In a unique twist on a common challenge to the deductibility of post-production expenses, plaintiffs in Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al. sued the unit operator for breach of contract to recover transportation costs incurred as a result of alleged regulatory violations of the Federal Energy Regulatory Commission’s (“FERC”) Shipper-Must-Have-Title policy. The plaintiffs in Grayson are non-operating working interest owners who elected to have the defendant-operator market their shares of production on their behalf. In Louisiana, working interest owners have the option to take their shares of production in kind to market separately from the operator. However, the Grayson plaintiffs chose to market through the operator by signing five marketing election letters, and in exchange, the plaintiffs agreed to bear their share of “any post production expense.”

Nevertheless, the Grayson plaintiffs sued the defendants claiming they “…violated a federal policy – the shipper-must-have-title rule – while transporting their gas and deducted the costs of that ‘unlawful’ transportation from Plaintiffs’ revenue shares.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *2 (W.D. La. 9/20/2022). In response, the defendants filed a Motion for Partial Summary Judgment aimed at dismissing all claims premised on alleged violations of the Shipper-Must-Have-Title policy. Specifically, the defendants argued that neither the Natural Gas Act nor any regulation or regulatory policy, such as the Shipper-Must-Have-Title policy, creates a private right of action. Moreover, within the four corners of the parties’ contracts, the defendants argued there was neither an express nor an implied basis to condition the deductibility of post-production expenses on the defendants’ compliance with federal regulations or policies.

On September 20, 2022, the Western District of Louisiana ruled in the defendants’ favor by finding no private right of action generally or specifically under the parties’ agreements. The Court’s analysis began by explaining the history that led to Congress passing the Natural Gas Act in 1938. The FERC was authorized to administer this act. As part of that regulatory authority, the FERC “establishes policies that govern interstate pipeline transportation.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *5 (W.D. La. 9/20/2022). The Court further explained that the purpose of the Shipper-Must-Have-Title policy was “to prevent natural gas distributors from buying up large amounts of pipeline capacity they do not need and then leveraging that capacity to price gouge third parties who need access to the market.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *5 (W.D. La. 9/20/2022). With this background, the Court upheld the long-standing rule that there is no express or implied general right of action to enforce the FERC’s regulations or policies. The Court concluded that the power to enforce belongs to the regulatory agency, not private parties like the plaintiffs.

Even still, the question remained whether there was either an express or an implied basis under the parties’ contracts that allowed a breach of contract claim to stand. The Court concluded that the parties’ contracts were clear and unambiguous. “By the contracts’ terms, the parties’ intent was for BPX to deduct ‘any post production’ expenses from the sales it made on Plaintiffs’ behalf without caveat.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *9-10 (W.D. La. 9/20/2022). The Court buttressed this conclusion by explaining the parties’ agreements lacked any language indicating an intent for plaintiffs to not shoulder costs associated with regulatory non-compliance. As a result, the Court concluded that “BPX had no obligation to abide by the Shipper Rule under the contracts’ unambiguous language.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *10 (W.D. La. 9/20/2022).

The Court then considered the plaintiffs’ appeal to an implied public policy to save its breach of contract claim for alleged regulatory violations. Specifically, the plaintiffs argued that their agreements implicitly incorporated all regulatory policies and rules for natural gas marketing, and the defendants breached those implied duties. In response, the Court found that it could not engraft onto the parties’ contracts new terms and obligations. Moreover, the Court found that to rule in plaintiffs’ favor would “…circumvent the NGA or to conjure up a right of action where one never existed.” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *12 (W.D. La. 9/20/2022).In granting the defendants’ Motion for Partial Summary Judgment, the Court also noted that “[w]hile the NGA does not provide Plaintiffs a right of action to enforce the Commission’s policies, the ‘unavailability of private enforcement is not the same as the unavailability of any enforcement at all.’” Grayson L.L.C. (Of Louisiana), et al. v. BPX Operating Co., et al., 5:21-cv-00044-EEF-MLH, Memorandum Ruling, Doc. No. 133, at *13 (W.D. La. 9/20/2022).

Although not yet final, this interlocutory ruling confirms prior rulings that there is no general private right of action to enforce regulatory rules or policies. However, this ruling went a step further by also interpreting the parties’ contracts to find no express obligation to abide by regulatory rules and policies. Finally, this ruling rejected any implied contractual term that would “backdoor” a private right of enforcement of the FERC’s regulatory rules and policies. While other claims remain, all claims premised on the defendants’ alleged violations of the Shipper-Must-Have-Title policy have now been dismissed with prejudice as a matter of law.

*In the interest of full disclosure, the authors of this article served as counsel of record on behalf of the defendants in Grayson. Any views expressed herein are those of the authors and do not necessarily reflect the views of Liskow & Lewis and/or its clients.

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