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EMLF Kentucky Mineral Law Conference 2017

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A Year in the Courtroom for Oil and Gas

Lucas Liben, Reed Smith LLP, Pittsburgh, PA1

Travis L. Brannon, K&L Gates LLP, Pittsburgh, PA2

I. Introduction and Overview

The last twelve months have seen significant developments in a number of oil

and gas issues throughout Appalachia’s courtrooms. This paper will summarize those

developments, and address royalty litigation throughout the region, cases regarding

Pennsylvania’s Environmental Rights amendment, developments in the Ohio Dormant

Mineral Act, West Virginia’s regime regarding pooling and preemption, class arbitration

questions, and zoning issues in Pennsylvania.

II. Royalty Litigation

This year saw significant decisions in royalty litigation in West Virginia, Ohio, and

Pennsylvania. While West Virginia and Ohio courts looked at – or at least were asked

to look at – the propriety of taking post-production deductions from royalty payments,

Pennsylvania courts examined issues regarding the sales price used to calculate

royalties.

1 Mr. Liben wishes to thank Jennifer Thompson and Amy Kerlin for their invaluable assistance in the research and drafting of this Article. Mr. Liben authored sections II, IV, and VI.

2 Mr. Brannon wishes to thank Emily Weiss and Jeff Jay for their invaluable assistance in the research and drafting of this Article. Mr. Brannon authored sections III, V, and VII-X.


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A. Leggett

Leggett v. EQT Prod Co.3 is the latest in a well-known line of West Virginia

royalty decisions,4 and a minimal background of those earlier cases is required to fully

understand Leggett. In Wellman, the Supreme Court of Appeals addressed a lease

calling for a royalty of “one-eighth (1/8) of the proceeds from the sale of gas as such at

the mouth of the well … .”5 After holding that in West Virginia “a lessee impliedly

covenants that he will market oil or gas produced[,]”6 the court further declared that

“unless the lease provides otherwise, the lessee must bear all costs incurred in

exploring for, producing, marketing, and transporting the product to the point of sale.”7

As to the “at the mouth of the well” lease language at issue, the court avoided the

question of whether or not such language “provide[d] otherwise” so as to allow

deductions to be taken, finding the query moot because there had not been any

“evidence whatsoever to show that the costs were actually incurred or that they were

reasonable.”8 Tawney picked up where Wellman left off, addressing the certified

question of whether “lease language that provides that the lessor’s 1/8 royalty is to be

calculated ‘at the well,’ ‘at the wellhead’ or [uses] similar language … [is] sufficient to

3 800 S.E.2d 850 (W. Va. 2017).

4 See Wellman v. Energy Resources, Inc., 557 S.E.2d 254 (W. Va. 2001); Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006).

5 577 S.E.2d at 258.

6 Id. at 265.

7 Id., Syl. Pt. 4.

8 Id. at 265.


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indicate that the lessee may deduct post-production expenses ….”9 The Court found

“that the ‘wellhead’-type language at issue is ambiguous.” Id. Tawney held that term

“lacked definiteness” and was “imprecise” because it “d[id] not indicate how or by what

method the royalty is to be calculated or the gas is to be valued.”10

Unlike Wellman and Tawney, which addressed the post-production deduction

question pursuant to a lease, Leggett addressed the question pursuant to W.V. Code §

22-6-8, “which provides that permits for flat-rate wells will not be issued unless the

lessee swears by affidavit that it will pay the lessor no less than one-eighth ‘of the total

amount paid to or received by or allowed to [the lessee] at the wellhead for the oil or gas

so extracted, produced or marketed.’”11 Leggett brought suit “resulting from EQT’s

deduction of certain costs incurred for the gathering and transporting of the gas … .”12

To begin, the court summarized the deregulation of the industry, noting that W.

V. Code § 22-6-8 was originally enacted in 1982.13 The court then discussed both

Wellman and Tawney, and began to hint at its views on their holdings, describing those

cases by using phrases like “noting simply,” “quickly conclud[ing,]” and “without further

analysis.”14 From there, the court noted the major distinction between those two cases

and the issue before the court: in both Wellman and Tawney the court had been faced

9 Tawney, 633 S.E.2d at 23-24.

10 Id. at 28.

11 Leggett, 800 S.E.2d at 853 (quoting W. V. Code § 22-6-8) (court’s emphasis)

12 Id.

13 See id. at 855-58.

14 Id. at 859-60.


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with lease interpretation issues, where here the court was required to interpret a

statute.15 The court discussed the differences in these kinds of interpretation, noting

that “a statute cannot be ‘construed against’ a party” and that “[t]he language choice –

‘at the wellhead’ – was that of the Legislature[,]” not the parties to a lease.16 Further,

the court reasoned that “the implied covenant to market relied upon by the Wellman and

Tawney Courts has no application as pertains to leases affected by” the statute.17 For

these reasons, the court “conclude[d] that neither Wellman nor Tawney are applicable

to an analysis of the ‘at the wellhead’ language contained in” the law.18 After reaching

this conclusion, however, the court did not yet move on, stating that it was “compelled to

further illustrate the faulty legs upon which this precedent and its iteration of the

marketable product rule purports to stand.”19 The court proceeded to discuss a litany of

commentators who have criticized Wellman and Tawney,20 but ultimately noted that

“however under-developed or inadequately reasoned this Court observes Wellman and

Tawney to be, the issue presently before the Court simply does not permit intrusion into

these issues. We therefore leave for another day the continued vitality and scope of

Wellman and Tawney.”21

15 See id. at 860.

16 Id. at 861.

17 Id. at 861-62.

18 Id. at 862.

19 Id.

20 Id. at 862-63.

21 Id. at 863.


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Because the court “reject[ed] Wellman and its progeny as dispositive of the

statutory issues[,]” it instead found that the question was “strictly one of statutory

interpretation … .”22 Starting with legislative intent, the court found the goal of the

legislature was “to ensure fair and adequate compensation for the State’s mineral

owners[,]”23 and “that the phrase ‘at the wellhead’ is not ambiguous” as used in the

statute.24 Continuing its discussion of the earlier cases, the court noted it “disagree[d]

fully with [Tawney’s] rationale that ‘at the wellhead’ is ambiguous simply because it fails

to fully outline allocation of post production costs.”25 The court found the “‘at the

wellhead’ language clearly indicative of a legislative intention to value the royalties paid

pursuant to the statute based on the unprocessed wellhead price … .”26 Not to be lost

in the analysis is the West Virginia court’s significant reliance on the Pennsylvania

Supreme Court’s similar ruling in Kilmer v. Elexco Land Services, Inc.27 Ultimately, the

Supreme Court of Appeals of West Virginia endorsed the net-back method in this

scenario, and determined “that the most logical way to ascertain the wellhead price is, in

fact, to deduct the post-production costs from the ‘value-added’ downstream price in an

effort to replicate the statutory wellhead value.”28 Under this rule Leggett allowed, in the

22 Id. at 863.

23 Id. at 864.

24 Id.

25 Id.

26 Id. at 865.

27 Id. at 865-66 (discussing 990 A.2d 1147 (Pa. 2010)).

28 Id. at 867.


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context of leases governed by W.V. Code § 22-6-8, for “pro-rata deduction or allocation

or all reasonable post-production expenses actually incurred by the Lessee.”29

B. Kinney

In Kinney v. CNX Gas Co., LLC30 the court addressed the propriety, under West

Virginia law, of a lease which called for a fixed rate ($1.20 per MMBtu) to be deducted

from the royalty for a number of various, listed post-production expenses, an amount

the lease stated “the parties are agreed will be presumed to be actually incurred and

reasonable.”31 The court did not address Leggett at all, instead analyzing the lease

provision pursuant to Wellman and Tawney.32 To begin, the court found that the lease

language was unambiguous, meaning “it must uphold the terms so long as they ‘do not

contravene some principle of law or public policy.’”33 The court then summarized the

rule set forth in Wellman:

Wellman held that a lease must state that deductions can be taken. Wellman also held – as the lease in that case did not state the parties’ agreement as to what the deductions taken would be – that the deductions charged would need to be actually incurred and reasonable.34

29 Id. at 868.

30 -- F.Supp.3d --, 2017 WL 3774376 (N.D. W. Va. Aug. 24, 2017).

31 Id., p. 2 (At the time of this article’s drafting, the Westlaw publication of Kinney had no pincites. The pincites used here are to the version of the August 24, 2017 order found on the docket for the case, at 5:15-cv-160).

32 See id., pp. 7-10.

33 Id., p. 7 (quoting Cotiga Dev. Co. v. United Fuel Gas Co., 128 S.E.2d 626 (W. Va. 1962)).

34 Id., p. 8 (citing Syl. Pts. 4 and 5, Wellman).


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Moving on to Tawney, the court held

“there are three basic elements that must be ‘expressly provided’ in an unambiguous manner in order for a lessee to satisfy the requirements of Tawney: (1) it must ‘expressly provide’ the lessor will bear some part of the costs incurred between the wellhead and the point of sale; (2) it must ‘identify with particularity’ the specific deductions the lessee intends to take; and (3) it must indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.”35

With these standards in mind, the court ruled that “[t]he subject royalty provision

meets all of those elements in a plain and unambiguous manner.”36 First, the court held

that “[t]he Lease expressly states that post production deductions can be taken[,]”

pointing to the “less an amount equal to $1.20 per MMBtu” language in the lease.37 The

court also found that the lease “specifically identif[ies] the deductions that will be

taken[,]” pointing to the listed expenses in the lease. 38 The court further found that

“[t]he lease also expressly identifies the method of calculating the deductions … [as]

based on volume at $1.20 per MMBtu.”39 The court also noted that “the Lease states no

implied warranties or covenants can be read into it,” which the court found “reinforces

that the Lease was intended to abrogate West Virginia’s general rule of implying a duty

to market – exactly as Wellman and Tawney require.”40 Lastly, the court found that “the

35 Id., p. 9 (citing and quoting Syl. Pt. 10, Tawney).

36 Id.

37 Id.

38 Id.

39 Id.

40 Id., pp. 9-10.


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parties freely contracted that the flat-rate deductions are ‘actually incurred and

reasonable[,]’” and held that the “Court will honor that language.”41

C. Lutz

West Virginia was not the only state to address fundamental issues in its royalty

jurisprudence in the last year; Ohio did as well.42 In Lutz the Supreme Court of Ohio

dealt with a question certified from the Northern District of Ohio, asking: “Does Ohio

follow the ‘at the well’ rule (which permits the deduction of post-production costs) or

does it follow some version of the ‘marketable product’ rule (which limits the deduction

of post-production costs under certain circumstances)?”43 Faced with this opportunity to

clarify Ohio’s jurisprudence, the highest court in Ohio chose not to take it, focusing on

the fact that “the rights and remedies of the parties are controlled by the specific

language of their lease agreement … .”44 Like the Leggett court, the Ohio court noted

the leases were signed prior to deregulation,45 but also noted that “[t]he contractual

relationship between the lessors and the lessee spans more than four decades.”46 The

court further went on to reason that “[i]f the language of the lease is ambiguous, we

cannot give effect to the parties’ intent, because we do not have extrinsic evidence. If

the language of the leases is not ambiguous, then the federal court should be able to

41 Id., p. 10.

42 See Lutz v. Chesapeake Appalachia, L.L.C., 71 N.E.3d 1010 (Oh. 2016).

43 Id. at 1010.

44 Id.

45 Id. at 1012.

46 Id. at 1013.


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interpret the leases without our assistance.”47 As such, the court declined to answer the

certified question.48 Of the dissenting justices who wrote opinions one, Justice Pfeifer,

supported the marketable-product rule,49 while the other, Justice O’Neil, stated he would

find that “[w]here a lease provides that the lessor’s royalty is based on value at the well,

Ohio follows the ‘at the well’ rule. I would further hold that ‘at-the-well,’ under Ohio law,

is defined as the gross proceeds of a sale minus postproduction costs.”50

D. Canfield

While Pennsylvania has already addressed the issues addressed by Leggett and

Lutz, royalty litigation nonetheless continues apace in that jurisdiction.51 Canfield was a

putative class action brought against an oil and gas lessee, its marketing affiliate, and

each of those entities’ ultimate corporate parent.52 The lease at issue “allowed for the

deduction of post-production fees[,]”53 but also included a controlling addendum which

“modified the royalty provision of the lease, and expressly provides that the lessee shall

not deduct certain post-production fees.”54 In Canfield, the marketing affiliate took “title

47 Id.

48 Id. at 1010.

49 Id. at 1013 (Pfeifer, J., dissenting)

50 Id. at 1013-14 (O’Neil, J., dissenting)

51 See, e.g., Canfield v. Statoil USA Onshore Properties Inc., 2017 WL 1078184 (M.D. Pa. Mar. 22, 2017). The Canfield opinion is lengthy, and addresses a number of divergent issues, ranging from statute of limitations defenses, see, e.g., id. at *15, to issues involving the Foreign Sovereign Immunities Act of 1976. See, e.g., id. at *5. This summary will not address those issues not specifically tied to the oil and gas industry.

52 See id. at *3.

53 Id. at *2.

54 Id.


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to the raw product at the wellhead … .”55 The lessee was paid pursuant to an

agreement with its marketing affiliate that “fixes the price of the raw natural gas to a

uniform hub price or index price for natural gas, regardless of whether the natural gas is

ever delivered to that particular hub on the interstate pipeline system.”56

The court began by addressing claims of an express breach of the lease’s terms.

The Middle District of Pennsylvania did not agree that the lessee had “breached the

express terms of [Canfield’s] royalty clause because [the lessee] did not base their

royalty calculation on ‘an actual market price’ and, instead, based their royalty

calculation on a ‘published index price … .’”57 The court reasoned that because the

lease called for royalties to be calculated “on ‘the amount realized from the sale of gas

at the well[,]’” the actual sale price must be used, “irrespective of whether or not this

sale price is based on an index price.”58 The court supported its finding by noting that

the term “amount realized … has acquired a technical meaning[,]” being defined as

“proceeds.”59 The court contrasted this with “market value” which “refers to the value of

the product in the relevant market.”60 Finally, the court also stated that “[t]he phrase ‘at

the well’ is ‘commonly understood to mean that the oil and gas is to be valued in its

unprocessed state as it comes to the surface at the mouth of the well.’”61 With all this

55 Id. at *3.

56 Id.

57 Id. at *16.

58 Id. at *17.

59 Id. at *17.

60 Id. at *18 (citations omitted).

61 Id. at *18 (quoting Williams & Meyers, Manual of Oil & Gas Terms A) (court’s emphasis)


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settled, the court reiterated its finding that “Canfield’s royalty provision was clearly not a

market value lease; it unambiguously provides that royalties will be based on the

amount realized from the sale of gas at the well, or proceeds.”62 Moving on to address

the propriety of an actual wellhead sale, as opposed to a downstream sale, the court

noted that the operative lease language called “for royalties to be calculated based on

the amount realized at the well and also provides that the lessee cannot deduct post-

production costs.”63 The court reasoned that “[t]he only way to construe the ‘at the well’

language and ready for sale or use clause together is to require a sale at the physical

location of the well.”64

Not having found an express breach of the lease’s terms, the court moved on to

address whether or not any implied terms had been breached. Specifically, Canfield

had alleged that by selling to an affiliate, at an index price, the lessee had breached

implied duties to market, and of good faith and fair dealing.65 The court began by

finding that the duty of good faith and fair dealing did not “set[] forth a separate,

cognizable claim under Pennsylvania law[,]” and thus an “implied affiliate claim and

implied index-price claim premised on a breach of a generalized duty of good faith and

fair dealing fails as a matter of law.”66 Next considering the duty to market, the court

recognized that Pennsylvania case law on the topic was old – prior to deregulation –

62 Id.

63 Id. at *19.

64 Id.

65 Id. at *20.

66 Id. at *22.


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and thus likely no longer applicable.67 The court also relied on the Kilmer decision68 to

state that it would “refrain from looking to the laws of states that impose the First

Marketable Product Doctrine, such as Colorado, Oklahoma, and Kansas.”69 Instead,

the court looked to Texas to address “the scope of the implied duty to market[,] and

found that “[a] central inquiry in determining whether the duty has been breached is

whether the transaction was a fraud or a sham, particularly where the allegation is

based on an inter-affiliate sale.”70 While the court found that “[s]imple allegations of one

affiliate selling to another do not state a plausible claim for breach of the implied duty to

market[,]”71 that was not the only allegation made, as “Canfield not only alleges that [the

lessee] and [the marketing company] were affiliates, but that [the lessee] used an index

price to calculate royalties.”72 Because at the motion to dismiss stage the court could

not assess whether the various hub prices used were objectively reasonable or

reflected “the lessee’s good faith business judgment[,]” and because allegations of a

“sham sale” were made, the court allowed the implied breach claim to survive the early

attempt at dismissal.73

67 See id. (discussing Iams v. Carnegie Natural Gas Co., 45 A. 54 (Pa. 1899)).

68 See supra.

69 Id. at 23.

70 Id. at *24 (citing union Pac. Res. Grp., Inc. v. Hankins, 11 S.W.3d 69, 74 (Tex. 2003)).

71 Id. (citing Flanagan v. Chesapeake Exploration, LLC, 2015 WL 6736648, at *2-3 (N.D. Tex. Nov. 4, 2015); Gottselig v. Energy Corp. of Am., 2015 WL 5820771, at *6 (W.D. Pa. Oct. 5, 2016)).

72 Id.

73 See id.


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Although certain claims survived against Canfield’s lessee, none of her claims

survived against the marketing company. The court found that the tortious interference

claim against the marketing company was not well founded because “[t]he only conduct

alleged is [the] purchase of natural gas at an index price[,]” and “it is not plausible

simply buying natural gas at a favorable price and reselling that product for a profit is

wrongful or improper.”74 The court dismissed the civil conspiracy claim against the

marketing company because there was no underlying tort to support the claim,75 and

dismissed the unjust enrichment claim because there had been no benefit directly

transferred by Canfield to the marketing company and the marketing company was not

alleged to have engaged in any misleading behavior.76 Finally, the court also found

Canfield was not entitled to an accounting from the marketing company, and that entity

was dismissed from the case entirely, with prejudice.77

III. Pennsylvania’s Environmental Rights Amendment

A. Pennsylvania Environmental Defense Foundation v. Commonwealth

On June 20, 2017, in Pennsylvania Environmental Defense Foundation v.

Commonwealth (“PEDF”), the Pennsylvania Supreme Court y issued a landmark

decision regarding Article I, Section 27 of the Pennsylvania Constitution, also known as

74 Id. at *28.

75 Id. at *29.

76 Id. at *30.

77 Id.


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the “Environmental Rights Amendment.”78 In PEDF, the Pennsylvania Supreme Court

nullified the three-part, judicially created “Payne v. Kassab” test that lower Pennsylvania

tribunals had applied for over 40 years to determine if government actions violated the

Environmental Rights Amendment. The court likewise illuminated some of the

Commonwealth’s duties under the “public trust” clauses in the Environmental Rights

Amendment. It concluded that, under those clauses, funds that the Commonwealth

derives from Pennsylvania’s public natural resources must be reinvested into the

conservation and maintenance of those resources and cannot be used to support other

public programs.

The PEDF plaintiffs asserted that certain Pennsylvania statutes violated the

public trust components of the Environmental Rights Amendment because, under the

statutes, funds that the Commonwealth derived from leasing state lands for oil and gas

development were not reinvested into the conservation and maintenance of

Pennsylvania’s public natural resources. The funds were instead funneled into the

Commonwealth’s general fund and used to support other public programs.

In a majority opinion, the Pennsylvania Supreme Court began its analysis by

dismantling the Commonwealth Court’s Payne v. Kassab test.79 The court explained

that “the proper standard of judicial review lies in the text of Article I, Section 27 itself as

78 No. 10 MAP 2015

79 The court said that the test is “unrelated to the text of Section 27 and the trust principles animating it” and “strips the constitutional provision of its meaning.” PEDF, No. 10 MAP 2015, Slip Op. at 27.


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well as the underlying principles of Pennsylvania trust law in effect at the time of its

enactment.”80

The court then observed that the Environmental Rights Amendment grants “two

separate rights to the people of this Commonwealth.”81 The first right, embodied in the

first sentence, is the “right of the citizens to clean air and pure water, and to the

preservation of natural, scenic, historic and esthetic values of the environment.”82 The

court explained that the first sentence is a prohibitory clause that “places a limitation on

the state’s power to act contrary to this right, and while the subject of this right may be

amenable to regulation, any laws that unreasonably impair the right are

unconstitutional.”83

The second right is embodied in the second sentence of the Environmental

Rights Amendment. The court described this right as “the common ownership by the

people, including future generations, of Pennsylvania’s public natural resources.”84

“Public natural resources,” the court explained, include state park and forest lands and

the state-owned oil and gas reserves that are found in those lands. The court also

pointed out that, as revealed by the legislative history of the Environmental Rights

Amendment, the second sentence was amended to “include the term ‘public’ to indicate

80 PEDF, No. 10 MAP 2015, Slip Op. at 28.

81 Id. at 29.

82 Id.

83 Id.

84 Id.


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that it did not apply to purely private property rights.”85 The court, however, suggested

(without deciding) that “public natural resources” might include certain privately-owned

resources that “‘involve a public interest.’”86

Next, the court concluded that “[t]he third clause of Section 27 establishes a

public trust pursuant to which the natural resources are the corpus of the trust, the

Commonwealth is the trustee, and the people are the named beneficiaries.”87 The

court, as a corollary, stated broadly (although arguably in dictum) that the

“Commonwealth,” as trustee, includes “both statewide and local” government

agencies.88 It then interpreted the public trust clause in light of the private-trust

principles that were in place when the Environmental Rights Amendment was adopted

— which it had not done before. It explained, in this regard, that “the Commonwealth

has a duty to prohibit the degradation, diminution, and depletion of our public natural

resources, whether these harms might result from direct state action or from the actions

of private parties.”89 In addition, it explained, “the Commonwealth must act affirmatively

via legislative action to protect the environment.”90

Turning to the constitutional claim at hand, the court made two main

determinations. First, it determined that because the Environmental Rights Amendment 85 Id. at 30 n.22.

86 Id. (quoting statement by Rep. Kury in Pa. L. Journal, 154th General Assembly, No. 118, Reg. Sess., 2271–72 (1970)).

87 Id. at 30.

88 Id. at 30 n.23.

89 Id. at 32.

90 Id. at 32-33.


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creates a trust and “pursuant to Pennsylvania [private trust] law in effect at the time of

enactment, proceeds from the sale of trust assets are part of the corpus of the trust,” the

proceeds that the Commonwealth generates by selling its oil and gas reserves “remain

in the corpus of the trust.”91 Second, the court determined that, for purposes of the third

sentence of the Environmental Rights Amendment, “[t]he phrase ‘for the benefit of all of

the people’ may not be read in isolation and does not confer upon the Commonwealth a

right to spend proceeds on general budgetary items.”92 The phrase, instead, when

“understood in context of the entire amendment,” signals that the “assets of the trust are

to be used for conservation and maintenance purposes.”93 The court therefore

concluded that, to the extent that the statutes at issue diverted the Commonwealth’s oil

and gas-sale proceeds away from programs for “conserving and maintaining” public

natural resources and into other public programs, they were unconstitutional.

Along the way, the court observed that, in affirming the Commonwealth Court’s

decision in Payne v. Kassab, it had concluded that the “trust provisions in the second

and third sentences of Section 27” are self-executing and therefore “do not require

legislative action in order to be enforced against the Commonwealth in regard to public

property.”94 The court expressly reaffirmed this holding. It also noted that its “prior case

law has not resolved” the question of whether the Environmental Rights Amendment is

91 Id. at 33-34.

92 Id. at 35.

93 Id. at 35-36.

94 Id. at 39 (citing Payne v. Kassab, 361 A.2d 263 (Pa. 1976)).


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self-executing “in regard to an attempt” under the first sentence “to enforce the people’s

rights against the owners of private property.”95

IV. Ohio Dormant Mineral Act Developments

One of the most important decisions in Ohio oil and gas law was issued by the

state’s Supreme Court a year ago, in Corban v. Chesapeake Exploration, L.L.C.96

Since that time, there have also been numerous cases addressing that decision’s

interpretation of the Ohio Dormant Mineral Act (“ODMA”).

A. Corban

In Corban, the United States District Court for the Southern District of Ohio

certified the following question to the Supreme Court of Ohio: If the 2006 version or the

1989 version of the ODMA applies to claims asserted after 2006 alleging that the rights

to oil, gas, and other minerals automatically vested in the surface landholder prior to the

2006 amendments as a result of abandonment.97 Justice O’Donnell authored the

plurality opinion, and held that by using the phrase “deemed abandoned and vested,”

95 Id. In a concurring and dissenting opinion, Justice Baer criticized the majority for importing private trust principles into the public trust components of Article I, Section 27. This approach, he insisted, is not supported by the language of Article I, Section 27. He emphasized that “Section 27 is silent regarding the creation of a ‘corpus’ and in no way suggests that the proceeds from the sale of natural resources should be included in such a corpus…. The trustee’s duties are to ‘conserve and maintain’ the resources, not the money.” PEDF, No. 10 MAP 2015, Concurring and Dissenting Slip Op. (Baer, J.) at 13. Justice Baer also explained that “Section 27 does not require that the Commonwealth conserve and maintain the resources for the benefit of the environment, but rather for the ‘benefit of all the people,’ which includes both the enjoyment of the natural environment but also the utilization of the resources, without waste, for the current benefit of the public.” Id. at 14.

96 76 N.E.3d 1089 (Oh. 2016).

97 Id. at 1092. The District Court also asked if the payment of a delay rental during the primary term of an oil and gas lease is a title transaction and “savings event” under the ODMA. See id. The court answered that question in the negative. See id. at 1099.


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the Ohio General Assembly created a “conclusive presumption” establishing that a

mineral rights holder had abandoned a severed mineral interest if the 20 year period

passed and no saving event occurred.98 As the conclusive presumption of

abandonment was only an evidentiary device that applied to an action to quiet title to a

dormant mineral interest, the ODMA did not automatically transfer the interest from the

mineral rights holder to the surface owner.99 The plurality found it apparent in analyzing

the “sequential legislation” regarding the ODMA that the legislature did not mean for title

to dormant mineral interests to pass automatically, outside the record chain of title.100 A

surface holder seeking to reunite a severed mineral interest under the 1989 Act was

required to commence a quiet title action.101

Examining the 2006 amendment to the ODMA, the court found that the notice

and recording requirements included in the amendment did not violate the Ohio

Constitution’s Retroactivity Clause.102 The court found that the statute did not remove a

surface holder’s right to abandoned mineral interests that accrued prior to the effective

date of amendment, but instead changed the method and procedure by which the right

is recognized and protected.103 Surface owners bringing claims after June 30, 2006

98 Id. at 1097.

99 Id.

100 Id.

101 Id.

102 See id., 1098-99.

103 See id., 1099.


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must follow the notice and recording procedures contained in the 2006 amendment to

the ODMA.104

B. Corban’s Constitutional Progeny (Thus Far)

In the roughly one year since it was decided, numerous cases have come down

interpreting or enforcing Corban’s edict.105 This section will focus on those cases

specifically regarding constitutional issues.

In Walker,106 decided the same day as Corban, the surface owner used the

notice provisions under the 2006 amendments to declare the mineral interests

abandoned.107 However, the mineral interest owner filed an affidavit to preserve its

104 See id., 1100. Two justices joined in Justice O’Donnell’s opinion with two additional justices concurring in the judgment on the first certified question and two justices dissenting as to that question. In a dissenting opinion, Justice Pfeifer accused the majority of “judicial modification under the guise of interpretation.” Applying the holding in Corban, the Court also decided numerous other cases on the same day, including Carney v. Shockley, -- N.E.3d – 2016 WL 4895981 (Oh. Sept. 15, 2016); Dahlgren v. Brown Farm Prop. LLC, -- N.E.3d --, 2016 WL 4891386 (Oh. Sept. 15, 2016); Eisenbarth v. Reusser, -- N.E.3d --, 2016 WL 4893353 (Oh. Sept. 15, 2016); Farnsworth v Burkhart, -- N.E.3d --, 2016 WL 4893859 (Oh. Sept. 15, 2016); Swartz v. Householder, -- N.E.3d --, 2016 WL 4887430 (Oh. Sept. 15, 2016); Taylor v. Crosby, -- N.E.3d --, 2016 WL 4909558 (Oh. Sept. 15, 2016); Thompson v. Custer, -- N.E.3d --, 2016 WL 4894783 (Oh. Sept. 15, 2016); Tribett v. Shepherd, -- N.E.3d --, 2016 WL 4894077 (Oh. Sept. 15, 2016); and Wendt v. Dickerson, 63 N.E.3d 1029 (Oh. 2016).

105 For example, in Albanese v. Batman, 68 N.E.3d 800 (Oh. 2016), the issue was whether the filing of a will with the probate court and the county recorder’s office was sufficient to prevent the mineral estate from being deemed abandoned under the 1989 Act, but the court applied Corban and held that there was no automatic abandonment and vesting of the mineral interest under the 1989 Act. Because the surface owners had not followed the notice requirements under the 2006 amendments, the mineral owners retained their interests. In Davis v. Consolidation Coal Co., 2017-Ohio-5703 (Ohio Ct. App. 7th Dist.), the court reaffirmed that cases filed after 2006 required courts to follow the 2006 amendments, that the 1989 ODMA was not self-executing, and that a recorded release was a title transaction; the final holding was actually first discussed, tangentially, in Chesapeake Exploration, L.L.C. v. Buell, 45 N.E.3d 185 (Oh. 2015), discussed below. Similarly, in McLaughlin v. CNX Gas Co., 639 Fed. Appx. 296, 299 n.5 (6th Cir. 2016) the court found that a recorded release is “simply the inverse of a lease[,]” and in Haas v. Chesapeake Exploration, L.L.C., 2017 WL 2839558 (Oh. Ct. App. 7th Dist. June 29, 2017), the court reaffirmed that post-2006 claims must follow the 2006 amendments. See also Stalder v. Bucher, 2017 WL 823760 (Oh. Ct. App. Feb. 27, 2017).

106 Walker v. Shondrick-Nau, 74 N.E.3d 427 (Oh. 2016)

107 Id. at 429.


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estate, as permitted under those amendments, causing the surface owner to file a quiet

title action, asserting that under the 1989 ODMA the mineral rights had already merged

with the surface.108 Applying Corban, the court held that the 2006 amendments were

applicable.109 Under those amendments, the mineral owner’s claim to preserve his

rights operated as a “saving event” which prevented the surface owner from declaring

the mineral rights abandoned.110 The Walker surface owners appealed to the Supreme

Court of the United States seeking certiorari, but that petition was denied.111 However,

the basis for their petition has been reiterated by surface owners in recent cases in both

state and federal court: a claim that the Corban decision deprived surface owners of “a

vested property right in the accrued cause of action and conclusive presumption of

mineral ownership under Ohio’s 1989 Dormant Mineral Act[,]” in violation of the

Fourteenth Amendment to the United States Constitution.112 Those constitutional

challenges have, to date, been unsuccessful.

In Buell113 the surface owners sought leave from the Southern District of Ohio to

amend their pleadings.114 Specifically, the surface owners desired to “expressly assert”

108 Id.

109 Id. at 430-31.

110 Id. at 314 (relying on Dodd v. Croskey, 37 N.E.3d 147 (Oh. 2015)).

111 See Walker v. Shondrick-Nau, 137 S.Ct. 824(Mem) (2017).

112 Chesapeake Exploration, L.L.C., et al. v. Buell, et al., No. 2:12-cv-916 (S.D. Oh. May 4, 2017); Village of Jewett v. North American Coal Royalty Co., et al., No. 2:14-cv-175 (S.D. Oh. June 8, 2017); Judgment Entry, Hickman, et al. v. Consolidation Coal Co., et al., No. 2013 CV 00683 (Oh. Ct. C. P. Columbiana County May 4, 2017).

113 The Southern District of Ohio decision discussed here constitutes the subsequent proceedings after Chesapeake Exploration, L.L.C. v. Buell, 45 N.E.3d 185 (Oh. 2015), one of the earliest in the string of decisions from the Supreme Court of Ohio regarding the OMDA. In Buell the Supreme Court of Ohio addressed two questions certified from the Southern District of Ohio: the Supreme Court found that an oil


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the “conclusive presumption” they alleged was granted to them by Corban, and to make

a claim for a declaratory judgment: (1) that the surface owners acquired a property right

in the mineral interests, (2) that Corban deprived the surface owners of those rights and

violated the Fourteenth Amendment of the United States Constitution, and (3) that the

surface owners, if Corban is constitutional, are entitled to assert their “conclusive

presumption” of ownership.115

Magistrate Judge Terence P. Kemp began by analyzing whether or not the

amendment should be denied as futile.116 He ruled that it should. As to the “conclusive

presumption” of mineral ownership that the surface owners wished to “expressly assert,”

Magistrate Judge Kemp found that this request:

refers to a remark in the Corban decision that the 1989 DMA created a “conclusive presumption” that a mineral rights holder had abandoned a severed mineral interest if the 20-year statutory period passed without a saving event. However, [the surface owners’] reliance on that statement is misplaced because the court went on to reason that the conclusive presumption of abandonment was “only an evidentiary device that applied to litigation seeking to quiet title to a dormant mineral interest.”117

Magistrate Judge Kemp held that, because the surface owners had not filed a quiet title

action under the 1989 Act, the “conclusive presumption” language was irrelevant.118

and gas lease was a “title transaction” that would toll the twenty-year abandonment period under the ODMA, but that an unrecorded expiration of a lease would not work to toll the statute.

114 See Buell, p. 4.

115 See id., pp. 4-5

116 See id., pp. 9-11.

117 Id., p. 10 (quoting Corban).

118 See id.


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The judge then went on to find that because the surface owners did not acquire or lose

a substantive right, and because certiorari had been denied in Walker, the surface

owners had not provided, nor was there, any “plausible argument that the Ohio

Supreme Court unconstitutionally deprived [the surface owners] of a right.”119

Very similar to Buell, in Village of Jewett the court again faced a motion to amend

the complaint to add claims that the surface owners were “‘deprived of a vested

property right without due process of law’ in violation of the Fourteenth Amendment” as

a result of Corban.120 The landowners were also, again “attempting to ‘expressly assert’

the ‘conclusive presumption’ in [the] quiet title claim as articulated in Corban.”121 The

court once more held that the “conclusive presumption of abandonment” was immaterial

because it only applied to actions filed under the 1989 act, not to cases filed after the

2006 amendments.122 The court further reasoned, in response to the argument that the

2006 amendments “extinguished the ‘conclusive presumption’” that “the enactment of

the 2006 DMA can properly ‘be viewed as the withdrawal of a remedy rather than the

destruction of a right.’”123

V. West Virginia Zoning and Pooling Issues

119 Id., p. 11. The surface owners in Buell have filed a request for reconsideration of this decision which, at the time this article was drafted, remains pending.

120 Village of Jewett, p. 5.

121 Id. at p. 8.

122 See id.

123 Id. at p. 9 (quoting Texaco, Inc. v. Short, 454 U.S. 516 (1982)). The Magistrate Judge decision in Village of Jewett was adopted and affirmed by District Judge George C. Smith. See Village of Jewett v. N. Am. Coal Royalty Co., 2017 U.S. Dist. LEXIS 112259 (S.D. Oh. July 19, 2017).


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This year, West Virginia state and federal courts have issued notable opinions

addressing zoning and pooling issues.

A. Wender

On August 30, 2017, in EQT Production Company v. Wender, the United States

Court of Appeals for the Fourth Circuit affirmed a federal district court’s invalidation of a

West Virginia county’s ordinance banning oil and natural gas wastewater storage at

horizontal drilling sites and underground injection control (“UIC”) wells.

In January of 2016, Commissioners of Fayette County, West Virginia enacted an

“Ordinance Banning the Storage, Disposal, or Use of Oil and Natural Gas Waste in

Fayette County” (the “Ordinance”), which explicitly prohibited the use of UIC wells for

purposes of permanently disposing of natural gas waste and oil waste.124 Immediately

afterwards, EQT challenged the Ordinance in the district court, asserting that it was

preempted by the comprehensive state and federal regulations that are associated with

West Virginia's UIC permit program, the federal Safe Drinking Water Act, and the Oil

and Gas Act.125 EQT asked the court to enjoin the enforcement of the Ordinance.126 In

response, the County argued that the savings clause in West Virginia's Water Pollution

Control Act (“WPCA”) gave it the authority to abate anything that its commission

determines to be a public nuisance, including UIC wells.127

124 Id. at *3. 125 Id. 126 Id. 127 Id.


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The Fourth Circuit explained that, in West Virginia, county commissions have

only the powers that are granted to them by the state, meaning that when a “provision of

a municipal ordinance is inconsistent or in conflict with a statute enacted by the

Legislature the statute prevails and the municipal ordinance is of no force and effect.”128

The Fourth Circuit stated that, as a result, “West Virginia law simply does not permit a

county to ban an activity—here, the permanent disposal of wastewater in Class 2 UIC

wells—that is licensed and regulated by the state pursuant to a comprehensive and

complex permit program.”129

The Fourth Circuit also explained that the County’s reliance on the savings

clause in West Virginia’s WPCA was misplaced because West Virginia regulates UIC

wells not only under that statute, but also under its Oil and Gas Act, which does not

contain a savings clause.130 Rejecting the County’s broad interpretation of the WPCA’s

savings clause, the Fourth Circuit stated that the purpose of the clause is to preserve

private citizens’ rights to bring a nuisance action against a state-permitted activity, not to

ban that activity altogether.131

Finally, the Fourth Circuit held that the Ordinance’s restriction on wastewater

storage at conventional well sites was preempted because it conflicted with the Oil and

Gas Act.132 Explaining that, under the Oil and Gas Act, “the legislature has vested in

the state DEP the exclusive authority over regulation of the state’s oil and gas

128 Id. at *7 (internal citations omitted). 129 Id. 130 Id. at *8. 131 Id. at *9. 132 Id. at *10.


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resources,” the Fourth Circuit concluded that, by banning wastewater storage unless the

storage was temporary and the wastewater would be permanently disposed in another

county, the Ordinance was in fundamental conflict with the Oil and Gas Act and DEP

regulations, which do not prohibit or impose temporal limits on wastewater storage.133

In applying West Virginia law, therefore, the Fourth Circuit affirmed the district

court’s striking down of an ordinance that purported to regulate the mechanics of oil and

gas operations.

B. Gastar v. Contraguerro

On May 31, 2017 the Supreme Court of Appeals of West Virginia, in Gastar

Exploration, Inc. v. Contraguerro, affirmed West Virginia’s adherence to the contract

theory of pooling and explicitly rejecting the cross-conveyance theory adopted by Texas

and other jurisdictions.134 135 The Court held that, in West Virginia, pooling is the

consolidation of contractual and financial interests; it does not create joint or undivided

property interests in the oil and gas underlying the pooled tract. As a result, consent or

ratification of pooling by the holders of nonparticipating royalty interests (“NPRI”) is not

required in West Virginia.136

133 Id. at *10-11. 134 No. 16-0429, 2017 WL 2418399 (W.Va. May 31, 2017).

135 See e.g. Minchen v. Fields, 345 S.W.2d 282 (Tex. 1961) (holding that unitization or pooling results in a cross-conveyance of title such that the interest holders “all own undivided interests under the unitized tract in the proportion their contribution bears to the unitized tract.”); see also Ragsdale v. Superior Oil Co., 237 N.E.2d 492, 494 (Ill. 1968) (stating unitization “creates a single ownership of the entire unit by the owners of the several tracts making up the unit, subject to the terms of the oil and gas leases.”).

136 Gastar at *10.


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In terms of oil and gas leasing and development, the decision reinforces the

contract theory in West Virginia and avoids multiple controversial aspects of the cross-

conveyance theory, such as (i) requiring consent of each NPRI within a given tract for

pooling or unitization purposes and (ii) arguably turning each NPRI holder into an

indispensable party to any litigation affecting the pool or unit. Furthermore, under a

cross-conveyance theory, problems could arise with “the validity of earlier pooling

agreements, increased royalty litigation, and complications for the lease acquisition

process.”137 In the Court’s view, such a scheme is undesirable to both producers and

landowners because pooling helps “to prevent waste, facilitate the orderly development

of the minerals, to preserve correlative rights and to effect equitable participation within

the pooled unit to be formed.”138

The NPRI holders in Gastar possessed a one-fourth nonparticipating royalty

interest (the “NPRI holders”) in the mineral rights of a 105.9 acre parcel, which was

pooled with other tracts by Gastar Exploration, Inc. (‘Gastar”) to form a 700 acre unit.139

Gastar created the unit pursuant to a lease it had obtained from PPG Industries, Inc.

(“PPG”) for more than 3,000 acres.140

PPG and Gastar traced their oil and gas interest and executive rights to a 1946

conveyance by the ancestors of the NPRI holders. After transferring the rights to the oil

and gas in place and the executive rights to discover and produce oil and gas, the

ancestors of the NPRI holders passed on only a non-participating royalty interest to their 137 See Id. at *10 n.15.

138 Id. at *10 n.16.

139 Id. at *2.

140 Id. at *1.


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heirs. In 2011, PPG entered into an operations agreement with Gastar, including the

acreage in which the NPRI holders hold their interest. In 2012, Gastar designated a

pooled unit and five wells in the unit have well bores reaching the minerals underlying

the NPRI holders’ parcel.

In their Complaint filed in the Circuit Court of Marshall County, the NPRI holders

alleged that Gastar had diluted their royalty interests when it created the 700 acre unit

and pooled the NPRI holders’ interests with others’ interests.141 In addition to seeking

damages against PPG and Gastar, the NPRI holders sought a declaration invalidating

the PPG-Gastar lease to the extent it permitted Gastar to pool or unitize the NPRI

holders’ interests with those of others.142

On appeal, the Supreme Court of Appeals reversed the circuit court and found

that West Virginia oil and gas precedent supports the express adoption of the contract

theory rather than the cross-conveyance theory with regard to pooling and its effect on

NPRI holders.143 Therefore, the PPG-Gastar lease resulted only in a consolidation of

leasehold interests but no merger of titles among the interest holders of the 700 acre

unit. 144 The Court’s decision was notable in at least two respects.

First, the Court clarified that extant West Virginia precedent is in line with the

contract theory of pooling, and the Court expressly rejected the cross-conveyance

141 Id. at *5.

142 Id.

143 See Boggess v. Milam, 34 S.E.2d 267 (W.Va. 1945) (finding that unitization does not result in merger of title); see also Donahue v. Bills, 305 S.E.2d 311 (W.Va. 1983) (finding that a lease clause reserving the executive right provided an “agency coupled with an interest” which has the benefit of “guarantee[ing] in advance . . . that parties who must acquiesce to the consummation of a business deal will do so at the appropriate time and in the appropriate form.”).

144 Gastar at *9.


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theory. In its analysis of West Virginia precedent, the Court stated that it had previously

recognized that an oil and gas unitization agreement alone “was a merger of contractual

obligations” and “does not effect a merger of title.” Furthermore, the Court also noted

that it had previously stated the oil and gas executive right, or “an agency coupled with

an interest,” is often a necessary and reasonable mechanism to address complicated

business transactions that can become “unwieldly and uncertain” when seeking

approval from numerous persons.145 Accordingly, the Court held that “pooling of

nonparticipating royalty interests with the interests of other individuals or entities for the

horizontal drilling and production of oil and gas from the Marcellus Shale Formation

does not create a joint or undivided property interest in the oil and gas underlying the

tract pooled.”146 Specifically, “the cross-conveyance theory resulting in such a joint or

undivided interest is rejected” and “consent or ratification by the holders of the

nonparticipating royalty interests is not required” for pooling.147

Second, the Court emphasized a principle of law that was designed to foster

efficient development of oil and gas. That is, the Court emphasized that adoption of the

cross-conveyance theory would “inject uncertainty in this State’s oil and gas

jurisprudence” and allow any NPRI holder, by withholding consent, to “unilaterally void

an entire pooling agreement involving thousands of acres and the bargained-for rights

of dozens of other interest holders.”148 The Court noted that the circuit court had

145 Id. (citing Donahue, 305 S.E.2d at 312).

146 Id. at *10.

147 Id.

148 Id.


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“effectively reconveyed executive right authority to the NPRI holders.”149 According to

the Court, such a legal regime would be especially detrimental in the context of

horizontal drilling and production, where the efficient development of mineral resources

is in part dependent on the ability to combine parcels into contiguous units.150 Thus, the

Court’s decision was a reaffirmance of legal principles that facilitate, not hinder, the

efficient development of oil and gas.

VI. Class Arbitration Issues

Federal courts in Pennsylvania and Ohio have recently addressed the question

of arbitrability in class action disputes involving oil and gas leases with arbitration

provisions.

A. Scout I

In Chesapeake Appalachia, L.L.C. v. Scout Petroleum LLC (“Scout I”)151, the

United States Court of Appeals for the Third Circuit held that courts, not arbitrators,

must decide whether a class action dispute should be governed by arbitration unless

the arbitration clause “clearly and unmistakably” delegates the decision to the arbitrator.

149 Id.

150 See Id. at *10 n.16 (discussing West Virginia public policy as embracing the responsible and economically beneficial development of the State’s natural resources).

151 809 F.3d 746 (3d Cir. 2016).


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In Scout I, Chesapeake entered into oil and gas leases with defendant Scout’s

predecessor.152 The leases included the following arbitration provision:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association. All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.153

In 2014, Scout filed an arbitration demand against Chesapeake, on behalf of itself and

similarly situated lessors, alleging that Chesapeake paid insufficient royalties.154

Chesapeake objected to class arbitration, and filed an action in federal court seeking a

declaratory judgment that (1) the district court—and not the arbitrators—must decide

whether class arbitration is available, and (2) the leases do not permit class

arbitration.155

The district court entered an order granting summary judgment to Chesapeake,

finding that “[t]he contract here is silent or ambiguous as to class arbitration, far from the

‘clear and unmistakable’ allowance needed for an arbitrator, and not a court, to turn to

the clause construction question.”156 On appeal Scout argued that the leases clearly

provide that arbitration will be conducted in accordance with the AAA rules, that

152 Id. at 748.

153 Id. at 749.

154 Id. at 751.

155 Id.

156 Chesapeake Appalachia, L.L.C. v. Scout Petroleum, L.L.C., 73 F. Supp. 3d 488, 501 (M.D. Pa. 2014).


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Pennsylvania law provides that the arbitration clause incorporates all of the AAA rules

into the leases, and that the AAA rules “clearly and unmistakably” vest the arbitrators

with the jurisdiction to decide the question of class arbitrability.157 Specifically, Scout

pointed to AAA Supplementary Rules 3 and 4, which provide that an arbitrator must

determine whether the arbitration agreement permits class arbitration.158

The Third Circuit, in an early 2016 opinion, first looked to the plain language of

the leases, and noted that the leases are silent as to the availability of class arbitration

and silent as to whether the question should be submitted to an arbitrator.159 The court

found it significant that the Leases used singular terms to describe the parties to any

arbitration and the dispute to be arbitrated, which indicated that bilateral arbitration was

contemplated.160 In addressing Scout’s incorporation argument, the court examined

the various AAA rules and concluded that the leases failed to satisfy the “onerous

burden of undoing the presumption in favor of judicial resolution of the question of class

arbitrability.”161 The court held that the incorporation of the AAA rules was a “daisy-

chain” that required the court to jump from the leases, to the AAA rules, to the

Commercial Rules – which deal with basic procedural issues arising out of bilateral

arbitration proceedings – and finally to the Supplementary Rules, which are not even

157 809 F.3d at 754.

158 Id. at 753-54.

159 Id. at 758-59.

160 Id. at 759-60.

161 Id. at 761.


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referred to in the Commercial Rules.162 Based on this reasoning, the court concluded

that the leases did not include the required “express contractual language

unambiguously delegating the question of [class] arbitrability to the arbitrator[s].”163 The

Third Circuit affirmed the district court’s order granting Chesapeake’s motion for

summary judgment, but declined to express an opinion on Chesapeake’s second issue

on appeal regarding the “clause construction” inquiry.164

B. Scout Petroleum II and Ostroski

Following the decision by the Third Circuit in Scout I, the district court was tasked

with addressing whether the contracts permitted class arbitration, or whether only

individual or bilateral arbitration was permitted.165 The Scout II court noted that in

Chesapeake Appalachia, L.L.C. v. Ostroski, the court had held that class arbitration was

not permitted.166 In Ostroski, the lease had an arbitration provision that was nearly

identical to that addressed in the Scout cases.167 The court in Ostroski held that class

arbitration was not permissible under the lease because United States Supreme Court

jurisprudence is clear that class arbitration is only permissible where both parties

consent, and here, the lease was silent as to class arbitration.168 The court in Scout II

162 Id.

163 Id. at 763.

164 Id.

165 See Chesapeake Appalachia, L.L.C. v. Scout Petroleum, L.L.C., 2017 WL 1541659 (M.D. Pa. Apr. 28, 2017) (“Scout II”).

166 Id. at *2.

167 199 F. Supp. 3d 912, 916 (M.D. Pa. 2016).

168 Id. at 916-17.


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adopted the reasoning in Ostroski and held that the leases only permitted individual or

bilateral arbitration rather than class arbitration.169 Scout filed an appeal to the United

States Court of Appeals for the Third Circuit on May 9, 2017.

C. Henceroth

Ohio federal courts have also addressed the arbitrability issue. In Chesapeake

Exploration, L.L.C. v. Henceroth, Chesapeake again filed a declaratory judgment action

against royalty owners seeking a declaration that 1) a court, and not an arbitrator,

decides whether class arbitration is available, and 2) the arbitration must proceed as

individual arbitrations, and not an arbitration on a class-wide basis.170 The royalty

owners agreed that the court was to decide whether class arbitration may be imposed,

and Chesapeake filed a motion for summary judgment seeking a declaration that class

arbitration is not available under the leases.171 The court concluded the dispute was

governed by the Federal Arbitration Act (“FAA”) because the leases substantially affect

interstate commerce.172 The court noted that, “under the FAA, when an arbitration

provision is silent as to the availability of class arbitration, a court may not impose it.”173

Thus, class arbitration was not available under the leases.174 The court further held that

even if Ohio arbitration law applied, the outcome would be the same, noting that several

169 Scout II, 2017 WL 1541659 at *5.

170 2016 WL 5661611, *1 (N.D. Ohio Sept. 29, 2016).

171 Id.

172 Id. at *5.

173 Id.

174 Id.


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recent cases in the Ohio Court of Appeals have agreed that when an arbitration

provision is silent as to class arbitration, it is left to the judiciary to decide.175

VII. Pennsylvania Zoning Challenges

The Commonwealth Court of Pennsylvania recently issued a decision that could

increase the use of local ordinances to challenge oil and gas activities.

A. Ivy Lee

On June 27, 2017, the Commonwealth Court decided that Section 617 of

Pennsylvania’s Municipalities Planning Code (“MPC”) permits a private cause of action

to enforce a municipal ordinance.176 In Ivy Lee, the plaintiffs sought to enforce a Taylor

Township Land Development Ordinance against defendant’s construction activities

even though the township refused to enforce the ordinance in that circumstance.177 At

issue was the Section 617’s language permitting a private cause of action for a

“violation of any ordinance enacted under this act,” and plaintiffs argued that “this act”

refers to the entire MPC, not just the zoning article, while defendants maintained the

private cause of action applies only to zoning violations.178

Based on the plain language of Section 617, the Commonwealth Court held that

the term “this act” within the phrase “violation of any ordinance enacted under this act,”

175 Id. at *6-7.

176 Smith v. Ivy Lee Real Estate, LLC, No. 111 C.D. 2017, 2017 WL 2774086, at *2 (Pa. Commw. Ct. June 27, 2017).

177 Id.

178 Ivy Lee, 2017 WL 2774086, at *2 (citing 53 P.S. § 10617).


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referred to the MPC has a whole, rather than the merely the zoning article under which

Section 617 is found.179 The Court explained “the fact that section 617 is contained

within the zoning article of the MPC is not dispositive,” and “elsewhere in Article VI, the

phrase ‘ordinance enacted under this act’ is qualified to specify a zoning ordinance,

which is in stark contrast to the language of section 617 which simply pertains to a

‘violation of any ordinance enacted under this act.’”180 Lastly, the Court clarified that

although Section 617.2(c) prohibits parties other than municipalities from seeking civil

penalties for zoning violations, Section 617.2 does not preclude private actions seeking

injunctive relief for an alleged zoning violation.181

Although oil and gas activities were not the target of the private action in Ivy Lee,

the decision provides an additional tool for plaintiffs seeking to challenge oil and gas

development in the future. Because many oil and gas activities are subject to local

ordinances enacted under the MPC, the ordinances may be exposed to private

injunctive actions in the future.

VIII. Ohio Lease Interpretation

This year, Ohio courts have issued decisions providing guidance for certain lease

interpretation issues, including the applicability of Pugh Clauses and the analysis of

production “in paying quantities.”

A. Summitcrest 179 Ivy Lee, 2017 WL 2774086, at *3.

180 Id.

181 Id.


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In Summitcrest, the Court of Appeals of Ohio for the Seventh District

(Columbiana County) considered whether a lease’s Pugh Clause applies to terminate a

lease as to the lands outside of a well unit during the primary term of the lease.182

Plaintiff-Appellee argued that the Lease’s Pugh Clause clearly provided that the Lease

terminated as to the lands outside of the 40 acre well unit, while Defendant-Appellant

maintained that the language of the Pugh Clause was taken out of context and did not

apply while the Lease was still in its primary term.183

Explaining the basics of a Pugh Clause, the Court stated the clause “protects the

lessor from a situation where a large tract of land is held under the lease by virtue of oil

or gas production on a very small portion,” and therefore “maintains a lease only as to

that part of the lease acreage actually producing and severs producing units from non-

producing units, despite the fact that leased lands are normally considered

indivisible.”184 However, the Court noted that the particular language of the Pugh

Clause at issue stated “[a]t the expiration of the primary term and any extension

thereof . . . this Lease shall terminate as to any portion of the Leased Premises located

outside of the surface boundaries of any [producing] well if at any time Lessee allows a

period in excess of one (1) year to elapse between the completion/abandonment of a

well and the commencement of actual drilling operations on an additional well.”185

182 Summitcrest, Inc. v. Eric Petroleum Corp., 60 N.E.3d 807,813 (Ohio Ct. App. 2016).

183 Id.

184 Id. at 814.

185 Id. at 814-15.


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Although the lower court relied on the “at any time” language of the Pugh Clause

to hold the lease had terminated, the Court of Appeals explained “the trial court's

interpretation that the Pugh Clause can be triggered at any time thwarts the maxim that

every word in a contract should be given meaning” by ignoring the “primary term”

language.186 Further, the Court of Appeals stated the trial court’s interpretation renders

the habendum clause meaningless, because under the habendum clause, the lessee

has no production requirements.187 Therefore, the Court stated “the fourth sentence of

the Pugh Clause must be read as part of the overall scheme presented in the

Addendum and in harmony with the lease as a whole,” and held that the “Termination

Date is the only trigger for all Pugh Clause provisions,” and accordingly, it does not

apply during the primary term or any extension thereof.188

Finally, with regards to equitable tolling of the lease for the duration of the suit

challenging the lease, the Summitcrest court clarified that in a recent case, where

landowners prevailed in trial court in challenging the validity of a lease, the Court

equitably tolled the lease terms during the pendency of the appeals process.189

Therefore, the Court held that in “order to preserve the status quo, the trial court should

have tolled the primary term of the lease as to the entire disputed acreage,” rather than

tolling the lease as to the unit acreage only, so the Court modified the trial court’s

186 Id. at 816.

187 Id.

188 Id.

189 Id. at 818 (citing State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, 47 N.E.3d 836 (Ohio Ct. App. 2016)).


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judgment “so that the Lease is equitably tolled as to the entire 2,734.496 acres, not just

the 640 acres contained in the 1–35 well unit.”190

B. Paulus

The Court of Appeals of Ohio for the Seventh District (Monroe County)

determined in further detail which activities by a well operator must be factored into the

equation for determining whether a well is producing in paying quantities.191 In Paulus,

lessees alleged that the lease should be terminated based on the lessor’s failure to

produce oil or gas in paying quantities.192 Although the lower court found that the well

was not producing in paying quantities, the lessors argued that the court’s analysis

should have included the amount paid to replace a pump in 2013 as an operating

expense or an excludable “reworking” expense, should include royalties as operating

expenses, should give the lessee's judgment on paying quantities proper weight, should

not considered the lessee's motive to continue producing even at low amounts merely to

preserve the lease rights for speculation, and should consider low market prices.193

In addressing lessors’ arguments, the Paulus court first explained that the Ohio

Supreme Court has adopted the standard definition of paying quantities: “quantities of

oil or gas sufficient to yield a profit, even small, to the lessee over operating expenses,

even though the drilling costs, or equipping costs, are not recovered, and even though

190 Id. at 818.

191 Paulus v. Beck Energy Corp., No. 16 MO 0008, 2017 WL 2839567, at *9-10 (Ohio Ct. App. June 16, 2017).

192 Id. at *1.

193 Id.


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the undertaking as a whole may thus result in a loss.”194 The Court found that under the

Blausey equation, which compared lessee’s gross receipts with lessee’s operating

costs, “a lessee cannot report income . . . without first subtracting the royalties paid to

the lessor from income or adding the royalties to the operating expenses.”195 Regarding

which expenses are included in the operating expenses side of the Blausey equation,

the Court also held that non-recurring, capital investments, such as installing or

replacing pump equipment, is excluded from operating expenses, but labor directly

related to production is considered an operating expense.196

Finally, the Paulus court explained that generally, the Court will defer to the

operator’s good faith judgment when it comes to the “in paying quantities” analysis by

allowing the lessee to continue even though the operation as a whole does not profit.197

However, the Court stated it will only give such deference if “the income minus the

current operating expenses makes a profit,” and that low market prices did not account

for the declining production over time, noting that low market prices can be guarded

against by using the lease’s shut-in clause.198 Thus, the Court held that here, the lease

terminated due to a lack of paying quantities because the five-year period at issue did

not result in a profit, but instead rendered a loss of $551.51.199

194 Id. at *9 (quoting Blausey v. Stein, 400 N.E.2d 408 (Ohio 1980)).

195 Id. at *10 (explaining a “royalty paid to the lessor from the well's production (which is represented in the gross income figure) cannot qualify as” profit to the lessee over operating expenses).

196 Id. at *12.

197 Id. at *15.

198 Id. at *13-15 (emphasis added).

199 Id. at *17.


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C. Lang

In another case regarding the a lease’s requirement of production in paying

quantities, the Court of Appeals of Ohio for the Seventh District (Monroe County)

considered whether the lease terminated for failure to produce in paying quantities,

despite the fact that the lessee operated the well at a profit from 1988 through 2002 and

again from 2008 forward.200 Despite lessors’ arguments that the gaps in operation and

production of the well was due to pump malfunction and repairs and constituted merely

a cessation of operations, the Court stated the evidence showed that the well was not

profitable for 4-year periods at least twice, which cannot be considered temporary

cessation.201

Further, the Court cited to the Blausey paying quantities analysis, noting “while

the lessee has discretion to determine a well's profitability, the determination of whether

a well is profitable cannot be arbitrary,” so “courts impose a standard of good faith on

the lessee.”202 The Court explained Antero “claims that during 2005 and 2006 the Well

did not produce any gas because of the broken pump, but this does not account for the

other years. Daniel Weiss himself called the Well a bad well and admitted it was not

profitable from 1983 through 2007,” and held the lease was terminated, because “any

200 Lang v. Weiss Drilling Co., 70 N.E.3d 625, 632 (Ohio Ct. App. 2016)

201 Id. at 631 (noting that “other courts have held that a lease expires when there is no oil or gas produced for two years or more).

202 Id. at 632.


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evidence that the Well has been profitable from 2008 to the present would be irrelevant

because the Lease would have terminated prior to 2008 due to lack of production.”203

D. Pennsylvania Comparison to Lang: Novosel

A Pennsylvania court recently addressed a similar, but distinguishable, situation

to the Lang case in Ohio. In Novosel, the Superior Court of Pennsylvania affirmed the

lower court’s ruling that a lease would not be terminated based on a lack of production

where the plaintiff failed to present evidence to prove that there was no production

during the period of time at issue.204

The Superior Court agreed with the lower court’s reasoning, which explained,

“Although Jedlicka is not on point with the instant case in all respects, it is on point in

that a lessor was seeking to terminate an oil and gas lease for lack of production, the

essence of the issue before this Court.”205 Further the lower court noted it had “been

asked by the Defendants to find circumstantially that if there was production during all

periods of time from which records can be found, i.e.[,] up to 1986 and after 2005, that

production must have occurred in the interim,” but “cannot decide the issue on

speculation. Such evidence does not satisfy the test of circumstantial evidence that the

facts proven must lead to the existence of the facts in dispute. On the other hand, the

Court cannot speculate that a lack of records of oil or gas sales to a purchaser and a

failure of one party to receive royalties constitute sufficient evidence of non-

203 Id.

204 Novosel v. Seneca Res., No. 1704 WDA 2014, 2016 WL 237954, at *5 (Pa. Super. Ct. Jan. 20, 2016).

205 Id.


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production.”206 The Superior Court emphasized that the plaintiff challenging the lease

had the burden to prove a lack of production in paying quantities, but she failed to do

so, and therefore affirmed dismissal of the claim.207

IX. Compensation for Damages Arising from Drilling Operations

A. Bickett v. Countrymark Energy Res., LLC

In Bickett v. Countrymark Energy Res., the Western District of Kentucky clarified

the available damages in an action brought by the owner of the surface area against the

owner of the underlying mineral rights.208 The case arose from crop damage caused by

seismic testing performed by a third party contracted by the mineral rights owner.209

Plaintiffs sought compensation for: (1) damage to crops due to the seismic testing; (2)

use of more surface area than is reasonably necessary due to the number of access

roads and well sites; (3) use of more surface area than is reasonably necessary due to

electric poles and guywires; (4) burial of the electric lines and poles because they are

an unreasonably dangerous use of the property; (5) replacement of gates on the

property that are unreasonably and negligently maintained; (6) replacement and

removal of pipe bridges on the property that are unreasonably and negligently

maintained; and (7) annual payments to maintain the access roads and well sites by

spraying and mowing to maintain the noxious vegetation that negatively affects

206 Id.

207 Id. at *6.

208 No. 415CV00093GNSHBB, 2017 WL 1228418 (W.D. Ky. Mar. 31, 2017).

209 Id. at *3.


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Plaintiffs' crop yield.210 The Plaintiffs further maintained that the Defendant’s negligence

“unreasonably and unnecessarily interfere[d] with Plaintiffs’ right to use the surface

estate.”211

As a threshold matter, the court first reconfirmed that under Kentucky law, “[a]n

oil and gas lessee, or owner of minerals, unless expressly limited by the terms of the

lease or conveyance, has the right to use and occupy so much of the surface as may be

necessary and reasonably convenient in the exercise of his rights in operating his

facilities and marketing the oil and gas, even to the preclusion of any other surface

possession.”212 But that, “the owner of minerals may become liable to the surface

owner if the surface owner suffers injury from the mineral owner’s negligence.”213

The court held that the Plaintiffs’ claims regarding access roads were properly

characterized as “improvements to the property” and that because the claims did not

arise out of a contract, the five-year statute of limitations for a claim for property damage

would apply.214 The court rejected Plaintiffs’ characterization of the access roads and

wells as “continuing trespass,” holding that under Kentucky law, the access roads and

wells were permanent structures and thus the statute of limitations began to run “from

the date the structure was completed and its operations commenced, or the date of the

210 Id.

211 Id.

212 Id. (citing Lindsey v. Wilson, 332 S.W.2d 641, 642 (Ky. 1960).

213 Id. at *4.

214 Id. at *5.


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first injury, or the date it became apparent that injury would occur.”215 The court also

held that Plaintiffs’ claims against the placement of power lines were barred for the

same statute of limitations reasons.216 Additionally, the court rejected Plaintiffs

contention that over-head powerlines constitute an ultrahazardous activity.217

In regards to the maintenance of the access roads and well sites, the court

rejected Plaintiffs’ contention that they were entitled to damages stemming from

Defendant’s failure to mow and spray vegetation at the wellheads.218 The court held

that it is “incumbent upon Plaintiffs, as owners of the surface rights, to mow or spray the

weeds” and that to hold otherwise would “impute duties on Defendant that do not exist

in law or per the deeds.”219

X. Farmout Agreements

A. EQT Prod. Co. v. Magnum Hunter Prod. Co.

In EQT Prod. Co. v. Magnum Hunter Prod. Co., the Eastern District of Kentucky,

ruling on summary judgement motions, was asked to rule on whether royalty provisions

requiring the payment based on the sale of “oil and/or gas” applied to natural gas liquids

(“NGLs”).220 The dispute arose from eleven Farmout Agreements (“FOAs”) entered into

215 Id. (citing Wimmer v. City of Ft. Thomas, 733 S.W.2d 759, 763 (Ky. App. 1987).

216 Id. at 8.

217 Id.

218 Id. at *11.

219 Id.

220 No. 5:16-CV-150-JMH, 2017 WL 3052979 (E.D. Ky. July 19, 2017), reconsideration denied, No. 5:16-CV-150-JMH, 2017 WL 3588238 (E.D. Ky. Aug. 18, 2017).


Paper 8 – 46

between EQT and Magnum Hunter. Under the FOAs, Magnum Hunter would develop

the resources and pay EQT a royalty based on “the sale of oil and/or gas produced.”221

After entering into the FOAs, Magnum Hunter, in an effort to comply with FERC

requirements, built a processing plant where gas from the FOA wells was processed

with regard to NGLs.222 EQT asserted that it was owed royalties from the sale of NGLs

whereas Magnum Hunter argued that NGLs did not fall under the scope of “oil and/or

gas.”223

When determining whether “oil and/or gas” included NGLs, the court considered

the FOAs in three separate subsets based on the contract language.224 First, the court

addressed the FOAs that defined “oil well” and “gas well” and attached and incorporated

an MOA defining “oil and gas.”225 This first subset relied on Ky. Rev. Stat. Ann. §

353.010(10) to define “gas well” and the court held that while “the terms “oil well” and

“gas well” are not synonymous with the phrase “oil and/or gas,” they are closely

related.”226 Additionally, the court noted that the FOAs “clearly state that royalties are

only owed on substances produced from the subject wells.”227 The court held that

under the definition provided by Ky. Rev. Stat. Ann. § 353.010(10), NGLs were not

221 Id. at *1.

222 Id. at *3.

223 Id. at *4.

224 Id. at *5.

225 Id. at *6.

226 Id.

227 Id.


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within “oil and/or gas.”228 The court relied on similar reasoning to reach the same

conclusion for the second subset of FOAs which did not incorporate an MOA.229

The third and final subset of FOAs did not include a definition of “oil well” or “gas

well.”230 Faced with the lack of definition, the court construed the term “gas” in

accordance with its plain meaning.231 The court relied on Merriam–Webster's Dictionary

of English Usage to define “gas” as “a fluid (such as air) that has neither independent

shape nor volume but tends to expand indefinitely ” and that in contrast, “liquids” are

“neither solid nor gaseous.”232 Consequently, the court found that in accordance with its

plain meaning, “the term ‘gas’ . . . unambiguously excludes NGLs.”233

The court concluded that the FOAs did not require Magnum Hunter to pay EQT

any royalties in connection with the sale of NGLs.

XI. Conclusion

Given the broad based and varying nature of litigation issues that found their way

to the court room during 2016 and 2017, the dynamic body of oil and gas case law in

the Appalachian Basin should be continually monitored. The summaries provided

above may serve as a general starting point for certain issues in the future, but the

228 Id. at *7.

229 Id.

230 Id.

231 Id.

232 Id.

233 Id.


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ultimate status of the law in each jurisdiction will need to be researched and updated as

more time passes. Regardless, the Appalachian case law on important oil and gas

topics continues to evolve and grow as the shale plays in this region continue to mature.

Lucas Liben

[email protected]

Reed Smith LLP

225 Fifth Avenue

Pittsburgh, PA 15222

www.reedsmith.com

Travis L. Brannon

[email protected]

K&L Gates LLP

210 Sixth Avenue

Pittsburgh, PA 15222

www.klgates.com

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