The outcome of Pennzoil’s lawsuit against Texaco for interfering with Pennzoil’s takeover of Getty Oil Company reinforced the movement in American business law toward holding corporations responsible not only for their own actions but also for the actions of others.
On December 28, 1983, Pennzoil Company launched a bid of $100 a share for approximately 20 percent of the stock of Getty Oil Company, which was considered to be “on the trading block” as a result of feuding among its principal shareholders. Getty Oil’s stock ownership was divided among the J. Paul Getty Museum, which owned roughly 12 percent, and a trusteeship that controlled 40 percent. The trusteeship itself was divided into three voting parts: Gordon Getty, the wealthy son of legendary J. Paul Getty; Security Pacific Bank, a corporate trustee; and attorney Lansing Hays.
The need for agreement among sets of these large stockholders on major voting issues distressed both Gordon Getty and the board of directors of Getty Oil, which had different ideas about how the company should be run. Getty at one point had attempted to buy a majority interest in the company for himself but had not succeeded. He then seriously considered selling off his position in the company. To corporate raiders and competing oil firms, the company thus came “in play.”
Getty Oil had a valuable asset that larger rivals such as Pennzoil and Texaco desired: oil in the ground. Its distribution and sales networks could not compete with Chevron, Texaco, Mobil, Pennzoil, or others, but it had raw materials. On January 1, 1984, Pennzoil chairman John Hugh Liedtke and Gordon Getty discussed a plan under which Pennzoil would acquire approximately three-sevenths of Getty Oil and gain access to the Kern River oil field, the fourth largest in the United States, holding the equivalent of 700 million barrels of oil. For Pennzoil, a company one-sixth the size of the $12 billion Getty Oil, such an acquisition promised to increase its oil reserves dramatically.
Texaco, too, wanted oil reserves. The petroleum giant had a reputation for aboveboard dealings and for an effective distribution network. As early as 1956, Gus Long helped Texaco to line the interstate highways with filling stations bearing the Texaco star, but in the 1960’s and 1970’s, the company’s oil fields started to run dry. In 1977, Texaco had the unfortunate distinction of being the first major oil company to lose its AAA bond rating from Moody’s and Standard & Poor’s Register of Corporations. Although it remained a corporate giant five times larger than Getty Oil, with an annual business output larger than that of the entire nation of Finland, Texaco had only slightly more than eight years’ worth of oil in the ground when John McKinley took over as the corporation’s chairman.
On January 2, 1984, only one day after Liedtke and Getty held their discussion of Pennzoil’s acquisition of 40 percent of the Getty Oil stock, representatives from the board of directors of Getty Oil contacted Texaco to invite a bid. Texaco was assured that Getty Oil was “in play.” It offered $125 a share, later increasing the bid to $128. Meanwhile, on January 4, Getty Oil’s board of directors in imminent danger of being removed by Gordon Getty approved a merger with Pennzoil at a price of $112 a share. What ensued next remains a matter of debate. Getty Oil officials contended that they approved only the price of $112 per share, with other merger details not finalized. That meant, as many of them later stated, that the deal had not been consummated. The legal staff of Pennzoil made matters worse by delaying their preparation of merger documents, giving Getty the impression that Pennzoil was not serious and that the company was still on the market.
From January 2 through January 4, Texaco officials met with Gordon Getty and reached an agreement with him. As a condition of sale, he received from Texaco an indemnification letter for himself and the museum. Attorneys for the prosecution later pointed to that letter as evidence that Getty knew that the sale might not be legitimate. On January 4, both Pennzoil and Texaco issued press releases announcing an agreement in principle “subject to a definitive merger agreement.” In both cases, attorneys could argue that no definitive merger agreement had occurred. One of the last elements of the deal with Pennzoil was for Getty Oil chairman Sid Peterson to sign a fee letter of $9 million from Getty Oil’s investment banking firm, Goldman Sachs. Geoff Boisi
Notes from subsequent meetings between Bruce Wasserstein
Location of the trial proved to be critical. Even though Texaco had its headquarters in New York City, Pennzoil wanted the trial in Texas, where oil-field traditions still remained strong and handshake deals were still honored. Pennzoil knew that local juries would view Texaco as a Yankee interloper. The trial opened in July, 1985, with Judge Anthony “Tough Tony” Farris presiding. He was replaced in October by Solomon Casseb, Jr.
Jamail and his team successfully portrayed Texaco as an eastern firm pitted against the smaller local companies. Jamail had particular success with his questioning of the Wall Street investment bankers and lawyers, during which he exploited the fact that they perceived a deal as completed only when all the paperwork was finalized, whereas Texans emphasized that a handshake constituted a deal. Many of the jurors indicated after the trial that they also disliked Gordon Getty, but he was immune from any action because of the indemnification letter.
Miller, for his part, committed a number of procedural errors, the most significant of which was never contesting the value of the claim. He could have called geologists and economists to point out that Getty was not worth $7.53 billion but merely a fraction of that, especially given that oil prices fell immediately after the deal was made. The combination of these factors and the evidence of the notes from the Texaco meetings convinced the jury to return a verdict in favor of Pennzoil, awarding it $7.53 billion in compensatory damages and $3 billion in punitive damages. Judge Casseb entered the judgment in December for the full amount, plus $600 million in interest, for a total of $11.1 billion.
Under Texas law, Texaco had to put up a bond equal to the judgment while it appealed. The full settlement would have bankrupted the oil giant. Texaco obtained temporary orders, followed by an injunction against Pennzoil, granting relief from the $11 billion bond. Instead, it put up a $1 billion bond. Numerous appeals followed, and in February, 1987, the Texas Court of Appeals ruled that Texaco had to pay only the actual damages of $7.53 billion. By April of that year, Texaco had filed a petition seeking protection from creditors under Chapter 11 of the federal bankruptcy law.
Faced with receiving a fraction of the original judgment from bankruptcy proceedings, Pennzoil sought to reach a settlement with Texaco. In December, 1987, Pennzoil agreed to a settlement plan under which Texaco would pay Pennzoil $3 billion. During the settlement period, however, investors in Pennzoil in actuality were purchasing legal claims against Texaco that only obliquely represented oil and refineries. Texaco raised the $3 billion through a restructuring in which it sold its West German and Canadian subsidiaries in 1988. It also raised about $1.2 billion through formation of the Star Enterprises venture with Saudi Arabia.
Texaco emerged from bankruptcy in April, 1988. The total restructuring actually left Texaco, which had the Getty Oil assets (including the Getty Oil headquarters building in Los Angeles), with less debt and higher equity. Pennzoil, meanwhile, invested its $3 billion settlement in Chevron stock, giving it a 10 percent share of Chevron. Through a stock exchange, Pennzoil obtained oil and gas in the ground.
The Pennzoil v. Texaco case marked the high tide of American tort law, with the leveling of damages against a large corporation that essentially drove it to bankruptcy. The case reinforced the movement in American business law toward holding corporations responsible not only for their own actions but also for those of others, in this case Gordon Getty and the Getty Museum. It also reflected a hostile public attitude toward corporations that reached far beyond the bounds of practical solutions to business problems. The jurors’ failure to appreciate differences in the financial cultures of Wall Street and the oil patches of Texas and their willingness to deliver a verdict for a judgment of such staggering size indicated their detachment from economic reality.
Interviews conducted with the jurors after the trial showed that several exhibited a desire to punish Texaco, which represented for them large companies in general. Similar sentiments in the 1970’s and 1980’s often surfaced in consumer lawsuits and torts. Multimillion-dollar settlements against drug companies, auto manufacturers, toy companies, and even food producers were a significant factor in driving the cost of doing business in the United States to levels far higher than in competing nations. In 1960, fewer than 50,000 product liability cases were pending in American courts; within only two years, the number had increased to 250,000; and by 1970, 500,000 cases were in the courts. A comparison of statistics concerning Great Britain and the United States reveals that the United States had tort claims ten times higher than those in Great Britain and malpractice claims thirty to forty times higher.
The legal system encouraged such anticorporate actions and judgments through the application of tort law, under which attorneys received up to 30 percent of any judgment. Joe Jamail received $450 million in fees in 1988, with the bulk of that money coming from the Pennzoil case. One estimate is that his total amount of compensation and fees from the case was $1 billion. Jamail was not the only lawyer to benefit from large corporate lawsuits. For example, Vinson & Elkins, a Houston law firm, collected close to $200 million in contingency fees for its settlements on antitrust actions against railroads.
The tort system allowed attorneys to file suits at virtually no cost, with the opportunities for Jamail-like rewards. These results seem to have tempted entrants into the field of law. In July, 1989, law school applications exceeded 725,000, with the number rising each year. Many students were drawn by the high pay associated with the practice of law. The system, however, was not entirely attorney-driven. Class-action suits became popular in the 1960’s, following Ralph Nader’s successful consumerism campaigns. Average citizens, at no personal cost, could jump on a lawsuit bandwagon under the control of an attorney who stood to gain huge rewards. Automakers suffered staggering verdicts, including a $120 million judgment against Ford and a $59 million judgment against Toyota. Large damage awards, rising numbers of lawsuits, and the consequent attraction of the practice of law led in part to the result that the proportion of attorneys to population in the United States rose to twenty times that in Japan or West Germany.
Seeming excesses in awards brought a backlash. Although not a substantial enough majority to enact national reform, large numbers of outraged Americans sought to place ceilings on torts and gained ground at the state level despite firm opposition from the Association of Trial Lawyers of America (known as the American Association for Justice since 2006). Success was achieved in some attempts to limit “shotgun” suits, wherein plaintiffs list everyone they can think of as defendants, hoping that one or more would settle. A more serious reform involved fee shifting, wherein a claimant pays attorneys only hourly rates (not contingency fees) as part of a separate contract and removes attorneys’ fees from consideration by the jury in determining the amount of the final settlement. Juries, scholars have noted, tend to bump settlements up to cover contingency fees.
Meanwhile, in the world of business, as a result of the phenomenal risk from consumer, environmental, government, and competitor lawsuits, American corporations were forced to devote an ever-increasing share of their assets to legal and accounting departments at the expense of research and development or lower prices for consumers. Foreign claimants have brought suit successfully in the United States, although by the late 1980’s, American courts had started to entertain suits against foreign competitors when the defendants had American ties, thus shifting some of the burden back to the foreign competitors. The Pennzoil suit showed that competitors potentially could use a single tort action to drive a competitor out of business. Accordingly, companies had to reinforce their legal departments and take even fewer risks.
The jury in the Pennzoil case probably wanted to affirm that a handshake constituted a deal; instead, it reinforced the view that all deals have to be finalized by attorneys. Although the proposition would be difficult to quantify, it is incomprehensible that many “handshake deals” occurred after the Pennzoil ruling.
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Coll, Steve. The Taking of Getty Oil: The Full Story of the Most Spectacular and Catastrophic Takeover of All Time. New York: Atheneum, 1987. Provides a thorough account of the case but does not include coverage of the terms of the final settlement, as the book appeared before the case had reached its conclusion. -
Feinman, Jay M. Law 101: Everything You Need to Know About the American Legal System. New York: Oxford University Press, 2006. Provides basic information on legal procedures in a question-and-answer format. Chapters 5 and 6 explain tort law and business contract law, respectively. -
Huber, Peter W. Liability: The Legal Revolution and Its Consequences. New York: Basic Books, 1988. Similar in tone to the Olson volume cited below, but perhaps more interesting to read. Does not mention the Pennzoil case in particular but gives a good background to emergent legal issues. -
Liman, Arthur L. Lawyer: A Life of Counsel and Controversy. New York: PublicAffairs, 1998. Memoir by a well-known attorney includes a chapter on the Pennzoil v. Texaco case, in which the author served as a witness. Provides an interesting perspective on the case. -
MacAvoy, Paul W. Industry Regulation and the Performance of the American Economy. New York: W. W. Norton, 1992. An economist presents an assessment of the impact of regulation on industry. Provides strong evidence of the economic harms of regulation, some of which remain even after adjustments are made for benefits. -
Olson, Walter K. The Litigation Explosion: What Happened When America Unleashed the Lawsuit. New York: Truman Talley Books-Dutton, 1991. A readable overview of the increase in litigation in the United States. Emphasizes the ill effects of too much litigation for society and business. -
Petzinger, Thomas, Jr. Oil and Honor: The Texaco-Pennzoil Wars. New York: G. P. Putnam, 1987. One of the best histories of the case available. Explores the essence of the North-South differences that led to the jury’s decision and carefully examines the struggle for control of the company. Suffers primarily from the lack of details of the final settlement process, as the book was published before the case was completed.
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