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Important Changes in Litigating Oil and Gas Cases in Federal Court

Posted 6:45 AM, April, 5th 2016 by Manning Wolfe & filed under Legal

What the 2015 Amendments to the Federal Rules Mean for Oil and Gas Companies
By Nicholas Ranjan, Esq., Partner David I. Kelch, Esq., Associate Law Firm of K & L Gates

Originally published in The Override,  the Los Angeles Association Professional Landmen Newsletter, January 2016 Edition

Permission to Publish - All Rights Reserved. See The Override for complete article.

Background (sic):  Many oil and gas disputes are litigated in federal court. This includes many land disputes, including bonus payment and fraud claims involving execution of oil and gas leases or claims against landmen and leasing companies. In recent years, federal litigation has undergone significant changes in discovery practices and rules. For example, with the increase in electronically stored information, like emails and text messages, the federal and local rules have changed to ensure that such electronically stored information, or “ESI,” is preserved and disclosed. The problem that many companies face, however, is that the costs of preserving, collecting, reviewing, and producing ESI as part of federal litigation can be extraordinarily high. This is particularly acute in cases against oil and gas companies that involve historical information, payment information, and large numbers of plaintiffs or claimants (e.g., payment, royalty, class actions, and mass contamination cases).[1] Similarly, even in “routine” cases—like oil and gas lease disputes—where the collection of ESI may extend to email accounts and text messages of landmen and other land personnel and agents in the field (sometimes on non-company servers), e-discovery costs can be disproportionate to the issues at stake.[2]

The high costs of e-discovery in federal litigation recently spurred the Supreme Court of the United States to amend the federal rules in a manner that has the potential to narrow the scope and limit the cost of expensive e-discovery. This has the potential of assisting those oil and gas companies that litigate in federal court in reducing and managing their defense costs, particularly in this challenging economic environment.

Below is a summary of the proposed amendments (which (sic) go into effect on December 1, 2015, absent congressional legislation opposing or altering them), and the potential effect of the changes on oil and gas litigation in federal court.

Summary of the Amendments:   The proposed amendments can be grouped into three categories: (i) early case management; (ii) proportionality of discovery; and (iii) preservation of ESI.

The early case management amendments are largely designed to spur “earl[y] and more active judicial case management.”[3] They include an amendment that decreases the deadline to serve a complaint and summons (from 120 days to 90 days), in order to expedite the start of a case.[4] They also include changes in the sequencing and manner of early conferences with the court, and the manner in which objections to discovery can be stated.[5]

Of greater consequence, the second category of changes is designed to eliminate disproportionality between what is at stake in litigation and discovery. For example, new Rule 26 recognizes that “the costs of discovery in civil litigation are too often out of proportion to the issues at stake in the litigation[.]”[6] With that in mind, the new rule limits the scope of discovery to that which is “proportional to the needs of the case[.]”[7] Importantly, this means that the new Rule 26(c)(1) will be amended to include “the allocation of expenses” among the terms that may be included—in other words, if certain ESI must be produced by a company, the other side may have to pay for the expense involved.

The final category of changes is designed to clarify the law regarding the spoliation of discoverable information. The new Rule 37(e)—a complete rewrite of the rule—was developed to “establish[] greater uniformity in how federal courts respond to the loss of ESI.”[8] The new rule only allows serious sanctions for spoliation (i.e. the intentional, reckless, or negligent withholding, hiding, altering, or destroying of evidence relevant to a legal proceeding) where the spoliating party “acted with the intent to deprive another party of the information’s use in the litigation.”

A Few Key Effects of the Amendments on Federal Litigation:  The most important effects of the amendments concern those related to the proportionality of discovery and preservation of ESI.

First, the scope of discovery is now limited to that which is “proportional.” In other words, courts will not permit discovery into expensive ESI, without a cost-benefit analysis. Before initiating discovery, courts are likely to hear conflicting estimates of the costs and the benefits of discovery. Using “extrinsic information,” such as “whether the requested information was created by ‘key players,’”[9] and evidence samples[10] will likely be important to a cost-benefit analysis. Further, where expensive e-discovery is required from an oil and gas company, that company may have the ability to allocate the costs to the other side.

Second, while it still remains critical to preserve potentially relevant ESI, the new changes to the rules are more forgiving when a party has inadvertently failed to do so. In the past, failure to preserve certain ESI could lead to sanctions, including preventing a party from introducing certain evidence or permitting the jury to infer an adverse fact simply because evidence was not preserved. The new rule would appear to prohibit such a severe result for inadvertent mistakes.

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The creative oil and gas litigator will leverage the new changes to the rules so that oil and gas litigation in federal court—particularly during the discovery stage—will be more proportional and less costly. For landmen and companies in the industry that face litigation that involves ESI (e.g., payment, royalty, class actions, and mass contamination cases) the changes may be beneficial in managing and defending litigation in a cost-effective manner.

Notes: See full article in The Override for case notes and references.

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