No Class Arbitration for Chesapeake's Leases, Judge Says

A Pennsylvania federal judge ruled Friday that Scout Petroleum LLC was not entitled to class arbitration in a long-running gas lease royalty dispute with Chesapeake Appalachia LLC that earlier saw the Third Circuit assert that this decision rested with courts unless a contract clearly designated otherwise.

U.S. District Judge Matthew Brann concluded that Scout could only pursue individual arbitration with Chesapeake on its claim that the company wrongly reduced royalties it owed from Marcellus Shale drilling.

Scout had sought arbitration that also included a putative class of thousands of Pennsylvania landowners.

“The contracts at issue here clearly allow for arbitration; but what the plain language of the leases allow is individual or bilateral arbitration, not a class arbitration,” Judge Brann said in the opinion. “The language in this matter is written in the singular, which indicates individual or bilateral arbitration, i.e.: ‘in the event of a disagreement between lessor and lessee concerning this lease.’”

Scout, which owns interests in a number of Marcellus Shale gas leases, launched arbitration proceedings in March 2014 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 the next month, alleging the arbitration provisions in the leases authorized only individual arbitration, not class arbitration, and asked 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 then went to the appeals court, arguing that its case was differentiated by language in the leases that ultimately linked in the American Arbitration Association’s “supplementary rules,” one of which stipulates that the class arbitration question would be decided by arbitrators.

But in January 2016, a panel disagreed, giving the authority to courts unless parties “clearly and unmistakably” delegated it to arbitrators. Scout subsequently asked the U.S. Supreme Court to hear the matter, but it was rebuffed in October.

That left Judge Brann to rule on the suitability of class arbitration. In doing so, he relied on a case decided by a colleague in Pennsylvania’s Middle District that dealt with an identical Chesapeake lease. In that case, Judge John E. Jones III determined that class arbitration was not permitted.

“It would be extraordinary indeed for me to hold differently than did Judge Jones when presented with the same lease language, from the same plaintiff, in the same court,” Judge Brann said. “Moreover, and perhaps more importantly, I agree with Judge Jones’s holding and sound legal reasoning.”

Attorney Robert Pratter, who represents Scout, said the company intended to appeal the decision.

An attorney for Chesapeake declined to comment on the ruling Monday.

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 Michael Coren 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.

REPRINTED WITH PERMISSION FROM THE MAY 1, 2017 EDITION OF LAW360 © 2017 PORTFOLIO MEDIA INC. ALL RIGHTS RESERVED. FURTHER DUPLICATION WITHOUT PERMISSION IS PROHIBITED. WWW.LAW360.COM