The Troubling Intersection of Royalty Disputes and Consumer Protection Laws

In the normal course, when landowners believe they have been underpaid royalties under an oil-and-gas lease, they sue individually. Most of the time the core claim is for breach of contract (notwithstanding that royalty-underpayment petitions are often littered with tertiary, throw-away causes of action that no one takes very seriously). As I have written in the past, however, decisions like this one from November out of the Fifth Circuit are making it easier for private litigants to ratchet up the pressure on operators by styling their complaints as putative class actions. This has the obvious potential to transform nuisance-value lawsuits into headline-making disputes that can involve thousands of lessors seeking a bigger piece of the pie from the working interest.

A new trend, emerging out of Pennsylvania and other states, is the aggressive use of consumer protection laws—not just by private litigants, but by attorneys general—to pursue operators for purported royalty underpayments. Pennsylvania is leading the charge. There, under Pennsylvania's Unfair Trade Practices and Consumer Protection Law, Attorney General Josh Shapiro has been doggedly pursuing Anadarko and Chesapeake on behalf of residents of his state for royalties that his office claims were burdened with excessive transportation and other post-production costs.

A Pennsylvania trial court had given the green light to Shapiro's office to move forward with its consumer-protection case, but put the litigation on ice during the pendency of an interlocutory appeal. Earlier this month, a Pennsylvania appeals court squarely sided with the Attorney General. Among other things, the appellate court concluded that mineral leases constitute precisely the kind of "trade or commerce" that the state's consumer protection law is designed to police. So the fight is back on.

Shapiro's office promptly issued a press release—which by no means minced words—in the wake of the decision:

Today’s Commonwealth Court ruling is a victory that upholds our lawsuit against Chesapeake Energy Corporation and Anadarko Petroleum Corporation. The court’s decision allows our action to move forward and address the misconduct by these companies against landowners in oil and gas leases under the Unfair Trade Practices and Consumer Protection Law. I’m fighting for landowners who we charge have been ripped off, and my Office will continue to pursue this case on behalf of Northeast Pennsylvanians.

There could be trouble ahead for operators if the future of royalty disputes lies increasingly within the province of states' attorneys (with broad powers and vast resources) operating under the auspices of consumer protection laws.