Reed Smith Client Alerts

Authors: Nicolle R. Snyder Bagnell Thomas J. Galligan

The Pennsylvania Supreme Court has accepted a certified question in a case that may provide oil and gas operators some relief from the uncertainty surrounding landowner-initiated lease invalidation claims. In Harrison, et al. v. Cabot Oil & Gas Corp., the court will decide whether a lessee is entitled to an equitable extension of the primary term of an oil and gas lease when a lawsuit to invalidate that lease proves unsuccessful. The plaintiff landowners in the case argue that established Pennsylvania case law prohibits such an extension, while Cabot and the Amici urge the state’s high court to join the majority of oil and gas-producing jurisdictions in allowing the remedy.

In August 2007, the plaintiffs entered into an oil and gas lease with Cabot. Halfway into the primary term, the plaintiffs sued Cabot to invalidate the lease on several grounds, all of which were eventually dismissed by the United States District Court for the Middle District of Pennsylvania. Cabot then sought summary judgment on a counterclaim for equitable extension of the primary term, arguing that the uncertainty caused by the lessors’ legal action had deprived the company of valuable time in which to conduct drilling operations. The court declined to grant Cabot’s request, and Cabot appealed to the United States Court of Appeals for the Third Circuit. Amici, including oil and gas operators, filed briefs, and the Third Circuit certified the question to the Pennsylvania Supreme Court in July 2014.

In their recently filed brief, the plaintiffs-lessors argue that this is not an issue of first impression in Pennsylvania, citing Lauchle v. Keeton Group, LLC, 768 F. Supp.2d 757 (M.D. Pa. 2011) (relying on Derrickheim Co. v. Brown, 451 A.2d 477 (Pa. Super. 1982)). They claim these cases support a finding that the primary term of an oil and gas lease cannot be equitably extended as a result of litigation surrounding the lease, because a primary term’s length is governed exclusively by the express language in the lease. They argue that express language cannot be modified simply because the lease’s validity has been disputed, regardless of the outcome of that dispute. Lessors further argue that oil and gas companies have superior bargaining power in drafting leases, and do not need the courts to provide a special remedy for economic hardship arising from litigation.

Cabot and the Amici urge the Pennsylvania Supreme Court to join most other oil and gas-producing jurisdictions, including Texas, Louisiana, and Montana, in adopting the equitable extension rule. They argue that an equitable extension rule is especially necessary for formations like the Marcellus Shale, where production via horizontal or directional drilling requires greater planning and expense than the drilling of traditional wells. The Amici assert that dismissed lawsuits have cost natural gas producers in the state a significant portion, and at times the entire portion, of the primary terms that they bargained for when entering the lease. The loss of that time has hampered their ability to plan and produce from the land. They argue that permitting equitable extension of oil and gas leases is consistent with current Pennsylvania principles of equity, as well as Pennsylvania contract law granting relief for a party who is the victim of a repudiation of a contract.

The case is Harrison, et al. v. Cabot Oil & Gas Corp., before the Supreme Court of Pennsylvania, No. 75-MAP-2014. Briefing of the case is in progress.

 

Client Alert 2014-266