The U.S. Supreme Court last Monday denied Shell Oil Co.’s petition to review a whopping $54 million punitive damage award for the producer’s failure to pay a “net-profits interest” to the owners of an Oklahoma oil and natural gas lease.

The $54 million punitive award, the largest in Oklahoma history, is more than 70 times the $750,708 in net profits that Shell failed to pay the lease owners between 1973 and December 1985. In addition to the punitive damages, the Oklahoma courts — Oklahoma’s Court of Civil Appeals and the Oklahoma Supreme Court — affirmed compensatory damages of $13.2 million.

The case arises out of a series of oil and gas agreements that the predecessors of a group of respondents, led by Nancy F. Hebble, entered into — transferring the lease to others but reserving for themselves a “net profits interest.” The arrangement gave them a contractual right to a portion of the profits from production. The lease, still subject to the net-profits interest, was assigned to Shell in 1948.

Between August 1973 and December 1985, Shell paid the amounts that were owed under the original agreements with the respondents’ predecessors, but the producer failed to pay the share of net profits from two oil and gas sources, according to court documents. In 1995 the respondents filed a lawsuit in U.S. District Court in Oklahoma, accusing Shell of breach of fiduciary duty, fraud and with violations of Oklahoma statutes regulating payments on oil and gas production.

The jury ruled against Shell. It awarded a total of $13.2 million in actual damages, of which $750,708 represented net profits from 1973 through 1985 that Shell failed to pay. The remaining $12.45 million was prejudgment interest calculated entirely at a special 12% rate. The punitive damages of nearly $54 million were awarded in the second stage of the trial.

In reviewing the decision, the Oklahoma appeals court said “the reprehensibility of Shell’s conduct is heightened by its intentional deceit of the interest owners whose oil proceeds it held for their benefit while it owed a fiduciary duty to those owners arising from its resort to the police powers of the state in unitizing oil and gas interests.”

And while “the amount of the punitive damage award was slightly more than four times the amount of the actual damages awarded, we do not find this disparity unreasonable. The punitive damage award in this case compares favorably with that in TXO Production Corp. vs. Alliance Resources Corp. [1993], where the jury awarded $19,000 in actual damages arising from the defendant’s baseless claim on plaintiff’s oil and gas interests and $10 million in punitive damages. Proportionately, Shell has received a much lighter sanction,” the appeals court said.

Shell brought a challenge to the constitutionality of the punitive award before the Oklahoma Supreme Court, which refused to review the case.

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