AUSTIN — For nearly a decade, Energy Transfer Partners and Enterprise Products Partners have battled each other in what is considered the most important partnership dispute in Texas since Pennzoil v. Texaco.
The Moment of Truth is finally here for the two rival pipeline giants. By the time the sun’s morning rays brush over the roof of the state’s capitol Tuesday, an army of lawyers for both companies will have already settled into the nearby building that houses the Supreme Court of Texas, shuffling papers as they brace themselves for the tough questions to come by the nine black-robed justices of the state’s highest court.
Their argument is over an Oklahoma-Texas pipeline project and the level of commitment that existed between the two midstream behemoths before Enterprise jilted ETP to couple with a Canadian firm.
In 2014, a Dallas jury found that ETP and Enterprise were in fact a partnership that Enterprise had fraudulently abandoned. ETP is asking the justices to reinstate that landmark jury verdict which declared, in effect that under Texas law there is a business partnership equivalent of common law marriage.
That verdict was overturned in a 2017 ruling by the Fifth District Court of Appeals in Dallas that unanimously reversed the jury’s decision. The appeals court ruled said ETP had failed to prove that Enterprise’s actions were part of a planned joint venture that superseded prior written agreements between the two pipeline giants that no official partnership would form unless certain conditions were met.
ETP must shoulder the heavy burden of convincing the Supreme Court to overturn the state appeals court. The 2014 jury verdict in the Dallas-based company’s favor reflected a school of thought that some say is radical. Plus, it’s no secret that the defense-friendly bench of the Texas Supreme Court is not a fan of preserving large jury verdicts for plaintiffs.
Reinstating the half-billion-dollar verdict would have an effect that reaches far beyond the monetary aspect, ETP says.
Energy Transfer makes essentially a three-pronged argument:
Texas state law is absolutely clear in the elements of forming a business partnership, and those elements existed here;
Enterprise’s actions and alleged deceit showed company executives knew a partnership had been formed; and
Reinstating the jury verdict is the noble thing to do — for the sake of keeping companies ethical and lawful in the way they conduct business in the Lone Star State.
“This is a big case for us, but not just from the dollar perspective,” Tonja De Sloover, Energy Transfer’s head of litigation, told The Texas Lawbook. “I trust that the Supreme Court will read the agreements and do the right thing for all Texas businesses, not just us. I hope Texas does not become a state where a party can steal an opportunity from its partner and say, ‘Texas law says I can.’”
“Our executives unknowingly lived through this very scenario,” De Sloover said. “That is not the way we do business, and it should not be the way others do business – in Texas or any other state.”
Enterprise’s legal team declined to be interviewed for this story, but the Houston-based company argues in its briefing that the Dallas appeals court got it right because it brought certainty back to the state’s business and legal community.
The key evidence for Enterprise, according to lawyers, are a series of agreements or letters of intent in which Enterprise states there was no partnership until both sides agreed that there was.
Lawyers for Enterprise say that the 2014 jury verdict caused “shockwaves” in the business community by finding that two sophisticated parties such as Enterprise and ETP could be legally-binding partners despite paperwork that said they were not.
“ETP favors a business environment in which no one knows they are in a partnership until the jury returns a verdict,” Enterprise writes. “That view created enormous concern in the Texas business community until the court of appeals ruled.”
“The court should note the grave consequences of ETP’s theory, which are emblematic of its overreaching approach to this entire case,” Enterprise writes. “If accepted, ETP’s novel argument would abolish not only conditions precedent to partnership but also the letter-of-intent cases allowing parties to bargain for conditions precedent to any binding contract. That result, which would cripple businesses in Texas, is not the law.”
To the contrary, ETP argues, the direction it urges the high court to take is in line with what the rest of the nation is doing.
“The question is whether Texas will join the 40-plus states that follow the Uniform Partnership Law — and hold that the parties’ conduct is what controls partnership formation — or whether the court will accept Enterprise’s invitation to become a national outlier and allow partners to steal from each other,” Mike Lynn, ETP’s lead lawyer, told The Texas Lawbook.
Moreover, Lynn argues, “The agreement that is so important to Enterprises’ argument is not an agreement to be bound to anything. At best, from Enterprises’ viewpoint, it is a statement at one point in time and binds no one by its express terms.”
Appellate partner David Keltner of Kelly Hart & Hallman will lead Enterprise’s oral argument at the Supreme Court. Jeremy Fielding, who played a significant role at trial, will deliver the argument for ETP. Fielding practiced at Lynn’s firm, Lynn Pinker Cox & Hurst, until last month, when he departed for Kirkland & Ellis.
The fact that 15 amicus briefs – seven favoring ETP and eight supporting Enterprise – have been filed is a testament to the widespread attention the case has garnered among major corporations, legal scholars and business groups.
2,930 days ago …
ETP sued Enterprise Sept. 30, 2011 alleging Enterprise broke its commitment to build a pipeline called the “Double E” from Cushing, Oklahoma, to Houston when it opted to pursue an opportunity with Canada-based Enbridge instead. ETP argued at trial that Enterprise and Enbridge conspired to cut it out of the deal.
Enterprise argues that it never had a legally-binding partnership with ETP, that the two never had an exclusivity agreement and that its project with Enbridge was fundamentally different. Enterprise has also emphasized that it ended its proposed joint venture with ETP after their open season expired without enough commitments from shippers.
The one commitment they did receive was from Chesapeake, but it accounted for less than half of the 250,000 barrels of oil per day needed to ship in order to make the project viable. Enterprise viewed ETP’s lawsuit as a “partnership by ambush.”
ETP says Enterprise’s characterization of its relationship with ETP being a “partnership by ambush” is laughable.
Enterprise represented itself as ETP’s partner at least 30 times in meetings to potential customers and to Enbridge, as well as through emails, press releases, web articles and conference calls, according to lawyers for ETP.
Although the case is now thousands of days old, Lynn and De Sloover say there is only one day in the case’s history that truly matters.
At 10 a.m. on Aug 9, 2011, ETP executive John McReynolds visited Enterprise Plaza in downtown Houston to meet with then-Enterprise CEO Michael Creel about their project.
At the exact same time, a different meeting was unfolding three floors down between Enterprise executives Mark Hurley and Bart Moore and Enbridge Senior Vice President Vern Yu, who had traveled to Houston from Canada to discuss the possibility of partnering with Enterprise to build a pipeline very similar to its project with ETP.
These meetings occurred six days before Enterprise terminated its agreement with ETP.
Lynn said ETP discovered this only after Enbridge — not Enterprise — produced emails in the litigation documenting their secret discussions, which ETP argues were in direct violation of an agreement between ETP and Enterprise to conduct no secret meetings during the course of their joint project.
In an Aug. 10, 2011 email, Enterprise executives sent a term sheet for Enbridge to review that laid out the details and conditions of their proposed joint venture.
Another internal email from Chesapeake dated Aug. 17, 2011, indicates Enterprise had told Chesapeake, the only committed shipper in ETP and Enterprise’s “Double E” pipeline, that Enterprise had “eliminated” ETP as a partner. Separately, ETP argues, Enterprise misleadingly told Enbridge that shipper commitments were made to Enterprise directly and not to the Double E joint venture.
Also: The same day Enterprise terminated the Double E joint venture, ETP alleges, Enterprise executives secretly boarded a private jet to Oklahoma to meet with Continental Resources — which had expressed interest in the Double E pipeline and would have been the first substantial shipper — and told executives about its new project brewing with Enbridge.
ETP briefs state that Enterprise admitted multiple times in various communications that it needed to “end” or “dissolve” the partnership and “drop” ETP as its partner before moving forward with the Enbridge joint venture.
“Enterprise knew that what it was doing was wrong,” Lynn says. “It moved to quickly steal the opportunity, and it moved secretly without telling ETP — even though the players were just a few yards apart.”
ETP’s legal team argues that the Supreme Court should look no further than that set of facts in determining whether Enterprise’s reasoning makes sense.
“By statute, a partner’s duty of loyalty cannot be waived,” Lynn said. “Stealing is never permitted. Enterprise says that the duty of loyalty can be waived (and thus, stealing can be made legal) if you just put the right legal label on the document.”
Legal arguments
At the heart of the ETP-Enterprise Supreme Court battle is whether a set of written agreements entered by the two parties or law established by the Texas Legislature defined — or prevented — the formation of the companies’ partnership.
Enterprise refers to three written agreements it had with ETP in April 2011 — an early-stage letter of intent, a confidentiality agreement and a reimbursement agreement — to argue that because certain conditions set out in them were not met, a legally-binding partnership never existed.
The document most discussed in the Fifth Court of Appeals’ decision was the letter of intent, which said no binding obligations between the parties should exist “unless and until” both sides signed definitive agreements that have been approved by both boards of directors. Because neither occurred, Enterprise argued that it barred partnership formation, and the appeals court agreed.
Signed on April 21, 2011 by ETP President and COO Marshall “Mackie” McCrea and Enterprise Senior Vice President Mark Hurley, that clause in the six-page agreement reads as follows:
“Neither this letter nor the JV Term Sheet create any binding or enforceable obligations between the Parties and, except for the Confidentiality Agreement dated March 16, between the Parties (the “Confidentiality Agreement”)’, no binding or enforceable obligations shall exist between the Parties with respect to the Transaction unless and until the Parties have received their respective board approvals and definitive agreements memorializing the terms and conditions of the Transaction have been negotiated, executed and delivered by both of the Parties.”
“Unless and until such definitive agreements are executed and delivered by both of the Parties, either EPD or ETP, for any reason, may depart from or terminate the negotiations with respect to the Transaction at any time without any liability or obligation to the other, whether arising in contract, tort, strict liability or otherwise.”
Lynn said Enterprise’s reasoning is problematic because it is “inconsistent with the basic principle of partnership law that actions control over words.”
“It asks the Texas Supreme Court to judicially amend a clear statute that says ‘intent’ is only one of five relevant factors,” he said.
Which leads the justices to the five-part test in the Texas Business Organizations Code.
Adopted by the Texas Legislature in 2003, the TBOC is described in court documents as essentially the same as its predecessor, the Texas Revised Partnership Act, which for the first time established five factors similar to the common law governing whether parties have entered a partnership.
Former state Representative Jim Rudd, in an amicus brief supporting ETP, wrote that TBOC states clearly that “partnership formation in Texas is judged by how the parties act, not just what they write.”
“If you act like a partner, you have a partnership,” Rudd wrote. “If you act like a partner and you have a side agreement that you are not partners, you are still in a partnership.”
What sets the TBOC apart from its predecessors was a totality-of-the-circumstances test, which in layman’s terms means one should consider the totality of parties’ speech, writings and conduct as the best evidence of partnership formation.
The Legislature’s intent on this was affirmed in the 2009 Texas Supreme Court decision, Ingram v. Deere, which ETP cites heavily in its briefs. At the same time, Ingram established the idea that proof of all five factors in the TBOC is not required to determine whether a partnership formed.
“By including expression of intent as only one of five factors to be considered, the Legislature determined that parties should not be able to conduct themselves as partners — sharing profits and losses, jointly controlling their enterprise, touting a ‘partnership’ to the public, etc. — and then later disclaim a partnership and its attendant duties by reference to an earlier, superseded agreement,” ETP writes.
The problem with ETP’s argument, Enterprise says, is that it would eliminate the notion of free-governing contracts among parties, which it argues is “a paramount principle of Texas commercial law.”
Enterprise heavily touts El Paso’s Eighth Court of Appeals’ 1931 decision in Root v. Tomberlin, which imposed five conditions were precedent to forming a partnership contract. The second condition — contract could only be executed after the business arrangement began producing profits — was not met, therefore a partnership was not established.
Another key element to Root, Enterprise points out, is that the “intention of parties to contract” is a “prime element in determining whether or not a partnership or joint venture exists.”
Moreover, no other case law, Ingram included, overrules Root because the TBOC’s five-part test was only designed to “supplement” existing state law while still preserving “the freedom of sophisticated parties to impose conditions on partnership formation,” Enterprise lawyers argue.
“That is why Root, true to its name, has secured its place in Texas jurisprudence,” Enterprise writes. “The court of appeals wisely rejected ETP’s argument that partnership formation is governed exclusively by section 152.052(a) [of the TBOC’s] five-factor test.”