In the Courts

Water Cases

Pape Partners, Ltd. v. DRR Family Properties LP, 623 S.W.3d 436 (Tex. App.—Waco 2020, pet. granted).

This case focused on a water rights dispute which arose when Pape Partners, Ltd. (“Pape”) purchased a tract of land in 2014 that included irrigation water rights recognized by the State of Texas in Certificates of Adjudication that were initially issued to the previous owners as a part of a judgment brought under the Texas Water Rights Adjudication Act. The Certificates of Adjudication were later amended to authorize use of the permitted water for irrigation of an additional 250 acres that were subsequently purchased by DRR Family Properties, LP (“DRR”).

When Pape attempted to record its purchase with the Texas Commission on Environmental Quality (“TCEQ”) in 2015, TCEQ notified DRR and other potentially interested landowners, and eventually concluded that DRR owned a portion of the water rights. Displeased with TCEQ’s determination, Pape moved to reverse the decision but Pape’s motion was overruled by operation of law. Without pursuing an administrative appeal, Pape brought suit seeking a declaration that it owned all of the water rights at issue. DRR responded with a motion to dismiss the suit for lack of subject matter jurisdiction, and the trial court granted the motion. Pape appealed the dismissal, asserting that the trial court erred in granting DRR’s motion because the question of property ownership is solely within the jurisdiction of the courts, the legislature did not vest TCEQ sole jurisdiction over Pape’s claim, and the ruling violated the separation of powers clause in the Texas Constitution. In analyzing Pape’s arguments, the court looked to TCEQ’s enabling legislation and found that “[a]lthough the [legislation] does not expressly grant exclusive jurisdiction over water rights to the TCEQ, the regulatory scheme behind surface water permits is pervasive and indicative of the Legislature’s intent that jurisdiction over the adjudication of surface water permits is ceded to the TCEQ.” The court also recognized that other courts had found the same enabling legislation granted TCEQ exclusive jurisdiction over other matters involving water rights. The court ultimately determined that, contrary to Pape’s position, the TCEQ had exclusive jurisdiction to determine water rights and affirmed the trial court’s judgment. In March 2021, Pape filed a petition for review with the Texas Supreme Court. The Court granted the petition and heard oral arguments on March 24, 2022, but has yet to issue an opinion.

Tex. Comm’n on Envtl. Quality v. Maverick County, No. 19-1108, 2022 WL 413939 (Tex. Feb. 11, 2022).

In 2013, Dos Repúblicas Coal Partnership (“DRCP”) applied to TCEQ for the renewal of a TPDES permit for wastewater discharge at a coal mine in Maverick County. TCEQ granted the permit at the time, but Maverick County and downstream landowners subsequently raised a question as to whether DRCP was the operator and the correct permit applicant. Section 305.43(a) of Title 30 of the Texas Administrative Code requires both “the operator and the owner” of such a facility to apply for a permit. DRCP owned the mine and hired a contractor to conduct day-to-day activities at the mine. After a contested case hearing, it was found that DRCP was both the owner and operator of the mine.

Those opposed to the permit sued TCEQ in district court. The court found that DRCP was not the mine’s operator and reversed TCEQ’s order, holding that TCEQ’s determination that DRCP was the proper applicant violated statutory and regulatory provisions, was not reasonably supported by substantial evidence, and was arbitrary and capricious. On appeal, the court of appeals agreed with the district court’s judgment, finding that DRCP’s contractor was the mine’s operator and therefore a required permit applicant, and reversed TCEQ’s order as to the operator issue.

On review, the Supreme Court held the governing definition of “operator” to be “the person responsible for the overall operation of a facility,” as provided by TCEQ rules. It also found that substantial evidence supported TCEQ’s determination that DRCP was the mine’s “operator” and the correct applicant for the permit—DRCP remained responsible for the “overall operation” of the mine despite having contracted out the day-to-day running of the mine. Accordingly, the Supreme Court reversed the judgment of the court of appeals and remanded the case for consideration of the remaining issues.

Litigation Case

Earnest v. Sanofi U.S. Services Inc. et al., No. 05-30184 (5th Cir. 2022).

In Earnest v. Sanofi U.S. Services Inc., the Fifth Circuit held that a pharmaceutical company violated the rules of evidence when it attempted to skate the line between Federal Rules 701 and 702. At trial, the district court ruled against a cancer patient alleging that Sanofi’s chemotherapy drug caused her to suffer permanent hair loss. On appeal Earnest challenged the district court’s evidentiary ruling, asserting the district court erred by (1) admitting testimony grounded on the company’s lay witness’s post hoc review of a clinical study of the drug, and then (2) allowing an expert witness to bootstrap the lay witnesses analysis into his own testimony. After review, the Fifth Circuit ordered remand and a new trial after determining that the admission of the fact witness’s testimony was in error and that the plaintiff’s rights were consequently substantially affected.

The pharmaceutical company presented two witnesses at trial, a doctor who was a Rule 30(b)(6) fact witness and an expert witness. At issue in review was both witnesses’ reference to TAX316, the drug’s clinical study on which both parties relied heavily for the issue of medical causation.

The fact witness, Sanofi’s designated corporate representative, testified regarding the procedure and theory behind clinical trials; specifically, he spoke about the data adduced from TAX316’s trial participants. After applying a methodology to exclude some of the participants, the lay witness testified that his analysis showed a decreasingly small number of study participants experiencing permanent hair loss. The expert witness’s testimony then relied on the fact witness’s analysis and concluded that the study demonstrated that permanent hair loss was an outlier risk of the drug regimen.

The Court held that, because the TAX316 study was conducted during the fact witness’s tenure with Sanofi, his testimony describing the study was admissible, up to a point. During its examination, Sanofi transparently sought the fact witness’s opinions about the TAX316 data “as a board-certified oncologist,” as much as a former Sanofi employee. Also, the fact witness’s testimony was littered with his interpretation and analysis of the TAX316 study data, which he prepared in litigation in response to Earnest’s Rule 30(b)(6) deposition notice. In the words of the Court, “Sanofi effectively smuggled inadmissible opinion testimony past the expert-disclosure and expert-discovery obligations imposed by the discovery and evidentiary rules by offering [the fact witness] as a lay witness.” The Fifth Circuit ruled that the district court erred in its evidentiary ruling on this issue.

The Fifth Circuit next addressed the issue of whether Sanofi’s expert witness inappropriately relied on the fact witness’s inadmissible testimony. The Fifth Circuit held that the expert witness’s dependence on the fact witness’s “re-analysis” of the TAX316 data had, in turn, tainted his analysis.

The Court found the admission of those witnesses’ improper expert testimony, which was featured prominently in the company’s closing argument to the jury, to have prejudiced the patient’s substantial right during the trial. The Court accordingly reversed and remanded.

Air and Waste Case

State of Tex. and TCEQ v. EPA, No. 22-1013 (D.C. Cir., pet. filed Jan. 28, 2022).

On January 28, 2022, the State of Texas and TCEQ filed a petition for review in the U.S. Court of Appeals for the District of Columbia Circuit challenging Environmental Protection Agency’s (“EPA’s”) designation of El Paso County as a nonattainment area for ozone. In November 2021, EPA designated El Paso County as a nonattainment area following the D.C. Circuit Court’s ruling in July 2020, which required EPA to reconsider its prior 2015 ozone National Ambient Air Quality Standards (“NAAQS”) designations for El Paso County, and 15 other counties, under Section 107(d) of the Clean Air Act. EPA based the designation on air quality monitoring data from years 2014-2016. If EPA’s designation is upheld, as a nonattainment area, El Paso County will be required to develop a plan to improve ozone air quality in order to meet the NAAQS.

Utility Cases

Fifth District Court of Appeals Rules that ERCOT Lacks Sovereign Immunity.

On February 23, 2022, the Fifth District Court of Appeals in Dallas ruled in an en banc review that the Electric Reliability Council of Texas (“ERCOT”) does not have sovereign immunity from all lawsuits and that the Public Utility Commission (“PUC”) does not have exclusive jurisdiction over all claims against ERCOT.

Panda Power Generation Infrastructure Fund LLC (“Panda”) sued ERCOT in 2016 for fraud, negligent misrepresentation, and breach of fiduciary duty, for publishing allegedly misleading reports and press releases about the scarcity of power in Texas, which prompted it to invest $2.2 billion in new power plants, only to face difficulty recouping its expenses as power prices remained low. Panda alleged that ERCOT published false market data to “encourage investors and their financial sponsors to build new power generation.” Panda argued that ERCOT is a private corporation and should not benefit from sovereign immunity. ERCOT argued it was immune from suit as an arm of the State performing functions for a public purpose exclusively assigned by the Legislature and the PUC.

In an earlier case before the Fifth District Court of Appeals (Panda I), the court determined that ERCOT’s actions were “entitled to sovereign immunity from private damages suits in connection with the discharge of its regulatory responsibilities.” Following that decision, however, three new opinions came out of the Texas Supreme Court addressing sovereign immunity and governmental immunity. In one of those opinions, the Court explicitly stated, “…we have yet to extend sovereign immunity to a purely private entity—one neither created nor chartered by the government—even when that entity performs some governmental functions.”

Given that Panda I granted immunity to a private, membership-based, nonprofit corporation not chartered by the government, the Fifth District Court of Appeals conducted an en banc review to correct its prior decision.

“[W]e conclude ERCOT is not entitled to sovereign immunity and the Legislature did not grant exclusive jurisdiction over Panda’s claims to the PUC,” the Fifth District Court of Appeals’ opinion reads. “ERCOT likewise is not liable for its ordinary negligence when it exercises its power to cause the interruption of transmission service for the purpose of maintaining the ERCOT system stability and safety, but it may be liable for ‘its gross negligence or intentional misconduct when legally due,’” the court stated.

In addressing the issue of sovereign immunity, the court analogized the structure and regulation of ERCOT to the economic development corporation evaluated in a previous similar case before the Texas Supreme Court, which concluded that the Legislature did not intend an economic development corporation to have discrete governmental-entity status separate from its authorizing municipality. The court noted that ERCOT is fundamentally a private organization and that regulatory oversight, even over a heavily regulated entity, does not confer governmental-entity status.

In response to ERCOT’s arguments that Panda’s claims fall within PUC’s exclusive jurisdiction, the court relied on Texas Supreme Court precedent establishing that the PUC’s jurisdiction to regulate is separate from its adjudication authority. In addition, the court points to the Public Utility Regulatory Act, which explicitly addresses the specific disputes involving ERCOT that may be resolved by the PUC.

This opinion is critical in light of the hundreds of lawsuits filed against ERCOT in the wake of Winter Storm Uri for wrongful death, personal injury, and property damage. Those cases have been consolidated before a judge in Houston. The decision is a huge win for the consumers and businesses who brought those suits against ERCOT, as ERCOT can no longer claim it has sovereign immunity, although the decision is likely to be appealed to the Texas Supreme Court.

Brazos Bankruptcy Litigation Paused.

Brazos Electric Power Cooperative (“Brazos”) and the Electric Reliability Council of Texas (“ERCOT”) have agreed to mediate their dispute over a $1.9 billion bill stemming from Winter Storm Uri.

Brazos claims that ERCOT violated the terms of their contract when it charged $9,000 per megawatt hour during much of the storm, which lasted about a week. Brazos filed for bankruptcy in March 2021 as a result of the bill, asking U.S. Bankruptcy Judge David Jones in Houston to drastically reduce ERCOT’s claim. Brazos, which had another $2 billion in funded debt at the time it filed for bankruptcy, says the amount it owes ERCOT is closer to $770 million.

The trial began on February 22, 2022. Early in the trial, former PUC Commissioners DeAnn Walker and Arthur D’Andrea, as well as former ERCOT CEO Bill Magness, all testified, facing harsh criticism from Judge Jones. On March 3, after wading through days of expert testimony, Judge Jones paused the trial to give ERCOT and Brazos time to mediate their dispute. Judge Jones said during the hearing that the parties should “sit in a room and understand what the options are.” Another Houston-based bankruptcy judge, Judge Marvin Isgur, has been assigned to oversee the mediation.

“In the Courts” is prepared by James Muela in the Firm’s Water Practice Group; Wyatt Conoly in the Firm’s Litigation Practice Group; Jeff Reed in the Firm’s Air and Waste Practice Group; and Roslyn Dubberstein in the Firm’s Energy and Utility Practice Group. If you would like additional information or have questions related to these cases or other matters, please contact James at 512.322.5866 or jmuela@lglawfirm.com, Wyatt at 512.322.5805 or wconoly@lglawfirm.com, Jeff at 512.322.5835 or jreed@lglawfirm.com, or Roslyn at 512.322.5802 or rdubberstein@lglawfirm.com.