Special Reuters Report: Oil Spill a Gusher for Lawyers; Litigation May Take Years

By Jonathan Stempel | June 30, 2010
  • BP payout should far exceed what Exxon spent on Valdez
  • The company’s $20 billion fund may not be enough
  • Accountability may take years if not decades to assess
  • Many federal laws allow civil, criminal liability

From a legal perspective, BP’s Deepwater Horizon blowout and the 1989 grounding of the Exxon Valdez are in many respects night and day.

“The Gulf is seen to be a systemic breakdown,” said Zygmunt Plater, a professor at Boston College Law School and former chairman of the Alaska Oil Spill Commission’s legal task force after the Valdez disaster. “It’s not just one guy who had some drinks.”

That was a reference to Joseph Hazelwood, the Valdez caption who admitted to drinking vodka before the spill. He was convicted of negligent discharge of oil, a misdemeanor, and sentenced to 1,000 hours of community service.

The closest analogues in the United States may be the litigation over asbestos, which analysts have estimated has cost between $250 billion and $300 billion, and tobacco, whose bill is hard to determine given the many pending cases.

But the Valdez disaster, which caused roughly 257,000 barrels, or 10.8 million gallons, to spill off the Alaska coast, does offer a glimpse into what analysts widely expect to be a grueling and extremely costly legal marathon for BP.

Litigation dragged on for two decades as Exxon Mobil Corp fought over punitive damages, saying the $5 billion that an Alaska jury awarded in 1994 was excessive. A federal appeals court later cut that to $2.5 billion, and in 2008 the U.S. Supreme Court slashed it to $507.5 million.

Exxon’s costs for the Valdez are now estimated at roughly $4 billion. This includes more than $2 billion for cleanup, a $900 million civil penalty, a $125 million criminal penalty, and just over $1 billion for litigation with victims.

BP will surely pay more — a lot more.

“We’re looking at multibillion dollar criminal and civil penalties against BP, certainly record amounts under U.S. environmental laws,” said David Uhlmann, a University of Michigan law professor and former chief of the U.S. Department of Justice’s environmental crimes section.

BP may have helped itself by setting up a $20 billion escrow fund for victims, under pressure from a frustrated White House. That is “the kind of post-incident conduct that the government wants to see,” and could result in lower penalties later, Uhlmann said.

TOUGH ROAD AHEAD

But the legal road ahead remains arduous. As with the Valdez, experts say litigation could take up to 20 years, with the cost and negative publicity potentially bringing one of Britain’s largest companies to its knees.

“This situation screams out for accountability,” said Mary Wood, director of the environmental and natural resources law program at the University of Oregon. “We can’t put a price tag on the liability until the damage ceases.”

Guessing BP’s ultimate liability for the worst oil spill in U.S. history has become something of a parlor game on both sides of the Atlantic.

The company said on June 28 it had spent $2.65 billion so far on its response effort. With the first of two relief wells not expected to be ready until August, that total is certain to soar.

Cleanup costs are likely to be only a small fraction of what the oil giant ends up paying.

Analysts at Credit Suisse have said BP’s cleanup and legal costs could reach $37 billion. Goldman Sachs & Co analysts projected $33 billion. Raymond James & Associates analysts, noting a “more plaintiff-friendly” U.S. legal system in environmental cases, projected $62.9 billion, after taxes.

Topping them all is Plater who, noting the millions of people who live on or near the Gulf coast, said the total could even reach $90 billion.

A BP spokesman, Mark Salt, said the company does not discuss litigation. BP has denied bankruptcy is an option.

TOP CHEF STIRS POT

BP’s potential costs have several components: cleanup expenses, civil penalties that depend on the size of the spill, and litigation with investors, businesses and municipalities.

Criminal penalties are also possible, after Attorney General Eric Holder said on June 1 the Justice Department had opened a criminal and civil probe into BP’s actions.

Already, lawsuits are pouring into courthouses almost as fast as tar balls are washing up onto beaches. More than 250 have been filed so far, and many seek class-action status.

At least six have been filed on behalf of investors. Some allege violations of federal racketeering laws for scheming to conceal the danger of the drilling operations, and even for interfering with the claims process to delay or avoid payouts.

The majority are intended to help the fishermen, charter boat captains, shippers, restaurants, resort operators and others who say their livelihoods have been damaged.

One, filed by award-winning New Orleans chef Susan Spicer, is on behalf of restaurants that say customers are staying away because of rising seafood prices, contamination fears and lower convention and tourism activity.

“They weren’t even prepared for an accident. So now, they are totally making it up on the fly,” said Scott Summy, a lawyer at Baron & Budd PC in Dallas who represents 18 fishermen and other plaintiffs against BP. “These acts play very well under various state common law theories, such as negligence or gross negligence, as well as federal statutes.”

ON THE HOOK

Jeffrey Fisher, a Stanford Law School professor who represented fishermen and other Valdez spill victims before the U.S. Supreme Court in the Exxon case, said BP may try to limit the field of potential claimants.

“When you have a calamity like this that has so many secondary and tertiary effects, which seep into the economy and the well-being of local communities, the question is going to be where courts draw the line,” he said.

“BP can argue it is only liable for hard economic losses, such as wages,” Fisher went on. “That will be a huge battleground. For example, someone told me that beach communities are losing out on huge amounts of tourism revenue. Is BP on the hook for any of that? We don’t know.”

In 2009, BP generated more than $27 billion of operating cash flow, and it ended March with $105 billion of assets net of liabilities. This suggests a large capacity to withstand evens tens of billions of dollars of spill costs.

Even so, “it’s hard for me to imagine anyone can suffer losses in the tens of billions of dollars and not notice it,” said Roger Marzulla, a partner at Marzulla Law LLC in Washington and former head of the Justice Department environment and natural resources division.

SEVERAL LAWS IN PLAY

The BP spill could run afoul of several federal laws.

The Oil Pollution Act of 1990 requires people seeking damages to contact the companies responsible for the spill to request compensation. Once they do, civil lawsuits can follow.

Under the same act, responsible companies must also pay up to $1 billion for cleanup. It also caps liability to victims at $75 million, though not if gross negligence, willful misconduct or certain safety violations are found. Some lawmakers want the cap retroactively increased to $10 billion, or even abolished.

Another law is the Clean Water Act, which allows liability of $1,100 per barrel spilled in waterways, but up to $4,300 per barrel if gross negligence is proven.

If the amount of oil spilled in the Gulf matches that of the 1979 blowout of the Ixtoc offshore well operated by Mexico’s Pemex — previously North America’s worst offshore spill — liability under this act could reach $15 billion.

Other laws are also at play. Among them is the Limitation of Liability Act of 1851, which the drill rig operator Transocean Ltd sought to invoke because it limits potential payouts by ship owners. Another is the Refuse Act, which prohibits the dumping of refuse into waterways.

Marzulla said BP could also face civil or criminal liability under three laws to protect wildlife. These are: the Endangered Species Act; the Migratory Bird Treaty Act covering roughly 836 species; and the Marine Mammal Protection Act covering dolphins and whales. Fines of $15,000 to $25,000 per violation are possible.

Uhlmann, meanwhile, said the Alternative Fines Act lets the government seek criminal penalties equal to twice the loss associated with the oil.

PROFIT VS. SAFETY

While it is impossible to believe BP wanted the spill to happen, investigators could argue that the company took shortcuts that made it inevitable.

“Your company conducted its planning as if an uncontrolled subsea blowout wasn’t even a possibility,” Florida Representative Nancy Castor told BP Chief Executive Tony Hayward at a June 17 Congressional hearing. “Why weren’t you prepared? Why did you elevate profits over safety?”

“I don’t believe we did elevate profits over safety,” Hayward responded.

BP’s recent U.S. safety record, however, is hardly pristine.

Last year, it agreed to a $50 million criminal penalty for violating the Clean Water Act in connection with a 2005 Texas City refinery fire that killed 15 workers. It has also pleaded guilty to a Clean Water Act violation over the 2006 release of roughly 212,000 gallons of oil in Alaska’s Prudhoe Bay.

“One of the things the government is looking at in this tragedy is: Did BP and others shoot straight about conditions at the well site before the explosion occurred, and since the spill began?” said Uhlmann. “If the government concludes that BP intentionally misled it about construction at the site or the amount of oil gushing, it could bring obstruction of justice and false statement charges.”

A criminal conviction under the Clean Water Act would cause BP to be shut out of government contracts for a period of time, a procedure known as debarment. The company could also be barred from such contracts upon the entering of civil judgments over environmental law violations.

BP has already faced partial bans on federal contracts because of past violations. For example, the company was ineligible for federally-funded contracts for services from the Texas and Prudhoe Bay facilities. Talks over those bans were halted after the Deepwater Horizon explosion.

THIS IS NOT ALASKA

Plater, the former chairman of the Alaska oil spill task force, said the 11 deaths caused by the BP explosion are likely to result in a finding of criminal liability.

He also noted that the size and location of the spill expose BP to far more costs than the Valdez did for Exxon. Plater said he would be “very surprised” if BP’s costs stopped at $25 billion to $30 billion, and that the sum “could be two or three times that.”

“This is not an attenuated 38,000 people on the coast of Alaska 4,000 miles away,” he said. “Harms are likely to be larger, with a population more than 100 times greater in the impact zone and much larger economies and coastal ecosystems.”

Michael Chalos, a partner at Chalos, O’Connor & Duffy LLP in Port Washington, New York who represented the Valdez captain Hazelwood, said criminal liability might turn on who at BP might have known of problems at the rig, and whether they had the capacity to fix them before the explosion.

“From a corporate standpoint, the lesson to be learned is what BP is doing,” Chalos said. “They have stepped up and acknowledged responsibility and are trying to do the right thing. But every corporation has some limit to its ability to pay. How much can BP afford before it can’t afford any more?”

PAY CZAR

One variable in how claims against BP over the Gulf oil disaster play out may be how Kenneth Feinberg assesses and pays victims’ claims as the administrator of BP’s $20 billion fund.

Feinberg has said claims can be filed over lost wages and profits, business interruption, personal injuries and death. He also said it is essential to “err on the side of the claimant” in dispersing emergency funds, even if that results in the fund being depleted faster.

“You’ve got to allow those payments to go out with less corroboration than you would if you’re giving a lump-sum payment that is the total compensation,” Feinberg told CNN on June 21. “We’ve got to ease the burden on these folks.”

Feinberg previously oversaw the disbursement of money to victims of the Sept. 11, 2001 attacks. To focus on BP, he will step down this summer as the U.S. Treasury Department’s “pay czar” for companies getting government help.

Lawyers said a critical issue for BP is whether claimants seeking more than emergency compensation will be required to sign releases absolving the company from further liability. That could limit the scope of any litigation.

DRAWING LINES

Brian O’Neill, a partner at Faegre & Benson LLP in Minneapolis who won the $5 billion punitive damage award against Exxon, said Feinberg may have some tough calls to make.

For example, he said one might easily conclude an operator of a beachfront hotel where oil has washed ashore could make a valid claim. But what of a beachfront hotel operator who has no oil damage, yet has suffered cancellations from customers worried that oil could come ashore? Or perhaps a hotel operator two miles inland who has no oil damage but has lost customers?

“How the administrator draws the lines as to who gets paid is the most interesting question right now,” O’Neill said.

Chalos said getting a payout from the fund may be the best course for victims with smaller claims. Referring to Exxon victims, he said: “A lot of the people who had claims are no longer around, sadly. If you can get fairly compensated by working with BP, then you ought to go that route, if I were advising a claimant.”

CONTRIBUTION

BP could also limit its liability under the legal concept of “contribution.” Essentially a form of blame-shifting, this is where a responsible party like BP seeks to recover from other parties that may have had a hand in the disaster.

In his Congressional testimony, Hayward said the government had named four responsible parties: BP, Transocean, Anadarko Petroleum Corp and Mitsui & Co. BP owns a 65 percent stake in the well, while Anadarko controls 25 percent and Mitsui 10 percent.

Anadarko has a much smaller balance sheet than BP, and far less capacity to absorb big liabilities from the spill, which Chief Executive James Hackett said was “preventable” and resulted from BP’s “reckless” conduct.

“We will be looking at our contractual remedies,” he said in an June 18 interview. “We’re focusing on the fact that there appears to be gross negligence and willful misconduct.”

Lawyers said BP might also seek to recover from two other defendants: Cameron International Corp, which provided a blowout preventer, and Halliburton Co, in charge of cementing the oil well to stabilize its walls.

“Other parties besides BP may be responsible for costs and liabilities arising from the oil spill, and we expect those parties to live up to their obligations,” Hayward said in a June 18 statement.

Contribution lawsuits may be BP’s best hope to cap costs.

“The real fight will be between BP, Anadarko, Mitsui, Transocean and Halliburton,” Uhlmann said. “Billions of dollars of liability are at stake, and the other companies are not going to want to help BP pay.”

“REOPENER”

BP may also try to insist that any government settlements not carry onerous “reopener” provisions that allow regulators to seek additional payments for latent problems.

Exxon’s $900 million settlement in 1991 with Alaska and the United States had a four-year “reopener window” letting the governments claim as much as an additional $100 million. A day before the window was to close on Sept. 1, 2006, they demanded another $92 million. They are still pursuing it.

In addition, BP may face battles over insurance. On May 21, for example, Lloyd’s of London asked a federal court in Houston to disallow a possible $700 million BP claim for coverage through a Transocean policy, saying the policy covers pollution originating only above land and water lines.

“Because liabilities BP faces for pollution emanating from BP’s well are from below the surface and from BP’s well, those liabilities are not within the scope of the additional insured protection,” the complaint said.

ONE-TO-ONE

One area where BP may not face enormous costs is punitive damages. For that it can thank the Exxon litigation.

This is because the 2008 Supreme Court ruling in Exxon Shipping Co v. Baker that set punitive damages in the Valdez case at $507.5 million, equal to the amount of compensatory damages, set a standard that may limit recoveries from BP.

“A penalty should be reasonably predictable in its severity,” Justice David Souter wrote for a 5-3 majority. (The Court’s ninth justice, Samuel Alito, recused himself because he owned Exxon stock.)

“Given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution,” Souter continued, “we consider that a 1:1 ratio, which is above the median award, is a fair upper limit” for punitive damages in maritime cases such as Exxon.

It is unclear where the Court might stand if it ever considers the BP spill. Souter retired last year. Justice John Paul Stevens, who dissented in Exxon, just completed his final term. Any litigation will likely take years to arrive. In the interim, lower courts are expected to follow the Exxon ruling.

AN IMPARTIAL JURY

Among the early battles will be over where to hear much of the litigation. Some judges have recused themselves from various spill lawsuits, presumably because of stock ownership.

BP wants lawsuits tried in Houston, closer to its offices and perhaps a friendlier environment. It has even requested that a specific federal judge be assigned: Lynn Hughes, an appointee of President Ronald Reagan.

According to the Almanac of the Federal Judiciary, which profiles judges based on unattributed comments from practicing lawyers, Hughes has “very good legal ability,” and also can be skeptical of claims by civil plaintiffs and the government.

“He hates plaintiffs and he hates the government,” one plaintiff’s lawyer is quoted as saying.

“He is, by and large, a little on the defense side,” said a civil defense lawyer, who then added: “You can change his mind, but you have to have the ammunition.”

BP must also be careful to find juries capable of divorcing what they know and feel about the spill and can see on the news or web from the evidence presented to them.

“You can always get a jury,” O’Neill said. “They got one in Alaska. It took four days.”

The U.S. Judicial Panel on Multidistrict Litigation is expected to meet on July 29 in Boise, Idaho to consider how best to combine many of the overlapping lawsuits.

ASBESTOS, DRUG, TOBACCO PRECEDENTS

Wherever it takes place, litigation will be protracted, as it has been in other areas where damages are often unknowable for years.

Asbestos, for example, still generates litigation because while many companies had stopped using it for fireproofing and insulation by the mid-1970s, after-effects can take decades to surface. W.R. Grace & Co has spent nine years in bankruptcy court after asbestos prompted a Chapter 11 filing.

Drug litigation also can take years. For example, Wyeth, now owned by Pfizer Inc, ultimately set aside more than $21 billion in a decade of litigation over the diet drug fen-phen, which was linked to heart valve damage.

And then there are cigarettes, where decades of litigation reached a peak in 2000 when a Florida jury ordered tobacco companies to pay $145 billion in punitive damages to sick smokers. While the Florida Supreme Court later threw out that ruling, thousands of cases remain in the courts.

“We have examples in tobacco, asbestos and pharmaceuticals where funds are set up by third-party trustees,” said Marzulla, the former Justice Department official.

“But those address one set of injuries,” he went on. “Here, it is much more complicated. There is no formula for how much fishermen, resort owners, beachfront property owners or others who make their livings in the bayou will be paid.”

Lawyers and analysts said a criminal penalty for BP could top the record $1.3 billion that Pfizer agreed to pay last September, as part of a $2.3 billion payout over marketing of the pain medicine Bextra.

“Could BP eventually get overwhelmed and go belly up? Sure, it happened to a lot of companies with asbestos exposure,” the energy investment boutique Tudor Pickering Holt & Co wrote this month. “But only after losing a bunch of court battles.”

“WE GO TO WAR OVER OIL”

Brian O’Neill, a partner at Faegre & Benson LLP in Minneapolis who won the $5 billion punitive damage award against Exxon, estimated that BP’s costs could reach $5 billion for cleanup, $4 billion for natural resources damages, and $10 billion in private lawsuits.

Shareholder lawsuits, on the other hand, are perhaps “not worth very much,” given what he called the government’s interest in keeping BP not only solvent but healthy.

“Oil is necessary to the country — we go to war over oil — so we don’t want to put a major oil transactor out of business,” he said. “The one thing that could screw it up for BP is if the administrator for the fund doesn’t pay out money quickly. It will be a major disaster for both the (Obama) administration and BP, and keep this thing churning.”

What if, however, damages did reach the $90 billion that Plater suggested. Could BP handle that?

“No,” Plater said, “but there could be contribution, and an attaching of assets. It could also teach someone about government. Mr. Reagan said the best government is the least government. In this case, we need government, but we need good government to avoid the collusive partnership our commission determined had made the Exxon Valdez incident inevitable.”

The administration of President Barack Obama may also want to ensure that any settlement with BP positions the government well in future litigation, according to Wood from the University of Oregon.

“When a private company harms a public resource, like the ocean or beach, they are liable,” she said. “Each fish, for example, gets a price tag. The crux is that the government is a trustee of public property that has been damaged. It has the absolute duty to make the people’s trust whole again, and get the last penny out of BP in the form of damages.”

What the government cannot do is restore the Gulf of Mexico to its pre-April 20 state, just as it could not restore the Alaskan waters and roughly 1,300 miles of coastline to where they were before anyone knew Exxon had a vessel called Valdez.

“The lesson of both of these things, not so much from a legal level, is that we’re not able to respond to massive oil spills,” Stanford Law’s Fisher said. “The only solution is prevention. It’s not response, and it’s not legal action.”

(Reporting by Jonathan Stempel; Additional reporting by Lewis Krauskopf in New York, Tom Bergin in Houston and Jeremy Pelofsky in Washington, D.C.; editing by Jim Impoco and Claudia Parsons)

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