In January, a jury in Roane County, West Virginia determined that natural gas producers had failed to honor their leases with gas well owners, and awarded a class of more than 10,000 natural gas well owners a total of $404 million in damages. The plaintiffs contended that Columbia Natural Resources, LLC, formerly owned by NiSource, Inc., and now owned by Chesapeake Energy Company, systematically and deliberately underpaid them in violation of their leases by withholding the production costs from the royalties paid to the plaintiffs. The jury’s verdict included compensatory damages of $134 million and punitive damages of $270 million.
Roane County Circuit Judge Thomas C. Evans, III entered an order affirming the verdict on June 27, 2007. Estate of Garrison G. Tawney, et al. v. Columbia Natural Resources, LLC, et al., Civil Action No. 03-C-10E (Circuit Court of Roane County, West Virginia). Once the court enters the final order, the defendants have four months to file their petition for appeal with the Supreme Court of Appeals of West Virginia.
In response to the outcry against the verdict by natural gas producers, West Virginia Governor Joe Manchin proposed a bill for the Legislature’s consideration during its three day special session, which ended yesterday, which, among other things, would have given the producers an implied covenant in all oil and natural gas leases that allows companies to deduct reasonable post-production costs when calculating royalties to the landowners. (The deduction of these costs formed the basis for the plaintiffs’ claims in Tawney.)
The Legislature chose not to take any action on the bill, on the grounds that it was too complicated to be considered in such a short session. In all likelihood, the Governor will resubmit the bill when the Legislature’s regular 60 day session begins in January 2008. Here is The Charleston (West Virginia) Gazette’s story this morning on the bill’s fate, as well as posts from Monday and yesterday by AP Larry Messina, who blogs at Lincoln Walks At Midnight. But it’s clear that the opposition to the bill voiced by the landowners, who include individuals and businesses, also was a consideration in the Legislature’s decision not to consider the bill.
What is not clear is whether the bill would apply to the jury’s verdict in Tawney. Messina posted this compilation of stories earlier in the week, including another Gazette article that said that the bill would effectively overturn the verdict because the implied covenant would be retroactive and would apply to the defendants in the action. But the bill specifically provided that its provisions would apply only in cases where there had been no jury verdict or final decision or judgment by a court of competent jurisdiction.
I’m sure the defendants in the Tawney case lobbied for language in the bill that would include them in the retroactive application of the implied covenant, but I don’t think the covenant can apply to them. Under West Virginia law, legislation that affects procedural rights can be applied retroactively, but legislation that affects substantive rights may only be applied prospectively. The finding of an implied covenant to allow companies to deduct reasonable post-production costs when calculating royalties would certainly affect the gas well owners’ substantive, rather than procedural, rights.
There are at least three other similar actions pending against natural gas producers in the United States District Court for the Southern District of West Virginia: The Kay Company, LLC, et al. v. Equitable Production Company, et al., Civil Action No. 2:06-CV-00612 and Jones, et al. v. Dominion Resources Services, Inc., et al., Civil Action No. 2:06-CV-00671, are both pending before District Judge Joseph R. Goodwin, and PRC Holdings, LLC, et al. v. North Coast Energy, Inc., 2:06-CV-00965, is pending before District Judge John T. Copenhaver, Jr.
Finally, on Monday, West Virginia’s natural gas industry announced a three year program to publicize its role in the state. Details of the program can be found at www.energizewv.com. As Messina points outs, the timing of the announcement is questionable. But Chesapeake may have figured out that a campaign promoting natural gas is more effective than a campaign pointing out that coal is dirty, at least in West Virginia.