Oil and gas firm ExxonMobil (NYSE:XOM) scored an important win against Massachusetts attorney general Maura Healey last week in federal court. Earlier this year Ms. Healey launched an investigation into whether or not ExxonMobil had "buried" its internal research into the impact of greenhouse gas [GHG] emissions on the global climate in the 1970s and 1980s, joining similar investigations brought by other Democratic state attorneys generals [AG] and spearheaded by New York attorney general Eric Schneiderman. This coalition of AGs quickly ran into trouble when it became known that, rather than hide the results of its research, ExxonMobil had actually allowed its scientists to publish them across several dozen peer-reviewed publications. Ms. Healey continued to demand access to the company's unpublished records on the subject, however, prompting ExxonMobil to attempt to block the move in federal court.
Under normal circumstances federal courts only hear state legal questions at the appellate level, a principle that is known as the "Younger abstention" (named after the court case in which it was described). An exception is made when a state's legal action is made in bad faith, however, examples of which include bias or prejudging on the part of the state officer. ExxonMobil's lawyers claim that the application of this exception is warranted on the grounds that Ms. Healey has made numerous comments that support the contention that the investigation is part of a pre-ordained political agenda.
The issue therefore turns on the actions of Ms. Healey and the other coalition members in the days leading up to and during the announcement of the wider investigations. The court's ruling (subscription required) describes a number of examples of behavior by Ms. Healey that suggest a lack of impartiality:
"Notably, the morning before the AGs United for Clean Power Press Conference, Attorney General Healey and other attorneys general allegedly attended a closed door meeting. At the meeting, Attorney General Healey and the other attorneys general listened to presentations from a global warming activist and an environmental attorney that has a well-known global warming litigation practice...One of the presenters, Matthew Pawa of Pawa Law Group, P.C., has allegedly previously sued Exxon for being a cause of global warming. After the closed door meeting, Pawa emailed the New York Attorney General's office to ask how he should respond if asked by a Wall Street Journal reporter whether he attended the meeting with the attorneys general. The New York Attorney General's office responded by instructing Pawa 'to not confirm that [he] attended or otherwise discuss' the meeting he had with the attorneys general the morning before the press conference."
More importantly, Ms. Healey also gave a speech in which, among other things, she stated that "[f]ossil fuel companies that deceived investors and consumers about the dangers of climate change should be, must be, held accountable" and ""[t]hat's why I, too, have joined in investigating the practices of ExxonMobil. We can all see today the troubling disconnect between what Exxon knew, what industry folks knew, and what the company and industry chose to share with investors and with the American public."
This last comment in particular was the one that likely tripped Ms. Healey up. An impartial investigation is not supposed to presume the guilt of the party being investigated. Obviously such impartiality is important if the investigators are to arrive at the truth rather than at a preordained result. More importantly, however, announcing an investigation on the grounds that a party is guilty in such a public manner threatens to taint the legitimacy of both the investigation and any subsequent legal proceedings. The purpose of an investigation is to determine the facts rather than to state the facts, with the stating of the facts being saved for after the investigation (for example, in court after a lawsuit or charges have been brought on the basis of the investigation's results).
Indeed, the District Court judge found that Ms. Healey's statements supported ExxonMobil's claim that the investigation is part of a political agenda:
"The Court finds the allegations about Attorney General Healey and the anticipatory nature of Attorney General Healey's remarks about the outcome of the Exxon investigation to be concerning to this Court. The foregoing allegations about Attorney General Healey, if true, may constitute bad faith in issuing the civil investigative demand [CID] which would preclude Younger abstention. Attorney General Healey's comments and actions before she issued the CID require the Court to request further information so that it can make a more thoughtful determination about whether this lawsuit should be dismissed for lack of jurisdiction."
Implications for ExxonMobil
Investors should note that the judge's ruling does not mean that Ms. Healey's investigation into ExxonMobil's old internal reports has been precluded from continuing. What the judge has done, however, is to require discovery to move forward into Ms. Healey's own internal reports and documents regarding the investigation. In other words, while trying to force ExxonMobil to turn over potentially-sensitive internal documents, Ms. Healey has exposed her own potentially-sensitive internal documents. This is because the U.S. Fifth Circuit Court, which the U.S. District Court for the Northern District of Texas appeals to, has historically viewed efforts by plaintiffs (ExxonMobil in this case) to force broad jurisdictional discovery in a favorable light.
A 2010 article in the Washington & Lee Law Review highlights a number of cases in which jurisdictional discovery was used to uncover documents relating to activities, communications, and agreements by defendants (Ms. Healey here) that support the plaintiff's claim. It is feasible, then, that ExxonMobil will successfully gain access to the documents of the AG coalition that members of Congress have unsuccessfully tried to obtain over the last several months. The AG coalition has already been embarrassed by the publication of documents obtained via Freedom of Information Act requests, and its efforts to squelch similar information requests suggest that the hidden documents do not support its investigations into ExxonMobil. Specifically, jurisdictional discovery will focus on any information that shows evidence of a political agenda behind Ms. Healey's investigation, the publication of which would serve to portray the entire AG coalition in a negative light.
The legal battle between the Democratic state AGs and ExxonMobil is just getting started. ExxonMobil potentially scored a public relations coup by convincing the District Court judge to permit jurisdictional discovery, however, while also building further support for its legal claim that the AGs' investigations have been tainted from the very start by political bias. Any other officials that are considering their own investigations would do well to look to the U.S. Securities and Exchange Commission [SEC] for an example of how to avoid the perception of agenda-driven bias. Rather than holding behind-closed-doors meetings with environmental activists prior to staging a highly-publicized announcement of its investigation containing multiple comments suggestive of a preordained result, news of the SEC's own investigation into ExxonMobil and climate change was quietly leaked (subscription required) to the press and followed by a formal "no comment" statement to reporters.
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Additional disclosure: I am long XLE.