In a lengthy and detailed post-trial opinion, New York (New York County) Supreme Court Justice Barry Ostrager has ruled that the New York Attorney General failed to establish that ExxonMobil Corporation made material misrepresentations in its public disclosures concerning how the company accounted for climate change risk. As discussed below, there are a number of interesting features to Justice Ostrager’s ruling. A copy of Justice Ostrager’s December 10, 2019 opinion can be found here.
As discussed here, the NYAG office filed its complaint against ExxonMobil in October 2018. The complaint followed an investigation begun three years before under the prior state Attorney General, Eric T. Schneiderman. The investigation followed a report that first appeared in the Los Angeles Times that Exxon Mobil’s internal assessment of the risks to the company from climate-related regulatory change and fossil fuels usage were far different that the assessments in the company’s public statements.
The complaint contains counts alleging violations of New York’s Martin Act, the state’s Executive Law Section 63(12), and two counts of common law fraud. (Prior to the trial, the NYAG withdrew the common law fraud counts.) The complaint alleges that the company sought to “systematically and repeatedly deceive investors” about the future impacts climate change regulation could have on the company’s assets and value.
The complaint alleges that the company developed a measure – the “proxy cost” of carbon – to account for the company’s climate change risks. However, the complaint alleges, Exxon frequently did not apply the proxy costs as represented; in many cases, the company used much lower proxy costs or no proxy cost at all. Because, the complaint alleges, that the use of the actual proxy cost would result in “massive” costs and “substantial write downs” the company used an undisclosed “alternative methodology” which allowed the company to report lower costs, avoid write downs, and continue to carry its hydrocarbon assets at valuations that were substantially inflated from the values it would have been used if the higher “proxy cost” measure had been used. The complaint alleged that this “fraud” reached the “highest levels of the company,” including its Chairman, Rex Tillerson.
The Court’s Opinion
In his December 10, 2019 opinion, written following a 12-day bench trial, Justice Ostrager concluded that the NYAG “failed to prove by a preponderance of evidence that any alleged misrepresentations” on which the NYAG sought to rely were false and material in the context of the total mix of information available to the public. Accordingly, he concluded that the NYAG’s allegation that the company’s disclosures had violated the Martin Act and Executive Law Section 63(12) “to be without merit.”
In support of his conclusion, Justice Ostrager stated that he found that there “was no proof offered at trial that established material misrepresentations or omissions contained in any of ExxonMobil’s public disclosures that satisfy the applicable legal standard.”
After reviewing the testimony concerning the company’s practices on taking account of carbon proxy costs and greenhouse gas (GHG) costs, he “rejected” the NYAG’s allegation that the company’s disclosures misled the investing public into believing that its GHG cost assumptions had the same values assigned to its proxy cost of carbon (a key component of the NYAG’s allegation that the company mislead investors about the company’s anticipated future costs of climate change).
In addition, the NYAG “produced no testimony …from any investor who claimed to have been misled by any disclosure, even though the Office of the Attorney General had previously represented it would call such individuals as trial witnesses.”
Justice Ostrager also found that the disclosures in the ExxonMobil climate change report documents about how the company would apply greenhouse gas cost estimates “where appropriate” were “consistent with other ExxonMobil disclosures and ExxonMobil’s business practices.” Perhaps even more significantly, Justice Ostrager also noted that the publication of the reports “had no market impact and was, as far as the evidence adduced at trial reflected, essentially ignored by the investment community.”
Finally, Justice Ostrager also said that, while he had concluded that the NYAG had not established that it was entitled to the recovery of damages, if he had reached the issue of damages, he “would have found that the Office of the Attorney General failed to prove any damages by a preponderance of evidence.”
It is clear from Justice Ostrager’s opinion that he formed a critical opinion of the NYAG’s case, both as framed and as presented. For example, at one point in the opinion, he refers to the NYAG’s complaint as “hyperbolic.” He noted that the NYAG failed to offer testimony from any witness who claimed to have been misled, “even though the Office of the Attorney General had previously represented it would call such individuals as trial witnesses.” With respect to the testimony of a research analyst whose testimony the NYAG intended to establish the materiality of the alleged misrepresentations, Justice Ostrager said the testimony “establishes the exact opposite of what the Office of the Attorney General attempted to prove.” The testimony of the NYAG’s expert witnesses, Justice Ostrager said, “was eviscerated on cross-examination and by ExxonMobil’s expert witnesses.”
By contrast, Justice Ostrager said that the trial evidence showed that “ExxonMobil executives and employees were uniformly committed to rigorously discharging their duties in the most comprehensive and meticulous manner possible.” The testimony of these witnesses “demonstrated that ExxonMobil has a culture of disciplined analysis, planning, accounting and reporting.” He added that “there was not a single ExxonMobil employee whose testimony the Court found to be anything other than truthful.”
However, while Justice Ostrager did make these positive observations about ExxonMobil, he was also careful to add that “nothing in this opinion is intended to absolve ExxonMobil from responsibility for contributing to climate change through the emission of greenhouse cases in the production of its fossil fuel products.” The company does not dispute that its operations produce greenhouse gases or that greenhouse gases contribute to climate change. But, Justice Ostrager noted, “ExxonMobil is in the business of producing energy, and this is a securities fraud case, not a climate change case.”
In any event, there is more to explain the outcome of this case than the possibility that the NYAG might not have put on a great case or that ExxonMobil may have mounted an effective defense.
In reading Justice Ostrager’s discussion of the way in which the company took future climate change costs into account in its planning process, it just seems like the NYAG’s case was based on a faulty assumption about the way the company used its “carbon proxy cost” measure in analysis of future costs. At a minimum, it does not appear that the NYAG established that the company’s internal use of this cost projection tool in any way misled the investing public.
One question that might be asked in the wake of this decision is what the implications might be for future climate change disclosure cases. To me, the outcome of this case seems very fact specific. ExxonMobil’s case that investors were not misled turned significantly on the specifics of the company’s practices in taking future climate change-related costs into account. To that extent, the outcome of this case simply may not be relevant to prospective future claimants, except in the general sense that it shows how establishing that investors have been misled can be present difficult proof issues.
A more interesting question about the outcome of the NYAG’s case is what the implications are of Justice Ostrager’s opinion for the other climate change-related disclosure cases pending against ExxonMobil. As discussed here, the securities class action lawsuit that investors brought against the company on similar allegations remains pending in the Northern District of Texas after having survived the defendants’ motion to dismiss. It seems likely that the trial outcome of the NYAG’s case will hearten the class action lawsuit defendants; it could also strengthen their resolve on the issue of settlement.
In addition to the class action lawsuit, there is also the lawsuit brought against ExxonMobil in October 2019 by the Massachusetts attorney general. The potential impact on the Massachusetts case from the outcome of the NY case may be harder to gauge. Unlike the NYAG case and the securities class action lawsuit, the Massachusetts AG’s case does not allege securities fraud; the Massachusetts lawsuit is based on consumer protection laws, and claims that consumers were misled about how the company contributes to global climate change and about being an environmentally friendly company.
In any event, and notwithstanding the outcome of the NYAG’s case, I continue to believe that climate change-related disclosures continue to represent a significant potential source of corporate liability exposure. And notwithstanding the outcome of this case, I continue to believe that we will see further climate change-related disclosure lawsuits. While to date there have only been a very small number of climate change related securities lawsuits, the possibility for future lawsuits remains. Regardless of the outcome of this case, climate change related disclosures will remain a focus for interest groups and regulators, and changing conditions will make climate change issues even more important in the future.