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Chevron weighs a surprising - and savvy - legal maneuver

September 10, 2013: 11:53 AM ET

In its RICO suit against environmental lawyer Steve Donziger, the oil giant may drop all its damages claims in hopes of avoiding a jury and winning a faster verdict.

By Roger Parloff, senior editor

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FORTUNE -- In a motion filed Monday in federal district court in Manhattan, Chevron (CVX) states that it may drop damages claims possibly worth tens of millions of dollars against Steven Donziger, the lead U.S. lawyer behind a $19 billion judgment issued against the oil giant by an Ecuadorian court in February 2011.

If Chevron does so, a question the company says it will decide by the end of this month, it will effectively convert the case into a bench trial -- one tried before a judge rather than a jury -- greatly streamlining it.

For Donziger, who presents himself as a crusading human rights lawyer fighting for the rights of the downtrodden, the ostensibly good news -- no damages liability -- comes with a potentially devastating downside. At a bench trial he would have no opportunity to play to jurors' emotions and prejudices, depriving him of the most potent weapons in his defense.

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Though Chevron has not yet quantified the damages it would otherwise be seeking from Donziger -- for attorneys fees and other expenses Chevron has incurred in uncovering and combatting Donziger's alleged frauds -- it is hard to imagine a figure less than $100 million, especially given that damages can be trebled under two of the laws under which Chevron is suing.

At the same time, such damages would be difficult for Chevron to recover in practice -- you can't get blood from a stone -- and that money was never pivotal to Chevron in any event, whose profits last year came to more than $26 billion. For Chevron, injunctive relief -- that is to say, court orders -- has always been the main event in this case: If it can win the liability portion of its case, it will likely seek, at a minimum, an order barring Donziger and his colleagues from trying to enforce the Ecuadorian judgment anywhere in the U.S., and forcing him to "disgorge" any moneys he ultimately might recover. Chevron would also likely attempt to bar his and others' attempts to enforce the judgment abroad -- although that would raise thornier, more controversial legal issues. The U.S. Court of Appeals for the Second Circuit has previously expressed reservations in this very case about the limits of a U.S. judge's power to bar defendants before him from seeking remedies in foreign courts.

(Chevron has virtually no assets in Ecuador, so the Ecuadorian judgment is worthless unless the Amazon Defense Front -- the organization that won it -- can find a court willing to enforce it in a country where Chevron has assets. So far, the Front has filed enforcement petitions in Canada, Argentina, and Brazil; its cases were dismissed in Canada and Argentina, but it is appealing.)

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Chevron's suit against Donziger in Manhattan, filed under the Racketeer Influenced and Corrupt Organizations Act, accuses him, the Amazon Defense Front, and four of the Front's Ecuadorian leaders of having procured the $19 billion judgment through a wide range of criminal conduct. (The Front and its Ecuadorian leaders have all defaulted by failing to appear in the New York action.) The Ecuadorian judgment arose from an environmental suit the Front filed in Lago Agrio, Ecuador, in 2003, alleging oilfield contamination by Texaco (which Chevron acquired in 2001) when it drilled in Ecuador from 1964 to 1992.

The judge handling Chevron's RICO case in Manhattan, U.S. District Judge Lewis Kaplan, has already found "at least probable cause" to believe that Donziger and the Amazon Defense Front team in fact engaged in wire fraud, extortion, witness tampering, obstruction of justice, money laundering, and bribery in the course of winning the Lago Agrio judgment -- many of those crimes allegedly plotted or carried out in the U.S. He has, likewise, found probable cause to believe that most or all of the 188-page, $19 billion judgment was secretly ghostwritten by the Ecuadorian plaintiffs' team itself, which allegedly won that opportunity by promising the presiding Ecuadorian trial judge a $500,000 piece of any recovery eventually collected. Chevron's RICO case is scheduled to go to trial in Manhattan on October 15.

In Monday's filing, Chevron also makes clear that it will definitely not seek any damages from two other individuals named as defendants in the case, Hugo Gerardo Camacho and Javier Piaguaje Payaguaje, who were individuals who simply served as named plaintiffs in the Front's environmental suit in Lago Agrio.

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Chevron spokesperson Morgan Crinklaw declined comment on Monday's development, as did Bill Fenton of Fenton Communications, a spokesperson for the Amazon Defense Front. Steve Donziger, who is representing himself in the RICO action, did not respond to emails seeking comment.

In postponing until the end of this month its final decision on whether to drop the damages claims against Donziger, Chevron noted that "unfolding events and resolution of outstanding issues may potentially bear on that decision." While there are many outstanding pretrial motions remaining to be ruled upon in the case, as well as developments to be watched in the enforcement actions abroad and in an international arbitration based in Washington, D.C., the seemingly most pertinent "unfolding" matter is a hearing on September 26 at which the U.S. Court of Appeals for the Second Circuit will hill hear oral arguments in an appeal that Donziger and the other defendants have brought in the RICO case itself. In that petition, which I have described in detail here, the RICO defendants seek to an order blocking Judge Kaplan from addressing certain issues that they originally raised in their answers to Chevron's complaint, but which they later realized might give Judge Kaplan the opportunity to render a very damaging ruling against their interests: namely, a declaration that the Ecuadorian judgment was so tainted by fraud and other due process violations as to be unenforceable under New York law. In addition, in that appeal the RICO defendants are trying once again -- for about the sixth time -- to have Judge Kaplan removed from the case on grounds of alleged bias.

As a long-time observer of the case, in my subjective opinion, Chevron's dropping of the damages claims against Donziger could prove to be a back-breaking blow to the RICO defendants. Though surprising, Chevron has dropped hints previously that it might do this. Furthermore, Chevron's primary goal in bringing this case from day one has been injunctive relief -- either barring Donziger and his colleagues from trying to enforce the judgment anywhere in the world or, failing that, obtaining a declaration barring enforcement in the U.S. due to fraud -- a ruling that, while not binding on foreign courts, would at least give those courts pause when faced with requests to enforce the judgment.

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The quantity and quality of evidence Chevron has presented to date of fraud and other wrongdoing by Donziger and his colleagues have been extraordinary, as Judge Kaplan's probable cause findings reflect. Nevertheless, Chevron's damages claims against Donziger, on the other hand, carried a built-in complication. Those facing damages claims have a right to a jury trial, and winning a jury trial would be a challenge for an oil giant suing a lawyer who portrays himself as a Robin Hood, selflessly fighting for the rights of the destitute.

By its nature, the RICO case alleged fraud in connection with how the Amazon Defense Front and its agents conducted their litigation in Lago Agrio; answering that question did not technically require relitigation of the underlying issues concerning Texaco's conduct in Ecuador between 1964 and 1992, and whether any wrongdoing that occurred during that period was adequately recompensed by a settlement and reparations agreement that Texaco and Ecuador struck and carried out to completion between 1995 and 1998.

Still, at its early stages, the RICO case did seem to hold out the prospect of providing a reliable judicial forum in which the whole history of the litigation could finally be fleshed out. Reporters like me certainly looked forward to that prospect. But over time Judge Kaplan ruled that, in light of what he saw as systematic, bad-faith obstruction and stalling on the part of the RICO defendants, he would have to pare the case down to the basics -- excluding relitigation of the underlying environmental disputes to the extent possible -- if the case was ever going to reach trial "in our lifetimes," as he put it. (The RICO defendants claim, of course, that Kaplan excluded relitigation of the underlying questions in order to suppress evidence of Texaco's alleged crimes.)

In my subjective view -- and no Chevron attorney or spokesperson has ever admitted anything like this to me -- this was going to leave Chevron with a very difficult row to hoe before a jury. The case, as so structured, calls for an extraordinary degree of compartmentalized analysis on the part of lay jurors. Lay people will want to know the answer to those underlying questions of basic justice, even if they are not properly the subject of the RICO suit per se: Did Texaco or didn't Texaco befoul the environment and harm destitute people in a way that still hasn't yet been adequately recompensed? Regardless of court rulings, Donziger and the other defendants are sure to try to keep those excluded issues front and center in the case.

In the absence of hearing evidence from Chevron reassuring them on that question, my guess is that many, if not most, jurors will assume that Texaco did, in fact, act poorly and that Chevron must have something to hide. Furthermore, if Chevron and the judge appear to be cutting off inquiry into those underlying questions whenever Donziger raises them, as will likely happen at a jury trial, jurors' suspicions of Texaco's conduct and Chevron's good faith will be further inflamed.

For that reason, I have long wondered how Chevron could win this case in front of a jury, no matter how rock-crushing its proof of Donziger's alleged wrongdoing might be.

Now I think I see the answer.

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