HOUSTON, April 24, 2019 – Baker Botts’ Supreme Court and Appellate Group is pleased to announce that on April 23, 2019, the U.S. Court of Appeals for the Eighth Circuit affirmed a complete victory for Southwestern Energy and its subsidiaries in a rare class action that proceeded to verdict. Smith v. SEECO, Inc., Nos. 17-3636 & 17-2378 (8th Cir. April 23, 2019).
A class of 12,000 royalty owners alleged that Southwestern Energy improperly deducted from royalty payments the full amount of gathering and treatment costs charged by its subsidiaries. That theory of liability marked the case as important for the industry because the deductibility of post-production costs paid to subsidiaries is a salient issue in much current oil-and-gas litigation. Plaintiffs sought approximately $100 million in actual damages and an additional $100 million in statutory penalties under Arkansas law.
Baker Botts served as Southwestern Energy’s appellate counsel before and during the trial. In that capacity, the Baker Botts team briefed several key issues and focused on error preservation and the jury charge. Paul Yetter (Yetter Coleman), Mike Powell (Locke Lord), and Marc Tabolsky (Schiffer Hicks Johnson) led Southwestern Energy’s trial team.
After a 10-day trial, the Little Rock, Arkansas federal jury returned a full defense verdict, finding that the subsidiary’s charges were reasonable costs incurred by Southwestern’s subsidiary and in line with market rates. Two sets of appeals followed. One was the plaintiffs’ appeal from the adverse verdict, raising various alleged evidentiary and legal errors. The other consisted of appeals by various parties who had unsuccessfully attempted to intervene in the case to challenge the district court’s opt-out procedures and to argue that class counsel was inadequate due to alleged conflicts of interest.
Baker Botts served as lead counsel on both appeals and successfully defended the favorable judgment. In published opinions authored by Judge Ralph Erickson, the Eighth Circuit systematically rejected each of the plaintiffs’ attacks on the judgment in the merits appeal, including their invitation to certify to the Arkansas Supreme Court the question of whether post-production costs paid to a subsidiary are deductible from royalty payments. The Eighth Circuit resolved the intervenors’ appeals on jurisdictional grounds because those intervenors filed their notices of appeal too late. In doing so, the court rejected the intervenors’ attempt to extend Devlin v. Scardelletti, 536 U.S. 1 (2002)—which allowed unsuccessful intervenors to appeal the fairness of class-action settlements after final judgment—to the context presented here.
The Eighth Circuit’s rulings cap a tremendous victory for Southwestern Energy. Southwestern Energy put considerable faith in its legal team by going to trial on a class action of this magnitude, and this case now stands as an important precedent for the industry.
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