generous to the class members. … There is no legal defect in a settlement that is too generous to the class.”

It didn’t take long for the causation issue that Halliburton had identified to resurface. Members of Juneau’s staff wondered what they should do about claims for losses that satisfied the objective causation tests in the settlement, but that clearly weren’t related to Deepwater. On September 25, 2012, Michael Juneau (the son of Patrick Juneau), who was working as special counsel to the claims center, emailed BP managing attorney Mark Holstein, asking how to handle the claim of a small accounting firm whose income fell temporarily because three partners went on medical leave. Could that business recover a fairly substantial amount, he asked?

Holstein answered yes, although in tortured language. The BP lawyer emphasized the importance of claims being processed under “objective, data-driven methodologies,” calling this a “cornerstone” of the settlement. There was no provision, he acknowledged, for reducing an award if these damages weren’t caused by the Deepwater spill.

“Nothing in the BEL Causation Framework (Ex. 4B) or Compensation Framework (Ex. 4C) provides for an offset where … extraneous nonfinancial data indicate that the [revenue] decline was attributable to a factor wholly unrelated to the oil spill,” Holstein wrote. “Such ‘false positives’ are an inevitable concomitant of an objective quantitative, data-based test.” However, he added perhaps too optimistically, “They should be relatively rare.”

Patrick Juneau summarized that position in a formal policy announcement he sent to BP and the plaintiffs on Oct. 10, 2012. He would compensate eligible BEL claims “without regard to whether such losses resulted or may have resulted from a cause other than the Deepwater Horizon oil spill provided such claimants have satisfied the specific causation requirements set out in the settlement agreement.”

By the time Barbier held his Nov. 8, 2012, final hearing on the fairness of the settlement, Juneau had already approved roughly $1 billion in awards, and BP still acted thrilled with the settlement. Kirkland’s Godfrey praised this settlement as a historic agreement “designed to fairly and generously compensate the legitimate claims of those who were injured as a result of the oil spill in this tragic casualty.”

At the same time, the parties were still discussing the importance of the objective causation tests. In mid-December, Barbier held an out-of-court conference with the parties on several issues, then sent a follow-up email to Godfrey, Holstein, and the plaintiffs team that stated both sides had agreed with Juneau’s “objective analysis of causation.” Barbier approved the pact on Dec. 21, 2012.

As BP was wrapping up the settlement, it was also extricating itself from another, more dire legal problem before a different federal judge. On Nov. 15, 2012, the company pled guilty to 14 federal felony criminal counts, including 11 for seaman’s manslaughter and one for lying to Congress, and agreed to pay $4.5 billion in penalties and fines over five years. The terms were generally considered favorable for BP, which made $25.8 billion in profit the previous year.

Almost as soon as BP inked this criminal deal, it started finding fault with the civil claims process. On Dec. 3, 2012—just before Barbier approved the settlement—the company filed with Juneau its first objection to a claim for millions of dollars that BP alleged wasn’t related to the spill. (The details of that claim are under seal.) On Dec. 7, Godfrey wrote a letter to the magistrate judge complaining that the plaintiffs lawyers were proposing ads to solicit clients that might not have been harmed by the spill. (The ads never ran.) BP, however, did not formally raise any of these issues with Barbier at the time.

Then, the next month, the company went to Barbier to contest how Juneau was processing claims. Its objections centered on a technical accounting issue: Plaintiffs weren’t properly matching revenue and expenses when computing lost profits, leading to some “absurd” results, BP claimed. BP asked Barbier to force Juneau to use this accrual-type matching, instead of a more simple cash-based approach. But Barbier rejected the request on March 5, 2013, finding that the settlement didn’t mandate accrual matching. Ten days later, BP sued claims administrator Juneau for breach of contract for not using the “matching” approach. On April 8, 2013, the company appealed Barbier’s March 5 ruling to the U.S. Court of Appeals for the Fifth Circuit.

Plaintiffs lawyer Rice contends that it’s no coincidence that BP stopped playing nice after it signed its criminal deal. While negotiating that plea, Rice claims, BP wanted to show the government that it was being generous with private plaintiffs, thereby earning goodwill that might lessen its penalty.

“The [plaintiffs'] latest story-line is … untrue,” says BP spokesman Geoff Morrell about Rice’s accusation. “No company has done more, faster, in the wake of an industrial accident.” The Department of Justice declined to comment about any aspect of this case.

Meanwhile, BP had brought a new firm into the litigation. Gibson, Dunn & Crutcher previously had played a secondary role in the company’s criminal plea, having represented BP’s board of directors while Kirkland represented BP. Now Gibson Dunn was taking the lead for BP before the Fifth Circuit: The April 8 appeal was filed by two of the firm’s most accomplished appellate lawyers, Theodore Olson and Miguel Estrada.

In the summer of 2013 BP began to air its complaints in the media. A June Bloomberg Businessweek cover story, “How BP Got Screwed on Gulf Oil Spill Claims,” highlighted claims by plaintiffs who allegedly weren’t harmed by the spill. In the article BP pointed the finger at Juneau, accusing him of approving claims for “fictitious and inflated losses.” On July 18, 2013, BP’s chief executive officer Robert Dudley appeared on CNBC’s “Mad Money” and accused Juneau of “hijacking” the settlement.

Barbier wasn’t pleased by the broadside against Juneau. In a hearing that happened to fall the day after Dudley appeared on television, the judge made it clear he was angered by the CEO’s remarks. “I find the recent attacks on Mr. Juneau’s character are highly offensive and inappropriate,” he said. “Personal attacks, hyperbole and use of such language, in my opinion, crosses the line, and these unfair, inappropriate, personal attacks should stop.” At the end of the hearing, Barbier denied BP’s request to enjoin Juneau from processing BEL claims.

As for BP’s allegations about fraudulent claims, Barbier said he would await the report of special master Louis Freeh: In early July the judge had appointed the former Federal Bureau of Investigation director—now the chairman of Pepper Hamilton—to examine the activities of Juneau and his staff. Freeh’s assignment had been prompted by the resignation of a staff attorney accused of taking kickbacks.

Despite Barbier’s warning, BP escalated its media campaign. Soon after that hearing it ran full-page ads attacking the claims process in The New York Times and other newspapers. The ads have continued into this year.

The plaintiffs lawyers—led by James Roy of Lafayette, La.’s Domengeaux Wright Roy & Edwards and Stephen Herman of New Orleans’ Herman, Herman & Katz—assert that BP has distorted the facts of these alleged abusive claims. Juneau has, in fact, denied more than 50,000 of the roughly 250,000 claims submitted (with more than half of the denied claims rejected for being incomplete). They concede that in a process involving 3,200 claims processors handling a quarter of a million claims, there will be some questionable awards.

More important, they stress, even if some people got money who weren’t harmed by the spill, BP agreed to a process that could lead to this result.

While BP was attacking the entire claims process in the media, in court it was challenging only the expense “matching” issue. On July 8, 2013, Gibson Dunn’s Olson appeared before a three-judge panel in New Orleans to try to convince the court to overturn Barbier’s March ruling on matching.

Judge Edith Clement asked Olson if there wasn’t a problem with causation in this settlement. She pointed to the example of an accounting firm that recovered an award even though its loss was due to its partners’ medical leave. “How can that logically be correct?” she asked. “Where is the legal connexity between a damage or an injury and the ability to make BP pay for it?”

“It was a part of a compromise,” explained Olson.

Clement sounded skeptical and suggested that a settlement without an actual causation threshold would violate Article III of the Constitution, which has been construed to give plaintiffs standing to sue only if the defendant caused the plaintiff’s harm.

Clement’s question became a turning point in the litigation. It gave Gibson Dunn a chance to unravel the whole deal by threatening to have the class decertified for lack of constitutional standing. Three weeks later, Olson and Estrada raised that argument in a separate Fifth Circuit appeal that had been brought months earlier by a small group of class members who objected to the settlement. Even though BP had previously defended the settlement in the objectors’ appeal, now it switched sides.

In court filings Gibson Dunn now argued that BP never intended for the settlement’s objective causation tests to function as a substitute for actual causation. And if the agreement didn’t include an actual causation requirement, Gibson Dunn reasoned, then the class should be decertified, because it would lack constitutional standing.

BP’s crusade against the settlement gained momentum when Freeh released his first report in September. Freeh found that Juneau had set the right ethical tone and policies, but he found that many of Juneau’s top staff had engaged in improper conduct that raised questions about conflicts of interest. Some were relatively minor: The report cited one senior official for allowing a lawyer with an $8 million claim pending to buy him lunch—twice. In the most serious example, Freeh recommended that the Department of Justice open a criminal investigation into a staff lawyer who may have taken kickbacks. He said he would address in a later report whether Juneau had proper controls to detect fraudulent claims. (That report hadn’t been issued at press time.) BP ran more ads trumpeting Freeh’s critical findings.

The oil company got more good news on Oct. 2. The Fifth Circuit panel that heard the “matching” appeal reversed Barbier, holding that claimants must match revenue and expenses. And, although the causation issue wasn’t before this panel, Judge Clement in dicta questioned whether a settlement that didn’t have a “causal-nexus” requirement was constitutional.

Seeking to build on that victory, Gibson Dunn filed an emergency motion with Clement’s Fifth Circuit panel, asking it to also compel Barbier to halt the payment of claims not caused by the spill.

In a blunt and angry response to this emergency motion, Barbier came close to accusing BP and its lawyers of lying about their intentions when they drafted the settlement. Charging BP with making a “startling reversal” of position, Barbier stated that according to everything he had seen and observed, BP had indeed intended for the objective causation tests to be the sole test for causation. “If anyone is attempting to rewrite or disregard the unambiguous terms of the settlement agreement, it is counsel for BP,” the judge wrote in a Nov. 22, 2013, ruling. “Frankly, it is surprising that the same counsel who represented BP during the settlement negotiations, participated in drafting the final settlement agreement, and then strenuously advocated for approval of the settlement before this court, now come to this court and the Fifth Circuit and contradict everything they have previously done or said on this issue,” the judge wrote. “Such actions are deeply disappointing.”

It’s not clear, however, how much influence BP’s lead settlement lawyer still had. Although Kirkland’s Godfrey was still listed among BP’s counsel on court filings, Gibson Dunn had taken over the crucial appeals. In addition, Kevin Downey of Williams & Connolly had by this time stepped in as lead counsel for the lower court proceedings before Barbier. Plaintiffs attorney Rice contends that BP needed new counsel because it would have been problematic for Kirkland to contradict its earlier positions. “The new lawyers are trying to get out from what the old lawyers agreed to,” he says.

BP group general counsel Bondy flatly denies this. “To suggest that supplementing our legal team was a maneuver to allow us to contradict prior legal positions is absurd,” he said in a statement. BP hired Olson and his colleagues at Gibson Dunn because they are “some of the best appellate lawyers in the country,” he said. The hiring of Williams & Connolly also reflects a common litigation strategy, he explained: “Companies engaged in contract disputes often hire lawyers not involved in the negotiation of those agreements to handle those disputes.”

The shift in counsel didn’t change Barbier’s mind. A month later, on Dec. 24, the judge went a step further and held that BP was estopped from arguing that the settlement agreement contained an actual causation requirement, because that position contradicted its earlier stance.

Shortly afterward, BP’s strategy of getting relief from the conservative Fifth Circuit hit a setback. On January 10 the panel considering the constitutional standing issue rejected BP’s argument that the settlement, as implemented, was unconstitutional. In a 2-1 opinion written by Judge W. Eugene Davis, the majority chastised BP for raising “nonsensical” arguments.

BP has vowed to keep fighting, and maintains it will ultimately prevail on the causation issue, just as it did on the expense matching dispute. At press time it had asked the Fifth Circuit for an en banc review of the Davis panel’s ruling. The company is also appealing Barbier’s interpretation of the causation issue to the Fifth Circuit panel containing Clement. Meanwhile the payment of all BEL claims had been stopped until Juneau puts in place a process for handling claims under the new accounting method.

Last October, BP revealed in public filings that it now estimates this settlement will cost it $9.2 billion, which is $1.4 billion more than its original figure. But even $1.4 billion looks insignificant compared to what’s at stake in the civil cases brought against BP by the federal and state governments—which are also before Barbier. The judge has already tried Phases One and Two; in Phase Three he will determine damages and penalties. (At press time Barbier hadn’t issued his decisions on the first two phases, and had not set a date for the Phase Three trial.)

Michael Moore, the former attorney general of Mississippi who is now in private practice, is representing his state in this case. He asserts that BP’s total liability could reach $44 billion, if Barbier trebles damages under the Clean Water Act and imposes punitive damages. Others, however, have pegged the company’s maximum liability at $17 billion.

“For the life of me I can’t figure out what [BP's] strategy could possibly be,” says Moore. “I can’t imagine that their strategy is just making [Barbier] as mad as they can make him.” He adds, “Maybe [their strategy] is to hire Ted Olson and take this to the Supreme Court and get a more business-friendly rule. Everything else doesn’t make a lick of sense.”

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