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EXXON'S DEFENSE A LETDOWN

Jan 13, 2001

Mobile Register

1/13/01

EXXON’S DEFENSE A LETDOWN

I have been following with great interest the news stories, editorials and letters to the editors of major Alabama newspapers following th $3.5 billion jury verdict against Exxon in Montgomery a few weeks ago.

Recently, state newspapers published a letter submitted by Kenneth P. Cohen, a spokesperson for Exxon, defending Exxon’s indefensible conduct by arguing that the lawsuit was merely a “contract dispute where reasonable people differed over the interpretation of an ambiguous lease agreement as to how to calculate royalties” payable to the state of Alabama.

As I understand the evidence (based on published news stories), this lawsuit was about a lot more than a simple dispute over the meaning of so-called “ambiguous” lease provisions. Mr. Cohen didn’t mention that a number of internal Exxon documents showed that Exxon deliberately decided to underpay royalties due the state even though they knew the State’s position on what the language of the lease agreement meant.

Alabama juries don’t award $3.4 billion in punitive damages for legitimate differences in opinion over what the language in a contract means. But they will do so, as they did in this case, when the evidence shows that one of the parties to a contract (Exxon) has deliberately set out on a course of action to minimize its monetary obligation to the other party (state of Alabama), in spite of knowing fully the basis upon which that other party is expecting to be paid.

Mr. Cohen then adds insult to injury by asserting that Exxon’s reference to the state’s “inexperienced regulatory staff and personnel” should be read in the “context of ... the department’s ambiguous lease form.” That defense strains the limits of credulity. Any person not working for Exxon can quickly grasp that this statement underscored Exxon’s belief that it could get away with its intentional misinterpretation of its leases with the State. The Montgomery jury clearly had no trouble understanding the implications of that reference.

Mr. Cohen also attempts to defend Exxon’s failure to report under oath on a monthly basis its gross production (volume of natural gas) and gross proceeds (money received) to the Department of Conservation.

The point was, and is, that Exxon’s leases with the state required the information be provided to the Conservation Department, the only state agency responsible for seeing that Exxon was paying royalties due the state in accordance with its leases, Exxon has yet to file the first such statement, under oath, with the Department of Conservation.

Finally, Mr. Cohen pleads for sympathy by implying that all this misunderstanding rests on the shoulders of the “department employee who wrote the lease ... by cutting and pasting together provisions of other lease forms,” having “never before written an oil and gas lease,” which “took him a year to write ... and that he has not written one since.”

As a former commissioner of the Department of Conservation, I have had the pleasure of working with that “department employee.” The evidence showed that the employee was the department’s chief legal counsel when he drafted the agreement. Mr. Cohen obviously does not understand or appreciate the significance of that fact. Anyone serving as the chief legal counsel of a major state agency has 1,001 task to perform.

Drafting the new standard oil and gas lease form was just one of his duties. The inescapable facts are: that employee drafted a lease that was designed to maximize the value of the state’s royalty interest; Exxon fully understood that lease when signing it 22 times; and Exxon intentionally “misinterpreted” its leases with the state, minimizing its royalty obligation, and “hid the facts” by not filing the required reports to the Conservation Department.

Unfortunately, in this particular instance, it appears that the defenders had more than a mere mistake to justify, and that 12 Alabama citizens were convinced that Exxon’s conduct would have deprived the state of as much as $1 billion had the audits I initiated in 1995 not caught the company.

- Jim Martin

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