Texas Biz Court Will Be A Brave New World For Energy Cos.

In this article from Law360, partner Nick Brown discusses the recent launch of the Texas Business Court. 

Energy companies gained a new forum to potentially hash out their legal fights on Sept. 1 when the Texas Business Court officially started hearing cases.

Attorneys based in the Lone Star State tell Law360 that the business court, as well as a new, dedicated intermediate appellate court, could be an attractive middle ground between the unpredictability of state trial courts and the expense and difficult-to-appeal nature of commercial arbitration.

"It's intriguing," said Jonathan Baughman, who heads the oil and gas practice group at McGinnis Lochridge LLP. "I've talked to some people that have considered putting together a provision that would designate the business court as the primary dispute resolution [forum]. If they can't handle a case, then it goes to arbitration or the regular district court."'

But attorneys also say there are plenty of questions about the business court and how it'll operate that will give energy companies pause before they take the plunge, from whether cases originating in other state venues can be moved into the court to what claims the court will actually have jurisdiction over. There's a $5 million threshold for a variety of intracompany disputes and a $10 million threshold for interparty disputes, including contracts, qualified monetary transactions and commercial transactions.

"I could see there being big arguments over the amount in controversy, and how you prove the amount in controversy," said Kirkland & Ellis LLP litigation partner Nick Brown, who's based in Houston. "How is the business court going to resolve those questions, and how long will it take? We won't know those answers for at least some months, I suspect."

Here are some things energy companies and energy attorneys should know about the Texas business court as it gets up and running.

Oil and Gas Litigation

Given the business court's $10 million threshold for contractual and monetary transaction disputes, Baughman said it's unlikely there will be many oil and gas royalty cases brought there, unless it's a particularly large royalty owner, or the parties have otherwise agreed to let the court handle any disputes.

"It's going to be more when you have big players, when you have oil and gas company A and oil and gas company B that have a joint venture agreement and have provided for disputes to be handled with this business court," Baughman said.

In the upstream space, that could encompass things like joint development agreements. Midstream, that could cover things like transportation agreements between a driller and a pipeline company.

Attorneys say there is a potential wrinkle to business courts handling oil and gas cases: geography. Only five of the Texas judicial regions, covering the state's major metropolitan areas, are hearing cases. Courts in more sparsely populated judicial regions aren't expected to be up and running until at least September 2026, and that's subject to funding from the state Legislature.

That means that many of the state's major oil and gas production regions may not have a local business court, most notably the largest, the Permian Basin of West Texas. Attorneys say parties may have to specify which business court will hear any disputes if they want that option in their agreements.

"That isn't to say disputes connected to the Permian can't be brought in the business court," said Brad Benoit, who heads Bracewell LLP's energy litigation group. "It's just something to note. It's not like the Fort Worth business court is going to automatically pick up every Permian case."

Energy Regulatory Litigation

Not only have business courts opened for hearing cases, so has the Fifteenth Court of Appeals, which the Legislature created and designated as the exclusive home for appeals of business court decisions.

Perhaps even more notable for the energy industry is that Fifteenth Court of Appeals will also have exclusive jurisdiction over cases brought by or against state agencies.

That means any case involving the Railroad Commission of Texas, Texas Council for Environmental Quality and the Public Utility Commission of Texas will send cases to the new appellate court.

Greenberg Traurig LLP of counsel Alan Hersh, a former staff attorney at the Third Court of Appeals in Austin, said having a dedicated appeals court could help more quickly move complex energy regulatory matters, such as utility rate cases, while lightening the load for other appellate courts.

"Having to help draft a 70-page PUC opinion, it takes time, and you have to clear the decks," Hersh said. "When the decks are lighter, you're going to have an easier time."

And with the Fifteenth Court of Appeals automatically handling cases involving state agencies, energy companies thinking about bringing disputes in the business court could get an idea of the appellate court's jurisprudence relatively quickly, Hersh said.

Jurisdictional Hurdles

Attorneys say one of the most important things energy companies have to consider before agreeing to litigate in the business court is whether the court has jurisdiction of not only their case in general, but each individual claim.

For example, Brown of Kirkland said a dispute over an oil and gas joint operating venture might have some contractual claims that meet the business court's $10 million threshold but other allegations that don't. And Brown said parties frequently include noncontractual claims, such as fraud, in partnership fights.

But the business court doesn't automatically have supplemental jurisdiction over non-business court claims. Parties to the specific claims, and the court, have to agree to supplemental jurisdiction.

"Obtaining that after the dispute has been initiated could be very difficult," Brown said.

Another potential hurdle is that the business court largely exempts actions taken by a bank, credit union or savings and loan.

"If you're in a multiparty dispute where a bank is involved, you may not be able to bring that part of the claim in a business court, even if you can bring your claim in the business court against your main business partner," Brown said.

There's nothing that necessarily would stop energy companies from pursuing claims in business court and regular courts simultaneously, but many companies may conclude that it's not worth the hassle and expense.

"If you've got a complex case involving torts, breach of contract and interference with contract, maybe even third parties that are involved, I think people are going to definitely be more hesitant about bringing those lawsuits [in the business court] and piecemealing litigation," Baughman of McGinnis Lochridge said.

Uncertainty Leading to Hesitancy

Don't expect energy companies to flock to the business courts now that the doors are open, attorneys say. Not only are they new courts with no developed case law, their ability to operate is still in question.

The new courts did score a significant win last month when the Texas Supreme Court rejected a constitutional challenge to the Fifteenth Court of Appeals brought by Dallas County.

"Until those get sorted out, there will be a cloud of uncertainty," Benoit of Bracewell said. "If you proceed in the business courts and it's determined that the courts are unconstitutional, you've litigated all of this time ... and all of it is a nullity."

Even if the business court passes constitutional muster, attorneys said companies may stick with what they know — commercial arbitration or trial courts — until they see some rulings from the business court, both on jurisdiction and merits. That could take a while if there aren't companies willing to be guinea pigs.

"The goal is to provide predictability and certainty," Brown of Kirkland said. "But to a certain extent it's a catch-22 because until a few decisions start to be issued, everyone, to some degree, is a test case."

Still, there's a lot of momentum to move complex disputes, including energy disputes, into the business court, attorneys said.

Greenberg Traurig litigation shareholder Craig Duewall said he's advising energy companies' general counsel to keep negotiating the standard litigation provisions in their contracts, and simply layer on a business court provision if they're serious about having complex, big-dollar disputes go there.

"The business court is just one extra tool that an energy litigator has there, to direct that case in front of a judge who has expertise on these issues," Duewall said.