Following Supreme Court arguments last month, the final chapter in the long-running legal battle between Energy Transfer Partners LP (“ETP”) and Enterprise Products Partners (“Enterprise”) is finally coming to an end. ETP is requesting the Texas high court to reinstate the $535 million judgment it obtained after a jury trial against Enterprise in 2014. The case presents critical issues regarding the manner in which a Texas partnership can be formed, and the importance of these questions for business owners and the size of the judgment have made this a closely watched legal conflict since the jury issued its verdict more than 5 years ago.
This post reviews the issues at stake in the ETP litigation and explains our prediction that the Supreme Court will not reverse the decision issued by the Dallas Court of Appeals in 2017, which unanimously overturned the jury’s verdict and held that no partnership ever arose between ETP and Enterprise. We expect the Court to rule that in light of the written conditions the parties had expressly agreed in writing must be met before a partnership would be formed between them, the contention that a partnership arose by their conduct is a dog that won’t hunt.
In the Beginning – A Brief Case Summary
The ETP case against Enterprise stems from a dispute over a highly profitable pipeline, which the parties considered pursuing together as a joint venture. The dispute and claims arose when Enterprise changed course and signed on to do the pipeline deal with Enbridge, based in Canada. ETP claimed that it had been jilted by its business “partner” in breach of Enterprise’s fiduciary duties, argued successfully to the jury that the parties had entered into a partnership agreement based on their conduct and oral statements. The jury agreed and awarded damages of more than $300 million to ETP, but the figure grew to $535 million figure by the time that the final judgment was entered in the case.
The Case on Appeal – Trial Judgment Reversed
On appeal, Enterprise argued that these two sophisticated companies in the energy industry had never agreed to enter into an unwritten partnership agreement, or as Enterprise framed it on appeal—a partnership by ambush, which directly contradicted the parties’ written agreements. The Dallas Court of Appeals concluded that the parties had placed two specific express conditions on their potential formation of a partnership—the signing of a written partnership agreement and approval of the agreement by the boards of both companies—and because those two conditions were not met, the jury’s verdict had to be reversed.
The Supreme Court Arguments – Affirm or Reverse
ETP argued forcefully (through Jeremy Fielding) to the Supreme Court that the conduct between the parties clearly satisfied the legal standard for the formation of a partnership because it met the five factor test in the Texas Business Organizations Code. Although the Court did not allow him to review each of these factors, they are set forth below:
Partnership Formation Factors:
(1) receipt or right to receive a share of profits of the business;
(2) expression of an intent to be partners in the business;
(3) participation or right to participate in control of the business;
(4) agreement to share or sharing: (A) losses of the business; or (B) liability for claims by third parties against the business; and
(5) agreement to contribute or contributing money or property to the business.
Section 152.052 of the Business Organizations Code (TBOC).
Arguing for Enterprise, David Keltner stressed that no partnership was ever formed by the parties because a partnership requires them to engage in an association for profit, and here, the parties stated in writing that no association would take place until specific conditions were met, which had never taken took place. ETP argued that the parties had waived these conditions precedent to the formation of a partnership by their conduct. Keltner’s rejoinder to ETP’s waiver argument was that ETP failed to request the jury whether waiver had occurred, and he contended that this was a strategic omission by ETP, because it did not want to risk presenting the waiver question to the jury.
Fielding countered that the waiver issue was subsumed within the first question of the jury charge when it was asked whether the ETP and Enterprise had agreed to form a partnership under the 5 components of TBOC. He insisted that adding a waiver question would have been redundant and what he described as an “orphan” question in the jury charge.
Supreme Court Predicted Holding
The safe bet here from both a legal and political lens is that the Supreme Court upholds the decision of the Dallas Court of Appeals. Legally, it seems dubious that the Court will permit partnerships to be created in Texas in disregard of the parties’ written agreements, particularly those which place specific conditions on the formation of a partnership. Texas courts routinely emphasize the sanctity of contract. In all likelihood, the Supreme Court will therefore give full effect to the conditions the parties documented in their written agreements and avoid opening the door to significant uncertainty in both the business and the legal world. The trial by ambush scenario is not one that the Court has shown any inclination to endorse.
On a political basis, the Supreme Court is composed entirely of justices who have a history of issuing decisions that either reject or refuse to sustain high dollar jury awards. The Court in this case would have to reverse the lower court and reinstate the trial court’s judgment for more than $500 million creating a huge outcry from the business community. That would be a shocking result from this Court.
Lessons Learned for Private Company Business Owners and Investors
The ETP/Enterprise legal saga is finally coming to a close. Whatever the outcome of the Supreme Court’s decision, however, there are a number of take always from this conflict that parties can put in practice to avoid the dispute the led ETP and Enterprise down this difficult path. These lessons are summarized below.
Creating a Clearer Standard for Partnership Formation
If ETP prevails as expected in the Supreme Court’s decision, it will have staved off a huge judgment, but at a very high price for this legal victory. The opinion from the Dallas Court of Appeals, however, already provides potential business partners with a good roadmap to help them avoid future disputes. The written agreement should clearly include all of the following elements for any parties exploring a potential joint venture or partnership opportunity with another company:
- Disclaimer Language – the parties’ preliminary agreements should specify that no partnership agreement is being entered into and that the preliminary agreement the parties are signing does not constitute a partnership. This type of disclaimer was included in the agreements that ETP and Enterprise signed, and ultimately protected Enterprise.
- Reference to Conditions Precedent – the parties’ agreements should state expressly that the are specific conditions to the formation of a partnership between them, and should state in the document that these are conditions precedent to forming any partnership. These conditions should include all of the following: (i) a signed partnership agreement, (ii) approval by the boards of both companies, and (iii). other conditions the parties may deem necessary. For example, the parties may specify that certain types of government approvals are required before a partnership is formed, or that government filings must be made or a specific amount of funding secured. ETP and Enterprise did not use the words “conditions precedent” in identifying the specific events that were, in fact, conditions precedent to forming a partnership between them.
- Elimination of Fiduciary Duties – the basis for the large jury award to ETP was a breach of fiduciary duties by Enterprise, which it owed as a partner once the jury found that the parties had entered into a partnership. The preliminary agreement should disclaim that the parties are fiduciaries until a signed partnership agreement is entered into, and should state affirmatively that: (i) the agreement they have signed does not create any fiduciary duties, (ii) their performance under the agreement is not subject to any fiduciary duties, and (iii) they are continuing to operate at arms-length throughout the process.
New Agreements Should Repeat the No-Partnership Stipulation
After the pre-up is signed including the disclaimer language set forth above, the parties may enter into later agreements for reimbursement of expenses or some additional due diligence. These supplemental agreements should reference the disclaimer language included in the original agreement to ensure that any later activities by the parties do not change the no-partnership stipulation from the original agreement. In addition, these later agreements need to specify that the new payment obligations do not amend the original agreements, do not create a partnership between the parties, and do not create any new fiduciary duties between the parties. The parties and their counsel need to be careful not to permit these later agreements to muddy the waters.
Similarly, as was done by Enterprise, the parties’ emails and other communications between them should include a standard disclaimer at the bottom that no partnership has been formed until all conditions prevent have been met.
During the trial of the case, ETP’s counsel repeatedly noted that Enterprise personnel had used the “P” word (partnership) to describe their relationship. These communications were then presented as evidence the parties were working together as partners. Companies should therefore caution their executives to avoid referring to the other company as “our partner” and they should not call the joint venture a “partnership.” These comments did not prove decisive on appeal in the ETP case, but they were not helpful to Enterprise’s position at trial.
If executives slip and use the “P” word in their communications, it is advisable not to disregard these comments. Instead, the party or their counsel should address these inadvertent statements and confirm to the other party that they were not accurate, and do not vary the parties’ agreements. Specifically, notice should be sent confirming that these statements do not create a partnership or any fiduciary duties between the parties.
A decision by the Supreme Court to reinstate the ETP jury verdict would be a decision of national prominence and be regarded in both the business and financial community as a highly publicized legal black eye for Texas. It would be akin to the Pennzoil v. Texaco decision and cause at least some pundits to characterize Texas as a dangerous place to conduct business. For these reasons, as well as the jury’s verdict disregarding the conditions expressly agreed to by the parties, there seems to be little chance that ETP will be able to restore the original judgment when the Supreme Court ultimately issues its decision.
This anticipated win for Enterprise comes at a steep cost after five years of expensive litigation and distraction. To avoid this legal morass and heavy expense, companies and investors who are considering potential joint ventures or other partnership opportunities need to focus on the terms of the preliminary agreements that they enter into before the business is actually formed. These preliminary agreements should include disclaimers of both partnership and fiduciary duties, along with the express reference to the words “conditions precedent” spelling out each of the conditions that must be met before any partnership is formed between the parties. The partnership dog may not hunt based on the parties’ conduct alone, but it certainly has the potential to be a painful bite if these preliminary agreements are not carefully drafted.