An early chapter in climate change litigation
New York’s claim against Exxon failed, capping a years-long legal battle. But the company will face have to face another climate disclosure lawsuit.
It has been four months since the New York Attorney General’s (NYAG) headline-grabbing climate change suit against ExxonMobil (Exxon) was dismissed. The decision followed a multi-year investigation by the NYAG into Exxon’s climate change-related disclosure.
The NYAG had alleged that Exxon misrepresented the cost of future climate change regulations to investors. Justice Ostrager of the New York Supreme Court, referring to the NYAG’s claims as “hyperbolic,” found that Exxon’s climate change disclosure had not misled investors.
As the first climate change-related disclosure trial, Exxon’s resounding victory is significant. However, the decision will not be the last chapter in litigation relating to oil and gas producers’ climate change disclosure — the Attorney General of Massachusetts’ similar claim against Exxon is ongoing and future cases will likely arise.
The NYAG began its investigation into Exxon on November 4, 2015, launched after years of lobbying by the #Exxonknew campaign. That campaign alleges that Exxon: (i) has known about the link between Greenhouse Gas (GHG) emissions and climate change since the 1970s; and (ii) since that time, misrepresented its research and climate change disclosure to the public. Like the #Exxonknew campaign, the NYAG’s investigation was originally predicated on claims that Exxon failed to disclose research about the impacts of GHG emissions on climate change.
In June 2017, the investigation changed course to investigate whether Exxon misrepresented to investors the risk of climate change to its business. The NYAG’s investigation into Exxon’s operations was far-reaching and required Exxon to produce over three million documents, much of which was not publicly available.
After nearly three years, the NYAG concluded its investigation and brought a securities fraud suit against Exxon under the state’s Martin Act (NY Gen Bus Law, Art 23-A).
Since the mid-2000s, Exxon has forecasted the impact of increased GHG regulations on the demand for oil and gas and how increased GHG regulations might affect the feasibility of future Exxon projects.
The NYAG claimed that Exxon made three material misrepresentations in reports published in 2014 which outlined that Exxon used proxy costs for carbon emissions to account for anticipated increased GHG regulations when assessing oil and gas demand and evaluating potential projects. These proxy costs were estimates for 2030 and 2040. The NYAG alleged that: (i) Exxon’s internal undisclosed guidance authorized applying a lower proxy cost than represented to the public; (ii) it did not apply proxy costs to projects in developing countries; and (iii) it applied lower proxy costs than it represented, or none at all, in parts of its business in developed countries, including the Alberta oil sands, instead applying a proxy cost based on then-current regulations.
The claims were brought under the Martin Act, which requires that the NYAG prove, based on a preponderance of the evidence, a “misrepresentation of material facts” that would have “actual significance in the deliberations of the reasonable shareholder.”
The NYAG’s claim failed. The Supreme Court made it clear at the outset that this action was not a platform for the NYAG to address climate change, writing that “this is a securities fraud case, not a climate change case.” The question was not whether climate change is happening or who is responsible, but whether Exxon made material misrepresentations that could have misled investors.
The Supreme Court was not persuaded that the proxy costs in 2030 and 2040 could have materially affected investor decisions in the 2013-2016 period. The proxy costs were, at best, an educated guess as to the economic effect of GHG regulations in the distant future. The witnesses put forward by the NYAG to support the assertion that the alleged misrepresentations were material were in the words of the Supreme Court “eviscerated” on cross-examination and by the Exxon expert witnesses. Further, the NYAG failed to produce any testimony from investors claiming to have been misled by Exxon. The Supreme Court found that, based on the preponderance of the evidence, Exxon had not made any misrepresentations of material facts that would significantly impact the deliberations of a reasonable shareholder.
In January 2020, the NYAG said it will not appeal the Supreme Court’s decision. As such, this years-long battle between Exxon and the NYAG has ended.
While this case was a categorical victory for Exxon, Exxon remains named as a defendant in more than a dozen active climate-change cases. Notably, the Attorney General of Massachusetts’ claim against Exxon is ongoing. A trial date has not been set. That case resembles the NYAG’s case in some respects but relies on Massachusetts’ state laws and a broader ambit of accusations concerning fraud and advertising. It is unclear if the New York Supreme Court’s decision is indicative of the MAG’s prospects of success.
Regardless, what is clear is that the New York Supreme Court’s decision was the first chapter, but not the last, in climate change-related disclosure litigation.