Small: State court targets oil industry

State court targets oil industry

By Jonathan Small

Oklahomans are justifiably concerned about judicial activism. Even “minor” rulings can have major consequences. A recent Oklahoma Supreme Court decision falls into that category.

Thanks to the court’s ruling, an untold number of contracts have been nullified and countless state businesses left with daunting potential legal liability. Oklahoma companies operating in the oil and gas industry may be among those hardest hit.

When companies use subcontractors, it is common to have an indemnity contract that protects the contracting company from being sued for alleged wrongdoing done by a subcontractor.

But in Knox v. Oklahoma Gas and Electric Co., the Oklahoma Supreme Court invalidated an indemnity contract.

The case centered on the widow of a man killed at a construction site. The wife filed a workers’ compensation claim against her deceased husband’s employer and received payment. She also sued all companies involved in the project. (Her husband’s employer was one of several subcontractors involved in developing a property for a solar power facility.

The Oklahoma Supreme Court was asked to determine if the employer of the deceased husband—who had already compensated the widow under workers’ comp—had to also indemnify the contractor as promised. The court held the contractor could not enforce its indemnification agreement with the subcontractor, because the subcontractor had already paid out under workers’ comp.

Notably, the Court was split with two justices dissenting and another two concurring in part and dissenting in part.

The Knox decision is expected, in practice, to nullify countless indemnity agreements regarding personal injury, leaving Oklahoma businesses facing unquantifiable and unpredictable liability.

Since indemnity agreements are routine in the oil-and-gas industry, those businesses now face dramatic financial and legal uncertainty. And that could have significant, negative impact on the Oklahoma state economy.

A study performed by RegionTrack and commissioned by the Oklahoma Energy Resources Board found the oil and natural gas industry employed over 200,000 workers with $31 billion in household earnings in 2023, meaning about one in every five dollars of total statewide income was generated by oil and natural gas.

The oil and natural gas industry contributed $55.7 billion to the state’s GDP in 2023, or 22 percent of all statewide economic activity.

The industry contributed $2.9 billion in total taxes in 2023, so any negative impact from the court’s ruling could be felt in areas such as reduced school funding, to cite just one example.

Put simply, the court’s decision dramatically increased liability to include many businesses that play no role in a worker accident and did so in a way that provides no guidance on how to reduce the associated financial exposure.

That’s a recipe for economic struggles that have nothing to do with market forces and everything to do with judicial activism untethered from common sense or longstanding legal precedent.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.