Two Companies Formed Partnership After All, Jury Finds

On March 4, 2014, a Dallas jury found that Enterprise Products Partners LP (“Enterprise”) had entered into a partnership with Energy Transfer Partners LP (“ETP”) to jointly develop a crude oil pipeline from Cushing, Okla. to the Texas Gulf Coast, despite the lack of executed partnership agreements and the inclusion of express non-binding provisions in their preliminary agreements. In awarding damages of $319 million to ETP, the jury concluded that a partnership had in fact been created and that Enterprise breached its partnership duties to ETP when it subsequently entered into a new joint venture with Enbridge (US) Inc. (“Enbridge”) to own and operate a neighboring crude pipeline.

According to the court filings, ETP and Enterprise entered into a confidentiality agreement, “non-binding” term sheet and reimbursement agreement, each of which contained customary non-binding disclaimers. Subsequent to entering into such preliminary documents, Enterprise and ETP publicly announced that they had “agreed to form a 50/50 joint venture” to construct the crude pipeline.

In addition, the parties began marketing capacity under a Federal Energy Regulatory Commission (FERC) open season using the project name “Double E Crude Pipeline, LLC.” During the summer of 2011, the parties exchanged drafts of the definitive agreements for the joint venture (including a draft LLC Agreement for Double E) but those agreements were never finalized or executed. Before the end of the open season period, Enterprise allegedly began separate discussions with Enbridge about jointly developing another similar crude pipeline.

When the Double E open season period closed in August 2011 without commitments from any major shippers other than Chesapeake, ETP sent Enterprise a letter stating that the parties had agreed that the project was not commercially viable and would not move forward. Enterprise then issued a press release announcing that Enterprise would not proceed with the proposed Double E joint venture with ETP. Shortly thereafter, Enterprise and Enbridge entered into and publicly announced a new joint venture to build a pipeline from Cushing to the Texas Gulf Coast.

ETP immediately filed a lawsuit against Enterprise claiming that a binding partnership had been formed and that Enterprise had breached its duties arising out of such partnership by negotiating and entering into the joint venture with Enbridge. ETP also sued Enbridge for tortious interference.

The Texas Business and Organizations Code sets forth a five-factor statutory test for determining whether a partnership is created, which includes a person’s: (1) right to receive a share of the profits of the business, (2) expression of an interest to be partners, (3) participation in control of the business, (4) agreement to share losses of the business or liability for third party claims against the business and (5) contribution of money or property to the business. The Texas Supreme Court applied this five-factor test in Ingram v. Deere, 288 S.W.3d 886 (Tex. 2009) and held that proof of all five factors is not required and no one factor is determinative; rather, the factors are considered under a “totality of the circumstances” test and a partnership may be formed regardless of the parties’ intent to form (or avoid forming) a partnership.

During the trial, ETP argued that the parties met the partnership test by: (i) naming and publicizing their joint venture entity, (ii) creating an integrated project team, (iii) soliciting major companies for business, (iv) representing in marketing materials that a joint venture entity had been formed, (v) sharing certain project expenses and (vi) holding the joint venture out as an entity capable of entering binding contracts.

Enterprise responded by claiming that ETP was trying to “create a partnership through ambush” and that no partnership existed because: (a) certain conditions precedent to partnership formation were not satisfied (i.e., board approval and execution of the definitive documents), (b) each of the preliminary agreements contained non-binding language evidencing the parties’ express intention not to form a partnership, (c) their joint endeavor to market and pursue the potential project was not an association to carry on a business for profit and (d) the parties only agreed to share project expenses, not losses and liabilities.

The trial jury was ultimately persuaded by ETP’s arguments that a partnership did exist. Once the jury determined that a partnership was formed, the jury also found that Enterprise’s subsequent dealings with Enbridge were in breach of Enterprise’s duty of loyalty to the partnership.

The jury did not, however, find Enbridge liable for conspiracy to interfere with the contract. After hearing of the jury’s verdict, an Enterprise representative said that the company did not find the verdict to be supported by the evidence set forth at trial and that Enterprise would “promptly seek to reverse” the verdict.

While the parties can expect a lengthy appeals process before the case is ultimately resolved, industry participants should proceed with caution in future joint venture dealings to avoid creating a binding partnership where none is intended.