Business Alabama Feature Article


A $3.5 billion judgment against ExxonMobil in Montgomery Circuit Court dredges up images of Alabama as a "tort hell" repellent to business. According to the Mobile trial lawyers who represented the state-and stand to earn a fee of $490 million-the case is a matter fundamental to good business: minding the till.
After a Montgomery jury put a tiger in ExxonMobil's tank with a record $3.5 billion fraud verdict, the world's largest oil company fired back with 60 stipulations as to why the verdict should be thrown out.

Circuit Court Judge Tracey McCooey on January 30 denied ExxonMobil's plea for a new trial. As this story went to press in mid-February, she was still considering a further ExxonMobil request to reduce the size of the mammoth award.

Whatever her decision is, McCooey declared she'd make it snappy. "This isn't going to be something that drags along for years and years like the Exxon Valdez," she told the company's lawyers.

The wrangle in Montgomery was the latest round in litigation ExxonMobil has been fighting from Alaska to Alabama, and an indication of Alabama's "tort hell" hasn't frozen over, according to Skip Tucker, executive director of Alabama Voters Against Lawsuit Abuse.

"Just on its face, I think it's ridiculous and a throwback to the bad old days and something we thought we had fixed," says Tucker, who pegs the award as the fourth largest punitive verdict ever in the United States.

Until there are guidelines on lawsuit damages, Tucker says, "wily, wealthy trial lawyers can beguile a jury into giving them pretty much everything they want."

ExxonMobil attorney Jack Balagia of Houston explains, "Our main argument at trial was the lease allowed us to pay royalties the way we paid them, that the state knew we disagreed with their interpretation and that we had asked the judge to resolve this dispute."

A high-powered group of Mobile trial lawyers was retained by the State of Alabama to go after $87 million in unpaid royalties and interest it contends Exxon dodged. They produced internal Exxon documents, including a memorandum referring to Alabama's "inexperienced regulatory staff and processes".

They seized on that phrase to convince the jury the oil executives figured Alabamians were "a bunch of Bubbas."

ExxonMobil says the comment in the memo simply and accurately described the Alabama Department of Conservation and Natural Resources' "poorly drafted lease form."

The lease was unclear, ExxonMobil said in response to the giant verdict.

"In fact, the trial evidence shows that the Department employee who wrote the lease did so by cutting and pasting together provisions of other lease forms. He admitted at trial that he had never before written an oil and gas lease, that it took him a year to write this one, and that he has not written one since," ExxonMobil said in a news release posted on its Internet website www.exxonmobil.com.

All true, lawyers for the state concede. They say Alabama's offshore gas lease incorporates model provisions taken from other leases, that it took a year of research to craft a good lease favorable to the state and that it's so water-tight there hasn't been any need to re-write it in the two decades it has been in use.

In fact, Robert Macrory, the DCNR attorney who developed the lease, is the former executive director of the Alabama Petroleum Council, a division of the American Petroleum Institute funded by ExxonMobil among others in the oil and gas industry.

At the time he was asked to craft a lease for Alabama offshore gas tracts in 1979, Macrory who later served as assistant commissioner of the Alabama Conservation Department, from 1995 to 1998-was the department's chief legal counsel.

His assignment was to develop a lease favorable to the state that would bring in the best return for the state's non-renewable offshore gas. "Most industry leases were just put on Farmer Brown's table," says Macrory, currently DCNR's deputy attorney general.

"All other forms-and those the subject of lawsuit after lawsuit across the country were lease forms prepared by the oil and gas industry to place the value at the wellhead where it is first severed from the earth," he says. "And each company had its own way of computing the value of gas at the wellhead."

After gathering leases from the federal government and from several states across the country, Macrory began reading gas and oil treatise and ran across a suggested model lease form first published in the "Nebraska Law Review,"

Macrory says he was impressed by the publisher's comments saying the lease treated the oil and gas company and the landowner fairly and equitably, basing royalty on gross proceeds.

He says the lease was recommended by an eminent University of Oklahoma oil and gas law professor who had written many books on the subject. "It had a provision that focused on gross receipts at the price received, disallowing all deductions," Macrory says.

When the Alabama gas finally began production in 1992-after years of delay, in large part owing to Alabama's regulatory processes and environmental suits by Alabama attorneys general-the fields came in at volumes that ranked them alongside the gas reserves of Prudoe Bay, Alaska, It was a huge, world-class discovery of new reserves, which were relatively close to shore, easy to produce and next door to one of the country's richest gas markets, Florida.

Even back in 1979, state geologists had a pretty good idea of the size and market potential of the Grand Canyon of reserves on top of which they was sitting. And, says Macrory, Alabama set out with determination to draft a lease that was suitably different from standard industry-drawn documents-leases that based royalty on the lowest possible value of gas at the wellhead.

Over the years, rafts of lawyers for Exxon, Mobil, Shell, Amoco, Unical and Hunt Oil signed Alabama's offshore gas leases. "None of these companies raised a question about this royalty provision up until audits were performed," Macrory says.

However, Exxon and the State of Alabama have disputed the royalties since 1995.

Representing the state, John Crowder of the Mobile law firm Cunningham, Bounds, Yance, Crowder and Brown-told the trial jury he "wished he could have been a fly on the wall" when Exxon executives discussed the lease with the company president and cited Alabama's inexperience in regulatory matters.

"They probably said something like, 'This is a no-brainer. We're not dealing with sophisticated people in New York or California. We're dealing with Alabama. We've got us a bunch of Bubbas, and they'll never figure out that we're cheating them out of royalties,"' Crowder told jurors.

In fact, the state ordered an audit by an independent industry expert beginning with the first year of production, in 1993. That audit report was filed in 1997, and there have been two more audits since, covering the entire period of production.

The jury awarded the state $87.7 million in compensatory damages and $3.42 billion in punitive damages. The punitive damages were based on three times the company's anticipated profit over the life of the Alabama underwater gas fields, which are expected to continue in production and development for another 30 years.

Similar suits are pending in Mobile County Circuit Court against four other companies producing gas off Alabama's coastline.

Alabama has leased the mineral rights in state-owned water bottoms along its coast to Exxon and several other majors since Mobil discovered the big natural gas bonanza in the late 1970s.

Both Exxon and Mobil operated their own offshore wells and on-shore gas processing plants before they merged into ExxonMobil in November 1999.

After ExxonMobil first filed for a declaratory judgment in Montgomery

County Circuit Court, the state responded by filing a counter-claim.

ExxonMobil attorney Balagia says the company filed the lawsuit first. "We had been unable to resolve it before. We had tried to settle this dispute with the state and had been in settlement discussions with them for several years," he says.

ExxonMobil's vice president for public affairs, Kenneth P. Cohen, characterizes the case as a royalty payment dispute. "We view this as a case of whether an additional $40 million was due the state," he says. "From the time it began, Exxon and the State of Alabama disagreed over royalty payment. We knew the way the lease was drafted we were going to have interpretation problems with the state."

Cohen goes on the counter-attack as he describes how this business disagreement morphed into allegations of fraud.

"These personal injury lawyers were hired to represent the state, and all of a sudden it moves from being a contract case into a case of fraud," Cohen says. "And a half-billion payoff for a few well-connected. Alabama trial lawyers. That's a chilling reminder of the influence wielded in your state by personal injury lawyers."

The Mobile firm selected to represent the state for 14 percent of the recovery in an agreement negotiated with Gov. Don Siegelman's office includes close supporters of the governor, a Mobilian who once practiced law in the seaport city.

Richard Dorman, a childhood friend of Siegelman who was one of the three attorney team taking on ExxonMobil, headed the governor's ill-fated lottery push year before last. He was chairman of the Alabama Education Lottery Foundation, a PAC to fund the lottery campaign.

The Cunningham, Bounds law firm, one of the most successful plaintiff firms in Alabama, was second only to trial lawyer béte noir Jere Beasley in contributions in 1998 to challengers who opposed pro-tort reform candidates. The firm kicked in a total of $955,000, compared to Beasley's $1 million, to six candidates, through the Democratic Party and two political action committees, Pro-Pac and Trial-Pac, according to the pro-tort reform Alabama Citizens for a Sound Economy.

ExxonMobil also hired the best lawyers it could get in the vigorously contested lawsuit, Crowder notes. He says ExxonMobil knew the lease drafted by Alabama strongly favored the state. "They have 115 lawyers. They reviewed this lease knowing it was different," Crowder says. "They signed it 22 times."

After Exxon's gas wells came on line, he says, "They made a conscious decision to ignore the terms of Alabama's lease and threw it in the pile with their industry friendly leases."

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