Nuisance Claims Are Out: Supreme Court Removes Weapon From Activist Arsenal

On June 20, 2011 the US Supreme Court issued its long-awaited decision in American Electric Power Co., Inc. v. Connecticut, holding that the Clean Air Act’s scheme for US EPA regulation of carbon dioxide and other greenhouse gases (GHGs) displaces federal common law nuisance claims seeking reduction of GHGs to address global warming. The decision reinforces the Court’s prior decision in Massachusetts v. EPA that the Clean Air Act authorizes federal regulation of GHGs and places US EPA, as opposed to the courts, front and center in the debate over control of GHG emissions.

In 2004 eight states, New York City and several private land trusts filed suits in the US District Court for the Southern District of New York against five major electric power companies alleging that the defendants were the "largest emitters of carbon dioxide in the United States," and their emissions substantially and unreasonably interfered with public rights in violation of the federal common law of interstate nuisance or, alternatively, state nuisance law. The plaintiffs alleged that these emissions were a public nuisance for contributing to global warming and sought injunctive relief requiring the defendants to cap and reduce GHG emissions by specific percentages each year for at least a decade.

The district court dismissed both suits as involving non-justiciable political questions. On appeal the Second Circuit reversed and found that plaintiffs had stated a claim under the federal common law of nuisance because US EPA had not promulgated any rule regulating GHGs. The Second Circuit found that until US EPA exercised its authority to regulate GHGs, displacement of the claim by the Clean Air Act could not occur.

The US Supreme Court was divided on whether the plaintiffs had standing to bring this claim and affirmed the lower court’s exercise of jurisdiction by default. The Court was united, however, in its conclusion that "the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel fired power plants." In Massachusetts v. EPA, the US Supreme Court clearly identified carbon dioxide as "air pollution." The Clean Air Act directs US EPA to identify categories of sources that contribute significantly to air pollution and are reasonably expected to endanger public health or welfare. Once US EPA identifies those categories, it must regulate the existing sources and establish performance standards for emissions from new and modified sources in each category. The Court found that these provisions of the Act provide an adequate avenue for the plaintiffs to petition US EPA to initiate rulemaking and to seek judicial review of US EPA’s regulatory decisions. Under this framework, the Clean Air Act "speaks directly" to the issue of carbon dioxide emissions from power plants, displacing federal common law public nuisance suits and leaving no room for courts to issue ad hoc decisions through common law suits.

The Court disagreed with the Second Circuit’s conclusion that federal common law could not be displaced until US EPA had actually exercised its jurisdiction over carbon dioxide emissions by issuing regulations. The Court found that it was Congress’s delegation of authority to US EPA that displaces federal common law, not US EPA’s exercise of that delegation. Citing the Massachusetts decision, the Court concluded such a delegation had occurred here for GHG emissions, thus placing the burden of balancing regulatory policies on US EPA, not the courts. If US EPA decides against regulating a particular source category in making these policy choices, the courts may not step in and force regulation under common law theories.

While the Supreme Court’s decision removes federal nuisance law as a mechanism for plaintiffs to seek to impose emission controls on GHG emitters, the decision leaves open the possibility for that relief under state nuisance law. The Court indicated that the availability of state law claims would depend upon the preemptive effect of the Clean Air Act, an issue that remains open on remand. Disposition of these issues will provide yet another important indication of the role courts will play in the continuing regulation of greenhouse gas emissions, if any.

CNX Deal Bellweather for Future Utica Valuations?

CONSOL Energy Inc. (NYSE: CNX) announced this morning that it sold a fifty-percent JV interest in nearly 200,000 Ohio Utica Shale acres to Hess Corporation (NYSE: HES) for $593 million. This equates to $6,000 per acre (without a discount applied). The purchase price includes an up front payment of $59 million and $534 million in a “drilling carry” whereby HESS pays for half of CNX's share of investment.

Is this transaction value unique to the acreage or do you believe it is representative of pricing on future Utica transactions?

Will WTI Discount Hamper Unconventional Resources Growth?

Historically, cash flow from legacy assets has helped many companies fund investment in unconventional resources in such plays as Eagle Ford. However, the recent discount to WTI has put a crimp in that cash flow (despite the small bump to $85.44 yesterday) and could result in CAPEX deficits for some companies who made assumptions about higher oil prices (a potentially dangerous mistake in a high cost environment). Will external funding be needed to bridge the gap? Will it be available? Will hedges suffice (probably not for many)? Will companies have to divest assets to fund development or will they make new offerings of equity?

What are your thoughts on how price discounts will influence CAPEX budgets and unconventional development?

ConocoPhillips Separation Looks Good for Shareholders, with a Few Legal Hoops Remaining

ConocoPhillips announced separation into separate E&P and R&M companies today. The spin-off is likely during the first half of 2012. ConocoPhillips' major businesses are well positioned in their respective markets, so the resulting spin-off companies should look strong from a financial perspective. See my article on Spin-Off transactions.

ConocoPhillips was a top performer among integrated oil companies during 2010. Leading analysts project that the company will earn $7.75 per share and dividends will rise by 10% annually in 2011 - 2012.

THE LEGAL DETAILS:

The ConocoPhillips board approved the separation yesterday.

A ruling from the IRS is required to ensure this transaction qualifies for tax-free treatment (though meeting the requirements does not appear to be an issue).

Neither FTC nor shareholder approval is required.

FTC and DOJ Revise HSR Form and Filing Requirements with Special Focus on Energy MLPs

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have announced major revisions to the Hart-Scott-Rodino (HSR) Report Form and the Premerger Notification Rules.

See http://www.ftc.gov/opa/2011/07/hsrform.shtm

The revisions are expected to come into effect in early August, 30 days after publication in the Federal Register.

The changes sweep away the requirements for parties to provide information including:

(i) Copies of documents already filed with the Securities and Exchange Commission;

(ii) Economic code "base year" data; and

(iii) Detailed breakdowns on all the voting securities to be acquired.


Despite the FTC’s aim to streamline the filing process, in some areas the filing burden has arguably increased. In particular, some controversial changes survived an 11-month consultation, albeit in a watered-down form.

In new Item 4(d) of the Form, all parties will be required to disclose all "confidential information memoranda" prepared by or for officers or directors of their ultimate parent companies in the year before the date of filing. This extends to studies, surveys, analyses and reports prepared by investment bankers, consultants and other advisers.

Perhaps more significantly, the revised Form provides a broad definition of a new term, "associate," to define entities under common management with the acquiring person, but not controlled by the acquiring person. The FTC has been concerned about the lack of information available about families of entities that fall outside the scope of the HSR Rules, and the antitrust ramifications of acquisitions involving them. (Master Limited Partnerships in the energy industry are highlighted in particular.) The new reporting demands apply to entities under "common investment or operational management" with the filing party and place detailed notification requirements upon them. The change means that private equity and investment funds could now be caught by disclosure requirements.

Under new Item 6(c)(ii), an acquiring party must report associates' holdings of voting securities and non-corporate interests in the target, where they are of five percent or more but less than 50 percent. This requirement extends to entities that have six-digit NAICS industry codes that overlap with the target's. Similarly, Item 7 will require information about "associate" entities.

The method of reporting revenue has also been revised (Item 5). All manufacturers – whether domestic or foreign – will be required to report revenue from sales of their products only under 10-digit NAICS codes. Sales of products that are only sold, and not manufactured, by the parties will continue to be reported under wholesaling or retailing codes.

Other minor revisions have been made to complete the changes made to the HSR Rules in 2005 that related to unincorporated entities.

The revisions will be published in the Federal Register within the next few days and will take effect 30 days after the date of publication.

EPA and Coast Guard Announce Agreement to Jointly Enforce US and International Air Pollution Requirements

The US Environmental Protection Agency (US EPA) and the US Coast Guard (USCG) recently announced an agreement (MOU) to jointly enforce US (Act to Prevent Pollution from Ships) and international air pollution (MARPOL Annex VI) requirements for vessels operating in US waters. These requirements establish limits on nitrogen oxides (NOx) emissions and require the use of fuel with lower sulfur content, in the latest efforts to protect human health and the marine environment by reducing ozone-producing pollution. The most stringent requirements apply to ships operating within 200 nautical miles of the coast of North America.

See http://www.epa.gov/compliance/resources/agreements/caa/annexvi-mou062711.pdf

In US EPA’s words, "[t]oday’s agreement forges a strong partnership between EPA and the US Coast Guard, advancing our shared commitment to enforce air emissions standards for ships operating in US waters. Reducing harmful air pollution is a priority for EPA and by working with the Coast Guard we will ensure that the ships moving through our waters meet their environmental obligations, protecting our nation’s air quality and the health of our coastal communities."

These sentiments were echoed by USCG leadership. "This agreement demonstrates the Coast Guard’s long-standing commitment to protecting our nation’s marine environment," said Rear Adm. Kevin Cook, Director of Prevention Policy for the USCG. "Aligning our capabilities with EPA enhances our commitment to the marine environment while minimizing the impact on shipping."

By way of background, MARPOL was developed through the International Maritime Organization (IMO), the United Nations agency dealing with maritime safety and security, as well as the prevention of marine pollution from ships. MARPOL is the main international agreement covering all types of pollution from ships. Air pollution from ships is specifically addressed in Annex VI of the MARPOL treaty, which includes requirements applicable to the manufacture, certification, and operation of vessels and engines, as well as fuel quality used in vessels in the waters of the United States. Since January 2009 all vessels operating in US waters must be in compliance with MARPOL Annex VI regulations, but enforcement has lagged.

See http://www.epa.gov/oecaerth/civil/caa/annexvi-mou.html

The purpose of the MOU was to establish terms by which US EPA and USCG can work together to implement and enforce Annex VI requirements. While the MOU does not add any new compliance requirements, it does signal that enforcement of the requirements has become a top priority. US EPA and USCG also sent a letter to the maritime industry notifying them of the MOU, and to advise that US EPA and USCG are taking measures to promote compliance, including investigating potential violations and pursuing enforcement actions with penalties for violations. The central provisions of the MOU relate to vessel inspections, certification, examination and investigations. Importantly, the MOU also discusses enforcement by criminal prosecution and penalties.

More information is available on US EPA's website.

See http://www.epa.gov/otaq/oceanvessels.htm#emissioncontrol

This development signals upcoming enforcement on the part of both agencies. Shipowners, ship operators, shipbuilders, marine diesel engine manufacturers, marine fuel suppliers and marine insurance providers should be prepared to deal with increased enforcement and prosecution of air pollution laws.

Outside Service Providers Are Not Liable Under Federal Securities Laws, Says US Supreme Court

Can an investment adviser be held liable in a private action under Securities and Exchange Commission (SEC) Rule 10b-5 for false statements included in its clients' mutual funds' prospectuses? On June 13, 2011 the US Supreme Court said "no" in Janus Capital Group, Inc. v. First Derivative Traders. That answer brought a huge sigh of relief from not only investment advisers but also other outside professional service providers.


BACKGROUND

Janus Capital Group, Inc. (JCG) is a publicly traded company that created the Janus family of mutual funds, which are organized in a business trust as the Janus Investment Fund. The Janus Investment Fund retained JCG's wholly owned subsidiary, Janus Capital Management LLC (JCM), to serve as its investment adviser. JCG, which issued prospectuses, was sued in federal district court, along with JCM, on allegations that both entities violated federal securities laws because statements in prospectuses for certain individual Janus funds were misleading.

The district court dismissed the case, rejecting the argument that JCM could be liable whether or not it drafted the misleading prospectuses. The US Court of Appeals for the Fourth Circuit reversed, holding that "although the individual fund prospectuses are unattributed on their face, the clear essence of plaintiffs' complaint is that JCG and JCM helped draft the misleading prospectuses."


SUPREME COURT WEIGHS IN WITH BRIGHT-LINE RULE

The Supreme Court granted certiorari to address whether JCM, as an advisor, could be held liable in a private securities action for false statements included in the prospectuses.

Justice Thomas delivered the Court’s opinion, which Justices Roberts, Scalia, Kennedy and Alito joined. The Court focused on the word "make." Rule 10b-5, promulgated by the SEC pursuant to authority granted under §10(b) of the Securities Exchange Act of 1934, prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities.

According to the Court, "for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker." The Court looked to speechwriting for comparison, noting this "rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit – or blame – for what is ultimately said."
The Court rejected the argument that both JCM and JCG might have "made" the misleading statements within the meaning of Rule 10b-5 because JCM was significantly involved in preparing the prospectuses: "This assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses. Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5."

Had the Court not created much needed clarity with a bright-line rule, many service providers – accountants, bankers, lawyers, investment advisers and the like – who are involved in preparing documents disseminated to investors would have remained at risk. The Court had previously held that there is no secondary "aiding and abetting" liability under Rule 10b-5 against those who do not "make" a statement, but contribute "substantial assistance." And now, given the Court's opinion in Janus, service providers can rest even easier, with a better understanding of what it actually means to "make" a statement under Rule 10b-5.