HOW TEXACO LOST COURT FIGHT

Special to the New York Times
Published: December 19, 1985

DALLAS, Dec. 18— A month ago, Texaco Inc. was one of the nation's strongest companies. Today, the oil giant is reeling and on the ropes.

Texaco suffered the body blow(重击) because a Houston jury decided that it owed $10.53 billion in damages to the Pennzoil Company for improperly luring Getty Oil from a merger with Pennzoil in January 1984.

The huge judgment shocked the nation's corporate and legal communities: Few people outside the courtroom had been following the twists and turns of the complex four-month-long trial. When the jury delivered its verdict on Nov. 19, the question from all quarters was, what evidence did the 12-member panel hear that led it to hit Texaco with the biggest civil judgment in American legal history?

The issue was whether Getty Oil had a binding contract with Pennzoil at the time it agreed to accept Texaco's higher offer. A review of parts of the 24,000-page transcript, and interviews with Pennzoil and Texaco lawyers, other legal experts and a juror point to several key elements that may have swayed the jury to find that such a contract did exist and then, to award a huge judgment.

Among the pieces of evidence presented were a signed merger agreement, press releases detailing the pact and Texaco documents authorizing indemnities for key Getty parties.

Texaco, having failed to persuade Judge Solomon J. Casseb Jr. to overturn the jury's finding, is seeking relief in both Texas and Federal courts. It could also reach a settlement with Pennzoil. Meanwhile, Texaco struggles to keep its finances in order.
For most of 1983, Gordon Getty, one of two surviving sons of the late J. Paul Getty and sole trustee of the Sarah C. Getty Trust, had been embroiled in an increasingly bitter feud with the Getty Oil Company's management over the company's direction. Mr. Getty, an archeology and opera buff, not a businessman, had control over 40.1 percent of Getty Oil's stock. This made him a powerful force in company affairs.

On New Year's Day 1984, he signed a pact with Pennzoil's chairman, J. Hugh Liedtke, that contemplated a major personal victory for Mr. Getty, who was then 49 years old, over Getty Oil's management.

For Mr. Liedtke, then 61, it appeared to be the capstone (顶石) to 30 years of building an oil company from scratch into one of the industry's major players. Mr. Getty would control four-sevenths, or 57 percent, of Getty Oil, and be named its chairman. Mr. Liedtke would become its president and chief executive, with Pennzoil controlling three-sevenths, or 43 percent, of Getty Oil stock.

Mr. Getty and Mr. Liedtke also agreed, in writing, to set a new course for Getty. If they had failed to agree on a ''restructuring'' by the end of 1984, then they would split Getty Oil's assets proportionately. According to minutes of a Getty Oil directors meeting that concluded in the early evening of Jan. 3, that agreement was approved by a voice vote, 15 to 1.

In addition, Harold M. Williams, president of the J. Paul Getty Museum, which controlled 11.8 percent of Getty's stock, also signed a copy of the agreement, which called for the museum to sell its block of Getty shares back to the company. The signatures of Mr. Williams and Mr. Getty represented 52 percent of Getty's stock, a clear majority.

The next morning, Jan. 4, Getty Oil, the Getty trust and museum each issued the same press release, including the particulars of the memorandum of agreement between Mr. Liedtke and Mr. Getty. Texaco Said That Price, Not Terms, Were Voted During the Pennzoil trial, Texaco argued before the jury that the Getty Oil board had voted only to approve the price of $112.50 offered by Pennzoil, not the terms of the agreement. Pennzoil countered that argument by putting Arthur Liman, a lawyer who negotiated with the directors for negotiated with the directors for Pennzoil, on the witness stand.

Mr. Liman told the jury that moments after he sent word to the Getty directors that Mr. Liedtke would increase Pennzoil's offer from $110 to $112.50, Martin Lipton and Martin A. Siegel, who represented Mr. Williams and Mr. Getty, respectively, emerged from the room where the Getty Oil directors had gathered. Mr. Lipton is a prominent corporate lawyer in the New York firm of Wachtell, Lipton, Rosen & Katz. Mr. Siegel is a merger specialist for the investment banking firm of Kidder, Peabody & Company.

Mr. Liman testified that one of them, he could not recall which one, said, ''Congratulations, Arthur, you've got a deal.'' Mr. Liman then entered the meeting room and shook hands with each Getty director, Mr. Liman testified.

Pennzoil's lawyers argued in court that this showed the intent required by law for a binding contract. James J. Shannon Jr., a 34-year-old juror who works as a public information writer for the city of Houston, said in an interview that the jury regarded the issuance of the press releases the following morning as strong evidence that Getty Oil's directors believed they had sold the company.

''We asked ourselves, if what the board approved was not the memorandum of agreement, then how did all the terms of that memo get into the press release?'' he recalled. He noted that Getty Oil's outside lawyer, Barton Winokur, and its chief in-house lawyer, Ralph D. Copley, had both approved the press release.

''All this talk about handshakes and oral agreements does not square(一致) with what we saw and heard in the courtroom,'' the jury's Mr. Shannon said. ''I'm not sure what handshake they are talking about, but there was a signed memorandum of agreement -signed by Pennzoil, by Gordon Getty and by Harold Williams.'' Pennzoil-Getty Deal Founders on Indemnity Pennzoil's lawyers also argued that Mr. Lipton, Mr. Getty and the Getty directors had insisted on indemnification by Texaco before accepting Texaco's higher price because they feared their previous agreements with Pennzoil were legally binding. This means that Texaco would assume legal responsibility for any actions that had been taken by the principals in the Getty deal with Pennzoil.

Indeed, top Texaco executives told the jury that the indemnities were an important part of their offer. John K. McKinley, Texaco's chairman, described them as ''essential.'' James W. Kinnear, vice chairman, said that Mr. Lipton, representing Mr. Williams and the Getty museum, had demanded an indemnity.

The Pennzoil side emphasized to the jury that this indemnity arrangement was unusual. In most business deals, Pennzoil said, the seller offers the buyer legal protection from any previous action for which it may be held liable.

Once Texaco agreed to the indemnities, the Pennzoil-Getty Oil deal began to unravel. Mr. Lipton was the first to break ranks with Pennzoil, when he accepted Texaco's higher offer of $125 a share (later raised to $128 a share). He was first approached by Texaco on the night of Jan. 5, a day after Texaco had mobilized that morning to prepare a higher offer for Getty Oil. Later that night, Mr. Getty, and then the Getty board, also agreed to accept the higher offer.

Mr. Getty, who lives in San Francisco, was not required to testify at the trial. But in a deposition, he said that when he learned on the night of Jan. 5 that Mr. Lipton and the Getty museum had just agreed to sell their stock to Texaco, instead of Pennzoil, he realized his new partnership with Pennzoil could not work.

Had he refused to sell to Texaco, he testified, he would have run the risk of being ''a locked-out minority'' and that the value of the Getty trust's stock would plummet(垂直下降). As a result, he concluded, he felt he had ''no choice'' except to sell to Texaco. New Judge's Charge To Jury Proves Pivotal Texaco rested its case on Nov. 14. At that point, the spotlight shifted to Judge Casseb, who had entered the case just three weeks earlier to replace an ailing colleague. His instructions to the jury on what it should consider a legally binding contract proved pivotal.

The judge said that a binding contract did not necessarily require a formal written agreement: ''The law provides that persons may bind themselves to an agreement even though they do not sign it, where their assent is otherwise indicated.'' On the other hand, he added, ''You may find that the parties did not intend to be bound until each and every term of their transaction was resolved.''

Texaco's lawyers maintained throughout the trial that Pennzoil and Getty had no formal agreement. David Boies, a lawyer hired by Texaco after the jury verdict, tried the same approach on Dec. 5 in an unsuccessful effort to persuade Judge Casseb to overturn the jury verdict.

Mr. Boies argued that the applicable law under which the case was being heard requires a formal, written agreement to meet the test for a binding contract. The Getty board's vocal approval of the memorandum of agreement and the subsequent handshakes fell short, he said. Then, Texaco Strategy On Damages Backfires In fact, the jury found that a contract did exist. It then took on the issue of damages.

During the trial, Pennzoil argued that it had suffered an actual loss of $7.53 billion because it did not get its share of the Getty Oil reserves it had acquired in the deal. In addition, it wanted another $7.53 billion in punitive damages.

Pennzoil figured it would cost $10.96 billion to find and develop 1.008 billion barrels - the amount of reserves it thought it had acquired in its agreement with Getty. Pennzoil then subtracted the $3.43 billion it would have paid for the Getty reserves from the $10.96 billion, arriving at $7.53 billion.

Thomas D. Barrow, a former vice chairmen of Sohio, testified for Pennzoil at the trial that those calculations were ''conservative.''

Texaco's lawyers chose not to respond directly with testimony to refute the Barrow testimony or Pennzoil's claim for damages.

The jury assessed $1 billion in punitive damages apiece for the indemnities that Texaco granted the Getty directors, Gordon Getty and representatives of the Getty Musuem.

Richard B. Miller, Texaco's lead lawyer during the trial, said a better measure of Pennzoil's loss would have been the difference between $112.50 a share it offered for Getty stock and $128 paid by Texaco.

He said the Texaco lawyers gambled that if the jury found Texaco had interfered with a Pennzoil-Getty contract, they would naturally conclude that Pennzoil should get no more than $15.50 a share for the Getty stock it anticipated buying. Mr. Miller maintained that the trial record was ''replete'' with those calculations.

''When you have a strong defense on liability as we did,'' Mr. Miller said, ''it is very defeatist to put on evidence of damages.'' Acknowledging that the tactic has since drawn a torrent of criticism, he said: ''You're going to get second-guessed if you lose on whatever you did. That just comes with the territory.''