The energy industry is currently navigating a shift in focus to digital and sustainable technologies. This change makes for new challenges, including litigation risk in the climate, cybersecurity, and corporate espionage sectors. This article is the first in a two-part series that provides insights to explain the legal dynamics shaping the future of energy and, more importantly, how to minimize or avoid risk when possible. This article will focus on climate litigation and other climate-related requirements.
Climate-related risk
Climate-related litigation against energy companies in the United States has been steadily increasing. Given the heightened focus on an accelerated energy transition, the growing wave of climate lawsuits against U.S. energy producers is not surprising. But recent climate lawsuits in the United States are different — the allegations focus on responsibility for climate change itself rather than a particular project’s emissions or location.
Fight over forum
To date, the fight in U.S. climate cases has centered on whether state courts have authority to rule on lawsuits alleging global climate impacts. Even if state courts have authority, it is the subject of hotly contested debate whether state courts are the appropriate forum for this type of litigation.
On April 24, 2023, the Montana Supreme Court issued the first major decision in a climate case, Held v. Montana. There, Montana youth activists sued the state of Montana, claiming Montana violated its state constitution by “supporting the fossil fuel industry.” The court ruled for the youth activists, finding that Montana youth have a state constitutional right to a “clean and healthful environment.” Consequently, Montana state oil and gas permitting laws, according to the court, are “unconstitutional” because the laws fail to require greenhouse gas emissions in the permitting review process.
Not surprisingly, the Montana youth trial has inspired similar lawsuits in states like California with state constitutions that guarantee environmental rights. Earlier this year, a California youth group sued the U.S. Environmental Protection Agency (EPA), alleging that the EPA allowed unsafe levels of climate pollution in violation of the state constitution guarantee of “a life-sustaining climate system.”
The EPA has asked the court to dismiss the youth activists’ lawsuit, arguing that it is barred by sovereign immunity and the Clean Air Act. While federal courts have so far refused to dismiss youth climate lawsuits on sovereign immunity grounds, the fact that the federal government (the EPA) is the defendant may alter the reviewing court’s analysis under the Clean Air Act.
Climate change litigation is not only being pursued by youth activist groups, but by municipalities and cities as well. The city of Maui filed climate change tort claims, including public nuisance, private nuisance, strict liability failure to warn, negligent failure to warn, and trespass, against several large oil and gas companies. The city and local government allege the energy companies “intentionally misled” consumers about the environmental impacts of fossil fuels. The Hawaii Supreme Court, in an October 2023 ruling, refused to dismiss the lawsuit.
The energy company defendants petitioned the U.S. Supreme Court to stop climate change tort litigation brought by state and local governments like the city of Maui and the county of Honolulu from being tried in state court. Counsel for Defendant-Petitioner Chevron stated,”[s]tate court litigation is not a constitutionally permissible means to establish global climate and energy policy.”
(“Energy Cos. Urge Justices To Slam Brakes On Climate Suits,” Law360, Feb. 28, 2024)
The energy companies contended that federal common law necessarily governs claims seeking redress for injuries allegedly caused by the effects of interstate or transboundary greenhouse gas emissions on the global climate.
However, on April 24, 2023, the U.S. Supreme Court denied the companies’ requests for review on jurisdictional issues in climate cases brought by state and local governments, and review of decisions by four U.S. circuit courts of appeals (1st, 4th, 9th, and 10th). And on May 15, 2023, the Court denied a similar petition from the 3rd U.S. Circuit Court of Appels. Notably, the U.S. Supreme Court has also declined to grant review of a similar appeal by energy companies in a Minnesota climate fraud lawsuit.
As it stands, the general trajectory is clearly unfavorable to the energy industry. The U.S. Supreme Court appears to align with the view that climate torts are a matter for state courts, at least in cases brought by state and local governments. Activists will, therefore, continue to creatively plead lawsuits that seek to monetize climate change. Perhaps most concerning for U.S. energy companies, future procedural and substantive questions that will determine the energy industry’s alleged “liability” for climate change will apparently be decided by state court judges and juries — who may be hostile to oil and gas defendants.
Many climate lawsuits have been filed in small, rural venues, which increases the likelihood of undisclosed conflicts that can jeopardize the ability to have a fair trial. Not only is the risk of heavy publicity and unfair pressure much greater in state court, energy companies face the financial burden of protracted litigation in multiple cases in different courts and the risk of inconsistent decisions in different states.
Scrutiny of climate commitments
In recent years, government regulators and agencies are taking a more active role in policing the energy industry, including the Securities and Exchange Commission (SEC). On March 6, 2024, the SEC enacted its climate reporting rule that requires publicly traded energy companies to disclose “material” Scope 1 and Scope 2 emissions and detailed information about climate-related risks to investors, including information about the financial harm caused by severe weather events.
While the SEC reporting rule does not require disclosure of Scope 3 emissions, energy companies still face a huge undertaking. (On March 15, 2024, the 5th U.S. Circuit Court of Appeals issued an administrative stay, temporarily blocking the implementation of the SEC’s climate reporting requirements.) Even if a company has relatively little information to disclose, every public energy company will have the burden of performing the exercise to reach the conclusion about what the company does and does not have to disclose.
Companies should also be careful that environmental, social and governance (ESG) disclosures do not suggest that emissions and climate-related risks represent material issues or present a risk to the company, which could expose the company to SEC enforcement proceedings if those matters in the ESG disclosures are not also disclosed under the climate reporting rule.
The SEC’s climate reporting rule will generally increase litigation risk for reporting companies in complying with the rules. Disputes will undoubtedly arise over whether certain emissions were “material” and, thus, required to be disclosed. But recent litigation indicates that energy companies are facing legal risk, not just in complying with the rule, but also related to the strength of their climate commitments.
Mitigating climate-related risk
Engage experienced advisers
First and foremost, corporate counsel should hire outside counsel who know your industry. They will know the pitfalls, the relevant business dynamics, and the typical regulatory and legal frameworks at play. This enables them to navigate complex legal landscapes more efficiently and to provide advice that is tailored to the specific challenges and opportunities inherent in energy issues.
Experienced advisers are better equipped to anticipate and address potential legal issues proactively. This proactive approach can save time and resources, helping businesses stay ahead of legal challenges. They also understand the industry’s dynamics can more effectively align legal strategies with broader business goals, contributing to more seamless and integrated decision-making processes.
Understand your venue
Understanding the venue goes beyond the geographical location and courtroom. It includes knowing your opponent, opposing counsel, the judge, the law clerk — anything you can learn about the other party or the court will be helpful in trying the case. But sometimes, information is difficult to come by. The best trial lawyers are creative.
First, get creative in researching and understanding relationships and connections in the community of venue. Always do a deep dive on your jury — always. The information provided by the court and/or on juror information cards about prospective jurors and the time that the attorneys have to review and analyze that information varies significantly across jurisdictions.
Second, check to make sure the prospective jurors are qualified to serve on a jury under state law. Individuals who are not qualified should be screened and not make it on the panel, but unqualified jurors pass the screening and/or incorrectly answer the questions more than people think.
Third, thoroughly search for the names of the opposing party, their witnesses, opposing counsel, the presiding judge, law clerk(s), and other court personnel in land records, vendor accounts, and royalty owner accounts. These individuals may have oil and gas leases, perform services, or do other business with the company that may constitute conflicts of interest or provide grounds for disqualification.
Source: Reuters