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Incentives to Settle Oil Spill Case Loom Large

Source: Houston Chronicle

Posted on 13 Feb 2012

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A legal brawl that began with the deadly Deepwater Horizon rig explosion and Gulf of Mexico oil spill nearly two years ago is within weeks of a courtroom showdown that many parties would prefer to avoid through a settlement.

The British oil giant BP has said as much.

"We are ready to settle, if we can do so on fair and reasonable terms," CEO Bob Dudley said last week as BP announced its quarterly financial results. "But we are preparing vigorously for trial."

That trial is scheduled for Feb. 27 before U.S. District Judge Carl Barbier of New Orleans, who will hear the case without a jury.

In what is just the first phase of a complex plan for litigating all the claims and counterclaims arising from the accident, Barbier will determine how to allocate liability for the damages it caused.

BP owned the Macondo well that blew out and triggered the April 2010 disaster.

Other parties are Transocean, which owned and operated the Deepwater Horizon; Halliburton, which cemented the well; federal, state and municipal governments; and more than 100 individual claimants.

The blowout and explosion killed 11 workers, caused the worst offshore U.S. oil spill and generated one of the most complex environmental law cases ever.

BP has allocated $36 billion for a potential payout related to the accident, according to its financial statements.

Several experts following the case believe that many of the parties - especially the corporate and government plaintiffs and defendants - will agree to at least partial settlements before or during the trial.

The federal government might agree to a settlement of $20 billion to $25 billion - well below what defendants could risk at trial - said David Uhlmann, a University of Michigan law professor who headed the Justice Department's Environmental Crimes Section for seven years.

"This is a case that should settle, at least as it pertains to the government claims against BP and the other companies involved in the Gulf oil spill," Uhlmann said. "The companies do not have good defenses, and going to trial risks higher penalties and months of bad publicity."

One uncertainty is the civil penalties that BP and others might face under the Clean Water Act. Those damages vary significantly depending upon whether violations are determined to have resulted from negligence or gross negligence. The penalty is up to $1,100 per barrel spilled through negligence, and up to $4,300 per barrel spilled through gross negligence.

The government has estimated the three-month spill spewed 4.9 million barrels of crude into the Gulf, but the spill's size is one issue in dispute.

That means the companies and government would have billions riding on whether the government could meet the higher burden of proving gross negligence - a gamble that gives both an incentive to settle. And that risk only involves the potential civil penalties under the Clean Water Act, not other potential environmental violations.

The Clean Water Act also carries criminal penalties, and criminal investigations are ongoing but so far have not resulted in any charges.

Depending upon which if any of the parties settle, Barbier's task starting Feb. 27 will be to determine liability for the accidents and the proportion of liability that each company must assume.

The next phase of the case would be assessment of compensatory and punitive damages, which are governed by federal maritime law, said Blaine LeCesne, a tort law professor at Loyola University.

Compensatory damages are for actual harm suffered, and punitive damages punish behavior.

In the case that arose from the 1989 Exxon Valdez oil tanker spill, compensatory and punitive damages were assessed on a 1-to-1 ratio. But the ratio could be different depending upon whether the judge relies on that earlier case as precedent.

The majority of corporate civil cases settle before a trial, legal experts said, but the multiple parties involved in the Gulf spill litigation make negotiations much more complicated than in most such cases.

While most individual plaintiffs signed away their right to sue in exchange for a payment from a $20 billion fund BP set up in 2010, scores of cases still remain.

"The biggest problem is that there are so many moving parts, so many defendants, so many plaintiffs - some of which are aligned, and some are not," said Dane Ciolino, a Loyola law professor who specializes in maritime law.

"This is very unusual litigation. It's not just one big class action against one company. In terms of the cleanup efforts, figuring out who was at fault, and the damages - tax losses, economic, environmental - the litigation is sprawling. No one has ever seen anything quite like it."