Wednesday, December 16, 2015

PA Attorney General Lawsuit against Chesapeake Energy

On December 9, 2015, the Pennsylvania Attorney General’s office announced that it had filed suit in the Court of Common Pleas of Bradford County against Chesapeake Energy Corporation and its affiliates.  The lawsuit alleges that Chesapeake underpaid landowners’ royalties for natural gas production.  The action was commenced pursuant to the Unfair Trade Practices and Consume Protection Law. 

In a press release Attorney General Kathleen Kane said that the alleged conduct amounts to a “bait-and-switch.”  Chesapeake allegedly misled the landowners into believing that any post processing production costs incurred from transforming the gas into a marketable condition would not be deducted from the royalties.  The complaint states that the bait and switch was carried out through the Market Enhancement Clause of the leases.  The clause included language that said that there would not be any deductions taken for post-production costs.

The complaint further alleges that Chesapeake and its affiliates engaged in a number of business schemes.  First they engaged in a self-dealing scheme that caused increased deductions to be passed on to the landowners.  Second, Chesapeake allegedly failed to disclose that it was deducting costs paid to affiliated entities when the leases provided that deductions would be taken only for costs paid to non-affiliated third parties.  Third, the complaint alleges that Chesapeake failed to disclose revenues received from its former midstream unit to the landowners.

The complaint requests that the court order Chesapeake and its affiliates to pay restitution to all who suffered losses as a result of the defendants’ conduct, pay civil penalties of $1,000 for each violation of the Unfair Trade Practices and Consumer Protection Law, and $3,000 for any violation that involved a person of age 60 years or older, and to enjoin the Chesapeake and its affiliates from engaging in any of the conduct described in the complaint that would violate the Uniform Trade Practices and Consumer Protection Law.  The lawsuit was filed by the Antitrust Section of the Attorney General’s Office. 

The Office of the Attorney General also filed an amicus curiae brief with the U.S. District Court for the Middle District of Pennsylvania which urges the court to reject the proposed settlement of the Demchak  No: 3:13-cv-02289-MEM class action and modify the agreement to provide a carve-out for the Attorney General’s office from release language of the proposed settlement.  The Demchak settlement deals with similar allegations of Chesapeake and its affiliates improperly deducting costs from royalties.

Written by Stephen Kenney - Research Assistant
Center for Agricultural and Shale Law
December 16, 2015

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