Opinion ID: 6336934
Heading Depth: 3
Heading Rank: 3

Heading: Smithson Litigation and Arbitration Decision

Text: During the audit period, Hess also was a working-interest owner and operator in some of the EOR units in West Texas. Id. at 222. In 2006, a group of private lease royalty owners sued Hess in the District of New Mexico, alleging that Hess undervalued royalties by intentionally negotiating lower prices for the CO2 in its purchase contracts and then using that lower price to value its in-kind sales to determine the amount of royalties it owed. See Smithson v. Amerada Hess Corp., No. 06-624-MCA (D.N.M. 2006). The matter proceeded to arbitration. A three-member arbitration panel determined that from October 2003 through December 2008, Hess had breached its duty of good faith and fair dealing to the royalty owners by obtaining the lowest fixed price possible for CO2 and using this “improper benchmark” to value its in-kind sales to them. ROA, at 351. To calculate a proper price, the panel “considered the numerous options of benchmarks and methodologies offered by the parties at the arbitration,” as well as the trove of evidence the parties provided that included 12 Appellate Case: 21-2011 Document: 010110678144 Date Filed: 05/02/2022 Page: 13 contracts and relevant pricing mechanisms. Id. at 353, 356–66. The panel also considered the testimony of Hess’s valuation specialist, who indicated that the proper formula “should be reflective of the market conditions in the fall of 2003, as well as reflecting the historical contracting practices from the . . . pool of contracts [that the parties provided].” Id. at 274. The panel ultimately determined that “the ‘blend’ of the 2 methods suggested by [Hess’s valuation specialist] . . . [was] the proper benchmark for the applicable period” (“the Smithson formula”). Id.; see also id. at 356–66 (detailing the Smithson formula). Hess sought vacatur of the arbitration panel’s decision, but the parties then entered a settlement agreement. Id. at 263–69. In March 2010, the district court approved the settlement agreement. Id. at 489–94.