Texas Business Dispute Blog

Tuesday, July 25, 2017

Ducks Don't Walk, Talk or Sign Partnership Agreements: Dallas Court of Appeals Reverses $535 Million Verdict for ETP

By Ladd Hirsch

Since 2014, Energy Transfer Partners LP (“ETP”) has been fighting to hold on to the $535 million judgment it obtained that year against Enterprise Products Partners (“Enterprise”).  Our blog post earlier this year analyzed ETP’s efforts to persuade the Dallas Court of Appeals that ETP and Enterprise, two sophisticated companies in the energy industry, had entered into an unwritten partnership agreement, or as Enterprise referred to it on appeal – a partnership by ambush in disregard of the parties’ written agreements.  

At trial, ETP’s counsel argued successfully to the jury that the parties had entered into a partnership agreement based on their conduct and oral statements, because if it walks, talks and sounds like a duck, it must be a duck.  The jury agreed.  Unfortunately, for ETP, the Dallas Court of Appeals picked a different animal when it held last week: “that dog won’t hunt.”  The appellate court concluded that ETP and Enterprise had placed two specific conditions on their potential formation of a partnership – the signing of a written partnership agreement and approval of the agreement by the boards of both companies -- and because those two conditions were not met, the jury’s verdict had to be reversed.

The appellate decision this month overturning the ETP judgment may come as a relief in business circles.  Companies that are considering entering into a business relationship with another company do not want to fear they unwittingly formed a general partnership before they have given their express, written consent.  Although the agreements negotiated by Enterprise and its counsel ultimately won the day, this vindication took place only after a lengthy legal dispute was resolved on appeal after a jury trial.  The costs to Enterprise have included millions of dollars in legal fees, a lengthy distraction for the company while the case has been ongoing, and damage to the company’s reputation from a jury finding at trial that Enterprise had breached fiduciary duties.   Moreover, the legal dispute is not yet over as ETP will undoubtedly appeal the appellate court’s decision to the Texas Supreme Court, which will then have to decide whether to accept the writ and issue an opinion in the case. 

The ETP case provides important lessons for businesses desiring to avoid a legal dispute over a claimed partnership, and this post focuses on the agreements companies can put in place to avoid future legal claims when they explore potential ventures with another company. 

The No Partnership Agreement Pre-Nup

The preliminary agreement a company enters into when it considers a potential business opportunity with another company is akin to a corporate pre-nup.  In the ETP case, Enterprise negotiated agreements with ETP that ultimately won the day, but at a high cost for this legal victory.  Fortunately, the opinion from the Dallas Court of Appeals provides businesses with a clear road map to avoid these partnership disputes at the outset.  An anti-partnership pre-nup agreement should include all of the following when a company is exploring some type of joint venture or partnership opportunity with another company:

  • Disclaimer Language – the parties’ preliminary agreements need to specify that no partnership agreement is being entered into and that the preliminary agreement the parties are signing does not constitute a partnership.  This type of disclaimer was included in the agreements signed by ETP and Enterprise, and ultimately protected Enterprise.
  • Reference to Conditions Precedent the parties’ agreements should state expressly that there are definite conditions to the formation of a partnership between them. These conditions should include a signed partnership agreement, approval by the boards of both companies, and any other conditions the parties deem necessary.  For example, the parties may specify that certain government approvals are required before any partnership is formed.  ETP and Enterprise did not use the words “conditions precedent” in identifying the specific events that were, in fact, conditions precedent to forming a partnership.
  • Elimination of Fiduciary Duties – the basis for ETP’s large jury award was a breach of fiduciary duties that Enterprise allegedly owed as a partner once the jury found that the parties had entered into a partnership. The pre-nup should therefore state that the parties are not fiduciaries, that the agreement does not create any fiduciary duties, and that their performance under the agreement is not subject to any fiduciary duties.  

New Agreements Should Repeat the No-Partnership Stipulation

After parties enter into a preliminary agreement that includes the disclaimer language set forth above, they may also enter into follow-on agreements to provide for the reimbursement of expenses or additional due diligence activities.  These supplemental agreements should also specifically reference the disclaimer language from the original agreement to ensure that later activities by the parties do not alter the no-partnership stipulation from the original agreement.  Parties and their counsel need to be careful not to permit later agreements to muddy the waters.

These later agreements may call for payment of expenses, third-party fees and other costs.  The subsequent agreements therefore need to specify that the new payment obligations do not amend the original agreements, do not create a partnership between the parties, and do not impose or create any new fiduciary duties between the parties.  Similarly, and this was done by Enterprise, emails and other communications should include a standard disclaimer at the bottom that no partnership has been formed between the parties until a partnership agreement has been signed and formally approved by both parties and their boards or managing members. 

Careful Communications

During the trial, counsel for ETP made much of the fact that Enterprise personnel had used the “P” word (partnership) to describe the parties’ relationship.  These communications were presented to the jury as evidence that ETP and Enterprise were already working together as partners.  Companies should therefore caution all of their executives to avoid referring to the other company as “our partner” and that they should not call the joint venture a “partnership.”  These comments ultimately did not prove decisive on appeal in the ETP case, but they were obviously not helpful to Enterprise’s position at trial. 

If executives do slip up and use the “P” word in communications with third parties, it is advisable not to disregard comments of this type.  Instead, the company or its counsel should address these inadvertent statements and confirm to the other party that these statements were not accurate, and they do not vary the parties’ agreements.  Specifically, notice should be issued that that these statements do not create a partnership or any fiduciary duties between the parties.

Conclusion

Unless the Texas Supreme Court issues a contrary decision on appeal, Enterprise has dodged a very expensive bullet.  As things stand now, Enterprise did not have a common law partnership with ETP, Enterprise did not breach any fiduciary duties to ETP, and it does not owe any damages to ETP.

While the Dallas Court of Appeals decision was a win for Enterprise, it was a costly one.  For companies that want to avoid expensive legal battles when they explore potential business opportunities, the guidance from the appellate court is instructive.  In this regard, the preliminary agreements that businesses enter with other potential partners should include disclaimers of both partnership and fiduciary duties, along with reference to and use of the actual words “conditions precedent” that must be met before any partnership is formed between the parties.

 

 


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