Original-iphoneApple v. Samsung Saga

In 2012 and 2013, two Silicon Valley juries awarded Apple a total of $929,860,041 for Samsung's use in its smartphones and tablets of three intellectual property types — design patents, utility patents, and trade dress (or overall image).

On May 18, 2015, the Federal Circuit affirmed the judgment that ensued as to the first two kinds of IP but held as a matter of law that Apple's trade dress did not meet the "nonfunctional" requirement for protection under the Lanham Act.* Apple Inc. v. Samsung Electronics Co., Ltd., No. 14-1335 (Fed. Cir. May 18, 2015). 

Because the trade dress award accounted for $382 million, the outcome slashed Apple's payday by 41 percent, to $547,860,041 (before interest).

In this post, we'll look at the Federal Circuit's ruling on the protectability of Apple's trade dress. We'll discuss the court's affirmance as to the design and utility patents another time.

Origins

A few days before it announced the first iPhone in January 2007, Apple filed patent applications that covered design elements of the smartphone. In 2011, Apple combined resulting design patents with utility patents and trade dress in an epic lawsuit against Samsung.

The case went to trial the first time in 2012. The jury in San Jose found largely for Apple, determining that Samsung infringed multiple design and utility patents and diluted Apple's iPhone trade dress. The trial judge ordered a retrial on a portion of the $1.049 billion damages award, leaving $639,403,248 in place. In 2013, a second jury found $290,456,793 in damages.

Appeal

Samsung attacked the judgment on many grounds. One succeeded. But by itself it will save Samsung $382 million.

Trade dress can't serve a functional purpose

The Federal Circuit's rejection of the trade dress verdict turned on the rule against protection of "functional" elements of a product's image. 

"The essential purpose of a trade dress is the same as that of a trademarked word: to identify the source of the product." Apple, slip op. at 7 (citation omitted). Trade dress consists of the product's or service's total image. But it must have "inherent" distinctiveness.

Examples:

  • Volkswagen's "Beetle" design;
  • Decor of Taco Cabana and Hard Rock Cafe;
  • Color and shape of drug capsules and tablets;
  • Shape of old Coca-Cola bottles

Because "'trademark law allows for a perpetual monopoly and its use in the protection of “physical details and design of a product”, it "must be limited to those that are 'nonfunctional.'” Apple, slip op. at 7 (quoting Leatherman Tool Grp., Inc. v. Cooper Indus., Inc., 199 F.3d 1009, 1011-12 (9th Cir. 1999)). As the court explained:

“In general terms, a product feature is functional if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 850 n.10 (1982). “A product feature need only have some utilitarian advantage to be considered functional.” Disc Golf Ass’n v. Champion Discs, Inc., 158 F.3d 1002, 1007 (9th Cir. 1998). A trade dress, taken as a whole, is functional if it  is “in its particular shape because it works better in this shape.” Leatherman, 199 F.3d at 1013. 

 Apple, slip op. at 7-8 (emphasis in original).

Apple's iPhone trade dress consisted essentially of the smartphones' now-familiar look — a rectanglular body with round edges, a flat screen with colorful, square icons, and black borders around the screen and the distinctive appearances of the colorful icons themselves. Apple, slip op. at 9 & 15.

Apple flunks

But the trade dress failed the "nonfunctional" requirement, according to the Federal Circuit.

The court's test for nonfunctionality weighed four factors: “'(1) whether the design yields a utilitarian advantage, (2) whether alternative designs are available, (3) whether advertising touts the utilitarian advantages of the design, and (4) whether the particular design results from a comparatively simple or inexpensive method of manufacture.'” Apple, slip op. at 9-10 (quoting Disc Golf, 158 F.3d at 1006).

The trade dress, the court concluded, may have beauty, but it also "serve[s] the functional purpose of improving usability." Apple, slip op. at 14.

___________________

* The Lanham Act also protects trademarks and service marks and provides a cause of action for some kinds of false advertising.

Don't Be LateFocus on substance over procedure

The Supreme Court just vacated a judgment that enforced a six-year statute of limitations against beneficiaries of a employer savings plan.

The ruling reinforces the view that this Court feels little love for limitations defenses. It suggests the Court prefers getting to legal substance.

Claims under ERISA

The Employee Retirement Income Security Act of 1974 governs savings, pension, and other plans that companies set up to benefit employees and their families. The statute protects plan beneficiaries partly by giving them the right to sue the plan sponsor (the employer) and other plan fiduciaries (often officers of the sponsor) for breaching their fiduciary duties to the plan and plan beneficiaries.

One kind of ERISA claim challenges the prudence of plan investment options on the ground that the plan and its fiduciaries should have periodically reviewed those options and substituted lower-cost alternatives.

The plaintiffs in Tibble v. Edison Int'l, No. 13-550 (U.S. May 18, 2015), made just such a claim. They alleged that the Edison 401(k) Savings Plan's sponsor (the power generator Edison International) and the Plan's fiduciaries violated their duty of care by not monitoring the mutual funds that the Plan offered and swapping less expensive choices for the existing ones.

Summary judgment

The district court granted the motion of Edison and the other defendants for summary judgment on the ground that the six-year statute of limitations expired before plaintiffs sued. It allowed the Tibble plaintiffs to argue that the Plan's fiduciaries should have conducted a review of investment options within the limitations period but rejected their argument, holding that Tibble and the others "had not met their burden of showing that a prudent fiduciary would have undertaken a full due-diligence review of these funds as a result of the alleged changed circumstances." Tibble, slip op. at 3. The Ninth Circuit affirmed. Tibble v. Edison Int'l, 729  F.3d 1110 (9th Cir. 2013).

Try again

The Supreme Court unanimously disagreed with the courts below. Per Justice Stephen Breyer, the Court concluded that the district court and court of appeals had applied too stringent a test for when a change in circumstances triggers a fiduciary's duty to review the investment options of plan participants.

Justice Breyer noted that, "under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones." Id. at 6. The Ninth Circuit erred by not "considering the nature of the fiduciary duty" and by failing to "recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances." Id. at 5.

Because the Ninth Circuit required proof of a "significant" change in circumstances before a duty to reevaluate investment choices arose, the Court vacated the decision and remanded to the Ninth Circuit "to consider petitioners' claims that respondents breached their duties within the relevant 6-year period under 1113, recognizing the importance of analogous trust law." Id. at 7.

Take-away

Last May, the Court ruled against another defendant who complained about the tardiness of a lawsuit. In Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014) (post here), the Court held that a laches defense cannot override Congress's judgment to allow suits under copyright law to collect damages for a three year "look-back" period.

The outcomes in Tibble and Petrella support the view that the Court gives narrow play to procedural defenses like limitations.

Limitations defenses present especially thorny issues for plaintiffs. The plaintiff may take the case all the way to verdict before she learns that limitations bars her claim. Plaintiffs should prefer to get that over soon, before they've spent a lot of time and resources on the case. Delaying judgment day on limitations thus may end up doing more harm to the plaintiffs — and their contingent-fee counsel — than good.

Barry Barnett

AkamaiPolicy debate

If a firm that performs steps A, B, and C of a "method" patent induces the firm's customers to take step D — the final one — does the firm infringe the patent?

The question — which a two-judge majority on a Federal Circuit panel answered no — produced 62 pages of opinions and a sharp dissent. See Akamai Technologies, Inc. v. Limelight Networks, Inc., No. 09-1327 (Fed. Cir. May 13, 2015). 

The ruling doesn't settle the issue; the court sitting en banc or the Supreme Court will have to do that.

But, to a surprising extent, the majority explicitly echoed the arguments by organizations that went to make patents harder to get and patent lawsuits more difficult for plaintiffs to win.

Single-entity rule

Akamai sued Limelight Networks for infringing Akamai's patent on a process for fetching online content. (The technology related to a method for easing access to data during "peak usage" by making segments of content available on multiple servers in more than one location.) A jury found that Limelight and its customers committed acts that together would have infringed the Akamai patent if a single entity had engaged in the conduct and awarded Akamai $40 million.

After much appellate review, the case landed again before a three-judge panel.

But "[f]or method patent claims, direct infringement only occurs when a single party or a joint enterprise performs all of the steps of the process." Akamai, slip op. at 7 (citing cases). Although performed all but one of the steps in Akamai's content-fetching process, the fact that users of Limelight's "content delivery network" did the final step ("tagging" the content they wanted) triggered the bar of the single-entity rule.

In spite of the existence of behavior constituting infringement, the majority held, no one infringed.

Amici speaky

But the words of the statute and logic alone did not produce the outcome.

The majority stressed "concern" in Congress and state legislatures "about the vulnerability of innocent customers to charges of patent infringement". Akamai, slip op. at 23. Citing the contentions of infringement defendants and their champions, it went on (per Judge Richard Linn):

Several amici, the White House, and other commentators identify numerous instances where patentees have sent demand letters to or sued dozens, hundreds, or, in some cases, even thousands of unsophisticated downstream users. If the law were expanded to impose joint and several liability on users of a single prior art method step, it would subject swathes of innocent actors across diverse industries to these practices. Using real patents as examples, amici warn that individuals could be liable for patent infringement for so little as initiating communication with a doctor or swiping a debit card. Another amici [sic] explains that “the hundreds if not thousands of contracts in a technology company’s supply chain could expose each actor in that supply chain to potential patent infringement liability . . . .” Cisco Br. at 5.

Id. at 24-25 (footnotes omitted).

Dissent

Judge Kimberly Moore summarized her reasons for dissent as follows:

Today the majority holds that the actions of multiple parties can only result in direct infringement of a method claim in three circumstances: in a principal-agent relationship, in a contractual arrangement, or in a joint enterprise functioning as a form of mutual agency. It divorces patent law from mainstream legal principles by refusing to accept that § 271(a) includes joint tortfeasor liability. The majority’s rule creates a gaping hole in what for centuries has been recognized as an actionable form of infringement. It claims that this result is mandated by the statute. I do not agree.

The single entity rule promulgated in BMC [Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007)] and Muniauction[, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008)] is a recent judicial creation inconsistent with statute, common law, and common sense. For centuries, the concerted actions of multiple parties to infringe a patent gave rise to liability. The plain language of § 271(a) codified this joint infringement. To construe that language otherwise would permit identical language in the statute to have inconsistent meanings. Congress meant to and did codify liability for joint infringement. It did not, as the majority suggests, purposefully do away with a broad swath of recognized forms of liability for infringement. I respectfully dissent from the majority’s decision to interpret § 271(a) in a manner that condones the infringing conduct in this case. 

Akamai, slip op. at 1-2 (dissent).

The future

Blawgletter expects that further review will probably ensue from the panel decision. The Supreme Court looked at the case last year (ruling that "inducement" liability for patent infringement requires proof of "direct" infringement, at least in method patent cases) after an en banc decision by the Federal Circuit. Another rehearing by the full court of appeals and another trip to the Supreme Court both seem plausible.

In the meantime, what effect will the panel's 2-1 ruling have? It will at the least prompt defendants in cases involving method patents to claim that someone else performs at least one step in the patent's process. It will also encourage method-patent plaintiffs to try fit their cases within the principal-agent,  contract, and joint enterprise exceptions that the panel recognized to the single-entity rule.

InterviewNuts and bolts, part two

Last time, we went over how to set up and get ready for an interview of a fact witness. Now we get to the main event.

These tips apply mainly in the context of gathering information about who knows what and who will make a credible witness for the trier of fact. But you may find some of them useful in other situations as well. 

Starting with the easy stuff

  • Begin the interview by identifying yourself, offering the witness your business card, and briefly explaining who you represent and giving a basic overview of the dispute.
  • Make clear that you do not represent the witness personally.
  • Don't promise confidentiality unless you know you can deliver on the promise.
  • Make sure you give an accurate case description that stresses the strengths of your client’s position.
  • Ask the witness for permission to take notes.
  • Also request permission to take the witness’s photo with your smartphone or tablet. (Don't forget to take the picture!)
  • Orally outline what you plan to cover, explaining that you will begin with basic background and then will move to work history and then the witness’s involvement with the parties and the subject matter of the dispute.
  • Ask where the witness came from, grew up, and went to high school and when the witness graduated; how many brothers and sisters the witness has and the age differences between or among the siblings; where and when the witness went to college and what the witness studied; and where and when the witness worked after graduating high school, college, or business/law/medical/other school. Do not rush over these questions; the questions deal with familiar territory and the witness’s favorite subject (himself or herself), and the answers will give you insights about the witness while helping you develop a rapport with the witness.
  • Keep a professional and cordial tone; avoid making personal or critical comments about others.

Getting to the merits

  • Say that now you want to talk about the witness’s involvement with your client, the opposing party, and the subject matter of the dispute.
  • Ask the witness to describe her or his first contact with each of those; and, for each, get a chronological description of the witness’s history from that first contact to now.
  • Use documents sparingly, mainly to refresh memory or frame a subject that you want to know about.
  • Take notes in as much detail as you can, but don’t let note-taking cause you to lose rapport with the witness.

Saying goodbye

  • Say that you have finished with the questions you have for now.
  • Explain that either side in the dispute may want to subpoena documents from the witness, take the witness’s deposition, or call the witness to testify at trial.
  • Ask the witness whether you can get back in touch if you have any further questions.
  • Offer to answer any questions the witness may have.
  • Thank the witness for the time.

Following up

  • Within 24 hours, edit your interview notes, attach the photo, and send a copy of the notes-plus-photo to trial team members.
  • Update the Cast of Characters and the Chronology to reflect the new info you obtained from the interview. 
  • Provide the witness’s contact into to the paralegal.
  • Send the witness an email briefly expressing thanks for meeting with you and encouraging the witness to contact you with any questions. 

 

MeetingHow-to tips, in two parts

You’ve identified someone as a potential fact witness in a dispute that involves or may involve your client. You want to find out what subjects the witness knows about. You don’t yet need to depose the witness, present the witness for deposition, or attend the other side’s deposition of the witness; if you did, you'd probably want to do a lot more than simply conduct an interview. But for now, how do you go about getting the background info you may need to use later on?

Today Blawgletter starts with tips on pre-interview work. We'll get to the interview itself on Thursday.

Setting up the interview

  • Request and arrange interviews of your client’s current employees through in-house counsel.
  • If you don’t represent the witness or the witness’s employer – because, for example, the witness no longer works for your client – try to have someone the witness trusts (possibly a former co-worker) introduce you to the witness and encourage the witness to talk or meet with you.
  • Make a personal connection with the witness by calling instead of sending email or texts, but choose an appropriate time to call (e.g., during work hours for probably friendly witnesses and outside of work hours for likely neutral and possibly hostile ones).
  • Unless you have reason to worry that the witness will not talk with you again – in which case you should get as much info as you can on the initial call – give him or her an estimate of how long the interview will last.
  • If the witness agrees to meet in person, choose a place that offers convenience and privacy for the witness; often a law office near where the witness works will do.
  • Avoid interviews in the witness’s workplace, which will present distractions.
  • Although ethical rules in most places allow clients to make reasonable payments to witnesses for their time and expenses, any compensation tends to undercut a witness’s credibility and should not happen routinely.

Preparing for the interview

  • Collect basic info on the witness from a Google search and from social media if you can do so without alerting the witness.
  • Search PACER and WestlawNext for info on the witness’s involvement in legal disputes, whether as party, fact witness, expert witness, or in some other way.
  • Get a document chron of key case documents plus any interesting documents that mention the witness; keep it to less than a redweld-full, as you likely won't have time to use more than a few of them.
  • Prepare a list, two pages or shorter, of topics and issues that you want to ask the witness about.
  • Dress appropriately but in any event better than you expect the witness will.

Next

You've now set up the interview and gotten ready for it. We'll talk about the main event and your follow-up on Thursday.

 Vexing judges

Ethos

Bryan Garner  writes in his ABA Journal column that "[t]here's a disconnect between what judges say they want" in briefs "and what lawyers give them."

He offers three reasons to favor the judges' view — "the 'halo effect'", "less is more", and "easy is better".

While Blawgletter agrees with each point, we also think Garner has hit on something more basic. It has to do with the most powerful way to appeal to an audience — ethos, or moral character.

Garner's reasons 

The first point — about the "halo effect" — relates to what happens in a reader's mind when your writing deploys what Garner calls "clean, precise, crisp sentences". The reader notices your "professional care" and may even equate it (perhaps wrongly) with "substantive soundness."

Garner's "less is more" idea posits that a short-but-punchy brief can sway with swagger and avoid weak points that dilute the strong ones.

And "easy is better" means that "the ideal brief spares the judge any unnecessary effort, physical or mental." Long, tedious briefs tax judges' ability, and willingness, to grasp your points.

So far, so good. But do the three have a unifying theme?

Logos, pathos, and ethos

A fourth century B.C. Athenian can shed light on the question.

In Rhetoric, Aristotle (or his students) identified three kinds of appeals to an audience — logos (argument from reason), pathos (persuasion by means of emotional appeal), and ethos (convincing through the moral character of the speaker or writer).

Those of us who went to law school tend to think that a focus on reason (logos) ranks highest in the persuader's art. We also suspect that the messier business of playing on the audience's feelings (pathos) comes next. Your stature as a moral person (ethos) hardly counts at all.

Character trumps everything else

But that way of thinking about persuasion grossly overvalues the analytical skills that our law teachers imparted to us. As Oliver Wendell Holmes wrote, "[t]he life of the law has not been logic . . . . The law . . . cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics." You have to put life into the logic. Else it means nothing to people — a group that notably includes judges.

Nor does emotion count most. When in doubt, people tend to go with how they feel about one side or the other. Who wears the black hat? That packs a bigger wallop than the cold rationality of the parties' competing positions. But feelings get you only so far with your audience.

That leaves the biggest of the big three — character. You make judgments about the moral traits of people all the time. And the reader of a brief quickly forms a view about the credibility and good faith of the writer. Can I trust what she says? Did he do the hard work necessary to give me a true understanding of the facts and the law? Does she have sound judgment? Does he seem wise? Has she tried to help me find the right outcome?

Back to the briefs 

The importance of ethos to your ability to persuade means that writing with an earnest desire to convince the court with your high moral character will produce more effective briefs. Precision and snappiness will earn you a halo effect, using only the space you need and no more will project confidence, and simplifying without oversimplifying will stimulate gratitude. All three enhance the judges' opinion of your worthiness and therefore foster belief in the rightness of your logic and emotion.

Ethos!

ContractKeys to the court house 

The contingent-fee option enables a claimant who has a valuable claim but can't afford hourly fees to hire a lawyer. He pays with a promise to share his recovery with the lawyer in return for the lawyer's sharing the many risks of pursuing a claim — including the risk of losing (or winning too little), of not collecting from the defendant, and of the effort's costing a lot more than you expected. 

People with plenty of money can agree to pay on contingent-fee basis, too — and they often do.

A client that won't abide by the contingent-fee agreement represents another kind of danger for the lawyer. A recent decision by the Fifth Circuit will help keep that danger in check, to the benefit of almost everyone.

Family fight

The case that produced the ruling arose from disputes over the fortune of Texas oil legend H. L. Hunt.

Hunt's great-grandson Al Hill, III, and his wife Erin engaged two law firms to represent them in more than a dozen lawsuits. The cases concerned the Hills' claims to assets of two trusts that H. L. Hunt and his wife had set up during the 1930s in the name of their daughter Margaret, who later married Al Hill, Sr., and Haroldson, the oldest son.

The Hills agreed in the engagement letters to pay the law firms full hourly rates for all of their work plus 15 percent of the Hills' "Gross Recovery". But because the Hills did not have the means to pay the hourly fees on a current basis, the contracts allowed them to defer payment until "financially practicable".

Fee fight

A year later, the law firms asked the Hills to pay $3.2 million for their hourly work. The Hills refused. They then fired the firms, which in turn brought arbitration against the Hills under the fee contracts. 

The trust lawsuits at length settled on a basis that yielded $188 million to the Hills.

An arbitration panel heard evidence on the law firms' fee claim for nine days. The panel rejected the Hills' "unconscionability" defense, among others, and awarded the firms their full fees — $3.2 million for the hourly component and a little more than $25 million for the contingent-fee part.

But when the firms asked the U.S. District Court in Dallas to confirm the award, it refused. The court ruled that Texas ethical rules would deem collecting an hourly fee plus a contingent one unconscionable:

In plain language, this is not simply a contract that was ill-advised when signed, but it is one in which Plaintiffs will receive something for nothing. The contingency fee is a guaranteed fifteen percent payment, on top of the generous hourly rate, for no additional work or risk of nonpayment. The court finds this type of contingency fee particularly troublesome and contrary to well-established Texas precedent. The contingency fee provision therefore results in a windfall that Texas public policy cannot countenance.

Campbell, Harrison & Dagley, L.L.P. v. Hill, No. 3:12–CV–4599–L, 2014 WL 2207211, at *13 (N.D. Tex. May 28, 2014).

The law firms appealed.

Fifth Circuit upholds fee agreement

Reversing, the Fifth Circuit reinstated the arbitration award. Campbell, Harrison & Dagley, L.L.P. v. Hill, 782 F3d 240 (5th Cir. 2015). It held:

The district court misapplied that standard. In particular, it rejected the arbitrators' determination that “the prospect of recovery [was] plenty uncertain”, finding instead that “[t]here was nothing contingent about [the firms'] recovery of their attorneys' fees”. . . . The court specifically rejected the total-fee amount based on its inclusion of the contingency-fee portion. As the court interpreted the fee agreement, the contingency fee constituted an “unearned payment” in the light of the non-contingent nature of the hourly-rate fees, and, as a result, made the fee agreement unconscionable. . . .
 
The arbitrators, on the other hand, specifically determined: recovery of any fees was uncertain; a reasonable attorney could find the fee arrangement reasonable; and the total fee was not unconscionable. (“There is nothing about a relatively high hourly rate schedule, uncertain to time of payment, and/or a relatively low contingent percentage, when the prospect of recovery is plenty uncertain, that should be offensive to a competent lawyer, a reasonable client, or an overall traditional public policy of fairness.”). This determination likewise comports with the plain language of the fee agreement, which allows for payment of the hourly-rate fees “as soon as is financially practicable ”. (Emphasis added.)
 

In rejecting the arbitrators' determinations regarding the uncertainty of recovery, the reasonableness of the total fee, and unconscionability, the court “substitute[d] [its] judgment for that of the arbitrators merely because [it] would have reached a different decision”. . . . As a result, it erred in vacating the contingency-fee-portion of the award and related awards (for the arbitration, the firms' attorney's fees, other fees, expenses, and arbitrators' compensation; and pre-judgment interest on the contingency-fee portion).

Campbell, Harrison & Dagley, L.L.P., 782 F.3d at 245-46 (citations omitted).

Significance

The outcome enhances confidence in contingent-fee agreements and therefore lowers the collection risk that law firms face when entering into contingent-fee arrangements with clients.

That should save clients who live up to their contracts money. Lower risk of collection will translate into contingent-fee percentages that reflect a premium for sharing risk of recovery on the client's claim but do not build in an additional premium for the lawyer's risk of enforcing the fee deal.

Everybody wins. Except of course the defendant.

Shutterstock_78081322Surface damage – what must operators do to accommodate existing uses of the surface estate?

Today we conclude Blawgletter's seven-part series on the Hottest Oil & Gas Claims for 2015, a paper we co-wrote for the 66th Oil & Gas Law Conference in Houston. This last piece deals with maybe the hardest claim to make out — a claim by the surface owner against an oil and gas lessee for interfering with pre-existing uses of the property.

Legal backdrop

Common-law states like Texas give the owner of minerals that underlie a tract of land priority over the owner of the tract’s surface. The mineral owner thus has the “dominant” estate, the surface owner the “subservient” one. Louisiana law likewise infers a right of the mineral owner — or, much more often, the lessee under an oil and gas lease — to make reasonable use of the surface. See, e.g., Caskey v. Kelly Oil Co., 737 So.2d 1257, 1262-63 (La. 1999).

In rare instances, the surface owner may get damages for an oil and gas operator’s abuse of its dominant position. The surface owner must prove that the operator’s use of the surface completely precludes or substantially impairs her existing use of the surface, she has no reasonable alternative way to continue the existing use, and the operator could accommodate the existing use by employing a reasonable and customary method that the oil and gas industry accepts. Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 249 (Tex. 2013) (holding that rancher failed to carry burden of showing that “he had no reasonable alternative means of maintaining his cattle operations” on a 40-acre tract); see Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794, 799 (Tex. 2014) (holding that lessee’s “implied surface easement extends to the surface of [a] pooled area”).

What options do surface owners have when they believe an operator has overstepped its right to use the surface?

Plaintiff's claim

Although difficult to establish, a claim for misuse of the surface will involve these factors: 

  • History of using the surface of the lease area for a specific profit-seeking purpose;
  • Excessive or indiscriminate damage to or occupation of the surface; and
  • Substantial loss of income due to interference with the existing use.

Wrap up

We appreciate your interest in the Hottest Oil & Gas Claims for 2015 series. You can read the rest of it by clicking on the links below.

Something new

Blawgletter will have a surprise for you in the next couple of weeks. Please stand by.

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Continue Reading Welcome to the new blog!

Shutterstock_131159597 (1)Pre-emption? Ha!

A 7-2 split on the U.S. Supreme Court last week revived state-law antitrust claims against natural-gas pipelines. End-user (or retail) customers alleged that the pipelines conspired to rig index prices and thus inflate sales prices. The ruling gave narrow play to the pipelines' "field pre-emption" defense. The Court held that a federal agency's power under the Natural Gas Act to regulate any "practice" that affected wholesale prices to resellers did not pre-empt the claims. ONEOK, Inc. v. LearJet, Inc., No. 13-271 (U.S. Apr. 21, 2015).

The decision plainly will help plaintiffs who bring claims under state law to fend off federal pre-emption defenses. But it may also aid those who bring federal-law claims that defendants contend Congress tacitly pre-empted.

Gas, gas, gas

Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission (FERC) had and has the power to make rules and issue orders relating to some, but hardly all, aspects of the domestic gas industry. FERC's authority has notably included a role in regulating prices that interstate pipelines charge to utilities and other middlemen. But over the years FERC has done less and less of that.

In the 1970s, with prodding from Congress, FERC began to shed its function as the setter of prices that pipelines could pay and charge. Yet FERC remained a hovering presence in the gas industry, although now it mainly aimed to  assure that pipelines didn't garner too much power in individual gas markets.

A flood of sales to wholesale (reseller) and retail (end-user) purchasers ensued. The deluge in turn led to use of more or less local indices as pricing benchmarks. The index price in theory reflected actual, arm's-length transactions, and it often found its way into private contracts as a presumably objective proxy for the market price.

Rigging the market

But reality didn't match the theory or the presumption. People manipulated the indices. As the Court noted, "sometimes those who reported [pricing] information simply fabricated it". ONEOK, slip op. at 7. Other times, it pointed out, parties reported prices from "wash" trades, which had no substance. Id.

FERC had snapped to the manipulation by 2003 — including as the result of the California electricity crisis of 2000-2001. By then, gas prices had more than tripled. Suspecting foul play, several groups of retail buyers sued, alleging a conspiracy to inflate gas prices through (among other means) rigging of price indices. They claimed violation of state antitrust laws only.

Dismissal and reversal

The defendants' having removed the cases to federal court, the district judge (in Nevada) who got all of them granted a motion to dismiss. He held that the NGA pre-empted the "field" and therefore barred antitrust claims that would have the (indirect) effect of regulating wholesale prices of natural gas. The fact that the plaintiffs limited their claims to retail prices, which FERC did not have jurisdiction to regulate, did not matter to the court. The practices in question affected prices at both levels, and the claims "aimed at" entities — interstate pipelines — over which FERC had regulatory jurisdiction and authority.

The Ninth Circuit reversed. The Supreme Court granted review. It affirmed the court of appeals decision.

Issues

The 7-2 majority, with Justice Breyer writing for it, leaned heavily on the fact that Congress left much of the natural-gas industry to state oversight, putting only the interstate transportation part under FERC's suzerainty. "Accordingly," Justice Breyer wrote, "where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents." ONEOK, slip op. at 10-11.

That "detailed examination" did not persuade the Court. "Antitrust laws", Justice Breyer noted, "are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace." Id. at 13. Under the Court's precedents, that meant the state-law claims could avoid pre-emption so long as they dealt with conduct that fell at least partly within state authority and did not "aim" to regulate the pipelines as pipelines. Because the retail buyers' lawsuits did not "seek to challenge the background marketplace conditions that affected both jurisdictional and nonjurisdictional rates", the NGA did not pre-empt them under a "field pre-emption" theory. Id. at 15.

Scalia dissent

Justice Antonin Scalia's dissent, which Chief Justice John Roberts joined, painted the pre-emption issue as a simple question of whether Congress gave FERC the sole power to regulate wholesale prices. "Because the Commission's exclusive authority extends to the conduct challenged here," he concluded, "state antitrust regulation of that conduct is preempted." Id. at 3 (Scalia, J., dissenting).

Upshot

ONEOK will have three main effects.

Most obviously, the pro-plaintiff outcome will help LearJet and the other end-users who brought or who will (by way of the class action mechanism) benefit from the litigation. Yet they have miles to go before they sleep. A "conflict pre-emption" attack awaits them upon their return to the district court.

Second, ONEOK will aid other plaintiffs who assert state-law antitrust and other claims that may impinge on the subject matter of federal regulation. Areas include these:

  • telecommunications (some of which the Federal Communications Commission oversees),
  • banking (the Federal Reserve);
  • public trading of securities (the Securities and Exchange Commission);
  • air transportation (Federal Aviation Administration);
  • pharmaceuticals and medical devices (Food and Drug Administration);
  • workplace safety (Occupational Safety and Health Administration); and
  • healthcare (Department of Health and Human Services).

Whether ONEOK makes a difference in a particular context will depend partly on how much leeway Congress left states for regulation of the subject matter and — assuming Congress left some room for state involvement — partly on the result of the "detailed examination" of which Justice Breyer spoke.

Finally, the Court's 7-2 rejection of Justice Scalia's sweeping view of field pre-emption should imply a softening of the Court's "implied repeal" doctrine, which hypothesizes that a "plain repugnancy" between two federal statutes requires that one of the two give way. The Court in Credit Suisse, with Justice Breyer again the author, seemed too quick to find a conflict between securities and antitrust law.** Justice Breyer's more modest approach in ONEOK may help confine Credit Suisse to its facts.

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* See Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007) (holding that SEC's authority to regulation initial public offerings of stock under federal securities law trumped claim under federal antitrust law that investment banks conspired to rig terms for providing IPO services). 

** See Jesse W. Markham, Jr., The Supreme Court's New Implied Repeal Doctrine: Expanding Judicial Power to Rewrite Legislation Under the Ballooning Conception of "Plain Repugnancy", 45 Gonzaga L. Rev. 437 (2009/10).