Jim Barrett stands next to a wellpad on his farm in Bradford County. He says Chesapeake Energy, which drilled four natural gas wells on his land, is cheating him out of royalty money. He is part of a class-action lawsuit against the company, which is separate from a case involving Chesapeake that's being pursued by the state Attorney General.
Marie Cusick / StateImpact Pennsylvania
Marie Cusick / StateImpact Pennsylvania
Jim Barrett stands next to a wellpad on his farm in Bradford County. He says Chesapeake Energy, which drilled four natural gas wells on his land, is cheating him out of royalty money. He is part of a class-action lawsuit against the company, which is separate from a case involving Chesapeake that's being pursued by the state Attorney General.
When natural gas drillers started rolling into Pennsylvania during the shale boom over a decade ago, some landowners got their hopes up.
âDepending on the amount of acreage you had, people had big expectations and small expectations,â said Jackie Root, a consultant and membership director of the Pennsylvania Oil and Gas Landowner Alliance.
Some farmers who leased their mineral rights were able to pay cash for new equipment or barns. Some landowners got enough money to put their kids through college.
But for many, those expectations never materialized.
âItâs like theyâre led up to the river and then actually canât get in there to drink,â Root said.
Some say the drillers arenât paying them what theyâre owed. Many have joined class action lawsuits in an attempt to recover their losses. Some have reached settlements with companies, while others are still waiting on a final decision.
Under the direction of former Gov. Tom Corbett and state Sen. Gene Yaw (R-Lycoming), then-Attorney General Kathleen Kane started investigating one driller, Chesapeake Energy, in early 2014. Her office filed a lawsuit in late 2015, alleging the company deceived landowners into leasing their mineral rights. The office said the case could affect more than 4,000 Pennsylvania landowners who signed leases with Chesapeake.
Now, after years of delays, a case in Pennsylvaniaâs Supreme Court could determine whether the AGâs case can go forward.
At the heart of that case is who is protected by the stateâs Unfair Trade Practices and Consumer Protection Law.
A decision siding with the AG would allow the case to finally be argued in Bradford County Court, where it originated. If they win there, royalty owners could have another tool when disputing contracts and payments with gas companies. Landowners hope that tool will ultimately help them get paid what they claim theyâre owed.
Under a traditional reading of the consumer protection law, the party leasing the rights would get the protection. In this case, that would be the gas company.
But the AG and interested parties say the real issue is bargaining power. And people typically hold less than big companies.
Root said drillers âhold all the cards, all the power and pretty much all the information,â which puts the landowner at a disadvantage. Ross Pifer, director of the Center for Agricultural and Shale Law at Penn State, said the case is a matter of how the law is viewed.
âYou can look at the plain language of the statute. You can also look at the purpose of the statute,â he said. âAnd the purpose of the statute is to level the bargaining power.â
The case
The AGâs office says Chesapeake Energy, Anadarko Petroleum and subsidiaries of both companies used deceptive, misleading, and unfair tactics in securing natural gas leases from landowners. The office wants to argue the case under the consumer protection law and plans to pursue antitrust remedies under the same law.
The Supreme Court is being asked to decide whether the AG can use the law to argue this instance. The court also has the option of saying both parties are wrong and could present an alternative.
Oral arguments done via video conference before the Supreme Court justices on May 27 focused on the technical language of the consumer protection law and the General Assemblyâs intent in enacting it.
Attorneys for the gas companies said the law doesnât apply in this case, because the landowners are sellers, not consumers.
Stephen Cozen, an attorney representing Anadarko, said the company is not distributing a product or service, but is leasing mineral rights from landowners. He said that means Anadarko is not engaged in trade and commerce as defined by the consumer protection law, and so its terms are inapplicable.
Senior Deputy AG Howard Hopkirk said the law is not limited to sellers, but may be used against any person engaged in unfair and deceptive trade practices. He said reducing the lawâs scope would diminish the rights of Pennsylvanians.
Justice Christine Donohue seemed to question the AGâs approach, asking why the office didnât bring the case under more specific terms.
âWhy has the Attorney General not taken the position that the economic reality of this transaction is that the gas extractors are selling their services as gas extractors?â Donohue asked, adding she did not think an attempt to get the broadest possible interpretation of the law would be legitimate.
When Justice Kevin Dougherty questioned what was deceptive about the companiesâ business practices, Hopkirk said the companies did not disclose the level of competition and that landowners might have been able to get higher prices for their leases.
âYour underlying premise is that landowners are ignorant to what theyâre doing with their land?â Dougherty asked.
âThey would be ignorant no matter how sophisticated they are regarding the contractual relationships between Chesapeake and Anadarko,â Hopkirk said.
About a month after the Supreme Court arguments, Chesapeake Energy filed for Chapter 11 bankruptcy, citing insurmountable debt.
AG Josh Shapiro called the filing âyet another tactic to delay and deceiveâ royalty owners.
âThe facts are clear â Chesapeake owes the good people of Bradford, Susquehanna counties millions of dollars,â Shapiro said in a statement. âThey can run to bankruptcy court but they canât hide from us.â
The stakes
In a brief supporting Chesapeake and Anadarko, industry groups Marcellus Shale Coalition, Pennsylvania Independent Oil & Gas Association, and American Petroleum Institute said upholding a lower courtâs decision to let the case proceed under the consumer protection law âwill introduce a great deal of uncertainty and complication into oil and gas leasing transactions.â
They say the state legislature has had opportunities to add consumer protection language into laws governing oil and gas leases, but has declined. They argue âthe courts should not legislate where the General Assembly has elected not to do so.â
The AG alleges the companies convinced landowners to lease the mineral rights to their land with an expectation the landowners would be paid royalties from the oil and gas extracted. But because of what the AGâs office says are misrepresented post-production costs, many royalty owners have seen low payments, no payments, and even negative balances. The office also alleged the companies had a non-compete agreement so landowners had less bargaining power.
A 1979 state law guarantees landowners a minimum one-eighth, or 12.5 percent, of the royalties earned from the oil or gas extracted from their land. But the definition of the guaranteed minimum is in dispute. Jackie Rootâs group is advocating legislation in Harrisburg to clarify, but that would only apply to future leases.
Dan Brier, an attorney representing Chesapeake, argued that if the Supreme Court lets this case move forward, the consumer protection law could become a general, all-purpose business regulation that could be invoked by any county district attorney.
âThis is a test cast to see if CPL is so expansive that it can be invoked by the commonwealth to seek antitrust remedies and seek relief on behalf of sellers, not consumers,â Brier said.
Pifer, at Penn State, said he doesnât see how the ruling in this case would affect transactions outside oil and gas leases, unless there was another such instance of uneven bargaining power.
Pifer said if the court allows the case to go forward under the consumer protection law, it could have a big impact for landowners. Then, courts would not be limited to the contractâs language in disputes, but could also look at the circumstances surrounding a lease, such as what was said during the contract negotiation.
Because leases are often transferred between companies, Pifer said they could be on the hook for previous negotiations, and not be able to rely solely on the contract language in future disputes.
Dean of the Creighton University School of Law Joshua Fershee has watched other cases against oil and gas companies play out in states such as Michigan and West Virginia. He said he hasnât seen the Pennsylvania AGâs angle used specifically before.
He noted oil and gas leases are stylistically very similar to what consumer protection laws were designed for, giving the example of a traveling salesman. The salesman shows up on a doorstep offering to sell something, like insurance, which might not have any value. In the case of gas leases, the person showing up on the doorstep is offering to buy something, but the gas companies are still the aggressors in the situation.
But he was unsure of the caseâs potential impact.
âI frankly donât see this as one of the bigger risks to shutting down oil and gas development,â Fershee said.
He said, if the case does not go forward, itâs possible the legislature could take action.
