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Pa. Court To Decide Class Arbitrability In Gas Lease Row

A Pennsylvania federal judge on Thursday gave a boost to Chesapeake Appalachia LLC in its dispute with Scout Petroleum LLC over gas lease royalties, saying that recent Third Court precedent determined that the court, rather than arbitrators, should decide whether class arbitration is permissible in the case.

U.S. District Judge Matthew W. Brann granted Chesapeake’s motion for summary judgment, finding that the Third Circuit’s ruling in Opalinski v. Robert Half International Inc. in July required the court to decide whether Scout’s allegations that Chesapeake shorted the royalties it owed were subject to class arbitration.

The judge noted that he had been preparing an opinion and order in the case when the parties decided, without contacting the court, to take the question to the American Arbitration Association, which ruled that it should decide the issue of class arbitrability and that the lease contract permitted class arbitration.

“The court had every expectation of crafting a detailed opinion as to why Opalinski was clearly controlling precedent that it would follow in rendering its decision on this matter,” the judge wrote. “However, given the parties' extreme sense of urgency in resolving the underlying issue, the calculation of royalty payments pursuant to the terms of certain gas leases, together with the fact parties seem unwilling to permit the court time to fully detail and explain its decision, the instant order shall be entered without further commentary.”

Scout Petroleum had begun arbitration proceedings before the AAA to recoup royalties it claimed Chesapeake owed under leases that allow it to explore for gas in the Marcellus Shale Formation in Pennsylvania, the order states.

Scout, which owns interests in the leases, claimed that Chesapeake wrongly reduced the royalties it owed Scout — along with a putative class of thousands of landowners who also entered into leases with Chesapeake — based on post-production costs.

Chesapeake, a subsidiary of Chesapeake Energy Corp., filed a complaint in April, alleging the arbitration provisions in the leases authorized only individual arbitration, not class arbitration, and asking the judge to rule that the court should decide whether the companies' contract was arbitrable as a class proceeding.

The Third Circuit determined in July in its Opalinski ruling that whether an arbitration agreement permits classwide arbitration is a question for courts, not arbitrators, to decide, siding with Robert Half in its challenge to an arbitrator's ruling that its agreements with former staffing managers allowed class proceedings.

A three-judge appellate panel reversed a 2011 district court order telling an arbitrator to rule on whether classwide arbitration was available and a December 2012 order rejecting Robert Half's bid to vacate the arbitrator's ruling that the staffing agency's pacts with workers were misclassified as overtime-exempt permitted class arbitration.

Judge Brann had been preparing an opinion based on Opalinski when Scout notified him Tuesday of the arbitration panel’s decision, according to the order. The judge vacated that decision, finding it contrary to the Opalinski ruling, and denied Scout’s motion to dismiss the case.

Counsel for the parties was not available for comment late Friday.

Chesapeake is represented by Daniel T. Donovan, Ragan Naresh and Kate Wooler of Kirkland & Ellis LLP and Daniel T. Brier of Myers Brier & Kelly LLP.

Scout is represented by Stewart L. Cohen, Michael Coren, Jacob A. Goldberg, Alessandra C. Phillips and Robert L. Pratter of Cohen Placitella & Roth PC.

The case is Chesapeake Appalachia LLC v. Scout Petroleum LLC et al., case number 4:14-cv-00620, in the U.S. District Court for the Middle District of Pennsylvania.