January 13, 2014 Practice Group: Oil and Gas Environmental, Land and Natural Resources Energy, Infrastructure and Resources The Eyes of Texas are upon a Subsurface Trespass Case By John F. Sullivan, Anthony F. Newton and Cleve J. Glenn Introduction The Texas Supreme Court is now poised to decide whether subsurface migration of fluids from an approved injection well may constitute an actionable trespass under Texas common law. Recently accepting a petition for review in Environmental Processing Systems, L.C. v. FPL Farming Ltd., 1 the Court s decision could impact how oil and gas producers dispose of waste products from hydraulic fracture stimulation and other related activities in Texas and could affect how courts in Texas and elsewhere evaluate common-law claims of subsurface trespass. The Initial Dispute: Environmental Processing Challenges the Texas Commission on Environmental Quality s Injection Well Permit The case before the Texas Supreme Court arises from a dispute over an alleged subsurface trespass by Environmental Processing Systems, L.C. ( Environmental Processing ), a waste disposal company, onto the mineral interests owned by FPL Farming Ltd., a rice farmer ( FPL ). This dispute dates back to 1996, when Environmental Processing sought a permit from the Texas Commission on Environmental Quality ( TCEQ ) to operate an injection well on land that was adjacent to two tracts of land owned by FPL. Environmental Processing planned to inject nonhazardous industrial wastewater 8,000 feet below the surface and 875 feet from FPL s property line. 2 FPL s predecessor in title (J.M. Frost III) objected to the application, but later settled with Environmental Processing for $185,000 and withdrew its objection. 3 In 1999, Environmental Processing sought an amendment to its TCEQ permit to increase the fluid injection rate. 4 FPL objected and a contested hearing before an administrative law judge was held. FPL argued that if the TCEQ allowed the leaking to continue and in fact to accelerate with increased injection it would impair its existing rights in its property in violation of Chapter 27 of the Texas Water Code. 5 Following the hearing, the administrative law judge concluded that since FPL had not shown any harm from Environmental Processing s wastewater plume, it had failed to show impairment. 6 The TCEQ, therefore, granted Environmental Processing s amended permit request to increase the injection rate. 7 1 See http://www.search.txcourts.gov/case.aspx?cn=12-0905 2 See FPL Farming, Ltd. v. Tex. Nat. Res. Conserv. Comm n, 2003 WL 247183, at *1 (Tex. App. Austin 2003). 3 Id. 4 Id. 5 Id. at *3. 6 Id. at *1. 7 Id. at *5.
FPL appealed to the Travis County district court, which affirmed the TCEQ s order. FPL then appealed to the Third Court of Appeals in Austin, which also affirmed the TCEQ s order. 8 The Court of Appeals concluded that the amended permit did not cause impairment of FPL s then-existing subsurface property rights; however, it did not foreclose the possibility of FPL bringing a separate trespass claim against Environmental Processing. The Court of Appeals noted that if the wastewater plume eventually migrated into FPL s subsurface and caused recognizable harm, it could seek damages from Environmental Processing. 9 In essence, the Court of Appeals invited FPL to bring a subsequent challenge to Environmental Processing s operation with better evidence of harm. The Subsequent Dispute: FPL Sues Environmental Processing for Damages In 2006, FPL sued Environmental Processing, alleging that its wastewater leaked into its property, causing damage. 10 It sought injunctive relief and damages based on three alternative theories of liability: trespass, nuisance, and unjust enrichment. 11 A. What Happened at Trial? The trial was vigorously contested, primarily on the issues of consent, damages, and whether Environmental Processing s waste plume had crossed the property line. While FPL did not contend that Environmental Processing s waste plume migrated to the surface or affected FPL s drinking water, FPL s expert (a geotechnical consultant), testified that Environmental Processing s waste plume migrated beneath FPL s land. 12 Despite this evidence, the jury rejected all of FPL s claims and the court entered judgment for Environmental Processing. 13 FPL, therefore, appealed to the Ninth Court of Appeals in Beaumont. 14 B. The First Appeal The Court of Appeals also found against FPL but did so on a threshold issue it raised on its own, without even reaching FPL s substantive challenges. 15 The court held that it could not review the merits of FPL s trespass claims because Environmental Processing s TCEQ permit conclusively shielded it from tort liability. 16 In the court s view, [w]hen a state agency has authorized deep subsurface injections; no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts. 17 Having lost again, FPL appealed to the Texas Supreme Court. 18 8 See FPL Farming, Ltd., 2003 WL 247183, at *2. 9 Id. at *5. 10 FPL Farming, Ltd. v. Envt l. Processing Sys., L.C., 351 S.W.3d 306, 309 (Tex. 2011). 11 Id. 12 FPL Farming, Ltd. v. Envt l. Processing Sys., L.C., 2010 WL 766213, *1 (Tex. 2010). 13 FPL Farming, Ltd., 351 S.W.3d at 309. 14 Id. 15 FPL Farming, Ltd. v. Envt l. Processing Sys., L.C., 305 S.W.3d 739, 744 (Tex. App. Beaumont 2009). 16 Id. at 745. 17 Id. at 745. 18 FPL Farming Ltd. v. Envt l Processing Sys., L.C., No. 09-1010 (Tex.) (rev. granted, Feb. 8, 2011). 2
C. The Texas Supreme Court s First Review In 2011, the Texas Supreme Court overruled the Ninth Court of Appeals, holding that a person possessing a permit issued by the TCEQ was not shielded from civil tort liability that may result from actions governed by the permit, and remanded the case to the Beaumont Court of Appeals to address the merits of FPL s trespass claim. 19 The Texas Supreme Court stated that [w]e do not decide today whether subsurface wastewater migration can constitute a trespass, or... whether it did so in this case. 20 On remand, the Ninth Court of Appeals reversed the jury verdict and remanded the case for a new trial on FPL s trespass claim. In so doing, the court held that FPL has an ownership interest in the water beneath its surface, and therefore, has standing to bring a trespass action where Environmental Processing s wastewater plume migrated into the subsurface of FPL s property. The Ninth Court of Appeals further held that the trial court misplaced the burden of proof on consent to the trespass, which should have been Environmental Processing s burden. D. The Texas Supreme Court will Review the Case a Second Time On January 18, 2013, Environmental Processing filed its petition for review, which was accepted by the Texas Supreme Court on November 22, 2013. This time, the Texas Supreme Court is expected to decide whether a cause of action exists in Texas for subsurface trespasses when underground water migrates to another tract of land or mingles with an adjacent subsurface pool of water. It is possible, however, that the Texas Supreme Court could pass on the trespass question and choose instead to address whether FPL impliedly consented to the trespass in 1996 when its predecessor in title (J.M. Frost III) settled with Environmental Processing by accepting $185,000 and withdrawing its request for a contested case hearing. E. Summary of Arguments In its petition for review, Environmental Processing primarily argues that the Beaumont Court of Appeals decision should be overturned for public policy reasons. It emphasizes the extensive use of injection wells across Texas by a variety of industries 21 and argues that the ubiquitous threat of trespass liability would hold the State s permitting system hostage and interfere with Texas s economic development. 22 Environmental Processing seeks a categorical abolishment of any cause of action for trespass arising from wastewater migration below the surface. 23 It argues that, at the very least, the Court should require plaintiffs to demonstrate harm from the encroachment or interference with their reasonable and foreseeable use of the deep pore space. 24 In response to Environmental Processing s arguments, FPL also presents several public policy arguments. First, it responds to Environmental Processing s claim that this decision could undermine the injection well permitting regulatory scheme by arguing that this is no 19 FPL Farming, Ltd., 351 S.W.3d at 315. 20 Id. at 314-315. 21 Petition for Review, Envt l Processing Sys., L.C. v. FPL Farming, Ltd., 2012 WL 6803545, at ix x. (Tex. Nov. 30, 2012). 22 Id. at *11 12. 23 Id. at *7 8. 24 Id. at *2. 3
different than claiming that a permit should immunize its holder from tort liability which the Texas Supreme Court already rejected. 25 FPL acknowledges that prospective trespass liability will force operators to obtain leases from their potentially affected neighbors, but notes that this is an appropriate result and will not hold up the permitting system. 26 Potential Implications of the Texas Supreme Court s Decision It is difficult to predict how the Texas Supreme Court will address and resolve the subsurface trespass issue. Even if the Texas Supreme Court were to rule in favor of FPL, the case would still need to go back to a jury trial, where expert testimony would be required to establish whether fluids from the injection operations migrated onto FPL s subsurface property. In the case of Coastal Oil & Gas Corp. v. Garza Energy Trust, 27 the Texas Supreme Court previously ruled that royalty interest owners were precluded from recovering damages on a trespass claim against a well operator engaged in hydraulic fracturing on an adjacent tract of land. The Garza case, however, is factually distinguishable from the present case. As mere royalty interest owners, the Garza plaintiffs lacked a possessory interest in the subject property. FPL, however, holds title to the property at issue in the present case. Without a possessory interest, the Garza plaintiffs could not establish standing to bring a standard trespass action, and as a result, were limited to trespass on the case, a remedy available to contingent interests. 28 The Texas Supreme Court said that because drainage stimulated by hydraulic fracturing falls under the rule of capture, the Garza plaintiffs could not show actual, physical harm to the property a key element of a trespass on the case claim. 29 That said, even if the Texas Supreme Court affirms the cause of action exists for subsurface trespasses where fluids migrate, the court may add a proof of tangible harm requirement. Under such a test, a plaintiff would only recover if it could demonstrate that the trespass either: (1) is presently causing demonstrable harm; or (2) will substantially interfere with its reasonable and foreseeable future use of the affected part of the subsurface. This is the approach being urged by the Texas Oil & Gas Association and other industry groups and one that has been adopted by a number of courts outside Texas. 30 The Texas Supreme Court Hears Oral Argument Oral argument was heard by the Texas Supreme Court on January 7, 2014. During oral argument, the Justices inquired as to how traditional trespass rules would operate in the context of subsurface trespass cases. The Court noted that other jurisdictions considering subsurface trespass cases have required plaintiffs to demonstrate some type of harm or interference with the reasonable and foreseeable use of the property. The Justices also inquired as to whether a right to preclude subsurface trespass should be absolute, or if courts should attempt to balance private and public interests. 25 See Respondent s Response to Petition, 2012 WL 6803545, at *6 7. 26 Id. at *10 11. 27 268 S.W.3d 1 (Tex. 2008). 28 Id. at 9 10. 29 Id. at 10 11, 17. 30 See, e.g., Chance v. BP Chems., Inc., 670 N.E.2d 985, 993 (Ohio 1996); Boudreaux v. Jefferson Island Storage & Hub, 255 F.3d 271, 273 (5th Cir. 2001); Cassinos v. Union Oil Co., 18 Cal. Rptr. 2d 574 (Cal. Ct. App. 1993). 4
It is unclear how the Court will ultimately rule. In any event, oil and gas industry participants and other industries that rely on subsurface injection for waste disposal should closely monitor this case. Authors: John F. Sullivan john.sullivan@klgates.com +1.713.815.7330 Anthony F. Newton anthony.newton@klgates.com +1.713.815.7330 Cleve J. Glenn cleve.glenn@klgates.com +1.713.815.7327 Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto Paris Perth Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Seoul Shanghai Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and South America and represents leading global corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. 2013 K&L Gates LLP. All Rights Reserved. 5