Lessons Learned About Indemnity and the Attorney/Client Privilege in Environmental Cases from Exxon Mobil Corporation v. Trade Exploration Corp.

Lessons Learned About Indemnity and the Attorney/Client Privilege in Environmental Cases from Exxon Mobil Corporation v. Trade Exploration Corp.

A Texas court of appeals held that an energy company did not waive the attorney/client privilege through the offensive use doctrine when it filed a lawsuit against the purchasers of properties for their failures to provide the company with a defense and indemnification for environmental claims made by third parties years after the sale.  All companies facing environmental claims can benefit from the lessons this case teaches.

The question arose from a complex set of facts beginning with Exxon Mobil’s sale of properties located in Louisiana to Trade Exploration Corp., Bryan Wagner, James Finley and Duer Wagner, III (the Wagner Group) in 1994.  The sales contracts required the Wagner Group to indemnify Exxon in litigation concerning these properties.  Twelve years after the sale, three suits dealing with these properties were filed by three plaintiffs (M.J. Farms, Avahoula Resources and Agri-South Group) against Exxon.  The plaintiffs claimed environmental damage to the properties due to oil and gas operations on them and sought restoration and remediation of the properties.  Pursuant to the contracts, Exxon requested a defense and indemnification from the Wagner Group, but the Wagner Group refused to provide it with a defense or indemnification.  The M.J. Farms case was tried in Louisiana in March of 2011.  Facing a potential $3.9 million dollar verdict, Exxon decided to settle that case prior to the end of trial.

As a result of having to defend against these lawsuits (and subsequently settle the M.J. Farms lawsuit), Exxon filed suit in Harris County, Texas seeking a declaration that it was owed a defense and indemnification by the Wagner Group.  Exxon also sought to recover the settlement amount (but not the cost of defending the suit) from the Group as a part of its damage claim.  In response to this part of Exxon’s claim, the Wagner Group moved to compel the production of all of Exxon’s privileged communications related to the defense and settlement of the M.J. Farms case.  In reply, Exxon asserted the privilege defense.  The Wagner Group then claimed that Exxon waived the privilege by its offensive use of the privileged information in seeking the settlement sum as damages because the information was needed to determine whether the settlement was reasonable.

Rather than engage in an in camera review of Exxon’s lawyer’s entire M.J. Farms litigation file to resolve the privilege dispute, the parties agreed to a compromise that would set up the legal issue without burdening the trial court with a review of all of the privileged documents.  Under this arrangement, Exxon produced a privilege log for the communications[1] of the in-house lawyer charged with overseeing the case.  The in-house lawyer was also deposed by the Wagner Group.  In the deposition, the lawyer was asked questions relating to his mental impressions of the case, including questions about his assessment of the performances of some of Exxon’s witnesses at trial, whether those performances affected the settlement value, whether Exxon considered the jury to be a good one, Exxon’s evaluation of the quality of the opening statements, Exxon’s evaluation of the quality of its lawyers’ performance in cross examination, etc.  The lawyer did not reveal privileged information in the deposition, but did provide testimony about the non-privileged information relating to the settlement (settlement negotiations, communications with opposing counsel, objective factors it faced at trial, the trial court’s pre-trial rulings, etc…).

After the deposition, the Wagner Group renewed its request for documents related to Exxon’s mental processes and subjective beliefs concerning the settlement and defense of the M.J. Farms case.  Exxon again objected to the renewed request for the documents and submitted its privilege log and an affidavit for the trial court’s review.  After the trial court reviewed the privileged documents in camera, it held that the privilege had been waived by Exxon’s offensive use of the privileged materials and ordered the preliminary production of two documents.  But, because it was likely that a mandamus action would result from its ruling, the trial court stayed its order (that the remaining documents be produced) until Exxon could obtain guidance from the appellate court.  Exxon’s mandamus action was filed in the Fourteenth Court of Appeals.

The Fourteenth Court of Appeals (Justices Brown, Boyce and McCally) conditionally granted the mandamus relief requested by Exxon, directed the trial court to vacate its order compelling the production of privileged documents, and ordered the trial court to act in accordance with the opinion.

The court of appeals’ decision focused on the offensive use doctrine and whether it applied to the question of the reasonableness of the settlement.  The offensive use doctrine prohibits a plaintiff who is seeking affirmative relief from maintaining that action while simultaneously asserting “evidentiary privileges that protect from discovery outcome determinative information not otherwise available to the defendant.”  Tex. Dep’t of Pub. Safety Officers Ass’n v. Denton, 897 S.W.2d 757, 760-61 (Tex. 1995).  The Texas Supreme Court has held that the offensive use waiver of privilege “should not be lightly found.”  Republic Ins. Co. v. Davis, 856 S.W.2d 158, 163 (Tex. 1993).  The Supreme Court instructed courts to carefully assess three factors when considering whether the offensive use doctrine waives a privilege.  These factors are: (1) whether the plaintiff seeks affirmative relief; (2) whether the protected information is outcome determinative of the cause of action asserted by the plaintiff; and, (3) whether disclosure of the protected information the only means the defendant has for obtaining the information needed to defend against the lawsuit.  Id.

Exxon argued that the trial court abused its discretion by ordering the production of privileged documents because the Wagner Group failed to meet the second and third of these factors.  Exxon argued that the second factor in judging whether a settlement is reasonable is an objective factor, not a subjective one.  As such, Exxon’s thoughts and motives behind its decision to settle should have been irrelevant to the issue of whether the decision to settle (and the amount thereof) was reasonable.  Consequently, Exxon argued that the privileged information was not outcome determinative of the reasonableness of the settlement.  By contrast, the Wagner Group argued that the inquiry into the reasonableness of the settlement necessarily required an examination into the subjective beliefs of Exxon and its lawyers.

As to the third factor of the test, Exxon argued that the Wagner Group could obtain evidence about the reasonableness of the settlement from non-privileged sources, so the privileged information was not the only means the Wagner Group had of defending against the declaratory judgment action.  In response, the Wagner Group argued that a putative indemnitee must establish good faith “from its standpoint,” so subjective information (the privileged information) was the only evidence of whether Exxon’s settlement was made in good faith.  See Mitchell’s Inc. v. Friedman, 303 S.W.2d 775, 779 (Tex. 1957).

The court of appeals agreed with Exxon.  Relying on its prior decision in Amerada Hess Corp. v. Wood Group Prod. Tech., 30 S.W.3d 5, 11 (Tex. App.—Houston [14th Dist.] 2000, pet. denied), the court of appeals held that the test for evaluating the reasonableness of a settlement is an objective standard and that a jury must be guided by expert testimony on whether the settlement was reasonable, prudent, and made in good faith under the circumstances.  The court of appeals also looked to federal Judge Lee Rosenthal’s decision in Interspan Dist. Corp. v. Liberty Ins. Underwriters, Inc., 2009 WL 2605314 at *34 (S.D. Tex. Aug. 21, 2009), in which she held that the question of whether a settlement “was reasonable, prudent, and in good faith under the circumstances” is not a subjective test.  Id.  The court of appeals also voiced a concern that the Wagner Group’s approach would lead to the wide-ranging discovery of privileged documents.

The court of appeals also noted that the Wagner Group had access to evidence regarding the reasonableness of the settlement from sources other than the privileged documents.  The evidence supported this conclusion.  For example, it demonstrated that the Wagner Group had a representative at the M.J. Farms trial.  Therefore, the Wagner Group failed to establish that the privileged information was the only means it had of establishing its defense.  Because the Wagner Group did not establish the elements of the offensive use waiver doctrine, the court of appeals held that the trial court abused its discretion when it ordered the production of the privileged documents.

After the court of appeals released its decision in the mandamus action, the Wagner Group sought to overturn that decision by filing its own mandamus action in the Texas Supreme Court.  The Supreme Court denied review and allowed the court of appeals’ decision to stand.

The case was then remanded to the trial court to be tried in accordance with the court of appeals’ decision.  The case was tried to a jury.  On April 22, 2016, the jury found that: (1) Exxon and the Wagner Group entered into contracts containing an indemnity obligation; and, (2) Exxon’s settlement of both the M. J. Farms and Agri-South[2] lawsuits was in good faith and was reasonable and prudent under the circumstances.  On July 8, 2016, the trial court entered a final judgment against the Wagner Group, awarding Exxon $65,022,998.52 in actual damages plus pre-judgment interest, costs and post-judgment interest.

Lessons learned:

  • It is possible to invoke contractual indemnity provisions in environmental cases;
  • When invoking these provisions, expect the opposing party to assert the offensive use doctrine in an attempt to make privileged documents discoverable;
  • Expect your opponent to argue that the standard for evaluating whether a settlement is reasonable should be a subjective standard because a putative indemnitee must establish good faith “from its standpoint.” See Mitchell’s Inc. v. Friedman, 303 S.W.2d 775, 779 (Tex. 1957);
  • Be prepared to argue that the offensive use doctrine is an objective standard, not a subjective one;
  • Introduce evidence showing that your opposing party has access to non-privileged information about the reasonableness of a settlement; and
  • If the offensive use doctrine is invoked, set up a procedure that only puts a fraction of your privileged documents before the trial court for in camera

[1] The documents consisted of communications between the in-house lawyer and other Exxon attorneys and corporate representatives.

[2] During the pendency of the declaratory judgment lawsuit, Exxon also settled the Agri-South case.