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
