Alert: Judge Rules in Favor of Pa. Natural Gas Industry



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On October 6, 2010, United States District Judge John E. Jones II issued an important order in favor of Pennsylvania's natural gas industry. Judge Jones dismissed the complaints in three cases brought under the Pennsylvania Guaranteed Minimum Royalty Act, 59 P.S. 33 et seq. (GMRA).1 In each case, the plaintiffs sought to invalidate oil and gas leases under the GMRA despite the Pennsylvania Supreme Court's recent ruling in Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010), in which it held that the GMRA permits calculation of royalties at the wellhead. In an attempt to circumvent Kilmer, the plaintiffs argued that application of the ruling should be limited to cases involving royalty clauses and post-production costs identical to those at issue in Kilmer. The plaintiffs also urged application of the unique standards of linguistic precision in the drafting of royalty clauses created by the West Virginia courts in Estate of Tawney v. Columbia Natural Gas Resources, 633 S.E.2d 22 (W. Va. 2006).

In a clear and sweeping decision, Judge Jones rejected all of the plaintiffs' arguments:

Though the essence of Plaintiff's argument is that Kilmer's holding should be narrowly applied, it is our view that Kilmer is properly read broadly in light of the fact that the Pennsylvania Supreme Court granted extraordinary jurisdiction to resolve the purely legal question of whether post-production costs are proper under Pennsylvania oil and gas law. The Pennsylvania Supreme Court recognized the more than seventy lawsuits, including the instant matters, pending in the Pennsylvania State and Federal Courts and the potential for stymied economic development when deciding to grant extraordinary jurisdiction to resolve this legal issue once and for all. Applying common sense to the matter, it is evident that the Pennsylvania Supreme Court surely considered that all of the leases that would be affected by their decision were not identical, thus their holding cannot be strictly applied only to leases that are on all fours to the lease in Kilmer. Such an application of Kilmer, or, rather, a non-application of Kilmer, defies both common sense and the concept of precedent.

We cannot imagine that the Pennsylvania Supreme Court, after granting expedited consideration and jurisdiction, meant to render a holding so narrow as to invite its consideration of myriad other cases involving leases that were not entirely identical to the Kilmer lease. We empathize with Plaintiffs? desire to escape what they consider to be bad bargains. But they have put too fine a point on ,Kilmer in aid of voiding their leases. Both the Pennsylvania Supreme Court, and this Court, recognize the need for finality. A holding contrary to the one we render today would trigger havoc in a multi-billion dollar industry. More importantly, it would be in error.

Counterclaims by certain of the defendants seeking a judicial extension of the primary terms of the subject leases due to the time consumed by litigation survived preliminary attack by the plaintiffs and will proceed before Judge Jones.

The Keeton Group LLC is represented in the cases by Steptoe & Johnson PLLC attorneys Russell L. Schetroma, Brian J. Pulito, and Nathaniel I. Holland.

1 Lauchle, et al. v. The Keeton Group, et al., USDC-MDPa 4:08-CV-1868; Gary K. Beach, et al, v. MK Resource Partners II, L.P., USDC-MDPa 4:08-CV-1950; and Andrew Hooker v. The Keeton Group LLC, et al., USDC-MDPa 4:08-CV-2091.