(Corrects description of Patrick Juneau to trial lawyer, instead of former plaintiffs lawyer, paragraph 8)
By Mica Rosenberg
NEW YORK, July 12 (Reuters) - Faced with hundreds of damage claims it says are fictitious and inflated, BP must decide whether to dive into a protracted legal battle it had sought to avoid when it settled a class action over the 2010 Gulf of Mexico oil spill.
The British oil giant asked the Fifth U.S. Circuit of Appeals in New Orleans this week to halt the claims. Should its challenge before the three-judge panel fail, BP will face a choice: ask for a hearing by all the court's judges, appeal to the U.S. Supreme Court, or try picking off individual cases one by one, legal experts say.
BP declined to comment on what its strategy would be.
At issue is how to interpret a 1,000-page settlement document BP negotiated with a committee of lawyers working on behalf of thousands of individuals and businesses affected by the Deepwater Horizon rig explosion. The blast killed 11 men and dumped millions of barrels of oil into the Gulf in one of the country's worst environmental disasters.
BP estimated the settlement, approved by a U.S. District Court in Louisiana in 2012, would cost $7.8 billion, but the payouts may end up ballooning to billions more.
The company has already paid more than $2 billion toward the 198,021 claims filed under the agreement. Overall it says it handed out over $10 billion to those affected by the spill and around $14 billion in cleanup and response costs.
Several lawyers not involved in the case said BP should have known it might be on the hook for more money and erred by agreeing to a deal that had no payout cap.
BP said it stands by the settlement but insists the problem is the person appointed by the court to dole out the money, Louisiana trial lawyer Patrick Juneau. The tussle is over how the administrator is calculating the amount of business losses due to the spill a claimant can be compensated for. BP takes issue with the time frame and the accounting methods Juneau is using.
Geoff Morrell, a BP spokesman, said Juneau's "misinterpretation" of the agreement "has ignited a feeding frenzy among trial lawyers attempting to secure money for themselves and their clients that neither deserves."
In a statement, Juneau said, "the proper place to address issues concerning the settlement agreement is in the courts."
U.S. District Judge Carl Barbier of New Orleans, who is overseeing the explosion of spill-related litigation, has repeatedly backed Juneau's interpretation.
So BP appealed to the higher court.
At times during the oral arguments on Monday, the Fifth Circuit judges threw tough comments at BP's lawyer Ted Olson, who served as U.S. solicitor general under President George W. Bush.
"The parties can't come in and change the agreement after it's been made," Judge James Dennis said.
There is no time limit for the Fifth Circuit to decide BP's appeal. If the three judges rule against BP, the company can ask for what is called an "en banc" hearing at the same court but in front of all the Fifth Circuit judges.
Fewer than 3 percent of en banc hearing requests are granted, according to the Fifth Circuit's website.
Also built into the settlement agreement itself is an internal appeal process that BP can use to challenge individual payments it believes were excessive and victims can use if they feel they were wrongly denied.
Internal appeal panels are chosen by Barbier from a list of nominees put forward by both sides. Thousands of appeals have already been filed this way. The process can be costly: There is a filing fee, and if the ruling goes against BP, the company is required to pay 5 percent over and above the original damage award.
If either side is not satisfied with the decision of the internal panel, they can ask Barbier to take up a discretionary review on a case-by-case basis.
Joseph Rice, a lawyer who spent a year and a half debating the settlement terms with BP on behalf of the plaintiffs, said BP has taken a handful of cases to this stage, but Barbier has not chosen to hear them yet.
If all else fails, of course, there is always the highest court in the land. That would be a long shot for BP.
Arthur Miller, an expert on civil litigation at New York University, doubts it will go that far, saying the Supreme Court prefers to hear cases that set legal precedent and are not focused on narrow contract questions. "This is a one-off situation."
Settling in the first place was meant to help BP avoid drawn-out litigation, like the 20-year legal brawl over the 1989 Exxon Valdez spill off Alaska. Claimants who opted in to BP's deal gave up their right to sue the company later.
The contested settlement replaced a process overseen by Kenneth Feinberg, an attorney who managed compensation for the victims of the September 11 attacks. Some plaintiffs were upset that damage awards under Feinberg were not flowing fast enough, and both sides agreed it would be better to settle.
Barbier is also overseeing a separate, multi-billion-dollar case to determine BP's federal pollution fines under the Clean Water Act, with potentially much higher liabilities. The second phase of that trial begins in September. (Reporting by Mica Rosenberg; additional reporting by Kathy Finn; editing by Howard Goller, Amy Stevens and Prudence Crowther)