BP: The case of the century

Financial Times
By Ed Crooks

The Deepwater Horizon disaster in 2010 caused the world’s largest offshore oil spill. It has also led to a mammoth legal action, as tens of thousands of plaintiffs – and the US government – fight for compensation

In New Orleans people know how to let their hair down, even when the stakes are high. The federal court that has been hearing the massive case to decide civil penalties and damages for the 2010 BP oil spill in the Gulf of Mexico is in an austere modernist building, dating from the 1960s, but it is only a short walk from the historic tourist trap of the French Quarter. The distinctive atmosphere of the Big Easy, as much Caribbean as it is American, permeates even here.

At pre-trial hearings, the mood among the attorneys is convivial, even jokey at times. Some of them have been meeting at the court for a year and a half, and they know each other pretty well. At one session, the magistrate judge opens by thanking the lawyers for the plaintiffs and for BP, who are on opposing sides of the case, for throwing such a good party the previous night. Social events have been a regular feature of the months leading up to the trial.

At another hearing, plaintiffs’ attorneys interrupt proceedings to put on black-and-white houndstooth hats with red feathers, the trademark of the University of Alabama’s American football team, in a rueful salute for its victory over their team, Louisiana State University, in the national college championships. In a revealing aside, one of the plaintiffs’ Louisiana-based lawyers suggested that a year from now he hoped the hats would be in LSU’s purple and gold. The implication was that the attorneys would all still be there, still arguing the case.

At the time this magazine went to press, all sides involved were still heading for a trial, scheduled to start at 8am on Monday, February 27. Negotiations were also still on over a possible settlement to resolve some or all of the claims, but BP had made it clear that it was ready to fight the case out in court. As Bob Dudley, its chief executive and the successor to Tony Hayward, put it earlier this month: “We are prepared to settle if we can do so on fair and reasonable terms. But equally, if this is not possible, we are preparing vigorously for trial.” Even if BP does strike a deal just before or just after the trial starts – one person who knows the company said a deal could be done “on the courthouse steps” – there are likely to be people who will want to fight on.

The case, MDL 2179, “In Re: Oil Spill by the Oil Rig ‘Deepwater Horizon’ in the Gulf of Mexico, on April 20, 2010”, has become the greatest legal show on earth: the largest and most complex lawsuit for more than a decade in the world’s most litigious country. Heard by Judge Carl Barbier in New Orleans – following a failed attempt by BP to take it to Houston, the oil capital of the US – it is intended to decide civil claims both for damages sought by businesses and individuals that lost money as a result of the spill, and for penalties and damages sought by the US federal government and five states along the coast from Texas to Florida. With tens of billions of dollars at stake – observers have suggested the total bill could reach $25bn or more – the outcome will decide the future of BP, Britain’s largest industrial company at the time of the spill, and tens of thousands of lives in the gulf coast region.

In the view of some lawyers, though, it need never have been brought at all. Within two months of the spill, under intense pressure from Barack Obama, BP put up $20bn for a compensation fund; an unprecedented move for a corporation involved in this type of disaster. Ken Feinberg, a Washington lawyer who earned universal acclaim for his careful handling of a similar fund for the victims of the 9/11 attacks, was put in charge of the process. “We will make this right,” BP said, promising long-term support for economic and environmental restoration. Its fund, the Gulf Coast Claims Facility (GCCF), is at the heart of that promise, intended to offer victims of the spill a way to make good their losses without going to court. It has not quite worked out that way.

Some of BP’s defence team in New Orleans, from left: Andrew Langan, of Kirkland & Ellis; Ryan Babiuch of Kirkland & Ellis; Don Haycraft of Liskow & Lewis

Facing them have been not only BP, but more than a dozen other companies that worked on the project to drill the ill-fated Macondo well and the subsequent clean-up, including Transocean, the owner and operator of the Deepwater Horizon rig, and Halliburton, which supplied the cement intended to seal the well. For all the superficial bonhomie, the case is fiercely contested. Already the court has heard allegations that evidence had been destroyed, battles over which witnesses can be called, and claims that Tony Hayward, BP’s former chief executive, lied about the existence of a personal email account when he gave a videotaped deposition for the trial.

Some of the most intense exchanges have been between defendants trying to pin the blame on each other. Early sparring over decisions on responsibility essentially ended in a draw; Judge Barbier said BP would have to bear any compensatory damages for people who suffered losses as a result of the spill, but Transocean and Halliburton were still on the hook for possible punitive damages and penalties.

Inside BP, spirits have been rising after a bruising 2011, marred by the collapse of a planned alliance with Rosneft of Russia. Profits for the fourth quarter were excellent, coming in at $7.6bn, and the company raised its dividend by 14 per cent. Dudley talked about being “on the right path”, and said BP planned to push back even further the frontiers of deep-water oil exploration. Everyone at the company knows, though, that its ability to invest in future growth and develop its US business depends on securing the best possible result from the Deepwater Horizon case.

The rough timetable set out by Judge Barbier divided the trial into three phases, lasting about three months each: phase one, intended to resolve who was to blame for the explosion and leak from the well; phase two, to determine how much oil was spilled and how well BP tackled the leak; and phase three, to identify where the oil went and what damage it did. The judge has earned widespread praise for the pace at which he has moved; the case has reached its critical moment just 22 months after the accident, compared with more than five years for the trial resulting from the 1989 Exxon Valdez spill. Steve Herman, one of the plaintiffs’ lawyers, says: “Judge Barbier has held the process tightly under control. He has kept the pedal to the metal, and made sure everyone filed the exhibits, deposed the witnesses and did everything they needed to get ready for trial.”

With its array of plaintiffs and defendants, the Deepwater Horizon case has been uniquely difficult. As of January, more than 7,700 pieces of evidence had been filed as exhibits, and more than 300 witnesses had given videotaped depositions. Documents in the case run to more than 72 million pages. If you printed them out and stacked them up, the pile would be four-and-a-half miles high, topping the tallest mountains in the Americas.

For tort lawyers, who contest civil wrongs, it is the biggest of big game, and the case has drawn top legal guns from across the country. BP has a team of lawyers from several firms, led by Andrew Langan, a tall man whose manner can shift from genial to icy in the blink of an eye. Langan is a partner at Kirkland & Ellis in Chicago, a firm that describes itself as one that “tries, and wins, bet-the-company cases”. The other defendants have also brought in high-powered lawyers from out of state to lead their teams: Steve Roberts from Sutherland in Houston for Transocean, and Donald Godwin from Godwin Ronquillo in Dallas for Halliburton.
Carl Barbier

Carl Barbier: Praised for the pace at which the case has moved

The US government, likewise, assigned the case to two of its brightest stars: softly spoken, bearded Steve O’Rourke from the Washington office, and Mike Underhill, drafted in from San Francisco because of his experience with the Cosco Busan spill in 2007. In that case, fewer than 1,300 barrels of oil leaked from the ship – compared with an estimated four million barrels from BP’s Macondo well – but the DoJ extracted a settlement worth $44m, plus a fine of $10m, and the ship’s pilot was sentenced to 10 months in prison. If any government lawyer was guaranteed to make the defendants think hard about whether they should make a deal, it is him.

The private sector plaintiffs, by contrast, are led by two locals, Louisiana born and bred. The two co-chairmen of the plaintiff’s steering committee, selected to run their side of the case, are Jim Roy, a seasoned campaigner in maritime personal injury cases, and Herman, the scion of one of New Orleans’ most eminent legal dynasties. They are just the public faces, though, for the 19-member committee representing a legal army of about 90 firms and some 340 lawyers. The group has taken over the entire eighth floor of an office building near the back of the courthouse in Carondelet Street, a 15,500 sq ft space with offices, conferences and war rooms, and 70 computers in use every day. Back in November, the plaintiffs’ lawyers estimated that they had already committed more than 230,000 hours to the case.

For the defendants’ lawyers, the case is a well-fed cash cow. BP has estimated that its legal fees and associated costs for the spill have already reached $1.73bn. For the plaintiffs’ team, it could be even higher. The lawyers’ fees vary from client to client, but in this type of action are typically 30-40 per cent of the damages, although for larger claims they could be 25 or even 15 per cent. The plaintiffs’ lawyers could between them make several billion dollars.

The influx of lawyers has proved something of a mini-stimulus for the hotels and restaurants of New Orleans. Places such as Le Foret and Herbsaint, both close to the courthouse, are regular hangouts for attorneys, and when they are pressed for time there is Mother’s, just across the street, where the speciality is “debris”: meat scraps swimming in gravy. Sometimes the lawyers want to get together, and sometimes it is hard for them to get away from each other. One party of BP’s lawyers realised that they were sharing the restaurant with their adversaries from the plaintiffs’ steering committee, and had to button their lips.

In the restaurants and bars of New Orleans’ central business district and French Quarter, it is easy to forget the troubles that have blighted this region. Leave the city on Highway 39, heading towards the fishing community of St Bernard Parish, and the evidence confronts you very quickly. Natural disaster, political neglect, economic decline and corporate incompetence have all left scars on southern Louisiana. In the Ninth Ward of New Orleans, devastated by Hurricane Katrina in 2005, there are still vacant lots, marked out by foundation stones, where homes were swept away when the concrete barrier holding back the Industrial Canal was breached. Many of the remaining single-storey houses are dilapidated, and many have been abandoned. Where the houses run out, there are stands of trees, all dead, killed by salt-water flooding.

A little further down the highway, the middle-class community where George Barisich, a 56-year-old third-generation fisherman, stores his gear is more comfortable; the houses are well-kept, and many are on stilts to protect against the next flood. But Barisich and tens of thousands of fishermen like him have also been battered by the hurricane, by competition from cheap imported shellfish, and by the BP spill. Now, in the legal action in New Orleans, they have a chance to hit back. “This was a man-made disaster that was preventable, and they’re trying to sneak out of what they owe us to put us back in business,” Barisich says. “It’s criminal what they’ve done.”

Energetic and still wiry in spite of a spreading paunch, he has helped round up hundreds of other fishermen in the area to join the lawsuit. As he works on one of his boats out on the bayou, the inlet where nearby vessels have names such as Cajun Viagra and Rebel Cruiser, Barisich explains why he is fighting. He applied for compensation to the GCCF, and was offered $25,000 for loss of earnings while fishing grounds were closed because of the spill. His true losses, and the investment needed to restore his ruined oyster beds, he estimates to be at least $2m. “You can’t offer working-class people with businesses chump change,” he says. “Because if you’re going to offer me chump change, I’m going to give it to the attorneys and throw the dice.”

In the view of Daniel Becnel, a prominent Louisiana tort attorney, people such as Barisich are probably helping their lawyers more than they are helping themselves. “This is a lawyer feeding frenzy,” he says. “Any time you have these disasters, lawyers become awfully wealthy really quick.” It is not that he is opposed to litigation on principle: his sprawling home, half an hour west of New Orleans, with its fruit trees, “eight or nine” border collies and a guest house with full-time cook, is testament to four decades of successful lawsuits over tobacco, cars, drugs, and dozens of other allegedly faulty or dangerous products. However, he argues, the fact that BP accepted its responsibilities so quickly, putting up the $20bn soon after the accident, changes the whole complexion of the case.

A trial might have been needed for BP, Transocean and Halliburton to thrash out between them how the blame for the disaster was shared, and perhaps for the US government to make its penalties stick, he says. It should never have been needed for those 116,000 claimants. He has represented about 5,000 people pursuing claims with the GCCF, usually on a more modest fee of just 10 per cent, and although the process is not perfect, he believes it has been working. If you cannot get money out of the GCCF, he says, you are unlikely to do any better by going to court.

“Most of the people that are doing the complaining really don’t have tax returns, they operated with cash. Or they think they’ll hit the lottery, and they want three times or 10 times more than their case is really worth,” Becnel says. “A lot of people who don’t have legitimate claims are going to be very disappointed. If you have a legitimate claim, you could get your case settled tomorrow.”

His specific bone of contention is a wrangle over fees with the plaintiffs’ lawyers, who have sought a cut of the more recent compensation payments made by the GCCF, even for people – some of Becnel’s clients among them – who were not represented by their group. His general point is that justice deferred is justice denied; and the Deepwater Horizon case could drag on for a very long time.

The example of the Exxon Valdez spill, he says, should make the fishermen of the gulf wary about trying to take BP on in court. Alaskan fishermen and others who sought punitive damages against Exxon had to fight for almost two decades, until in 2008 the US supreme court awarded them only about $500m, cut from an original award from the lower court of $5bn. “Think of the Exxon Valdez: 20 years those people hadn’t been paid. And why? Because lawyers took it to court,” Becnel says. “In the end, what did they get? They got an average of $15,000 per person. Well Exxon was willing to offer them $50,000 per person right at the get-go … a third of the plaintiffs had already died. So it didn’t make a lot of sense.”

Gerry Nolting of Faegre Baker Daniels in Minneapolis knows that story as well as anyone. He was one of the lawyers who led the long and ultimately frustrating campaign against Exxon. Yet he joined the Deepwater Horizon case, with about 1,100 clients. “The comparison is night and day,” he says. “Judge Carl Barbier understands that the way you get the case resolved is by keeping it moving. You don’t allow BP to do what Exxon did over the Exxon Valdez.”

Hundreds of his clients are in the same position as Barisich, he says: offered derisory settlements by the GCCF. Not one of them has accepted and signed the agreement needed to receive a final payment, in which they must agree to waive their right to sue. “The settlement offers from Ken Feinberg are generally ridiculous,” Nolting says. “Ken Feinberg’s fund is not a serious option at all.”

Feinberg is used to this kind of attack; he cites “a stiff backbone” as an essential qualification for his job. Speaking in his Washington offices at 1455 Pennsylvania Avenue, a block from the White House, with a “glory wall” showing his press cuttings and meetings with presidents and other members of America’s political elite, he responds with all the confidence of his establishment credentials. “By all accounts, despite criticism and well-intentioned recommendations for change, and all of that, the Gulf Coast Claims Facility has done exactly what the president, the administration and BP expected it to do,” he says.

One objective of setting up the fund was to take the political heat out of the spill, which dominated the news agenda and scorched Obama’s popularity in the spring and summer of 2010. In that, it has unquestionably succeeded.

The remaining unhappiness about his compensation awards, Feinberg says, is explained by the “emotion” stirred up by the disaster. “Everybody believes that every ill they ever suffered – financial, personal, social – is the fault of the spill. And it is rare indeed that somebody acknowledges that maybe it isn’t the fault of the spill. And that makes the job more difficult. Perfectly understandable, the emotion associated with the spill. And you have to deal with that emotion.”

Former CEO, Tony Hayward, became a focal point for public anger during the crisis. He appeared before Congress in June 2010, and resigned the following month. Currently CEO of oil producer Genel Energy, he has given videotaped evidence for the trial.

In New Orleans, there are plenty of people who have come to terms with their anger over the spill, and moved on. In one of the tacky tourist shops of Bourbon Street, there is a big pile of T-shirts with the slogan “FUBP”, and a design of the company’s green and yellow “Helios” logo smeared in brown. The assistant says he cannot remember selling a single one. “After they got their money, most people just forgot about it,” he says.

The numbers from the GCCF suggest that most of the spill’s victims do indeed feel that way. As of February 17, the fund had issued final payments to 193,760 businesses and individuals, having handled a total of 572,365 claimants. Most of the amounts paid have been small: about 182,000 individuals and 17,000 businesses were paid $5,000 or less, including interim sums intended to tide people over until their full claims were dealt with. Some, however, are very large: 42 individuals and 262 businesses have each been paid over $500,000. On February 17, there were only 12,277 claims under review; and even some of the people who were still wrangling with the fund were hopeful that they would get what they wanted in the end.

Galatoire’s restaurant, founded in 1905, is one of them. Its brightly lit dining room is an oasis of old-fashioned New Orleans sophistication amidst the strip clubs and T-shirt shops of Bourbon Street, but it was hit hard by the disappearance of local seafood from its menu in the summer of 2010, according to Bill Kearney, its owner. He has not agreed a compensation payment from the GCCF, but he still sees dealing with the fund as a better route than fighting in court. “The system has been overwhelmed; there wasn’t any standing organisation to handle so many claims ,” he says. “But BP has done a great job of facing up to its responsibilities and trying to make good the damage, and I am sure it will finally work out favourably for us.” He has even appeared in a widely shown TV commercial, paid for by BP, extending “a cordial invitation to visit the gulf” to US holiday makers.

Not everyone has so much faith. As you approach the city of Biloxi, Mississippi, about 80 miles east of New Orleans along the gulf coast, the IP Casino towers over the surrounding landscape like a medieval cathedral, a monument to the city’s devotion to the gambling industry to boost the local economy. At the time of the spill, Shelly Dennis worked there as a nail tech, giving manicures in the spa attached to the casino and hotel complex. Tips were an important part of her income, and she estimates she lost between $16,000 and $17,000, as visits to the casino slumped. The beach, now pristine white sand again, was covered in workers in protective clothing scraping up the oil that washed ashore.

Dennis spent a long, hot day that summer lining up outside the GCCF’s Biloxi office with hundreds of others to file her claim, but she was turned down. “They said I didn’t have enough proof that my losses were due to the direct effect of the spill,” she says. “I followed all the rules, and turned in all my paperwork, but they just denied my claim.” What infuriates her is how arbitrary the decisions seemed to be. Her cousin, a waitress also reliant on tips, got $33,000. She knows many people who received $5,000. “It blows my mind that they can deny my claim, and not theirs,” she says. She is relying for legal advice on the Mississippi Center for Justice, a non-profit group, part-funded by BP, which provides pro bono support for people throughout the gulf region. If she had been able to afford a lawyer, she would have joined the case in New Orleans. “I’d love to go to court and fight it out,” she says. “But I don’t know what else to do.”

One of the ironies of this saga is that, with most of his claims processed, Feinberg has paid out only about $6.7bn of BP’s $20bn. If there is money left over once his work is done, it will go back to BP, to help cover its clean-up costs, now estimated at $14bn, or to pay further damages claims. If Feinberg had been less rigorous in his demands for proof of losses, and the money had flowed more freely, he might have bought off many of the people who decided to take BP on in court.

From the moment the case began, BP knew it would have to pay something. Its priority was to avoid a cost that would leave the company structurally weakened. If the damages and penalties it was forced to pay were too great, it could be pushed into selling more assets, on top of the $38bn already planned, that could constrain the company’s long-term growth.

Living on the gulf coast, people have become used to the idea that their lives can be changed in an instant by acts of God, or chance. The spill was the result of a series of careless decisions that no one outside the oil industry would have understood, and the long-term damage caused by the oil is similarly unpredictable. The creation of the GCCF was supposed to bring order and coherence to the recovery, but it too has seemed obscure and arbitrary to many of the people who have dealt with it. Even once MDL 2179 is resolved, there will be further battles over how the money is divided up.

On his boat, fixing a winch so he can get back to work, Barisich reaches for another gambling metaphor. “It’s a big game of poker,” he says. “Draw poker with my life on the table, in the pot.” 6

Ed Crooks is the FT’s US industry and energy editor. Additional reporting by Christopher Booker.

Deep Water Horizon disaster

Timeline of a disaster

April 20 2010: Explosion on the Deepwater Horizon kills 11 men and pours four million barrels of oil into the Gulf of Mexico

April 22 2010: Deepwater Horizon rig sinks

May 29 2010: ‘Top kill’ attempt to block the leak fails

June 16 2010: BP promises a $20bn fund for victims of the spill, agreed on at a meeting with Barack Obama

June 17 2010: Tony Hayward, then BP’s chief executive, gives evidence to US Congress

August 10 2010: A judicial panel orders that 77 cases connected to the spill should be brought together and transferred to the Eastern District of Louisiana under Judge Carl Barbier

October 1 2010: Bob Dudley replaces Tony Hayward as BP chief executive

April 20 2011: BP sues Transocean and Halliburton, alleging they caused the spill. Those companies also sued BP

October 17 2011: BP reaches an agreement with Anadarko Petroleum to resolve claims over the spill. Anadarko, which had a 25 per cent stake in the Macondo well, agrees to pay BP $4bn

October 31 2011: Depositions of experts for the trial begin

December 5 2011: BP accuses Halliburton of intentionally destroying evidence

December 16 2011: Depositions of experts for the trial end

January 26 2012: Judge Carl Barbier rules on the dispute between BP and Transocean, saying BP must pay all compensatory damages to spill victims but Transocean is still potentially liable for official penalties and punitive damages

January 31 2012: Dispute between BP and Halliburton is resolved in the same way

February 2012: Litigation now brings together 116,000 claimants

February 27 2012: Scheduled date for the trial to begin

Tina Nandha