CHAPTER 13 DISCOVERY AND DOCUMENT PRESERVATION ISSUES PRESENTED BY ROYALTY OWNER LAWSUITS AS AFFECTED BY MERGERS AND ACQUISITIONS AND STATUTES OF LIMITATION DECISIONS

• Jurisdiction: United States

Private Oil & Gas Royalties: The Latest Trends in Litigation
(Dec 2008)
CHAPTER 13
DISCOVERY AND DOCUMENT PRESERVATION ISSUES PRESENTED BY ROYALTY OWNER LAWSUITS AS AFFECTED BY MERGERS AND ACQUISITIONS AND STATUTES OF LIMITATION DECISIONS
J. Kevin Hayes
Hall Estill Hardwick Gable Golden & Nelson, P.C.
Tulsa, Oklahoma

J. Kevin Hayes is a shareholder and senior litigator with the firm, specializing in energy and general commercial litigation. He also serves on the firm's Board of Directors and Executive Committee. He is a graduate of the University of Tulsa College of Law and has been with Hall Estill since 1975. Mr. Hayes' practice has historically focused on the representation of energy-related companies in property, construction and contractual right matters. In addition, he has represented clients in matters before the Federal Energy Administration in connection with wage and price control matters, has represented numerous gas pipeline companies in contractual dispute litigation, oil and gas producing companies in joint interest owner and royalty owner litigation, and has represented telecommunications companies in litigation concerning claims of landowners owning land adjacent to rights of way upon which fiber optic cable has been laid. Today, Mr. Hayes is involved as lead counsel in several major class actions involving oil and gas royalty owner claims as well as claims involving disclosures made by rental car companies. Mr. Hayes has published a number of papers including Gas Royalty Issues Arising From Direct Gas Marketing, presented at the Southwestern Legal Foundation's 43^rd Annual Institute on Oil and Gas Law and Taxation, February 19-20, 1992 and Oil and Gas Marketing Issues in the 1990's, presented at the Rocky Mountain Mineral Law Foundation, April 19-20, 1993 and also published in the Oil and Gas Law and Taxation Review. Mr. Hayes is admitted to practice in Oklahoma and before the United States Supreme Court, United States Court of Appeals for the Tenth Circuit, the Oklahoma Supreme Court and the U.S. District Court for the Northern, Eastern and Western Districts of Oklahoma. In addition, he is an AV-rated attorney through Martindale-Hubbell, was selected a Best Lawyer in America in Commercial Litigation and Energy Law, recognized as an Oklahoma Super Lawyer in Energy & Natural Resources, and ranked by Chambers USA as a "Band 2" attorney in Energy & Natural Resources Law. Further, Mr. Hayes is a member of the Oklahoma and Tulsa County Bar Associations, is a past President of the Council Oak Chapter, American Inns of Court. He is also a frequent speaker on Energy and Oil & Gas legal issues.

TABLE OF CONTENTS

I. Introduction

II. Overview of Discovery Obligations

A. Preservation Obligation

B. Spoliation and Sanctions

C. E-Discovery Amendments to the Federal Rules

III. Royalty Owner Suits in the Context of Oil and Gas Mergers and Acquisitions

A. Overview of Royalty Owner Actions

B. Oil and Gas Mergers and Acquisitions: Structure and Liability

C. Preservation Issues Presented by Oil and Gas Mergers and Acquisitions

IV. Oil and Gas Mergers and Acquisitions: E-Discovery Best Practices

A. Preparation

B. Investigation

C. Identification

D. Negotiation and Preservation

V. Preservation Issues Resulting From Statutes of Limitations in Royalty Owner Suits

A. Application of Statutes of Limitations to Royalty Owner Actions in Oklahoma, Texas, Colorado, Wyoming, North Dakota and Kansas

B. Preservation Issues Arising in States Which Allow the Statutes of Limitations to Toll for Royalty Owner Actions

VI. Conclusion

I. INTRODUCTION

Royalty owner litigation continues to proliferate, resulting in an array of unique discovery and document preservation issues. These discovery and preservation issues are further complicated by significant merger and acquisition activity in the oil and gas industry. Additionally, court decisions in royalty owner litigation tolling otherwise applicable statutes of limitations for certain types of royalty claims amplify potential discovery and document preservation related problems. Discovery in royalty owner litigation typically involves significant quantities of data, including both traditional storage of data, i.e., paper, and electronically stored information ("ESI"). Consequently, a thorough understanding of recent changes in the Federal Rules related to electronic discovery ("e-discovery") is required. In many instances, access to electronic data relevant to a royalty owner action may depend on the use of outdated software applications and hardware ("legacy systems"). Where royalty owners are successful in tolling the applicable statutes of imitations, the likelihood that relevant data will

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reside on legacy systems is increased. It is essential for producers contemplating merger and acquisition activity to proactively address the management of data, in both electronic and traditional forms, in order to mitigate future discovery and document preservation-related issues.

This paper will explore the discovery and document preservation-related issues confronting working interest owners faced with royalty owner claims. Section II will provide an overview of discovery obligations, focusing on preservation, spoliation, sanctions, and changes to the Federal Rules. Section III will present an overview of royalty owner litigation and the structure of oil and gas mergers and acquisitions, and will examine preservation issues arising from the structure of oil and gas deals. Section IV will suggest best practices for ESI preservation in the context of oil and gas mergers and acquisitions. Section V will discuss the application of statutes of limitations to royalty owner actions in Oklahoma, Texas, Colorado, Wyoming, North Dakota and Kansas, and will evaluate preservation issues presented by states allowing significant tolling of the applicable statutes of limitations.

II. OVERVIEW OF DISCOVERY OBLIGATIONS

A. Preservation Obligation

An organization has a duty to preserve all documents relevant to pending or reasonably-anticipated litigation.¹ This duty arises from the common law doctrine of spoliation of evidence.² "Spoliation of evidence" refers to "the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence."³

The duty to preserve relevant documents attaches when litigation is "reasonably anticipated."⁴ Certainly, a party can be held to "reasonably anticipate" litigation after receipt of a complaint, subpoena, or other document in a pending matter.⁵ However, the duty to preserve documents also extends to a period of time before the formal commencement of litigation.⁶ But the point at which litigation becomes "reasonably anticipated" is often ambiguous. Imposition of the duty to preserve documents requires more than a mere possibility of litigation.⁷ The Sedona Guidelines suggest that a "reasonable anticipation of litigation arises when an organization is on notice of a credible threat it will become involved in litigation or anticipates taking action to initiate litigation."⁸

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Once an organization reasonably anticipates litigation, the organization must suspend its routine document destruction policy and implement a "litigation hold".⁹ A litigation hold requires the party to take affirmative action to identify all sources of relevant, discoverable information and preserve them.¹⁰ The duty to preserve extends to all documents (both traditional and electronic) and tangible things "`likely to have discoverable information that the disclosing party may use to support its claims or defenses.'"¹¹

The attachment of the duty does not require an organization to preserve every document. Instead, the organization "`is under a duty to preserve what it knows, or reasonably should know, is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.'"¹²

In addition to the preservation obligation triggered by civil litigation, an actual or contemplated federal investigation, matter or official proceeding creates a preservation obligation pursuant to Sections 802 and 1102 of the Sarbanes-Oxley Act of 2002.¹³ Where the merger or acquisition is likely to trigger a review under the Hart-Scott-Rodino Act,¹⁴ then it is probable that the Sarbanes-Oxley preservation obligation would be triggered.

B. Spoliation and Sanctions

A party seeking sanctions for spoliation of evidence must establish three elements.¹⁵ First, the party in control of the evidence must have had a pre-existing obligation to preserve the evidence at the time of destruction.¹⁶ Second, the party must have destroyed the evidence with a culpable state of mind.¹⁷ Any document destruction occurring after the duty to preserve attaches is, at the least, negligent.¹⁸ Depending on the jurisdiction, ordinary negligence may be sufficient to demonstrate culpability.¹⁹ Third, the destroyed evidence must be relevant to the claim or defense of the party seeking sanctions, such that a reasonable juror could have found the

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evidence in support of the claim or defense.²⁰ Relevance automatically exists if the evidence was destroyed intentionally or willfully.²¹ However, if the destruction was only negligent, relevance still must be proven.²²

A trial judge may exercise discretion to determine the appropriate sanction, if any, for spoliation of evidence.²³ The chosen sanction should serve three purposes: "(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk [by destroying evidence]; and (3) restore `the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence.'"²⁴ Typical sanctions include fines, cost-shifting of opponent's expenses...