6th Circ. Backs Chesapeake Win in Landowners' Royalties Suit

Kirkland partners Daniel Donovan and Ragan Naresh achieved a victory for Chesapeake Energy Corp. in a case involving allegations by royalty owners that Chesapeake underpaid royalties under oil and gas leases.

The Sixth Circuit on Thursday affirmed an Ohio federal court's dismissal of a class action brought by landowners claiming a Chesapeake Energy Corp. unit shorted them on oil and gas royalties, ruling that the company's actions "conform to the language of the leases."

Dale H. Henceroth, Marilyn S. Wendt and eight other landowners filed suit in 2015, alleging Chesapeake Exploration LLC had breached its contracts with them by underpaying their owed royalties. Specifically, the landowners said Chesapeake should be paying them royalties based on a higher price associated with the later-enhanced and more expensive gas further down the line.

But last September, U.S. District Judge Benita Y. Pearson threw out the suit, finding that Chesapeake was paying landowners "exactly what the parties negotiated for" in their leases.

And a Sixth Circuit panel on Thursday agreed, rejecting a slew of the landowners' arguments on appeal, including that the contract doesn't explicitly cover them in Ohio and that the gas sales from Chesapeake to an affiliate down the line are invalid because the contract is unsigned.

The contract's title refers to "all states," and that's bolded and underlined at the top, the panel said. Chesapeake has consistently treated the contract as covering Ohio, and "nearly ten years into this relationship, it's too late to change that reality now," the Sixth Circuit said.

Additionally, contracts need not be signed or even in writing to be enforceable, the panel said.

"A consistent practice of purchase orders, delivery and money exchanged ... suffices," it said. "That remains true even if the signature page of the contract remains blank."

According to the suit, Chesapeake leases land from the certified class members to produce and sell any oil and natural gas on the property. That gas is then sold at the wellhead to an affiliate, Chesapeake Energy Marketing LLC, which enhances the gas and then sells it at a higher price to third-party purchasers. And that affiliate foots the bill for post-production costs rather than Chesapeake, the landowners said.

They argued they were entitled to royalty payments based on the higher downstream price paid to the affiliate without cost deduction as opposed to just the proceeds Chesapeake earned from the sale of the oil and gas at the wellhead.

But Judge Pearson granted the company's motion for summary judgment, holding that the lease language "is plain and unambiguous and the evidentiary record is clear: Chesapeake paid plaintiffs 1/8th of the proceeds it received from the sale of the oil and gas produced and marketed from the leaseholds."

She added that there are "no genuine, material facts in dispute."

Chesapeake has faced a number of landowner suits in recent years, including a set of consolidated suits alleging a bid-rigging scheme between Chesapeake and Sandridge Energy Inc. to suppress prices in the Anadarko Basin. In 2018, Chesapeake and its co-founder agreed to shell out $6.97 million to oil and gas royalty owners to settle antitrust claims filed on behalf of thousands of landowners claiming the company conspired to fix prices on their leases.

Counsel for the parties didn't immediately return requests for comment Thursday.

U.S. Circuit Judges Alice M. Batchelder, Julia Smith Gibbons and Jeffrey S. Sutton sat on the panel for the Sixth Circuit.

The class is represented by James A. Lowe of Lowe Eklund & Wakefield Co. LPA and Robert C. Sanders of the Law Office of Robert C. Sanders.

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

The case is Henceroth et al. v. Chesapeake Exploration LLC, case number 19-3942, in the U.S. Court of Appeals for the Sixth Circuit.