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Ohio Supreme Court Denies Compensation to Landman

Posted in Energy

Yesterday, September 25, 2018, the Supreme Court of Ohio issued the decision of Dundics v. Eric Petroleum Corporation, 2018-Ohio-3826, which could have broad implications for third-party landmen, land companies and oil and gas producers in Ohio.  In that decision, the Court held that the Ohio Real Estate Brokers’ statute, R.C. Chapter 4735, applies to transactions involving oil and gas.  Specifically, the Court held that an outside landman must be a licensed real estate broker in order to seek compensation for work performed in obtaining an oil and gas lease on behalf of a producer.

In Dundics, an outside landman sued a producer for breach of contract, claiming that the producer failed to make promised payments for work performed by the landman in obtaining oil and gas leases.  The producer moved to dismiss the lawsuit, arguing that because the landman was not a licensed real estate broker, the landman was not entitled to enforce his agreement with the producer.  The trial court granted the motion to dismiss and the court of appeals affirmed.

The Supreme Court affirmed the dismissal of the lawsuit.  The Court found that because oil and gas interests are included within the broad definition of “real estate” under R.C. 4735.01(B) and because there was no exception for oil and gas leases or landmen, the statute applied, and the landman was unable to seek compensation for his work because he was not a licensed broker.

Sixth Circuit Rejects Groundwater Hydrological Connection Theory for CWA Jurisdiction

Posted in Environment

On September 24, 2018, the Sixth Circuit held that the Clean Water Act (CWA) does not apply to pollutants that travel through groundwater before entering navigable waters in Tennessee Clean Water Network, et al. v. Tennessee Valley Authority, Case No. 17-6155.

The defendant in this case, Tennessee Valley Authority (TVA), operates a coal-fired power plant that produces coal ash as a waste product.  TVA disposes of the coal ash (which is mixed with water) in ponds adjacent to the Cumberland River. While some of this coal ash wastewater is permitted to be discharged through a pipe to the Cumberland River, some wastewater is alleged to leak through the coal ash ponds into groundwater, which then traveled to the Cumberland River.  The TVA’s permit covered the direct discharge from the pipe to the Cumberland River; it did not cover the indirect discharge to the Cumberland River (i.e. the discharge from the ash ponds to groundwater, and then groundwater to the Cumberland River).

The district court found that because the groundwater was “hydrologically connected” to the Cumberland River, and TVA did not have a permit to discharge wastewater from its coal ash ponds, it violated the CWA.  As a matter of law, the district court determined that discharging without a permit from a point source through hydrologically connected groundwater to navigable waters is a CWA violation when the hydrological connection is “direct, immediate, and can generally be traced.”

In the recent decision, the Sixth Circuit disagreed with the “hydrological connection theory” and reversed the district court decision, holding that the CWA only applies to discharges made directly to a navigable water.  The court adopted reasoning from the companion case, Kentucky Waterways Alliance, v. Kentucky Utilities Co., Case. No. 18-5115, issued the same day, that the basis of the CWA’s regulatory power creates a requirement that discharges be directly into navigable waters.  The CWA regulates “effluent limitations,” which are defined as restrictions on pollutants that may be “discharged from point sources into navigable waters.”  The court reasoned that the use of the word “into” indicates directness and a point of entry and therefore the CWA can only apply when pollutants are added directly to navigable waters.

The two Sixth Circuit decisions create a circuit split, as the Fourth and Ninth Circuits have applied the hydrologically connected theory and determined that the fact that a pollutant traveled through groundwater before reaching a navigable water did not preclude CWA liability. The split among the Circuit Courts makes the groundwater hydrological connection theory ripe for Supreme Court review.

Recent oil and gas verdict highlights the importance of FLSA compliance

Posted in Energy

Under the federal Fair Labor Standards Act, employees who are covered by the Act’s overtime provisions must receive overtime pay for hours worked over 40 in a workweek at a rate of not less than time and one-half their regular rate of pay. An employee who prevails in his or her lawsuit for unpaid overtime compensation is also entitled to an award of reasonable attorney’s fees and litigation costs. A recent case from the United States District Court for the Western District of Pennsylvania highlights how expensive an FLSA case can be.

In 2015, in Sammy Mozingo v. Oil States Energy Services L.L.C., oil field workers in Texas filed a class action alleging that their employer Oil States had misclassified them as exempt from overtime laws. Twenty-nine frac hands, grease hands, and crane operators opted out of that class action and, instead, filed their own suit under the FLSA in federal district court in the Western District of Pennsylvania. Multiple employees thereafter settled their claims with Oil State until eight employees remained. Both the employees and Oil State cross-moved for summary judgment, which the Court denied. The case then proceeded to trial in 2018.

After two week-long trials for four employees each, the juries returned verdicts in favor of each of the eight employees. The juries awarded damages to the employees ranging from $54,292 to $178,388 – the total amounted to $1,003,154. The Court then awarded the plaintiffs’ lawyers their reasonable attorney’s fees of $2,263,904 and reasonable costs of litigation of $118,826. Combined, Oil States paid damages, fees, and costs totaling $3,385,884 for just these eight employees. Of course, this amount does not include the amount Oil States had to pay its own attorneys, nor does it account for the costs and distraction associated with years-long litigation culminating in two weeks of trial.

The Mozingo case is notable for several reasons. First, the case is unusual in that it went to trial, as many such case typically settle. Second, the case highlights how expensive FLSA litigation can be when employees are found to be misclassified and so not properly paid overtime. Third, the amount of attorney’s fees and costs awarded to prevailing employees can be substantial and may even exceed the amounts the employees recover. Finally, the case underscores the importance of wage-hour compliance. Contact your Vorys lawyer if you have questions about the Fair Labor Standards Act, similar state laws, and best practices for ensuring compliance.

Authors: Thomas H. Fusonie and Michael C. Griffaton.

Columbus’ Proposed Community Bill of Rights Exceeds the City’s Legislative Power

Posted in Energy

The Supreme Court of Ohio held last week that a proposed voter initiative creating a Community Bill of Rights for the City of Columbus was properly excluded from the upcoming November 2018 ballot. State ex rel. Bolzenius v. Preisse, Slip Opinion No. 2018-Ohio-3708. The initiative, had it been included on the ballot and enacted into law, would have “prohibit[ed] most hydrocarbon-extraction activities within the city and impose[d] strict liability on any government or corporation that violate[d] its terms.” Further, the initiative would have authorized any resident of the City to enforce its rights and prohibitions by bringing an action in court. Because the initiative created a new cause of action—something municipalities lack the power to do—the voter initiative exceeded the City’s legislative power. Thus, the Court found the Franklin County Board of Elections’ decision to exclude the voter initiative from the ballot was proper.

WOTUS Litigation Continues to Ebb and Flow

Posted in Environment

On August 16, 2018, a federal district court judge in South Carolina issued a nationwide injunction which halts the effectiveness of USEPA’s “Delay Rule.”  83 Fed.Reg. 5200 et seq.  The Delay Rule purported to delay the effectiveness of the Obama WOTUS Rule until February 2020.  Because of this new ruling, the Obama WOTUS Rule is now in effect in 26 states, including Ohio, Pennsylvania, and Texas.  Other states in which the Obama WOTUS Rule is now in effect are: California, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Oklahoma, Oregon, Rhode Island, Tennessee, Vermont, Virginia and Washington.

Despite the South Carolina Court’s nationwide injunction of the Delay Rule, the Obama WOTUS Rule is still not effective in the other 24 states, including, bizarrely enough, South Carolina.  This is due to two other federal district court judges (in North Dakota and Georgia) previously issuing injunctions halting the effectiveness of the Obama WOTUS Rule itself, but only in certain states that were parties to those cases.  The Georgia decision is currently under appeal to the 11th Circuit Court of Appeals.  The South Carolina decision itself is likely to be appealed, and litigation also continues against both the Delay Rule and the Obama WOTUS Rule in other district courts across the nation.

As a backdrop to all of this litigation, USEPA continues to move forward with a regulatory process to repeal the Obama WOTUS Rule and replace it with a definition of Waters of the United States more in keeping with the late Justice Scalia’s opinion in the Rapanos case, which should represent a more limited view of federal authority.  A public comment period on the “repeal” portion of USEPA’s rulemaking efforts closed on August 13, 2018.  USEPA has yet to finalize the repeal, or propose a different definition.

The morass of injunctions, appeals, rulemakings, and other assorted legal and regulatory actions surrounding the Obama WOTUS Rule and the various USEPA efforts to delay, repeal, and replace the Obama WOTUS Rule shows no signs of abating anytime soon.  We will continue to provide updates as the status of the applicability of the Obama WOTUS Rule continues to shift.

Wyoming Court Upholds Oil and Gas Royalty Rule

Posted in Energy

On August 6, 2018, the U.S. District Court in Wyoming upheld the vast majority of a Obama-era rule issued by the Department of Interior’s Office of Natural Resources Revenue against a challenge by the American Petroleum Institute (API).  The Rule related to enforcement of noncompliance and civil penalties for parties that are subject to the Federal Oil and Gas Royalty Management Act.  API challenged the Rule, arguing that it is arbitrary and capricious and exceeded the agency’s authority under law.

The Court disagreed, upholding the entirety of the Rule with the exception of provisions related to the agency’s ability to seek penalties for a time period during which an administrative law judge had granted a stay of a penalty pending an administrative hearing.

The case is American Petroleum Institute v. U.S. Department of the Interior et al., case number 17-CV-083-F in the U.S. District Court for the District of Wyoming.

Pennsylvania Supreme Court Continues Rulings Against Municipal Zoning Authority

Posted in Energy, Environment

On August 3, 2018, the Pennsylvania Supreme Court vacated another municipal zoning decision favorable to oil and gas development.  In its per curium order of Delaware Riverkeeper Network v. Middlesex Township (N0. 270 WAL 2017), the Supreme Court directed the Commonwealth Court to reconsider its previous decision upholding a local zoning ordinance that permitted oil and gas development in agricultural and some residential areas.  This order, accompanied by the Supreme Court’s recent decisions in Gorsline v. Fairfield Township and Environmental Defense Foundation v. Commonwealth, indicates a willingness by the Supreme Court, including four of its newly elected justices, to limit (or perhaps prohibit) drilling in agricultural and residential zoning districts premised upon the Environmental Rights Amendment to the Pennsylvania Constitution.

Here, the Commonwealth Court had upheld the zoning ordinance based upon a three-part balancing test, which was subsequently revoked by the Supreme Court.  As such, the Commonwealth Court must now decide the case based upon different criteria.  [Interestingly, several unconventional wells have already been drilled pursuant to the challenged ordinance.]

The challengers, like those in the other cases noted above, are strong anti-fracking advocates, who seek to limit unconventional drilling to industrial zoning districts.  However, such districts are oftentimes not available for leasing or applicable parcels are too small for the construction of well pads.  Further, such restrictions limit the extraction of natural gas from a miniscule portion of the subsurface area within the municipality.  On a favorable note to exploration and production companies, the Supreme Court specifically claimed that its recent decisions “should not be misconstrued as an indication that oil and gas development is never permitted in residential/agricultural districts or that it is fundamentally incompatible with residential or agricultural use.”

Supreme Court of Ohio One Step Closer to Addressing Statute of Limitations Case

Posted in Energy

In Browne v. Artex Oil Co., Case No. 17 CA 20, the Fifth District recently determined that an action to declare an oil and gas lease terminated due to a lack of production was subject to a breach of contract statute of limitations period of either eight or fifteen years (for more, see here).  On August 2, 2018, the Fifth District determined that its ruling in Browne was in direct conflict with a decision from the Fourth Appellate District in Rudolph v. Viking International Resources Co., No. 15CA26, 2017-Ohio-7369 (which applied a 21-year statute of limitations applicable to adverse possession claims), and thus certified the question of the appropriate statute of limitations to the Supreme Court of Ohio (see here).  The Supreme Court has yet to take the case up on appeal, but if it does, we will be sure to report back.

USEPA Issues Supplemental Notice of Proposed Rulemaking for Waters of the United States, Seeks Additional Comments

Posted in Environment

On June 29, 2018, USEPA issued a supplemental notice of proposed rulemaking (the “Supplemental Notice”) to its July 2017 proposed action to repeal the 2015 definition of “waters of the United States” adopted under the Obama Administration.  The Supplemental Notice includes additional justification for the repeal of the 2015 definition, and also clarifies that USEPA is still seeking to repeal the entirety of the 2015 definition as step one in a two-step process.  The second step, yet to be initiated, will be to adopt a new regulatory definition for waters of the United States based on Justice Scalia’s opinion in the Rapanos plurality opinion.

The 2015 definition has yet to go into effect due to a combination of court-issued stays, and, more recently, USEPA’s promulgation of a final rule adding an effective date to the 2015 definition which delays its effectiveness until 2020.  This effective date delay rulemaking is currently under legal challenge by a variety of states and environmental groups, as is the 2015 definition itself being challenged in court by a different group of states as well as industry groups.

Given the volume and variety of litigation that has already occurred surrounding the definition of waters of the United States, any final rulemaking repealing the 2015 definition will almost assuredly be subject to additional litigation.  The Supplemental Notice may represent USEPA’s effort to provide better support for a future final rule to withstand any such challenge.

USEPA is accepting additional comments on the Supplemental Notice for 30 days following its publication in the Federal Register, until August 13, 2018.  Comments can be submitted under Docket ID No. EPA-HQ-OW-2017-0203 at https://www.regulations.gov/.

Federal Court Rejects Takings Challenge to Ohio’s Statutory Unitization Law

Posted in Energy

On June 13, 2018, a federal district court rejected a takings challenge to a unit order issued by the Ohio Division of Oil and Gas Resources Management under the state’s statutory unitization law, R.C. 1509.28    The court found that “the statutory unitization procedure set forth in R.C. § 1509.28 operates to protect the correlative rights of landowners….and it was passed as a valid exercise of Ohio’s police power.”  See Kerns v. Chesapeake Exploration, LLC , N.D. Ohio No. 5:18 CV 389 (June 13, 2018).   Although the constitutionality of statutory unitization or its analog, mandatory pooling, is well-settled nationwide, Kerns is the first decision to squarely consider Ohio’s unitization law.

Click here to read the decision.

[Disclosure: Vorys represented Chesapeake Exploration, LLC in this case].