While the Deepwater Horizon oil spill has largely disappeared from the news headlines, for the parties involved in the litigation, the legal machinations, particularly with respect to liability, have a long way still to go.

In the first of several related rulings, on September 4, 2014, U.S. District Judge Carl Barbier (the presiding judge of MDL 2179, the limitation and liability action regarding the Deepwater Horizon oil spill) issued a ruling allocating liability in the United States’ Clean Water Act (CWA) enforcement action against BP, Transocean, and Halliburton. Specifically, the court ruled that BP was grossly negligent and 67 percent at fault, Transocean was negligent and 30 percent at fault, and Halliburton was negligent and 3 percent at fault. The finding that BP’s actions were grossly negligent lifts the maximum CWA civil penalty from $1,100 per barrel of oil discharged to $4,400 per barrel. Using the EPA’s estimate of 4.9 million barrels discharged, which BP has strenuously disputed, the penalties assessed could be in excess of $20 billion. Additionally, the court found that BP’s actions would typically have merited a punitive damages award, but held that punitive damages are prohibited in this instance by specific 5th Circuit precedent.

In October 2013, the court completed the trial regarding the total number of barrels discharged but has not yet released its findings. Additionally, the court is set to commence the “Penalty Phase” of the trial – in which the parties will present evidence related to the CWA penalty factors, which will be used to determine the fine to be assessed per released barrel – in January 2015. Once the court determines the number of barrels discharged and the applicable fine per barrel, it will determine BP’s ultimate liability in CWA fines (the fines assessed will vary depending on the allocation of fault, but BP is indemnifying both Halliburton and Transocean).

In reviewing the court’s decision, there are a number of important legal theories that the court relied on in making its decision, which should be “takeaways” for the oil and gas industry:

  • Causation: According to the court, liability under the CWA requires more than simple “but for” causation but less than many proximate causation tests. If a company’s negligent act is “a substantial factor in causing the injuries,” then it may be found liable under the CWA.
  • Gross Negligence: The court described gross negligence under the CWA as “an extreme departure from the care required under the circumstances or a failure to exercise even slight care.” Further, it stated that a finding of gross negligence requires only objective proof and does not additionally require subjective proof of a “culpable mental state” as BP argued. It is possible that BP will challenge the gross negligence standard used by the court on appeal.
  • Attribution of Employee Conduct: The court found that “a corporation is vicariously liable under the CWA . . . for the gross negligence and/or willful misconduct of its employees” and rejected BP’s contention that the company is liable only for “authorized” employee actions or actions that are subsequently ratified by the company.
  • Punitive Damages: The court stated that BP’s conduct was sufficiently egregious to justify an award of punitive damages, but held that 5th Circuit law prohibits punitive damages in this scenario.[1] The court went out of its way, however, to state that it would have awarded punitive damages under 1st and 9th Circuit law.

The court’s findings of fact and corresponding analysis also give insight into the actions and events that the court found particularly significant and, in some respects, provide useful guidance to the industry regarding which “best practices” could be used to help head off a finding of gross negligence in the future. The following is a list of some of those findings:

  • The court focused intensely on whether certain decisions actually were – or theoretically could have been – “motivated by profits” or based on financial pressure.
  • The court viewed deviations from the original drilling plan or from established “best practices” skeptically, particularly if those decisions saved time or money. However, in at least once instance, the court determined that following the drilling plan and best practices was insufficient. The court took a more favorable view of deviations when there was formal deliberation and debate prior to making the change to the drilling plan.
  • If a test result deviated from the expected or modeled result, the court generally expected the test to be rerun or the results to be investigated and understood before moving forward.
  • The court stated that “a greater degree of care is required when the circumstances present a greater apparent risk” and found that cumulative decisions that increased risks, even when the individual decisions themselves were not unreasonable, further “raise[d] the standard of care” required. In other words, when the drilling is difficult or complicated, an even higher standard of care (and perhaps even more testing) must be taken during each subsequent step in the drilling process. For example, the court found that, due to the previous drilling complications, “the negative pressure test at the Macondo well demanded a level of care exceeding the ‘high’ care typically required during such a test.”
  • The court took a favorable view of explicit actions prioritizing safety (e.g., demonstrable responsiveness to kicks) when determining that Transocean and Halliburton were only negligent.
  • While the court did not find that violating a regulation or law itself constituted negligence as a matter of law, regulatory violations were given significant weight in the analysis. Complying with the applicable regulations was not sufficient, however, as the court stated that “[a]lthough MMS regulations at the time did not explicitly require a negative pressure test, no party disputes that it is a safety-critical test.” The misinterpretation of this unrequired negative pressure test was one of the court’s main bases for the finding of gross negligence against BP.
  • The court undertook a formalistic analysis of entity responsibility, looking to the contractual documents for allocations of responsibility.
  • Some harmful evidence was generated during BP’s post-accident internal investigation. For instance, while neither participant to the 8:52 pm phone call regarding the interpretation of the negative pressure test testified at trial, the court relied on notes regarding their post-accident statements to BP’s incident investigation team to establish BP’s actual knowledge that the negative pressure test was unsuccessful.

The court’s decision provides useful insight into how a reviewing body, in the wake of a significant environmental, health, and safety incident, may view the decisions and actions taken by major players in the oil and gas sector, both pre- and post-incident. As a result, the sector has an opportunity to learn from the incident and to adjust or adopt new best practices in order to promote increased safety in the oil patch and to avoid the unfortunate string of events that led to the Macondo well blowout.

BP has engaged in an extensive appeals process regarding Judge Barbier’s previous rulings related to the implementation of two large settlement agreements that BP entered into with private plaintiffs throughout the Gulf of Mexico region – and the relationship between BP and the court has, at times, been acrimonious. Given the extraordinarily high stakes involved, it is almost certain that BP will appeal at least portions of the court’s recent ruling.