Natural gas cases in state, federal courts; Roane County verdict still not certified

Story by Juliet A. Terry

The $404 million Roane County verdict from January is stilling hanging over natural gas producer Chesapeake Energy, other producers are facing similar lawsuits in state and federal court in West Virginia.

Equitable Production Co., Statoil Energy Inc. and Ashland Oil Inc. are defending a possible class-action lawsuit in U.S. District Court for the Southern District of West Virginia.

Other companies facing natural gas royalty litigation include Dominion Transmission Inc., North Coast Energy Inc. and East Resources Inc.

Waiting for a Decision

Among the many plaintiffs' lawyers involved in the litigation, Charleston attorney Marvin Masters represents landowners -- both individuals and businesses -- who believe the gas companies have not paid all the royalties due.

The claims are similar to those involved in the $404 million Roane County verdict in Tawney v. Columbia Natural Resources and NiSource Inc.

In that case, the now-deceased Garrison Tawney and more than 10,000 other royalty owners who questioned the price they were being paid for natural gas produced from their property filed the lawsuit after asking former West Virginia Supreme Court of Appeals Justice George Scott to investigate their concerns.

The royalty owners said they also felt they were cheated out of millions of dollars in royalty payments because of a financial arrangement between NiSource and CNR.

The jury determined the companies had fraudulently refrained from paying landowners the full value of their royalties and awarded plaintiffs $134 million in compensatory damages and $270 million in punitive damages.

That verdict still is not final because Roane County Judge Tom Evans has not yet certified the award or made a decision to change it.

Royalty Calculations

A major point of contention in the lawsuit was how the gas companies calculated the royalties payable to landowners.

The plaintiffs said the companies were paying them far less than the standard one-eighth share they were due, and that essentially is the same complaint involved in the other cases, which some lawyers have nicknamed the "Tawney Jr." lawsuits.

"The issues are very similar," Masters said.

That issue was sent to the West Virginia Supreme Court of Appeals last year, and its decision framed how the rest of the Tawney litigation proceeded.

According to oil and gas industry sources, natural gas producers across the country generally pay landowners one-eighth of the price for the product.

As the industry has evolved over time, the sale price for natural gas includes costs associated with transporting gas to the point of sale, which has moved further away from the wellhead. Companies, in turn, deduct those expenses from the sale price when calculating the royalty due landowners.

The state Supreme Court said companies no longer could deduct the post-production costs when calculating royalty payments in West Virginia for lease contracts that stipulated royalty payments were based on the value of gas "at the wellhead" or using similar language, which the court said was ambiguous.

Oil and gas lawyers predicted a flurry of royalty litigation in West Virginia following that decision because the industry has been deducting post-production expenses as part of normal business practices for years.

"Every single operator will be sued for this because every operator's been doing this," Chesapeake general counsel Henry Hood said in a March interview. "This is going to be up there with asbestos."

Masters said the other royalty lawsuits have been in progress for a while, although the Supreme Court decision "clearly spelled out the law."

"They were not filed because of that decision. That's always been the law," Masters said.

And the law, he said, makes it clear his clients have not been treated fairly. In the complaint for Kay Co. v. Equitable Production, the landowners say the natural gas companies owe them royalty payments. Kay Co. has petitioned for class-action status.

"Defendants have intentionally failed and refused to pay royalties to plaintiffs as a rate calculated on the fair value of the natural gas produced and marketed from (their) leases," the complaint states. "Defendants entered into a scheme and design to intentionally mislead plaintiffs into believing they were being paid all the royalty due them. ..."

Equitable has denied the allegations in its court filings.

Class Action Fairness Act

Some of the lawsuits have been removed from state court to federal court because of the Class Action Fairness Act, a 2005 federal law designed in part to prevent trial lawyers from forum shopping their interstate class-action lawsuits. When President Bush signed the Class Action Fairness Act, he said the law also "provides new safeguards to ensure that plaintiffs (in) class-action lawsuits are treated fairly" and get true compensation for their injuries.

Masters said it doesn't matter whether his royalty cases are litigated in state or federal court. One of the only differences, he said, is that federal court can pull jurors from more than one county.

"We're not going to do a national class, and we're only dealing with West Virginia wells, so really it's pretty much the same at state or federal court," he said.

- The State Journal is a WV business newspaper