Class-Action Arbitrations in Oil and Gas Leases

Class-Action Arbitration

Class-action arbitration is an important issue for the oil and gas industry. Many standard lease forms entered into during the Marcellus and Utica era contain arbitration clauses. As royalty disputes become more frequent in Pennsylvania, driven in part by low-price market conditions that have reduced the payments from oil and gas production for both lessors and lessees alike, class-action arbitration has been more commonly invoked as a way to challenge a lessee's royalty calculations, where the leases contain arbitration clauses that preclude proceeding on a class-action basis in court. Class-action arbitration has generally been resisted by the oil and gas industry on the basis that the arbitration clauses commonly used in the leases do not evince an intent to arbitrate in a class setting ' rather, each lessor must individually arbitrate its dispute under the lease in a separate arbitration action.

A number of class-action arbitrations involving oil and gas leases were instituted in Pennsylvania beginning in 2014. In the midst of those cases working through the arbitration process (or through challenges to the arbitration process raised in federal district courts), the Third Circuit issued an opinion in Opalinski v. Robert Half International, 761 F.3d 326 (3d Cir. 2014), cert denied 135 S. Ct. 1530 (2015). The Opalinski court held that the issue of whether class-action arbitration was available was a threshold substantive question of “arbitrability” that had to be decided by a court, unless the parties' arbitration clause “clearly and unmistakably” provided otherwise.

The decision in Opalinski left the door open to what language would meet the “clearly and unmistakably” standard that would delegate the issue of availability of class-action arbitration to the arbitrator. This is the issue that was litigated in a number of district courts in Pennsylvania and other jurisdictions, leading to the conflicting results noted in Scout , collecting district court cases that split on the issue of what arbitration language meets this standard.

Incorporation of the AAA Rules

The Third Circuit in Scout concluded that an arbitration clause that references the American Arbitration Association rules does not meet the “clearly and unmistakably” requirement of delegating to the arbitrator the question of class arbitrability. The Third Circuit's decision turned on a careful parsing of the language of the leases and the language of the American Arbitration Association rules.

In Scout, lessors under oil and gas leases seeking class action arbitration status argued that express language within the leases' arbitration provision referring to “the rules of the American Arbitration Association” met this standard based on the doctrine of incorporation. The lessors argued that this reference constituted an incorporation of the specific “Commercial Rules of Arbitration,” which in turn incorporates the “Supplementary Rules,” which is the section of the arbitration rules that expressly addresses class action arbitration proceedings, and more specifically authorizes an arbitrator to determine class action arbitrability.

The Third Circuit disagreed. It noted that the American Arbitration Association website contained over 50 sets of rules, and the arbitration provision in the leases did not refer to any one specific set of rules. The court noted that nothing in the commercial rules that typically apply to the lease disputes mentioned class action arbitration, and in fact, the rules were instead couched in terms of bilateral arbitration only.

The commercial rules also do not expressly refer to the supplementary rules. Accordingly, the Third Circuit found that the reference to “the rules of the American Arbitration Association” in the arbitration provision in the leases could be reasonably read to incorporate the supplementary rules, but that it was also reasonable to read the arbitration provision as not incorporating the supplementary rules.

As there was more than one reasonable reading of the arbitration provision, the Third Circuit, applying its precedent in Opalinski, concluded that the reference to the American Arbitration Association rules did not “unambiguously” delegate the class arbitrability issue to the arbitrator, and therefore that issue had to be decided by the court.

The Third Circuit also addressed other arguments raised by the lessors regarding the meaning and effect of the reference to the rules of the American Arbitration Association, rejecting each one for failure to overcome the presumption against delegating the class arbitrability issue to the arbitrator. The court concluded by noting that its conclusion was the same as the holding of the U.S. Court of Appeals for the Sixth Circuit in Reed Elsevier v. Crockett, 734 F.3d 594 (6th Cir. 2013), cert. denied, 134 S. Ct. 2291, 189 L. Ed. 2d 173 (2014), and that its ruling would avoid creating a circuit split.

Impact of the Third Circuit's Ruling

The Third Circuit's ruling in Scout adds a much greater depth of analysis than the Sixth Circuit's ruling in Reed Elsevier to reach the same result. These opinions should carry considerable persuasive authority among other courts that address the same issue. Given appellate courts' agreement on this issue to date, lessees with interests in Pennsylvania oil and gas leases with similarly worded arbitration provisions are fairly assured that their arbitration provisions do not delegate the authority to determine class arbitrability to the arbitrator.

The Third Circuit's opinion in Scout did not reach the ultimate question on the merits: whether the parties intended class-action arbitration, the decision is limited to addressing the “who decides” issue.

One recent district court decision, Bird v. Turner, No. 5:14CV97, 2015 WL 5168575 (N.D. W. Va. Sept. 1, 2015), in the Northern District of West Virginia, found that a similarly worded arbitration clause did not indicate an intent by the parties to arbitrate class actions claims. This remains an open issue that will be litigated in the future in Pennsylvania district courts, now that the procedural issue of “who decides” has been resolved on leases involving this common arbitration language.

Justin H. Werner is a partner at ReedSmith, resident in the firm's Pittsburgh, PA, office. The article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.