Twice I have successfully represented large groups of landowners regarding the proper calculation of landowner royalties. The first case was Charton v. MB Operating Co. Inc., (1990 CV 110417), which involved about two thousand landowners in Tuscarawas County, Ohio; the matter was filed as a class action. In that case, it was alleged that MB Operating was deducting about 25% of landowner’s natural gas royalties to cover its costs of transporting and marketing same. Because MB Operating used a number of different lease forms, and because those forms did not have consistent language which addressed how royalties were to be calculated, there was a concern that the class members claims might not meet the commonality requirement under class action rules. The Court did ultimately certify the class and the matter was settled eventually. The class members received checks representing a significant percentage of the deductions that had been made over a period of several years.
More recently, I filed another class action suit on behalf of about 800 landowners who were disputing the manner in which their landowner royalties were being calculated. This case was Campbell v. Equitable Production Co. (2004 CV 993), and was filed in Mahoning County, Ohio. This case, rather than dealing with deduction of transportation or marketing costs, dealt with the issue of whether a price set out in a long term sales agreement entered into by the lessee was equivalent to the “field market” or “wellhead” prices mentioned in the leases. Again, this matter was settled, with significant benefits being paid out to the class members.
Future Utica Landowner Royalty Class Action Litigation
It is almost certain that the royalties Utica drillers pay landowners will become the subject of lawsuits like the ones I handled above. Those cases involved a tremendous amount of effort and time. The lawsuits I see on the horizon will involve considerably more work for a number of reasons. The first reason has to do with geology: because the oil and gas produced from shallower wells is immediately marketable, it didn’t require significant processing or transfer from one party to another before it was ultimately sold. Only a few parties would have relevant documentation about costs and fees they may have deducted from landowner royalties. Compare that to the gas and liquids coming from deeper Utica wells. This product needs to be transported significant distances and then treated and fractionated before it can be sold, and as a result, it might change hands several times before it is ultimately sold. This makes proving costs and fees much more time-consuming and difficult.
Making matters even more complicated, it seems apparent that the products from shale wells may be sold at various points between the wellhead and points of sale by the downstream buyers of the refined products. This practice, particularly where the seller is selling to an entity that it has an ownership interest in, should cause one to be concerned that the sale is not an “arms length” transaction and not a true indicator of the price upon which the landowner’s check should be calculated.
Chesapeake Energy recently settled a lawsuit for nearly $8 million for improperly paying landowner royalties in Pennsylvania. I expect we will be seeing similar suits filed on these issues here in Ohio once we have significant amounts of landowners receiving their royalty checks.
About Eric Johnson
ERIC C. JOHNSON attended Ohio State University, earning a degree in economics and then graduated from the University of Cincinnati Law School in 1983. His areas of practice are personal injury law, real estate, oil and gas, contracts, litigation and appeals.