Sorry BP, Your Oil Spill Settlement Is Legal


Last Friday, a three-judge panel of the Fifth Circuit appeals court in New Orleans came to a decision that will change the course of BP’s (NYSE:BP) fight over the manner in which victim compensation claims for the 2010 Gulf of Mexico oil spill are determined. That ruling held that the settlement of a class action brought by Gulf Coast businesses who endured the months-long oil leak that befouled beaches, killed wildlife, and disrupted the economies of their state was legal.

The judges stated there was “no merit” in the company’s argument that a deal allowing businesses unaffected by the Deepwater Horizon disaster to claim compensation should be illegal. Plaintiffs’ lawyers took that decision as a victory; it upheld a pact worked out by the company’s own lawyers and stymied BP’s efforts to rewrite history and the settlement.

However, BP will continue to pursue its secondary argument: the court’s interpretation of the settlement agreement. In recently-filed court documents obtained by the Financial Times, BP said the company would “continue to press its position on the agreement’s threshold requirements that claimants’ losses must be traceable to the spill.” The papers also noted that “BP is shining a light on the abuses of the settlement and fighting to ensure that the agreement is implemented in accordance with its intended purpose and express language.”

BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010 when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Marshes, fisheries, and beaches stretching from Louisiana to Florida were polluted, harming local tourism and fishing. The oil producer has acknowledge responsibility for the oil spill, spending more than $25 billion on cleaning up the marshes, fisheries, and beaches along the coast and compensating victims. That spending is just the tip of the company’s spill-bill iceberg; $42.4 billion has been spent or earmarked for spending on clean-up, compensation, fines and other legal costs. BP even sold assets that generated $5 billion of cash flow a year to pay those expenses.

However, the biggest driver of skyrocketing spill bill costs is victim compensation. Originally, the company forecast payouts related to plaintiffs’ claims would cost just $7.8 billion. But, by late October, that estimate had been increased to $9.2 billion, and by the calculations of Juneau, approximately $3.81 billion has been paid out to 40,371 spill claimants. When the restitution payments started to overshoot its original estimate, BP began to contest the manner in which restitution payments were awarded, arguing that court-appointed fund administrator Patrick Juneau has compensated “fictitious and inflated losses.”

The sideshow of BP’s civil trial in the district court in New Orleans has been the company’s efforts to convince Judge Carl Barbier to tighten the standards by which Juneau evaluated compensation claims made by the individuals and business harmed by the 2010 Gulf of Mexico oil spill. At first, BP attempted to cooperate with the mountain of litigation that government agencies, private individuals, and businesses dumped on its docket. But after taking an initially conciliatory approach toward the court on the matter of victim compensation, BP changed tactics last year in an effort to take control of its spill bill. Now, BP claims that the company’s efforts to compromise were met with overreaching and outright fraud by the plaintiff’s lawyers, and the fact that the settlement agreement allows the compensation of businesses that lost no money as result of the spill should make it illegal.

But on January 10, two of the three Fifth Circuit judges rejected BP’s argument that individual fraudulent payments undermined the validity of the overall settlement. “Indeed the reason that BP has identified no [legal] authority for this proposition,” Judge W. Eugene Davis wrote in his opinion, seen by Bloomberg Businessweek, “is that it is nonsensical.” A statement issued by lead plaintiffs’ attorneys Steve Herman and Jim Roy called the Fifth Circuit ruling “an enormous victory for the gulf and an important step forward in ensuring that every eligible claimant is fully compensated according to the objective, transparent formulas spelled out in the settlement agreement that BP co-authored and agreed to.”

Still, that ruling does not prevent BP from fighting how the settlement is interpreted, and on the issue of the calculation of losses, BP has made more progress with the appellate court. The original methodology for assessing claims utilized by Juneau provided a large measure of latitude for how businesses filed their compensation applications, enabling them to maximize the size of their apparent loss and their subsequent compensation. To ensure that loss compensation is appropriate, BP is pushing for the court to employ an accurate picture of a business’s performance by linking revenues and the costs a business would incur to generate those revenues .

New Orleans District Court Judge Carl Barbier, who is presiding over BP’s ongoing civil trial, rejected the need for comprehensive matching originally. But a different panel to the one who made Friday’s ruling decided that Barbier should order Juneau to design a new set of procedures for calculating losses that include matching. All restitution payments have been suspended until these legal issues over the settlement are solved.

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