September 11, 2013
Practice Groups:
Oil and Gas
Commercial Disputes
Energy, Infrastructure
and Resources
Energy
Arbitration/Class Waiver Clauses in Oil and
Gas Leases: The Applicability of
Concepcion and Italian Colors Restaurant
to the Natural Gas Industry
By J. Nicholas Ranjan and David I. Kelch
Class action lawsuits filed against natural gas producers have become increasingly common. For
example, in Pennsylvania over the last several years, royalty owners have filed a number of royalty
and bonus-payment class action lawsuits in state and federal court, which have caused producers to
incur significant time and expense to defend. In light of the costs and risks involved in class action
litigation, producers have begun contemplating the use of arbitration clauses in their oil and gas leases,
which would require all disputes to be resolved in a private and confidential arbitration setting and
would prevent a royalty owner from combining his claim with hundreds or thousands of other similar
claims by pursuing a class action lawsuit or class arbitration. While such arbitration/class waiver
clauses had been declared by certain courts to be unenforceable in the past, two recent decisions from
the Supreme Court have endorsed the use of arbitration/class waiver clauses.
In AT & T Mobility, LLC v. Concepcion 1 and American Express Co. v. Italian Colors Restaurant, 2 the
Supreme Court recently issued two decisions holding that arbitration/class waiver clauses in consumer
contracts can effectively prevent plaintiffs from bringing class actions. As a result of these decisions,
parties to oil and gas leases in Pennsylvania have begun considering what effect, if any,
arbitration/class waiver provisions would have in their oil and gas leases, and whether, for example,
Concepcion and Italian Colors Restaurant would prevent royalty owners from bringing the
increasingly common royalty and bonus-payment class actions being filed in Pennsylvania.
In short and as discussed below, it appears likely that Concepcion and Italian Colors Restaurant will
apply to oil and gas leases, and thus, in light of these decisions, a well-drafted arbitration clause in an
oil and gas lease may potentially be used to preclude class-wide dispute resolution arising out of lease
disputes.
How does an arbitration clause preclude the right to pursue a
class-wide dispute resolution?
An arbitration clause can be used to essentially “contract out” of class action litigation. Indeed, by
their very nature, most arbitration clauses preclude litigation entirely, including class action litigation,
arising out of disputes covered by the arbitration clause. Instead, most typical arbitration clauses
mandate that defined disputes between the parties will proceed through private arbitration, where the
parties select one or more privately retained arbitrators to resolve their disputes in a confidential and
less formal setting. What is less clear, however, is whether class arbitration is permitted when the
parties include an arbitration clause in the contract.
1
2
131 S. Ct. 1740 (2011).
133 S. Ct. 2304 (2013).
Arbitration/Class Waiver Clauses in Oil and Gas Leases:
The Applicability of Concepcion and Italian Colors
Restaurant to the Natural Gas Industry
Class arbitration is a relatively new phenomenon in the United States, and is neither addressed in the
Federal Arbitration Act (“FAA”), 3 nor was contemplated by the FAA’s drafters. Class arbitration
operates similarly to class action litigation. Thus, if class arbitration is permitted in a contract or lease
that has an arbitration clause, the efficiency of bilateral arbitration is typically lost. For example, class
arbitration, similar to class action litigation, can require class member notices, application of formal
rules of evidence, including unwieldy class-wide discovery, and formal approval and notice of any
class settlement.
Few, if any, arbitration clauses expressly provide for class arbitration. Thus, the key question
becomes: In the absence of a class arbitration provision, does the arbitration clause alone open the
door to a class arbitration procedure? Courts are somewhat divided on this issue, but most have held
that where an arbitration clause is silent as to the permissibility of class arbitration, class arbitration is
not permitted.
Nevertheless, to avoid any doubt as to whether an arbitration provision in an oil and gas lease
authorizes class arbitration, a carefully crafted arbitration clause should expressly preclude or waive
class arbitration.
How have Concepcion and Italian Colors Restaurant affected the
limitations on class waivers?
Under the FAA, an arbitration clause is presumed to be valid and enforceable, “save upon such
grounds as exist at law or in equity for the revocation of any contract.” 4 Therefore, to be enforceable,
an arbitration provision that waives class arbitrations and class actions cannot be considered
“unconscionable” under the relevant state contract law.
In the past, courts would oftentimes hold that arbitration provisions that waived the right to class
arbitration or class action litigation were unconscionable because the parties had unequal bargaining
power, the arbitration provision was in buried boilerplate, or the absence of a class remedy would
effectively prevent the plaintiff from pursuing relief (i.e., the amount at issue was too small to pursue
except on a class-wide basis). Concepcion and Italian Colors Restaurant, however, eviscerated this
line of reasoning.
In Concepcion, at issue was a judicially crafted rule in California that class arbitration waivers in
contracts of adhesion governing disputes over small amounts of money were unconscionable and
could not be enforced. The Supreme Court held that the California state law interfered with the core
attributes of arbitration and created a scheme that is inconsistent with the FAA—i.e., in other words,
that the FAA’s presumption in favor of enforcing arbitration clauses preempted California state law.
In Italian Colors Restaurant, the Supreme Court considered American Express’s arbitration
agreement with merchants that contained a class arbitration waiver. The merchants brought an
antitrust class action and opposed American Express’s motion to compel arbitration, arguing that the
class arbitration waiver was unconscionable because the cost of arbitrating a single claim far exceeded
the potential recovery. Following its decision in Concepcion, the Supreme Court rejected this
argument, refused to create such an exception to the FAA’s presumption in favor of enforcing
arbitration clauses, and held that contractual waivers of class arbitration are enforceable even if the
cost of proving an individual claim in arbitration exceeds the potential recovery of the plaintiff.
3
4
9 U.S.C. § 1 et seq. 9 U.S.C. § 2.
2
Arbitration/Class Waiver Clauses in Oil and Gas Leases:
The Applicability of Concepcion and Italian Colors
Restaurant to the Natural Gas Industry
Concepcion and Italian Colors Restaurant make clear that arbitration clauses/class waivers governed
by the FAA will be strictly enforced, and that contentions that such clauses are unconscionable or
otherwise unenforceable are unlikely to prevail. 5
Do Concepcion and Italian Colors Restaurant apply to oil and
gas leases?
In light of Concepcion and Italian Colors Restaurant, the question remains whether those decisions—
which concerned consumer contracts—apply to oil and gas leases that have arbitration/class waiver
provisions. While there have yet to be any reported decisions to consider the applicability of
Concepcion and Italian Colors Restaurant to the oil and gas lease context, it appears likely that those
decisions will apply for at least two reasons.
First, the more supported view is that most, if not all, oil and gas leases containing arbitration clauses
are governed by the FAA. This is important because the Court’s decisions in Concepcion and Italian
Colors Restaurant were predicated on the FAA and the fact that the FAA essentially preempted state
unconscionability laws. Thus, if a contract is not governed by the FAA, those decisions may arguably
not apply. Oil and gas leases should be considered to be covered by the FAA because the FAA
applies to any contract involving interstate commerce. 6 Like the Supreme Court’s interstate
commerce jurisprudence, the interstate commerce nexus that governs the applicability of the FAA is
extraordinarily broad. Thus, where the parties to the oil and gas lease are located in multiple states, or
the contemplated scope of development under the oil and gas lease is through interstate channels (even
where development has not yet occurred), courts have held that the interstate commerce nexus will
likely be deemed to be sufficient for the FAA to apply. 7 If the FAA applies, Concepcion and Italian
Colors Restaurant apply as well. 8
Second, Concepcion’s holding has already been extended to the non-consumer contract context. For
instance, the Supreme Court relied on Concepcion in Italian Colors Restaurant in an antitrust context.
The holding in Concepcion has also been extended to real property, 9 employment discrimination, 10
5
Since Concepcion and Italian Colors Restaurant, the Third Circuit has similarly upheld the enforceability of an
arbitration/class waiver clause. See Homa v. Am. Express Co., 494 F. App’x 191 (3d Cir. 2012).
6
Allied-Bruce Terminex Cos., Inc. v. Dobson, 513 U.S. 265 (1995).
7
See Alexander v. Chesapeake Appalachia, LLC, 839 F. Supp. 2d 544, 550 (N.D.N.Y. 2012) (holding that FAA
applies because “[a]lthough the oil and gas leases at issue involve real property only in New York, the plaintiff
landowners in New York negotiated the subject leases with CAP, an Ohio company and CNR, a Delaware limited
liability company. Those leases have since been acquired by Chesapeake, an Oklahoma limited liability company,
and Statoil, a Delaware corporation”); accord In re Chevron, --S.W.3d--, 2010 WL 299149, at *5 (Tex. Ct. App. 2010)
(finding that FAA applied because “[i]t is a matter of common knowledge that the oil industry involves interstate
commerce”).
8
There is limited authority from the U.S. District Court for the Middle District of Pennsylvania concluding that an oil
and gas lease covering only property in a single state renders state law, not the FAA, applicable. This line of
authority, however, is based on one largely unsupported slip opinion. See Ulmer v. Chesapeake Appalachia, LLC,
No: 4:08–cv–2062, slip op. at 2 (M.D. Pa. Jan. 16, 2009) (citing no authority, but finding that “[t]he oil and gas lease
at issue in this case involved property only in Pennsylvania, and therefore, the FAA does not apply”); Eisenberger v.
Chesapeake Appalachia, LLC, No. 3:09-cv-1415, 2010 WL 1816646, at *2 (M.D. Pa. May 5, 2009) (citing only Ulmer
for the finding that “this Court will apply Pennsylvania law in this case, as it involves a gas and oil lease for a property
located entirely in Pennsylvania”); Roman v. Chesapeake Appalachia, LLC, No. 11-1614, 2012 WL 2076846, at *3
n.1 (M.D. Pa. June 7, 2012) (citing Ulmer, but not deciding whether state law or FAA applied); Vosburg v.
Chesapeake Appalachia, LLC, No. 11-1615, 2011 U.S. Dist. LEXIS 155364, at *6-7 n.2 (M.D. Pa. Nov. 16, 2011)
(citing Ulmer, but not deciding whether state law or FAA applied).
9
A-1 A-Lectrician, Inc. v. Commonwealth Reit, No. 12-00607 ACK-BMK, 2013 WL 1817688 (D. Haw.
Apr. 26,
2013).
10
Wallace v. Red Bull Distribution Co., No. 5:12-CV-02431, 2013 WL 3823130 (N.D. Ohio July 23, 2013).
3
Arbitration/Class Waiver Clauses in Oil and Gas Leases:
The Applicability of Concepcion and Italian Colors
Restaurant to the Natural Gas Industry
and employment contract 11 cases by various courts. Thus, it appears that there is no reason why
Concepcion and Italian Colors Restaurant would be considered limited to consumer contracts and
would not apply to any contract, including oil and gas leases.
Conclusion
After Concepcion and Italian Colors Restaurant, the use of carefully crafted arbitration clauses in oil
and gas leases may be an effective way to preclude class arbitrations and class action litigation. As
courts continue to apply Concepcion and Italian Colors Restaurant, parties to oil and gas leases may
consider reviewing or redrafting their arbitration clauses in such a way as to immunize them from
further challenge.
As always, lease forms should be reviewed by legal counsel with experience and competency in oil
and gas law and the law of arbitration.
Authors:
J. Nicholas Ranjan
nicholas.ranjan@klgates.com
+1.412.355.8618
David I. Kelch
david.kelch@klgates.com
+1.412.355.7427
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11
D’Antuono v. Service Road Corp., 789 F. Supp. 2d 308 (D. Conn. 2011).
4