BP’s Fight to Stop the Payment of ‘Fictitious’ Claims

The blowout of BP’s Macondo well in April 2010 signaled the start of what became the industry’s largest ever accidental release of oil.[1] The failure of the well’s Blowout Preventer and the lack of an effective containment plan exacerbated the disaster by allowing oil to be discharged for another 87 days following the blowout.[2] An estimated 5 billion barrels of oil would be released into the Gulf before BP successfully capped the well.[3]

In the aftermath of the spill, several important considerations pressed BP to pursue a legal course premised on compromise and settlement. First, as one of the world’s leading investors and producers in the Gulf of Mexico, the oil company had a significant incentive to engage in good faith efforts to equitably settle claims of Gulf area residents suffering spill-related damages.[4] Next, BP likely wanted to avoid the more litigious approach taken by Exxon following the 1989 Exxon-Valdez spill, which resulted in 20 years of litigation and finally culminated with a plaintiff victory in 2009.[5]Lastly, a settlement based approach was necessary to revive the public image of a company whose stock price had tumbled nearly 25% from pre-spill levels.[6]

A.     Settlement With Private Plaintiffs

For the above reasons, BP quickly accepted legal liability as a “responsible party” under the Ocean Pollution Act and, at the urging of the Obama Administration, created a $20 billion settlement fund to go towards spill-related claims.[7] Over the next 18 months BP would pay over $6.3 billion to satisfy the claims of affected businesses and individuals.[8]

In February 2011, BP began negotiating a class settlement (“the Settlement”) with most private plaintiffs still having spill-related claims. The Eastern District of Louisiana gave final approval of the compromise reached by the parties in December 2012 and appointed a Claims Administrator to carry out claim payments.[9] Issues, however, quickly arose between the two parties as BP began to question the validity of payments for economic (i.e. business) related losses under the agreement. Under the Settlement, any individual who conducted commercial activities in the Gulf region and could produce evidence of decreased earnings following the spill was entitled to recover under the agreement.[10] Reduced earnings were to be established by comparing profits earned during a sample pre-spill period (“Benchmark period”) selected by the claimant to that received during a post-spill period (“Compensation Period”) also chosen by the claimant.[11]

B.     Conflicting Interpretations

The current dispute over the Settlement largely hinges on the differing interpretations of the agreement taken by the Claims Administrator and BP. The Claims Administrator interpreted the settlement as allowing recovery whenever a claimant could show that they received reduced profits during the Compensation period when compared with the same monthly period during the Benchmark period.[12] This approach was premised on the idea that once the claimant satisfied these criteria, economic losses were “presumed to be attributable to the oil spill.”[13] Moreover, the Administrator pointed out that the Settlement did not authorize any additional procedures aimed at identifying any possible alternative causes for losses established by claimants.[14]

BP took issue with this interpretation because of the differing accounting methods used by spill claimants in the course of keeping financial records.[15] Specifically, the company was concerned that the Administrator’s interpretation allowed for windfall awards to claimants using cash accounting who had presented financial records which did not accurately reflect spill related losses.[16]Moreover, BP pointed to several examples to demonstrate claimants’ incentives to select pre and post spill earnings periods that would provide for the largest settlement awards and further allow “recovery for fictitious and inflated losses” not caused by the spill.[17]Indeed, BP now estimates the current value of economic based settlements to be $9.2 billion when the company had originally estimated a total cost of $7.8 billion.[18] BP concluded that the interpretation furthered by the Administrator conflicted with the Settlement’s overall purpose of “compensating those affected by the spill for actual economic damages.”[19] The Administrator rejected this contention because he “did not believe he was authorized to carve out specific types of claims for additional analysis as BP had proposed.”[20] BP thus sought judicial review of the Administrator’s interpretation of the Settlement.

C.     Judicial Review of the Settlement

     1.      The Eastern District’s March 5th Order

In a March 2013 Order, Judge Barbier of the Eastern District of Louisiana sided with the Claims Administrator by summarily dismissing BP’s Settlement interpretation.[21] The Court reasoned that the Administrator’s interpretation complied most closely with the objective and “straight-forward mechanisms [used to calculate damages] set forth in the settlement.”[22] Judge Barbier further stressed that, under the Settlement, BP had agreed to allow claimants the ability to choose periods that provided for the greatest recovery.[23] The Court thus concluded that these factors suggested the Settlement anticipated the occasional award of fictitious damages and that BP had agreed to this consequence “when it decided to buy peace through a global, class-wide resolution.”[24]

       2.      The Fifth Circuit’s October 2nd Ruling

BP immediately appealed the district court order by seeking a preliminary injunction from the Fifth Circuit to cease claim payments under the Claims Administrator’s interpretation of the Settlement.[25] In October 2013, the Fifth Circuit returned a ruling which addressed BP’s fear of windfall and fictitious recoveries for claimants who keep cash-based records.[26]Writing for the majority, Judge Clement pointed out that the Settlement did not specifically address the method by which such claims were to be processed.[27] The majority further concluded that the district court too quickly dismissed BP’s argument that cash-based records should be more heavily scrutinized to avoid the payment of inflated claims.[28] The Circuit panel also rejected the district court’s opinion that BP had acquiesced to the payment of inflated cash-based claims by agreeing to the Settlement.[29] Judge Clement emphasized that BP had only intended that the Settlement compensate actual economic losses, and more importantly, the company never agreed to pay out excessive losses solely resulting from the method by which a claimant kept their books.[30] The majority reasoned that the Administrator’s interpretation adopted by the district court was “completely disconnected from any reasonable understanding of calculation of damages.”[31] The panel then remanded the issue back to the district court to further develop the factual record with regards to the Settlement formula as applied to cash-based claims.[32]

The Fifth Circuit further addressed BP’s argument that the Administrator’s interpretation of the Settlement had led to the payment of fictitious losses (i.e. losses wholly unrelated to the spill).[33] Judge Clement pointed to illustrative case law concerning Article III standing in the class action context to infer that, if BP was indeed correct in this assertion, the Settlement was likely unlawful.[34]Specifically, the Court cited Denney v. Deutsche Bank AG for the proposition that a “court must find that both the class and representatives have suffered some injury requiring court intervention” to avoid the dismissal of a class action lawsuit for lack of standing.[35] More importantly, however, the Court stressed that a class action settlement cannot create any new legal rights.[36] The Court reasoned that, if the Administrator was interpreting the Settlement to allow for payments to claimants who would otherwise have no colorable legal right, the district court had no authority to approve such a settlement.[37]

       3.      On Remand in the Eastern District

Judge Barbier responded to the Fifth Circuit’s concerns in an order issued December 24, 2013.[38] The Eastern District sided with the Fifth Circuit’s opinion that the amount of recovery should not hinge on the method in which the claimant kept their financial records.[39]Accordingly, the District Court remanded the issue to the Claims Administrator “to adopt and implement an appropriate protocol or policy for handling” damage awards to claimants using cash accounting.[40]

The Court, however, again rejected BP’s argument that the Claims Administrator should adopt additional measures to avoid awarding damages to those claimants with losses unrelated to the spill.[41] The Court reasoned that, because the interpretation furthered by BP was contradictory to that advocated by the company during settlement negotiations, BP was judicially estopped from asserting its current interpretation regarding causation.[42]Specifically, the Court pointed to several statements previously made by BP where the company clearly acknowledged that once a claimant satisfied the causation tests set forth in the Settlement, losses were “presumed to be caused entirely by the spill, with no analysis of whether such declines were also traceable to other factors unrelated to the spill.”[43]

Moreover, the Court rejected the Fifth Circuit’s suggestion that the Settlement may be completely invalid if it provided damage awards to claimants who would lack standing under Article III to bring a claim in the absence of the Settlement.[44] First, the Court pointed out that only the author of the opinion, Judge Clement, supported the Article III standing issue.[45]Next, the Court reasoned that a claim-by-claim standing analysis as advocated by Clement would impose a “new, undefined, and subjective requirement as to whether each claim is ‘colorable.’”[46] Judge Barbier noted that a major purpose of all class settlements is to avoid such unnecessary delays.[47]  Lastly, the Court emphasized that, in the context of class action settlements, the standing analysis focuses on whether the class representative has standing, not on whether every member of the class has standing.[48]

The Court concluded that the economic formulae provided in the Settlement were the exclusive means by which causation was to be determined and that BP was judicially estopped from asserting any argument to the contrary.[49]The Court further found that the Settlement was valid under Article III’s standing requirements.[50]

     4.      The Fifth Circuit’s January 10th Order  

In early January 2014, a separate Fifth Circuit panel reached a 2-1 decision in support of the Eastern District’s standing analysis.[51] Writing for the majority, Judge Davis acknowledged that there were two distinct approaches to the standing analysis with regards to class action lawsuits, neither of which had been definitively adopted within the Fifth Circuit.[52] A first approach advocated by the Third, Seventh, Ninth, and Tenth Circuits focuses solely on whether the named plaintiffs or class representatives have standing.[53] Popularly known as the Kohen test, this analysis acknowledges that it is “almost inevitable [that] a class will…include persons who have not been injured by the defendant’s conduct,” but this certainty does not preclude Article III standing.[54]

A second approach, and that applied by Judge Clement in her October 5th opinion and known as the Denney test, determines class members’ standing based on whether the unnamed claimants are “alleged” to have colorable legal claims.[55] In her opinion, Judge Clement reasoned that the Settlement would be invalid under Denney if the Claims Administrator interpreted the agreement as allowing recovery for unnamed class members who “had not sustained losses at all, or had sustained losses unrelated to the oil spill.”[56] Judge Davis, however, disagreed with Judge Clement’s interpretation and instead held that the class members would have Article III standing under both Kohen and Denney.[57]

Applying Kohen, the Fifth Circuit reasoned that the class action clearly had Article III standing because the named class plaintiffs “ha[d] each alleged injury in fact, traceability to the defendant’s conduct, and redressability by the relief requested.”[58] The panel further concluded that the class members also satisfied the Article III standing requirements under Denney.[59] Specifically, Judge Davis emphasized that Denney did not require every class member to submit evidence indicating personal standing as “long as every class member contemplated by the class definition ‘can allege standing.’”[60] Because the Settlement defined business loss claimants as those individuals suffering losses as a result of the oil spill, Judge Davis reasoned that the unnamed class members bringing business loss claims had Article III standing under Denney because “it [was] sufficient for standing purposes that the plaintiffs seek recovery for economic harm that they allege they have suffered.”[61] Accordingly, the panel rejected BP’s argument that the Settlement be invalidated because of the inclusion of class members who had not suffered injuries actually linked to the spill.[62]

D.     Conclusion

While the recent January Fifth Circuit opinion signals a clear setback in BP’s efforts to stop the payment of what the company alleges are fictitious claims unrelated to the spill, the ruling is likely not the final determination of the conflict between BP and economic loss claimants. Given that BP now estimates that the Settlement will cost around $9.2 billion, the company has obvious incentives to continue pushing its own interpretation of the Settlement’s causation requirements. Indeed, following Judge Davis’s opinion, BP stated that it is considering its legal options and “will continue to press its position on the proper interpretation of the settlement agreement’s provisions requiring a causal nexus between a claimant’s injury and the spill.”[63]

Preferred citation: Spencer King, BP’s Fight to Stop the Payment of ‘Fictitious’ Claims, LSU J. Energy L. & Res. Currents (February 26, 2014) http://sites.law.lsu.edu/jelrblog/?p=415.

[1] Gulf Spill is the Largest of Its Kind, Scientists Say, The New York Times (last visited Dec. 2013), http://www.nytimes.com/2010/08/03/us/03spill.html?_r=2&fta=y&.

[2] Mark Davis, Lessons Learned: The Legal and Policy Legacy of the BP Deepwater Horizon Spill, 3 Wash. & Lee J. Energy, Climate, & Env’t 155, 157 (2012).

[3] See Gulf Spill, supra note 1.

[4] See BP Adds 2 Drilling Rigs in Deepwater Gulf of Mexico, (last visited Dec. 2013), http://www.bp.com/en/global/corporate/press/press-releases/bp-adds-2-drilling-rigs-deepwater-gulf-mexico.html (“BP is the largest investor in the Gulf of Mexico over the last ten years…BP was the largest oil and gas producer in the deepwater Gulf of Mexico in 2012…BP directly employs more than 2,300 in the Gulf of Mexico”).

[5] Arthur J. Ewenczyk, For a Fistful of Dollars: Quick Compensation and Procedural Rights in the Aftermath of the 2010 Deepwater Horizon Oil Spill, 44 J. Mar. L. & Com. 267, 268 (2013).

[6] See BP’s $7.8 Billion Dollar May Speed Payments For U.S. Spill, Westlaw Journal Environmental at *2 (2012) (“Analysts said the settlement was a positive factor for BP’s stock”).

[7] See Ewenczyk, supra note 5, at 269.

[8] In re Deepwater Horizon, 732 F.3d 326, 329 (5th Cir. 2013).

[9] In re Oil Spill by Oil Rig Deepwater Horizon in Gulf of Mexico, on April 20, 2010, 910 F. Supp.2d 891 (E.D. La. Dec. 21, 2012).

[10] In re Deepwater Horizon, 732 F.3d 326, 329-30 (5th Cir. 2013).

[11] Id. at 330.

[12] Id. at 330-31.

[13] See Appellees’ Brief on the Merits, In re Deepwater Horizon, 732 F.3d 326 (5th Cir. 2013) (Nos. 13-30315, 13-30329), 2013 WL 2391828, at *13 (“[O]nce a business establishes causation under [the formula], that business is entitled to compensation…without any inquiry into the question of whether some or all of the losses may have been caused by something other than the spill”).

[14] Id.

[15] See In re Deepwater Horizon, 732 F.3d at 330 (“As early as September 28, 2012, BP raised concerns about the varied accounting methods claimants used in the ordinary course of their record keeping and the ways in which erroneously states expenses could cause erroneous variable profit calculations”).

[16] See Brief for Appellants, In re Deepwater Horizon, 732 F.3d 326 (5th Cir. 2013) (Nos. 13-30315, 13-30329), 2013 WL 1950964 at *2 (“[T]he Claims Administrator’s rigid focus on monthly records as originally maintained by claimants…systematically results in fictitious and inflated awards where those records do not accurately reflect the firm’s revenue and corresponding expenses in a given months”).

[17] See id. at *36-37 (One claimant’s attorney, for example, admitted to the Settlement Program that $269.669 in revenue earned during September 2008 had erroneously been recorded in October 2008 while the related expenses were recorded in September 2008. The claimant chose a Benchmark Period that included October but not September making the Variable Profit in the Benchmark Period artificially high).

[18] BP Wins Appeals Court Order Stopping Some Spill Payments, Bloomberg, (last visited Dec. 2013) http://www.bloomberg.com/news/2013-12-02/bp-wins-appeals-court-order-stopping-some-spill-payments.html.

[19] See Brief for Appellants, In re Deepwater Horizon, 732 F.3d 326 (5th Cir. 2013) (Nos. 13-30315, 13-30329), 2013 WL 1950964 at *2.

[20] In re Deepwater Horizon, 732 F.3d at 331.

[21] Id.

[22] Id.

[23] In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico, on April 20, 2010 (E.D. La. March 5, 2013) available at www.deepwaterhorizoneconomicsettlement.com/docs/DHECC_Alert_BEL_Evaluation_Order.pdf.

[24] Id.

[25] In re Deepwater Horizon, 732 F.3d 326 (5thCir. 2013).

[26] Id.

[27] Id. at 336.

[28] Id.

[29] Id. at 338.

[30] See id ([BP] has argued consistently that the formula was intended to compensate for real economic losses, not artificial losses that appear only from the timing of cash flows).

[31] Id. at 339.

[32] Id.

[33] Id. at 340.

[34] Id. at 341-42.

[35] Id at 342.         

[36] Id.

[37] Id.

[38] In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico, on April 20, 2010 (E.D. La. Dec. 24, 2013) available at http://www.laed.uscourts.gov/oilspill/orders/12242013Order(RevisedBELremand).pdf (last visited February 10, 2014).

[39] See id (pointing out that “there was never any discussion or suggestion that the calculation or determination of lost profits would be based simply on how the financial data was maintained by a claimant, or would depend on whether the a claimant kept its accounting records on a cash or accrual basis”).

[40] Id. at 5.

[41] Id. at 12.

[42] Id.

[43] Id. at 16.

[44] Id. at 21.

[45] Id.

[46] Id. at 24.

[47] Id.

[48] Id. at 28 (citing William B. Rubenstein, et al., Newberg on Class Actions § 2:1, (5th ed. 2011).

[49] Id. at 37.

[50] Id.

[51] In re Deepwater Horizon-Appeals of the Economic and Property Damage Class Action Settlement, No. 13-30095 (5th Cir. 2014) available at http://www.ca5.uscourts.gov/opinions/pub/13/13-30095-CV0.pdf.

[52] Id. at 10.

[53] Id. at 11.

[54] Kohen v. Pac. Inv. Mgmt. Co. LLC, 571 F.3d 672, 677 (7th Cir. 2009).

[55] In re Deepwater Horizon-Appeals of the Economic and Property Damage Class Action Settlement, No. 13-30095 at 14, available at http://www.ca5.uscourts.gov/opinions/pub/13/13-30095-CV0.pdf.

[56] In re Deepwater Horizon, 732 F.3d 326, 343 (5th Cir. 2013).

[57] In re Deepwater Horizon-Appeals of the Economic and Property Damage Class Action Settlement, No. 13-30095 at 15 (5th Cir. 2014) available at http://www.ca5.uscourts.gov/opinions/pub/13/13-30095-CV0.pdf.

[58] Id.

[59] Id. at 16.

[60] Id. at 17-18.

[61] Id. at 18 (quoting Cole v. Gen. Motors Corp., 484 F.3d 717, 721-23 (5th Cir. 2007).

[62] See id. at 48 (quoting Mims v. Stewart Title Guar. Co., 590 F.3d 298, 308) (“[c]lass certification is not precluded simply because a class may include persons who have not been injured by the defendant’s conduct”).

[63] BP appeal to stop ‘fictitious’ U.S. oil spill claims fails, Reuters (last visited Jan. 2014), http://www.reuters.com/article/2014/01/11/us-bpspill-ruling-idUSBREA0A04920140111.

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