AUSTIN – For one side it was a partnership; for the other, it was simply “a feasibility study.”
But Tuesday’s collision between Dallas-based Energy Transfer Partners and Houston-headquartered Enterprise Products Partners in the Supreme Court of Texas lived up to its billing as a case that involves more than a failed joint venture and a $535 million jury verdict.
It’s a Hobson’s choice for the state’s highest court: a choice between the statutory law that defines a business partnership in Texas and the four corners of a contract – long regarded by SCOTX as marking sacred ground.
Legal experts say it is the most important business partnership dispute to be decided by the Texas Supreme Court since Pennzoil v. Texaco in the 1980s.
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 form a joint venture with a Canadian firm. The Enterprise desertion was deemed a breach of fiduciary duty by a Dallas jury in 2014, which ruled that Texas law does provide for a business version of common law marriage.
That verdict was unanimously overturned in 2017 by the Dallas-based Fifth Court of Appeals.
ETP attorney Jeremy Fielding began oral arguments proposing two key reasons why the jury verdict should be reinstated.
First, he said, it is “undisputed” that the history of the deal satisfies the five factors defining a business partnership under the Texas Business Organizations Code. Second, that the contract Enterprise backed out of doesn’t say what they say it says.
Chief Justice Nathan Hecht quickly interrupted, asking Fielding to clarify whether any partnership agreement where the parties had already acted as though they were partners would be unenforceable if their agreement specified that it wouldn’t be effective “until x” happened.
Justice Eva Guzman followed that up, asking under what conditions any such contract stipulation could survive if the venture had already satisfied the Texas Business Code.
Fielding said the partnership had, in fact, gone beyond that. When asked by Enterprise leadership in July 2011 whether ETP was “still in,” company CEO Kelcy Warren answered, “Yes.”
The anecdote addressed an Enterprise argument that the proposed joint venture had never been formed because neither company signed definitive agreements approved by their respective boards.
“But the CEO is not the board,” opined Justice Brett Busby, a recent addition to the court. “So, I’m trying to figure out what to do with that language.”
On behalf of Enterprise, David Keltner picked up on that argument. He reiterated that a partnership between Enterprise and ETP could not have been formed without a formal agreement. Under a different section of the TBOC, partnerships are not legally formed between two parties until there is an “association” to carry on a business for profit, Keltner argued.
That was not the case here, he said, because ETP and Enterprise agreed in advance that they would not pursue a business for profit unless certain key conditions were met. That is directly the opposite of association: “Disassociation,” he said.
Justice Jeffrey Boyd chimed in.
“Can you agree it could be true that both these parties associated to carry on a business for profit as described through the five factors and yet at the same time, had previously agreed that doing so would not create a partnership in spite of the business code provisions … Could those both be true?”
“In the abstract, divorced from the facts of this case, that could be the case,” Keltner replied, “But in this case it’s uniquely unavailable.”
Justice Guzman asked Keltner if a circumstance could exist in which there’s “conduct so inconsistent with whatever intent is reflected” in the contract that causes a partnership to form under the five-factor test.
“We have to admit that could occur,” Keltner answered, but he said that was not what happened in this case. He argued that under a different statute under Rule 279 of the Texas Rules of Civil Procedure, there was a requirement to present a waiver question to the jury.
Although ETP argues that the parties had waived the conditions precedent that were not met to form a partnership, Enterprise argues ETP missed the boat on making that argument since they did not bring a question about waivers before the jury. Keltner argued that wasn’t an accident: “They made a strategic decision not to submit waiver in this case and risk the answer.”
When Justice Boyd and Justice Guzman asked Fielding to address the waiver issue, he answered that the waiver issue was still addressed in question 1 of the jury charge. The question asked if ETP and Enterprise formed a partnership and included the five components of the TBOC.
“Not all of these factors must be established for a partnership to exist,” the directions in the jury charge state right before the question. “The issue of whether a partnership exists should be decided considering all of the evidence that bears on these factors. No single fact may be stated as a complete and final test of partnership.”
Not to mention, Fielding added, including a waiver question would have made no sense. It would be the equivalent of asking, “Are you sure?” had there been a waiver question right after question no. 1. “It would have been an orphan question,” he said.
When Justice Guzman asked Keltner if a business agreement is “for profit” if the parties “agree to seek and develop profitable relationships” since “eventually” that’s what the arrangement would lead to, Keltner replied “not in this case.”
“Could it be? Yes. But that fact that you didn’t make a profit makes no difference. The fact that you never even got the business off the ground makes no difference … as the court of appeals says, you have to have the potential or the capacity for generating profit.”
Justice Lehrmann cut in: “So you’re saying they could have agreed to be partners but were not entering in this enterprise to try to make a profit?”
“This was a feasibility study,” Keltner replied. “That’s what it was. We were trying to figure out what this matter might look like and whether it could make a profit. That was the reason for the open seasons.”
During rebuttal, Justice Debra Lehrmann asked Fielding to address Keltner’s profit argument.
Fielding responded that it “was very clear” that the statute uses the profit language to distinguish organizations that have the purpose to make profits and associations that are nonprofits or non-commercial.
Justice Jane Bland, the court’s newest member, interrupted, saying that it was obvious the statute was designed to distinguish more than profit versus nonprofit, such as an employee relations situation of splitting revenues.
Fielding said the better way to distinguish the two would be commercial versus non-commercial.
“There’s no dispute that the purpose of the partnership [between ETP and Enterprise] was to make a profit,” he said. “The parties were not just doing this for fun.”
Legal experts following the case say that ETP is shouldering a heavy burden by trying to convince the Texas 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, they say.
Reinstating the half-billion-dollar verdict would have an effect that reaches far beyond the monetary aspect, ETP says.
“This is a big case for us, but not just from the dollar perspective,” Tonja De Sloover, Energy Transfer’s head of litigation in Houston, told The Texas Lawbook in an exclusive interview. “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.”
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 wrote in a court filing. “That view created enormous concern in the Texas business community until the court of appeals ruled.”
Jeremy Fielding is a partner in the Dallas offices of Kirkland & Ellis. Until recently, he was a partner at Lynn Pinker Cox & Hurst, the firm that represented ETP at trial. David Keltner is with Fort Worth-based Kelly Hart & Hallman.