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3rd Circ. Says Courts Must Decide On Class In Royalty Fight

The Third Circuit said in a precedential opinion Tuesday that courts must determine whether disputes are subject to class arbitration unless parties “clearly and unmistakably” delegate this power to arbitrators, favoring Chesapeake Appalachia LLC in a gas lease royalty fight with Scout Petroleum LLC.

The appeals court upheld a lower court ruling that gave the courts power to determine whether Scout’s claim that Chesapeake wrongly reduced the royalties owed to not only Scout but also to a putative class of thousands of landowners could be resolved via class arbitration.

The panel acknowledged that the arbitration clause in the leases with Scout and the other landowners was imperfect, but said that they failed to conclusively demonstrate an agreement to let arbitrators decide the issue.

“It is not our role to ascertain whether one, among various competing interpretations of an arbitration agreement, is reasonable under ordinary principles of contractual interpretation, assess whether in hindsight a better arbitration agreement could have been written, or determine whether the arbitrators possess the power to decide other questions of arbitrability,” Judge Robert Cowen said in the opinion. “Instead, the court must determine whether the leases clearly and unmistakably delegate the specific question of class arbitrability to the arbitrators. We conclude that the leases do not meet such an onerous burden.”

Scout, which owns interests in a number of Marcellus Shale gas leases, launched arbitration proceedings to recoup royalties it claimed that Chesapeake owed. It claimed that Chesapeake improperly deducted  post-production costs in thousands of leases.

Chesapeake then filed a complaint in April 2014, 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.

That October, a federal district judge ruled in the company's favor, concluding that recent Third Court precedent determined that the court, rather than arbitrators, should decide whether class arbitration is permissible in the case.

Scout said that its case was differentiated by language in the leases that ultimately linked in the AAA’s “supplementary rules,” one of which stipulates that the class arbitration question will decided by arbitrators.

But the panel disagreed, saying that the link to these supplementary rules was more tenuous than Scout suggested.

“We ... agree with Chesapeake that this case implicates ‘a daisy-chain of cross-references’ — going from the leases themselves to ‘the rules of the American Arbitration Association’ to the commercial rules and, at last, to the supplementary rules,” Judge Cowen said. “Having examined the various AAA rules, we believe that the leases still fail to satisfy the onerous burden of undoing the presumption in favor of judicial resolution of the question of class arbitrability.”

An attorney for Chesapeake declined to comment on the ruling Wednesday and an attorney for Scout did not immediately respond to a request for comment.

Judges Patty Shwartz, Cheryl Anne Krause and Robert Cowen sat on the panel.

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

Scout is represented by Stewart L. Cohen, Michael Coren, 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 15-1275, in the U.S. Court of Appeals for the Third Circuit.