General Publications November 15, 2023

“What Texas Business Court Could Mean for Oil, Gas Cases,” Law360, November 15, 2023.

Extracted from Law360

With profits exceeding $4 trillion in 2022, the oil and gas sector is one of the largest industries in the world. It supports over 10 million jobs in the U.S., and represents approximately 10% of the U.S. economy, yet the industry remains heavily rooted in Texas.

In fact, the Texas Oil & Gas Association recently reported that Texas produces 43.2% of U.S. oil and 28.5% of U.S. natural gas. So it should come as no surprise that over 20 energy-related Fortune 500 companies are headquartered in Texas.

Because of the industry's prominence in this state, oil and gas disputes often originate and are litigated under Texas law. Even disputes arising in other states, or under other jurisdictions, that are not litigated under Texas law often look to Texas as an informative authority.

Based on the size and economic impact of the industry, many may assume that these oil and gas disputes are typically handled by federal courts, which can offer increased efficiency and predictability in dispute resolution. But this is often not the case.

In fact, due to mandatory-venue statutes and jurisdictional rules, much oil and gas litigation is currently handled in Texas state courts in rural counties, where district judges whose circuits include several counties preside over general-jurisdiction "cattle call" dockets.

This means that summary judgment arguments concerning multimillion-dollar oil and gas disputes are often presented alongside family law and criminal matters to courts without specialized experience with complex commercial litigation.

The challenges of litigating oil and gas disputes under the current Texas judicial system are not limited to the trial level. While these disputes often begin in rural venues, the appeals from oil and gas cases regularly go up to appellate courts responsible for deciding issues originating from large geographic areas — despite having far fewer justices than some of their sister courts.

Thus, the average time between filing and disposition in some courts of appeals with heavy oil and gas dockets is often greater than that for appellate courts with larger judicial benches.

Some of the challenges in litigating Texas oil and gas cases may dissipate after the recent enactment of H.B. 19 and S.B. 1045.

H.B. 19 adds a new Chapter 25A to the Texas Government Code. It expands the Texas judicial system by creating a specialized business court with statewide jurisdiction to resolve certain business and commercial disputes arising after Sept. 1, 2024.

H.B. 19 grants the business court jurisdiction concurrent with state district courts over the following categories of claims:

  • Corporate disputes — e.g., governance, securities claims and derivative actions — with amounts in controversy exceeding $5 million;
  • Corporate disputes involving publicly traded companies, regardless of the amount in controversy;
  • Qualified transaction disputes — e.g., transactions involving loans or credit advancements — with amounts in controversy exceeding $10 million;
  • Disputes with amounts in controversy exceeding $10 million arising "out of a contract or commercial transaction in which the parties to the contract or transaction agreed in the contract or a subsequent agreement that the business court has jurisdiction of the action, except an action that arises out of an insurance contract"; and
  • Certain actions arising out of violations of the Finance Code or Business & Commerce Code with amounts in controversy exceeding $10 million.

The business court will also have concurrent jurisdiction over actions seeking injunctive or declaratory relief involving disputes based on claims within the court's jurisdiction, as well as supplemental jurisdiction over any other claim related to a case or controversy within the business court's jurisdiction, provided the parties and the court agree to have the business court hear those supplemental claims.

While H.B. 19 provides that the business court will have statewide jurisdiction, that jurisdiction will be carved into 11 multicounty divisions. Five of those divisions, which represent a minority of Texas counties but a substantial majority of the state's population and business base, will begin operating on Sept. 1, 2024.

In 2025, the Texas Legislature will consider the results obtained by the business court through the initial business court divisions during the initial months of their operation, to determine if the policy considerations that supported creating the business court justify funding additional business court divisions.

S.B. 1045 amends Chapter 22 of the Texas Government Code to create a new court of appeals with statewide jurisdiction. Appeals from the business court will funnel up to the new Fifteenth Court of Appeals, which will begin accepting cases on Sept. 1, 2024, and have statewide jurisdiction.

The jurisdiction of the Fifteenth Court of Appeals will include not only appeals from the business court but also appeals from suits in which Texas is a party. Many of these appeals are currently under the jurisdiction of the Third Court of Appeals.

The next few years will no doubt involve a decent amount of trial and error, as the business court begins to establish its jurisprudence and a body of reported decisions — the business court, unlike Texas district courts, is expected to issue written opinions explaining its decisions — and navigates potential constitutional or other challenges to its jurisdiction.

But once established, the business court may help streamline complex energy cases involving oil and gas litigation. Ideally, the time spent resolving oil and gas disputes will be reduced, and the business court will offer a more uniform approach to dispute resolution than the current county-by-county system.

Additionally, having a specialized court of appeals to review oil and gas decisions from the trial-level business court may increase efficient resolution, and help provide stability in Texas jurisprudence for complex issues that routinely arise in oil and gas litigation.

As H.B. 19 is currently enacted, however, many oil and gas disputes that would satisfy the amounts-in-controversy thresholds for the business court's jurisdiction may remain outside the reach of the business court, without the agreement of the parties.

This is especially true for disputes involving legacy contracts or long-standing commercial transactions, because it is unknown how broadly "commercial transactions" will apply, or how narrowly consent to the business court's jurisdiction will be interpreted.

Thus, in the short term, oil and gas disputes may involve more procedural litigation than has traditionally occurred with disputes in this industry.

Further, many oil and gas disputes arise in geographic regions that will not be covered by the five initial divisions of the business court. Disputes that arise outside the geographic reach of the five initial divisions will continue to proceed in district courts until at least Sept. 1, 2025, unless the parties enter an agreement that places the venue for their dispute in a county that is included in one of the initial divisions.

As time goes on, we may see an increase in oil and gas instruments that incorporate mandatory venue clauses selecting the Texas Business Court for commercial disputes. Because the business court is expected to offer advantages over arbitration — particularly the ability to appeal, and reliance on jurisprudential precedent — parties to oil and gas agreements that currently include binding arbitration clauses may consider amending their agreements to move covered disputes to the business court.

In the interim, industry players should continue to watch how the new system develops to see if proceeding in the business court will provide greater stability and efficiency in oil and gas disputes.

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