United States Senate Passes Amendment “Supporting” Transfer of Public Lands to States

Last week, the United States Senate passed a largely symbolic budget amendment sponsored by Alaska Senator Lisa Murkowski (chair of the Senate Energy and Natural Resources Committee) that “supports” the idea of selling, transferring or trading federally-managed public lands to the states. The idea of western states “taking back” public lands has been around since the Sagebrush Rebellion of the 1970’s, but in recent years has been gaining new momentum.   In the last 5 years, 8 states, including Utah, Wyoming, Montana, Idaho and Nevada have “studied” the feasibility of “taking back” or somehow acquiring title to the millions of acres of federally-managed public lands that were reserved to the Union at the time of statehood.

The amendment, S. A. 838 to Senate Resolution 11, is described as “establish[ing] a spending-neutral reserve fund relating to the disposal of certain Federal land,” and conveys no actual authority to transfer lands and does not cover any specific parcels or identify any states by name. Instead, the purpose of the amendment is to demonstrate that “considering such bills is a priority of the Congress” says Robert Dillon, communications director for the Senate Energy and Natural Resource Committee, as reported by High Country News.   Under the Senate authorization, the chamber’s “support” applies generally to “initiatives to sell or transfer to, or exchange with, a State or local government any Federal land that is not within the boundaries of a National Park, National Preserve, or National Monument.” Voting on the measure was largely split down party lines, with Senator Cory Gardner of Colorado as the lone Western Republican to vote no, joining all of the Western Democrats.

While the idea of states taking title to federally-managed public lands (whether through voluntary transfer or litigation) has been widely viewed as, at best, an unlikely and costly proposition, the idea has gained considerable traction in Western states with large percentages of federally-managed public lands. Utah has taken the idea the farthest, passing a law in 2012 demanding the transfer of approximately 20 million acres of federal land. In each fiscal year since 2012, the Utah legislature has allocated taxpayer money to study the issue and devise legal strategies. Most recently, in the 2015 Utah legislative session, the state passed a law allocating considerable funds to pay outside legal counsel to help devise a legal strategy and, potentially, bring litigation against the federal government. The state has recently issued an RFP soliciting bids for this work.

The issue has raised considerable debate in Utah and across the West, with most casual observers wondering about the legality and feasibility of the proposal. While the State of Utah staunchly defends the basic legality of its law authorizing the “take-back” of federal lands, most scholars disagree. According to John Ruple of the University of Utah College of Law, “The [United States] Constitution gives the federal government the authority to retain and manage that land.” Proponents of “taking back” federal lands argue that state enabling acts require federal transfer of public lands to the states. However, as stated by Mr. Ruple, states’ enabling acts do not create an obligation to “return” lands to state management; instead, in the enabling acts, “the state is disclaiming any future claims to federal lands.”

The Senate’s recent action in approving Amendment 838 does not affect the fundamental Constitutional question of state assumption of federal land. It does, however, signal a willingness on the part of the legislative branch to dive into what has, until recently, been a debate largely confined to Western state houses.

High Country News has an excellent series of articles covering the full range of the public land transfer debate:

https://www.hcn.org/articles/utah-bill-would-push-land-transfer-debate-to-federal-court

https://www.hcn.org/articles/western-states-trying-to-take-back-federal-lands-get-a-boost-from-the-u-s-senate

For the State of Utah’s position on its federal land transfer law, see:

http://publiclands.utah.gov/current-projects/transfer-of-public-lands-act/

The University of Utah College of Law’s analysis, authored by John Ruple, can be found at:

http://content.lib.utah.edu:81/cdm4/item_viewer.php?CISOROOT=/utlawrev&CISOPTR=9160

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Mediation in a Nutshell

Mediation typically occurs at some stage of the adversarial process. That process involves parties who are focused on the strengths of their respective positions/cases, and who are committed to convincing a decision maker that the other side should be defeated. The challenge for mediation is that these same parties are suddenly asked to shift gears, slow down, take a breath and come at resolution of the dispute in a very different way.
What mediation isn’t
The mediation session is not a trial or an arbitration, and the mediation process is not about deciding who’s right and who’s wrong. In a way, the mediation process is the inverse of a trial in that the parties themselves are the decision makers.
Perhaps most important, mediation is not about outdoing the other side. It’s not about winning or losing in the classic courtroom sense. The mediation process is a negotiation that may, or may not, result in agreement and dispute resolution. The negotiated result, if there is one, must seem (feel) fair on all sides to be acceptable and sustainable.
What mediation is
Thus, if the mediation process is to have a hope of being successful, each party must accept the challenge to identify and then focus on and evaluate its own weaknesses. Further, each party must be willing to listen to, accept, and evaluate the other party’s strengths.
The common perspective among the parties must be the following:
• Mistakes were made and things could have been done better.
• There is no pride of authorship.
• Each party had some participation in those mistakes.
• The dispute would not have arisen otherwise.

Those mistakes come at a collective cost that must be shared (compromised) if there is to be a mediated resolution. The benefit of a mediated resolution is that it avoids the cost and risk of litigation. This benefit must entice each party to stop looking back (except to define lessons learned), swallow hard, get on the right scale and commit to resolving the issues and moving on.
So, the victory in the mediation process, if any, is in resolution of the dispute. To get to that victory, each party and their counsel must accept the fact that a well-advised resolution may be seem painful, may feel like an abdication of principle, but it manages and avoids otherwise unmanageable and unavoidable risk. A mediated resolution also minimizes opportunity cost so that resources can be put back to constructive use in the life of each party. In short, a mediated resolution, though it may not make everyone happy, puts each party back in control, and therefore, adds value.

Getting There Check List – Mediator
The mediator must
 Bring understanding and creativity to the table
 Be a spokesperson for each side while maintaining credibility and trust
 Be a motivator, not an advocate
 Be the reality checker and manager of expectations
 Be an edge softener, and do so without ego – leave that at the door

Getting There Check List – Parties and Counsel
Each party and their counsel must
 Control their own myopia and their own emotional (and probably economically ill-advised) investment in the rightness of their position.
 Understand their own position weaknesses
 Check (counterproductive) “principles” at the door
 Have the courage, knowledge and authority to accept compromise.
 Know, going in, the perimeters (absolute boundaries) and parameters (variables) of acceptable compromise.
 Be able walk in the other party’s shoes with empathy, without pride of authorship and without personal investment in a litigated win.
 Get on the right scale and stay there - listen to Pogo: "We Have Met The Enemy And He Is Us"

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Energy Book Review: “The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes,” Bryan Burrough (Penguin 2009)

Now that it looks like at least four of the Republican Presidential candidates claim a Texas connection - Jeb Bush, Ted Cruz, Rand Paul and Rick Perry - a look back at where the Texas connection to the White House began (hint: it wasn’t LBJ) is well-timed. http://www.chron.com/news/politics/article/A-look-back-at-presidential-candidates-from-Texas-6106289.php “The Big Rich,” by Texan and author of the seminal “Barbarians at the Gate: The Fall of RJR Nabisco,” Bryan Burrough, tells the fascinating story of the 20th century creation of the Texas oilman and how that led to the Texas place in presidential politics. This tale of oil and politics, (and movie stars, bigamy, island mansions, art, drugs and bankruptcies) is told through the lives of Roy Cullen of Houston, Sid Richardson and the Bass brothers of Fort Worth, Clint Murchison and H.L. Hunt of Dallas. Burrough explains, “If Texas oil had a Mount Rushmore, their faces would adorn it. A good ol’ boy. A scold. A genius. A bigamist. Known in their heyday as the Big Four, they became the founders of the greatest Texas family fortunes, headstrong adventurers who rose from nowhere to take turns being acclaimed America’s wealthiest men.” But this book is more than a biographical quartet; Burrough brings a reporter’s political analysis and lively writing style to put these lives and the birth of the modern oil and gas industry into the larger context of U.S. politics and popular culture. Texas oil and the money it created shaped our modern world including the politics of today. These Texans also shaped popular culture from the image of Spindletop, to Edna Ferber’s “Giant,” to “Dallas” and J.R. Ewing and the Dallas Cowboys. And, Burrough’s descriptions of how these four oilmen responded to the fluctuations of supply and demand and used and abused leveraged debt provide some food for thought for our 21st century era of low oil prices. A great read for anyone interested in U.S. history and the oil and gas industry. http://www.bryanburrough.com/books/the-big-rich/

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New BLM Fracking Rule

On March 20, 2015, after considering more than 1.5 million comments, the BLM released its much anticipated fracking rule for oil and gas wells on Federal and Indian lands.

More than 90 percent of all wells, including those on Federal and Indian property, are hydraulically fractured by injecting water, sand and chemicals under high pressure to stimulate the flow of oil and gas. Due to increased public concern over fracking, the rule imposes new requirements for assurance of wellbore integrity, management of flowback fluids, and disclosure of chemicals. The rule requires:

• Before fracking, operators have to perform a successful mechanical integrity test showing that the well can withstand at least the maximum anticipated pressure for 30 minutes with no more than a 10 percent loss of pressure.
• All flowback fluids from fracking must be stored in above-ground tanks. A lined pit may be used instead only if a tank would be infeasible and numerous conditions are met, including being at least 300’ from any stream and 50’ from any usable groundwater.
• Chemicals used in fracking have to be disclosed publicly within 30 days of the last stage of fracking for each well. This information must be certified and submitted “through FracFocus or another BLM-designated database, or in a Subsequent Report Sundry Notice.”

The rule allows operators to request a variance from particular requirements if “the proposed alternative meets or exceeds the objectives of the regulation for which the variance is being requested,” but the “decision whether to grant or deny the variance request is entirely within the BLM’s discretion” and may be rescinded or modified at any time. Various states, including Colorado, Wyoming and North Dakota, are considering whether they might be able to opt out of at least parts of the new rule because their own standards are so strict. BLM Director Neil Kornze told a House Natural Resources subcommittee on March 24 that he is looking at whether variances are warranted for Wyoming and other states and would like to reach those determinations before the 90-day effective date of the rule.
The same day that the BLM initially released the new rule, March 20, 2015, the Western Energy Alliance and Independent Petroleum Association of America filed suit in Federal court in Wyoming to challenge the rule for being unnecessary, overly burdensome and duplicative of environmental regulations and paperwork already required by state regulatory agencies.

The final rule was published in the Federal Register on March 26, 2015. 80 Fed. Reg. 16128. Unless legal challenges are successful, the new fracking rule will take effect on June 24, 2015.

Link to BLM announcement of fracking rule:  http://www.blm.gov/wo/st/en/info/newsroom/2015/march/nr_03_20_2015.html

The text of the rule in the Federal Register may be found at: http://www.gpo.gov/fdsys/pkg/FR-2015-03-26/pdf/2015-06658.pdf

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Baseball Arbitration

Now that Spring Training is in full swing, let’s talk some baseball! Okay, not that kind of baseball, but another topic in our series on arbitration - “baseball arbitration.”

Some parties are reluctant to submit disputes to arbitration because they worry about “split the difference” awards. Arbitrators are generally selected, directly or indirectly, and paid by the parties. This leads to a perception that arbitrators have an interest in rendering decisions that will maximize the chances that they will be chosen again in future disputes by “splitting the difference” between the parties to avoid offending either side. For parties who are reluctant to submit disputes to arbitration for these reasons or for parties who may want more control over how a compromise is reached, “Final Offer Arbitration,” also known as “baseball arbitration,” is an option worth exploring.

Final Offer Arbitration requires an arbitrator to view all of the unresolved issues as a package and select one party’s package over the other party’s package. It is known as “baseball arbitration” because each side submits a figure or proposed remedy and the arbitrator is required to select one offer or the other. The arbitrator cannot formulate a compromise or choose the midpoint between the two.

The idea behind Final Offer Arbitration is that each party, conscious of the risk that an unreasonable proposal will have little chance of acceptance by the arbitrator, will make concessions in order to submit what it believes is the most reasonable offer. If one of the two proposals is too extreme, the other side essentially wins by default. The two sides are more likely to bargain in good faith in hopes of reaching a settlement if they fear that the arbitrator may view the other side’s offer as more reasonable. Unlike conventional arbitration where parties may take aggressive positions designed to influence the arbitrator’s compromise, Final Offer Arbitration has the advantage of incentivizing the parties to move toward the middle. If the final offers are close, it may not matter that much which of the two proposals the arbitrator chooses. If the offers are far apart but one side has submitted a ridiculous offer, the arbitrator’s decision is relatively easy. The disadvantage in removing an arbitrator’s flexibility is, of course, that if both offers are far apart and equally ludicrous, the arbitrator’s hands are tied.

Final Offer Arbitration has advantages, but there are a number of issues that should be carefully considered before electing this route. The provisions of the arbitration agreement should be tailored to the nature of potential disputes and the parties’ desires. The arbitration agreement should clearly spell out, among other matters, when and how offers may be made, the deadline for modifying offers, when the offers are shown to the arbitrator, and the type of relief that may be included in an offer. The parties may provide, for example, that at any time prior to the close of the arbitration hearing, the parties may exchange revised written proposals or demands, which shall supersede all prior proposals. Or they may provide that final offers must be submitted within a certain number of days before the arbitration hearing commences. In some instances, the process of submitting the offers moves the parties so close together that the dispute is settled before the hearing or before the arbitrator makes a decision. There are also variations the parties might want to explore, such as “night baseball” arbitration, which requires the arbitrator to make a decision without the benefit of seeing the parties’ proposals and then to make the award to the party whose proposal is closest to that of the arbitrator. Another variation is to have Final Offer Arbitrations on an issue-by-issue or claim-by- claim basis.

Final Offer Arbitration works well where the parties are only seeking monetary relief or where the dispute involves pricing or valuation disputes. It can also be used for non-monetary awards in the nature of specific performance, declaratory relief or injunctive relief, but in such cases extra scrutiny should be exercised when drafting the arbitration agreement. Parties should always consult with experienced counsel when drafting Final Offer Arbitration agreements and before signing such agreements to make sure the arbitration agreement will achieve the intended results and benefits. Properly drafted, Final Offer Arbitration provides a powerful incentive for the parties to move toward the middle and expeditiously resolve their disputes.
For more on arbitration, see our earlier posts.

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“Balanced Prosperous Energy Future” on Public Lands?

On March 17, 2015, Secretary Jewell presented what was billed as a “major speech” to describe her vision of a “balanced prosperous energy future” at the Center for Strategic and International Studies. Directly tying the U.S. “energy transformation” to the recovered U.S. economy, she noted, “The energy revolution we experienced in the past six years helped spur the recovery, but it has also been accelerated by the policies our country [read: the Obama Administration] has put in place.”

Secretary Jewell said that since 2008, U.S. oil production grew from 5 million to 9 million barrels per day and U.S. dependence on foreign oil is at the lowest point it has been in more than 30 years. She continued, “The amount of solar energy has increased ten-fold, and wind energy has tripled since 2008 . . . Families are driving farther than ever on a tank of gas . . .These shifts in U.S. energy markets aren’t marginal or temporary: They are tectonic shifts.”

But, she added, “you can’t talk about energy without talking about climate change.” She posed this question to the audience, “How do we modernize our energy programs to anticipate the new energy future?” Her prescription for meeting this challenge is interesting.

According to the Secretary, we “modernize” U.S. energy policy by increased federal regulation of fossil energy and federal promotion of renewable energy. To achieve this energy future, she highlighted these Obama ongoing and new reform efforts:
 Continuation of the 2010 onshore oil and gas leasing reforms that added two new layers of NEPA review before lease sales and reduced annual lease sales in any one state to one a quarter in geographic rotation. Results to date: BLM leasing at an historic low in last 25 years.
 Increased regulations for off-shore oil and gas drilling post-Macondo including: well design, production systems, blowout prevention and well control equipment.
 New fracking rule for oil and gas on federal and tribal lands—out this month.
 New methane controls for onshore oil and gas to cut “emissions and wasted gas that result from venting and flaring.”
 New stream protection regulations for coal mining operations.
 New off-shore oil and gas rule to “raise the bar on blowout preventers and well control measures.”
 New rules for off-shore Alaska oil and gas exploration.
 New reforms of the federal coal program to ensure a “fair return,” to federal and state governments and greater transparency and competitiveness.
 New coal regulations to answer this question: “How do we manage the coal program in a way that is consistent with our climate change objectives?”
 New oil and gas royalty policy - BLM will be taking comments on raising oil and gas royalty rates.
 New inspection fees for oil and gas (Congress needs to okay this request.)
 New legislation to eliminate oil and gas “tax credits and incentives” and invest instead in wind and solar incentives.
 More use of planning efforts like Master Leasing Plans “to open up access to resources in the right places” and close access to oil and gas leasing by “identifying places that are too special to drill.”
 Continue planning and policy efforts to promote on and off-shore renewable energy in order to expedite permitting times for renewable energy.

The Secretary concluded her list of regulatory reforms by stating that as a “grandmother,” she is “determined to make energy development safer and more environmentally sound in the next two years.”
Will this prescription of more federal regulation for fossil energy support the “tectonic shift” in U.S. energy production or act as a brake on the U.S. energy revolution? That is not a difficult question to answer.

Link to text of Secretary Jewell’s remarks:  http://www.doi.gov/news/pressreleases/secretary-jewell-offers-vision-for-balanced-prosperous-energy-future.cfm

 

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Employer Alert: Colorado’s New Wage Protection Act Implements Sweeping Changes to Wage Claims

Colorado employers need to be more mindful than ever with regard to timely payment of wages. A new Wage Protection Act (“Act”) has expanded wage claims under the Colorado Wage Claim Act by broadening remedies, creating an administrative resolution procedure, and increasing penalties and fines for noncompliance.

Broader Rights:  While previously only former employees had the right to pursue wage claims, the new Act expands this right to current employees. It also adds the right of employees pursuing minimum wage claims to recover attorneys’ fees and costs if they prevail.

Employees are also now afforded significantly more time to pursue wage penalty claims against employers. Before its amendment, the Colorado Wage Act gave employees only 60 days to make a written demand for wages in order to trigger the right to recover a penalty in addition to the unpaid wages. The new Act eliminates this requirement and gives employees two years after payment is due to make a demand for payment; in cases of willful violation, the employee now has three years to make a demand.

Administrative Resolution Procedure:  One of the most significant changes under the Act is the establishment of an administrative procedure designed to provide a speedy resolution of smaller wage claims. This optional remedy permits wage claims of $7,500 or less to be decided by the Colorado Department of Labor and Employment, Division of Labor (the “Division”), which now has the power to investigate and decide claims for wages earned on or after January 1, 2015, and to issue citations and assessments for wages owed, penalties, and fines. The Division is under a mandate to issue its determination on claims just 90 days after it sends notice of the complaint to the employer.

Increased Penalties and Fines:  Under the existing law, employers failing to pay employee wages are subject to penalties equal to the greater of 125% of the wage owed or up to 10 days of the employee’s daily earnings. Under the Act, employers now also face additional fines of up to $50 per employee, per day, beginning on the date the wages were originally due. These penalties and fines establish an expectation for employer’s good faith efforts to pay employees, including the requirement to mail paychecks to employees' last-known addresses within 60 days when other delivery methods fail.

Ignoring a legitimate demand for wages will only increase the penalties and fines. Failing to pay a demand creates a rebuttable presumption against the employer of a willful violation, can increase the penalty by 50%. In addition, if the demand is made by the Division on behalf of the employee, failing to timely respond will result in a $250 fine. On the other hand, an employer’s full payment within 14 days of the demand eliminates the penalties and fines and can head off further investigation by the Division.

Employers can also be fined for failing to adhere to a new three-year record keeping requirement, which applies to the information contained in an employee’s itemized pay statement. These records must be made available to the Division upon request and noncompliance will result in fines up to $250 per employee, per month, up to a maximum of $7,500.

Recommendations:  There are several ways in which employers can ensure compliance with wage laws:

• Make sure all employees are receiving at least minimum wage in every paycheck--even when permissible deductions are taken and regardless of an employee willingness to work for a lessor wage (which is unlawful).

• Wage deductions are only permitted in limited circumstances, so make sure the deduction is permitted before taking it.

• Treat wage demands seriously and respond promptly.

• Implement a three-year retention policy for all wage payment records.

Additional information concerning Colorado’s wage laws can be found at: https://www.colorado.gov/pacific/cdle/wagelaw

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Sixty Years of Fracking Data – What Does it Say?

On January 27, 2015, the U.S. Geological Survey, the science arm of the U.S. Department of the Interior, published a scientific investigative report, supported by a separate data series, consisting of hydraulic fracturing and fracturing treatment records from 1947-2010. Over 1 million fracked wells and 1.8 million fracking treatment records were reviewed by the agency. This is the first time that such a comprehensive analysis of the practice and evolution of fracking has been made available to the public and should prove of great value inside and outside of the oil and gas industry. The report and data set survey the practice of fracking from its initial use to the present and consider drilling techniques, additives, proppants, treatment fluids and water use. This information was then compared by the agency to information in peer-reviewed articles. The Abstract summarizes a key finding, “[w]ater-intensive horizontal/directional drilling has also increased from 6 percent of new hydraulically fractured wells drilled in the United States in 2000 to 42 percent drilled in 2010. Increases in horizontal drilling also coincided with the emergence of water-based ‘slick water’ fracturing fluids. As such, the most current hydraulic fracturing materials and methods are notably different from those used in previous decades and have contributed to the development of previously inaccessible unconventional oil and gas production target areas, namely in shale and tight-sand reservoirs.” In sum, new fracturing technologies have unlocked previously inaccessible resources.

Gallegos, T.J. and Varela, B.A., 2015 “Trends in hydraulic fracturing distributions and treatment fluids, additives, proppants, and water volumes applied to wells drilled in the United states from 1947 through 2010—Data analysis and comparison to the literature: U.S. Geological Survey Investigations Report 2014-5131. http://dx.doi.org/10.3133/sir20145131 and “Data regarding hydraulic fracturing distributions and treatment fluids, additives, proppants, and water volumes applied to wells drilled in the United States from 1947 through 2010.” http://pubs.usgs.gov/ds/0868/

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Colorado Supreme Court Issues Important Water Rights Opinion in Wolfe v. Sedalia Water & Sanitation District.

The Colorado Supreme Court has now determined the standard for quantifying water rights that have already changed from one use to another in a prior case. This is an issue that has been very unclear for some time, and many water users have been uncertain about how this issue would be addressed, until now.

In this case, the Court considered an appeal from an application to change the use of a water right that had originally been decreed for irrigation purposes, with an 1872 priority date. In 1986, the owner of the water right had obtained a water court decree, changing the use of the water right from irrigation uses to replacement purposes for an augmentation plan. In the 1986 case, the water right was quantified with an annual average of 13 acre feet per year for augmentation purposes, based on the long-standing principle that water rights will be limited to their historical beneficial use amount when they are changed to new uses.

The new owner of the water right, a water and sanitation district, acquired this water right, and sought to change it again, from augmentation purposes to municipal purposes. The central issue in the case was whether the applicant was entitled to rely on the previous quantification of the water right from 1986, or whether the court would need to consider the use of the water right since the last quantification and re-quantify the water right based on average historical use, including those years. This would have been a real problem for the applicant, because the water right had not been used at all since it was originally changed to a new use in 1986. Thus, if the water right needed to be requantified again based on a historical use study including those years, the yield of the water right likely would have been reduced substantially.

The Colorado Supreme Court ruled that the doctrine of “issue preclusion” (also known as collateral estoppel) will prevent relitigation of the historical beneficial use of previously changed water rights in many cases. However, in a subsequent change of water rights case, the court should take into evidence any periods of nonuse of the water right since the previous change case. If the water court determines that there has been “prolonged and unjustified nonuse” of the water right, since it was changed the last time, then this will be a legal basis to determine that “changed circumstances” have occurred. In that event, the water court should consider the nonuse of the water right since the last change decree, and requantify the water right based on a new historical use analysis.

While this decision provides some guidance to those seeking to change their water rights that may have been changed once before, it still leaves open some uncertainty. Subsequent cases will need to address what qualifies as “prolonged and unjustified nonuse” of a water right, thereby triggering a new historical use analysis. Also, a bill is currently pending in the Colorado Senate, SB 15-183, which would remove the “prolonged and unjustified nonuse” exception. If this bill passes, then prior quantifications of changed water rights will be preclusive, regardless of whether the water rights have been used since the first quantification. The bill does not address abandonment of water rights due to non-use, however. Therefore, water rights that have been previously changed but not used for an unreasonable length of time since then may still be susceptible to claims that they have been abandoned and are therefore no longer valid.

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Summary of The Colorado Oil and Gas Task Force Final Report

The Colorado Oil and Gas Task Force submitted its Final Report on February 27, 2015 making nine recommendations to the Governor that received two-thirds of the vote of the Task Force members as required by Executive Order 2014-005 to constitute recommendations of the Task Force.

1. Collaboration of local governments, the COGCC and Operators relative to oil and gas locations and urban planning.

    The Task force recommended that the COGCC should initiate rule-making to define and adopt a process of enhancing local government participation during the COGCC application for Permit to Drill process concerning locations of “Large Scale” oil and gas facilities in “Urban Mitigation Areas.” The recommendation contemplates giving local governments an opportunity to address location of right-of-way for pipelines, facility consolidation, access routes and mitigation measures within an Urban Mitigation Area and would require operators to consult with the local government. Operators would be required to indicate whether such consultation has taken place when submitting Form 2A, Oil and Gas Location Assessment, and to state whether there has been local government approval. A local government’s request concerning location should be based on an established set of reasonable standards or criteria. COGCC staff and local government liaison would be charged with convening meetings to consider alternative locations and encourage locations that consider distances between building units and/or high occupancy units. If a compromise cannot be reached, the Operator may offer to engage in mediation with the local government which process shall conclude within 45 days. If no agreement is reached, the COGCC will conduct a hearing and hear evidence from the local government, the Operator and the staff before the Oil and Gas Location Assessment may be approved.

2. Including future oil and gas drilling and production facilities in existing local comprehensive planning processes.

   The Task Force recommended that operators register with Local Government Designees (LGD), and upon the request of the LGD, submit operational information for purpose of incorporating potential oil and gas development into local comprehensive plans. The Operator would be required to provide the LGD a good faith estimate of the number of wells that the operator intends to drill in the next five years in the municipal jurisdiction, corresponding to the operator’s internal analysis of reserves classified as “proved undeveloped” for SEC reporting purposes, along with a map showing the location of the operator’s existing well sites and related production facilities, sites for which operator has made application for COGCC permits, and sites identified for development on the operator’s current drilling schedule for which it has not yet made application for COGCC permits. The plan may be changed at the operator’s sole discretion and shall be updated by the operator if materially altered. The Local Government Planning Department will prepare a comprehensive map of potential future drilling and production sites within its jurisdiction, and identify sites that it considers compatible with the current and planned future uses of the area, sites where minor issues may need to be resolved by negotiation, and sites where it anticipates significant conflicts with current and planned future uses as indicated in the Comprehensive Plan.

3. Enhancing Local Government Liaison and Local Government Designee Roles and Functions.

    The Task Force recommends the COGCC should undertake a review that would include outreach to local governments to better understand barriers to greater utilization of the LGD/LGL functions, enhancing education to local governments on how to engage the LGD/LGL process, expanding on LGD comment period on APDS and appropriate Conditions of Approval to 60 days, offering financial and other support to train LGDs, and apply for Energy and Mineral Impact Assistance Funds to assist local governments with the creation of LCD positions.

4. Increase COGCC full time staff, including inspectors, field operations, enforcement and permitting staff.

    The Task Force recommend the General Assembly should authorize COGCC to hire 12 additional full time employees to inspect wells, conduct environmental investigations and response actions, conduct intake of and track citizen complains, process permit applications, and perform data analysis to respond to data and information requests from the legislature, media, public, industry, and other stakeholders.

5. CDPHE staffing, a health complaint line, a human health risk assessment and a mobile air quality monitoring program.

    The Task Force supports the Colorado Department of Public Health and Environment’s (CDPHE) request to the General Assembly to convert five temporary employees to permanent status to continue its air monitoring and leak detection activities and to establish a health complaint and information line. The Task Force also encourages CDPE to seek funding for mobile air quality monitoring unit and funding to conduct a human health risk assessment in compliance with current scientific standards.

6. Creation of an Oil and Gas Information Clearinghouse

    The Task Force recommends the establishment of a clearinghouse on a user-friendly interactive website to communicate information regarding Colorado’s oil and gas industry that would be available to local governments, the general public, oil and gas operators and other interested persons, including information on permit review and consultation, drilling and completion practices, testing and monitoring practices, regulatory enforcement, repository of memorandums of understanding, and impact studies and analysis.

7. Recommendation to reduce truck traffic for oil and gas activities.

    The Task Force recommends that COGCC and CDOT take the lead to convene a working group to investigate any and all steps that can and should be taken by government and industry to reduce the use of large trucks and trailers in oil and gas activities.

8. Recommendation regarding air quality rules.

    The Task Force recommends the General Assembly continue the new state air quality regulations for oil and gas methane.

9. Compliance Assistance Program

    The Task Force recommends the COGCC should implement and emphasize a compliance assistance program to help operators comply with operating rules and policies, and to assure that inspectors are enforcing those rules and policies in a consistent manner.

The Minority Report. Other proposals considered but not receiving the two-thirds approval necessary to become recommendations of the Task Force are encompassed in the minority report, and include recommendations (1) to require residential drilling plans; (2) to coordinate Local government land use processes with issuance of state oil and gas permits; (3) to create a statutory oil and gas dispute resolution panel ; (4) to acknowledge local government siting authority; (5) to change standing and notice requirements (6) to allow local governments to assess fees to fund inspections and monitoring of the oil and gas industry; (7) to facilitate planning for oil and gas development and provide flexibility in locating wells; (8) to amend COGCC Rules and the Oil and Gas Conservation Act to acknowledge local government regulatory authority; (9) to enact legislation to improve the operational conflict preemption standard; (10) to clarify the balanced responsibilities of the Commission and acknowledge the important role of local government land use regulation; (11) to encourage the use of memoranda of understandings; (12) to amend comprehensive drilling plan rules to harmonize state and local authority; (13) to expand the statutory procedure for notification and consultation with mineral owners/lessees when significant surface development projects are being prepared for local land use approval; (14) to conduct a review of the negative health impacts from fracking and drilling, (15) to provide adequate compensation to affected surface owners; (16) to provide public disclosures of chemicals used in oil and gas operations and removing trade secret protections; (17) to require disclosure of hydraulic fracturing process; (18) to allow counties to regulate noise associated with oil and gas operations and to amend existing rules regulating noise; (19) to require down-gradient groundwater water quality and soil monitoring for oil and gas processing facilities; and (20) to delay further rulemaking in subject areas recently studied or which new rules have already been adopted.

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Arbitration Pitfalls – Broad or Narrow Scope

Arbitration Series - Part 3 of 3:  When drafting an arbitration provision, careful attention should be given to the language describing the scope of disputes to be arbitrated. Unless the parties intend to arbitrate all disputes that may touch on or collaterally relate to the contract, the arbitration clause should contain express language specifically identifying and narrowly describing the scope of disputes to be arbitrated. In determining whether a given dispute falls within the scope of a contractual arbitration provision, courts first determine whether the arbitration clause is broad or narrow. Chelsea Family Pharmacy, PLLC v. Medco Heath Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. “ Id., at 1262. In contrast, where an arbitration clause is broad, “there arises a presumption of arbitrability and arbitration of even a collateral matter . . .if the claim alleged implicates issues of contract construction or the parties' rights and obligations under it.” Id. The precise wording of an arbitration clause does matter and should be carefully considered.

“Arising Out Of” “Relating To” or “Connected With:” The arbitration clauses recommended by the American Arbitration Association (“AAA”) call for arbitration of “any controversy or claim arising out of or relating to this contract, or the breach thereof.” Such language has universally been construed to be a broad arbitration clause. C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 415 (2001); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Getzelman v. Trustwave Holdings, Inc., No. 13-cv-02987-CMA, 2014 WL 3809736 *3 (D.Colo. Aug. 1, 2013). The use of such terms as “related to” or “connected with” extends the scope of the arbitration provision beyond claims under the contract. Julian v. Julian, No. 4137-VGP, 2009 WL 2937121 at *5 (Del. April 23, 2009) (“related to” language “explicitly extends the scope of the arbitration provision ‘beyond the four corners of’” the agreement); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (arbitration clause encompassing “all disputes or controversies arising under or in connection with this Agreement” constituted “a broad arbitration clause as it covers not only those issues arising under the employment contract, but even those issues with any connection to the contract.”). Similarly, contracts that call for arbitration of “any dispute between the parties” without limiting language have also been construed to be broad arbitration clauses. Qwest Corp. v. New Access Communications, LLC, No. 03-N-1278, 2004 U.S. Dist. LEXIS 28523, * 3 (D. Colo. Mar. 31, 2004) (arbitration clause covering “any claim, controversy or dispute between the parties” with no restriction found to be broad)

Disputes “Under” or “Arising Under” the Agreement: Courts have split over the interpretation of arbitration clauses limiting arbitration to disputes “under” or “arising under” an agreement. Some courts construe such clauses to be relatively narrow. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 924 (9th Cir. 2011) (“arising under” language signals a narrow arbitration clause); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (phrase “arising under” deemed relatively narrow); Carro Rivera v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996) (because tort claims did not relate to contract interpretation and performance, they did not “arise under” the agreement); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So.2d 483, 488 (Miss. 2005) (arbitration of disputes “arising under this agreement” is narrow and focused only on those disputes actually “under” the agreement). Many other courts, however, have found clauses requiring arbitration of any dispute “arising under” the agreement to constitute a broad arbitration clause. Cook v. PenSa, Inc., No. 13-CV-03282-RM-KMT, 2014 WL 3809409 *13-14 (D. Colo. Aug. 1, 2014) (determining that “the Tenth Circuit would follow the majority of federal circuits and give the phrase ‘arising under’ a broad construction based on strong federal policy in favor of arbitration.”); Viaero Wireless v. Nokia Solutions Network U.S. LLC, No. 13-CV-00866-RM-CBS, 2013 WL 5366402, at *5 (D. Colo. Sept. 25, 2013) (unpublished) (noting that “arbitration provision extends to ‘any dispute under this Agreement . . . ,’ and therefore, the presumption in favor of arbitration extends to peripheral matters relating to the parties' obligations”); Dialysis Access Center, LLC v. RMS Lifeline, Inc.,638 F.3d 367, 382 (1st Cir. 2011) (giving broad construction to provision requiring arbitration of “any dispute that may arise under this [Master Service] Agreement”); Consol. Brokers Ins. Servs., Inc. v. Pan-Am. Assur. Co., Inc., 427 F. Supp. 2d 1074, 1083 (D. Kan. 2006) (finding arbitration clause, which encompassed “[a]ny dispute arising between the parties under this Contract,” to be “a broad provision”).

Drafting Narrow Arbitration Clauses: Given the strong presumption in favor of arbitration, unless the parties intend to arbitrate all disputes related to their contract, including collateral and peripheral matters that may merely implicate issues of contract construction or the parties' rights and obligations under it, extreme care should be taken to limit the arbitration clause to specific, narrowly defined types of disputes. The parties should include express language identifying with specificity the type of disputes they agree to arbitrate. The parties also may want to recite their intention that the arbitration clause is intended to be narrow, that the agreement to arbitrate only covers those categories of disputes specifically listed, and the parties do not intend to arbitrate statutory, tort or other claims that merely touch on or collaterally relate to the agreement.

In addition, where the parties intend to arbitrate only a limited category of disputes but want those disputes, but only those disputes, to be resolved under an arbitration organization’s arbitration rules, those rules should be carefully reviewed, specifically identified in the contract, and express language should be included in the arbitration clause excluding the application and operation of any arbitration rule that would otherwise extend the scope of arbitrable disputes beyond what the parties intend. Arbitration rules adopted by an arbitration association such as the AAA, for example, typically provide that: (1) the parties shall be deemed to have made such rules a part of their arbitration agreement whenever they have provided for arbitration under such rules; (2) the arbitrator shall have the power to determine disputes over the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim; and (3) the arbitrator shall have the power to determine the validity of a contract of which an arbitration clause forms a part, and that such arbitration clause shall be treated as an agreement independent of the other terms of a contract. See, e.g., AAA Commercial Arbitration Rules R-1 and R-7. While courts recognize that arbitration is purely a matter of contract, any ambiguities will be construed in favor of arbitration. Parties should draft their arbitration clauses accordingly.

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Arbitration Pitfalls – Failing to Specify Duration

Arbitration Series - Part 2 of 3:  Arbitration clauses are often contained in purchase and sales agreements, underwriting agreements, earn-in agreements, and other contracts covering specific transactions or limited to a specific performance period. See prior post. Parties may have intended the arbitration clause to only cover disputes concerning the performance or interpretation of the contract. However, parties who incorporate broad arbitration clauses in their contracts, such as clauses calling for arbitration of any dispute “arising out of,” “related to” or “connected with” the agreement, may be forced to arbitrate post-contract disputes they did not intend to arbitrate.

Federal courts have held an arbitration clause in a contract is presumed to survive the expiration of the contract. Newmont U.S.A. Ltd. v. Insurance Co. of North America, 615 F.3d 1268 (10th Cir. 2010); Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775 (10th Cir. 1998). The Tenth Circuit governing most of the Rocky Mountain states has held that this presumption in favor of continuing arbitrability will only disappear in two situations:

     1) if the parties expressly or clearly imply an intent to repudiate post-expiration arbitrability, or
     2) if the dispute cannot be said to arise under the previous contract.

In Riley, the Tenth Circuit held that to “arise under” a contract means the dispute involves rights which “to some degree” have vested or accrued during the life of the contract and merely ripened after termination, or the dispute relates to events which have occurred “at least in part” while the agreement was still in effect. 157 F.3d at 781.

Given the strong presumption in favor of arbitration, any implied intent to repudiate post-expiration arbitrability must be clear. Several courts, for example, have found the presumption in favor of arbitration applies even though only certain provisions in the contract survive closing or termination of the contract and the arbitration clause is not listed as one of the provisions that survive. In Huffman v. Hilltop Companies, LLC., 747 F.3d 391 (6th Cir. 2014), for example, the court held an arbitration clause covering any claim arising out of or related to an agreement was broad and gave rise to the presumption of arbitrability, even though the arbitration clause was not listed among those provision that survived the termination of the contract. The court ruled the strong presumption in favor of arbitration applied absent an indication that the parties clearly intended for the survival clause to serve as an exhaustive list of the provisions that would survive expiration of the agreement. See also, W. Liberty Foods, L.L.C. v. Moroni Feed Co., 753 F.Supp.2d 881, 885 (S.D.Iowa 2010) (holding that an arbitration clause did not expire despite the fact that it was not listed in the contract's survival clause). These courts have reasoned that if the parties had intended to extinguish the arbitration provision upon the termination of the agreement they could have done so expressly.

When parties negotiate the terms of an arbitration clause, they should consider whether they want to arbitrate disputes between them after the contract is completed or terminates. If the parties intend to limit arbitration to disputes that arise during contract performance, they should pay careful attention to the language of their arbitration clause and include express language narrowly describe the scope of disputes that will be subject to arbitration and specifying any durational limitation on their agreement to arbitrate.

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Equitable Extension of Oil and Gas Lease Rejected During Pendency of Lessor’s Declaratory Judgment Action to Declare Lease Invalid: Pennsylvania

On February 17, 2015, in a decision that is contrary to the principle that is nearly universally applied in other oil and gas producing jurisdictions, the Pennsylvania Supreme Court held that an oil and gas lessee is not entitled to an equitable extension of the primary term of a lease when the lessee is forced to spend years litigating the question of the lease’s validity. This decision represents a material departure from the general rule followed in other jurisdictions that, when a suit by a lessor challenging the validity of an oil and gas lease is unsuccessful, equitable principles apply to ensure that the lessee is not deprived of the agreed-upon time within which it must perform to maintain the lease.

In Harrison v. Cabot Oil & Gas Corp., No. 75 MAP 2014, Harrison, the owner of real property leased for oil and gas production to Cabot, sued Cabot seeking a declaration that the lease was invalid. Harrison argued that the lease was invalid because he signed the lease after Cabot represented that Harrison would not receive more than $100 per acre as a lease bonus. Cabot filed a counterclaim requesting that the primary term of the lease be extended for the period of time during which the lawsuit was pending in the event that the courts confirmed the validity of the lease.

The U.S. District Judge granted summary judgment in favor of Cabot on Harrison’s claim, finding that the lease was valid and enforceable. However, the court ruled against Cabot on the counterclaim, declining to extend the primary term of the lease. The court reasoned that equitable extension of the lease was not proper because the filing of a declaratory judgment action by a lessor seeking invalidation of an oil and gas lease is not a “repudiation of the contract,” which would justify an equitable extension under Pennsylvania law.

On appeal to the Third Circuit, the Third Circuit certified a question of law to the Pennsylvania Supreme Court, asking the state court to determine “whether the primary term of an oil-and-gas lease should be equitably extended by the courts, where the lessor has pursued an unsuccessful lawsuit challenging the validity of the lease.”

The Pennsylvania Supreme Court agreed with the U.S. District Court’s refusal to equitably extend the lease, concluding that commencement of an action seeking judicial declaration of an oil and gas lease’s invalidity is not a “repudiation of the lease” because, under Pennsylvania law, repudiation requires an “absolute and unequivocal refusal to perform” the contract. Rather than an outright refusal to perform the lease, the Pennsylvania Supreme Court found that Harrison was only trying to “settle and to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations,” as set out in Pennsylvania’s Declaratory Judgment Act.

The Court concluded that to hold otherwise would be to adopt a special repudiation rule for oil and gas leases. The Court also emphasized lessor’s observation “that oil-and-gas-producing companies are free to proceed according to their own devices to negotiate express tolling provisions for inclusion in their leases.” (Emphasis added.) The Court concluded that the result might be different where evidence of “affirmative repudiation of a lease” is present: “Our determination is only that, consistent with the prevailing substantive law of this Commonwealth, the mere pursuit of declaratory relief challenging the validity of a lease does not amount to such.”

Therefore, even though Cabot was forced to standby and do nothing to develop the leasehold while the litigation was occurring, all while the primary term of the lease ticked-by, the court concluded that Cabot was without a remedy to recoup the time lost during the litigation.

This outcome is contrary to the decision of almost every other court to consider the issue. As explained by Patrick H. Martin & Bruce M. Kramer, “courts have almost universally held that when the lessor has brought a suit during the primary term claiming the termination of the lessee's interest, the lessee, should he prevail in such action, will be entitled to a period of time extending beyond the expiration of the primary term to gain production.” 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 604.7 (2009). For example, in Southwestern Energy Production, Inc. v. Elkins, 374 S.W.3d 678 (Ark. 2010), the Arkansas Supreme Court applied the repudiation doctrine to toll lease performance from the date the suit was filed, finding that not tolling lessee’s “obligation to drill as of that date would create an impossible dilemma” for lessee to “either use the contested lands and potentially expose itself to more liability or refrain from using the lands and lose its investment....” Other courts have reached similar conclusions. See, e.g., Snowden v. JRE Investments, Inc., 2010 Ark. 276, 370 S.W.3d 215, 221-22; Barby v. Cabot Petroleum, Inc., 944 F.3d 798, 799 (10th Cir. 1991), citing Duerson v. Mills, 648 P.2d 1276, 1277 (Ok. 1982), overruled on other grounds, Baytide Petroleum, Inc. v. Continental Resources, Inc., 231 P.3d 1144 (Okla. 2010).

Oil and gas lessees should be concerned that other courts may adopt this precedent because it could allow a lessor or other interested party to challenge the validity of an oil and gas lease and force the lessee to decide between continuing to develop the lease in the face of the risk that the lease will be invalidated (and, arguably, that lessee’s actions are a trespass on lessor’s land) and losing the lease for failure to develop during the primary term. It appears that this issue has yet to be decided by the Colorado Supreme Court. As such, it would be prudent for Colorado lessees to include express tolling provisions in their leases.

For more information about Harrison v. Cabot Oil & Gas Corp., oil and gas lease validity litigation, and equitable principles, please contact Kathryn Haight or Steve Sullivan.

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State vs Local Control of Oil and Gas Activity: Ohio

On February 17, 2015, in State ex rel. Morrison v. Beck Energy Corp. (Slip Opinion No. 2015-Ohio-485), the Ohio Supreme Court ruled, in a 4-3 decision, that Munroe Falls, a suburb or Akron, could not use local zoning laws to supersede or override the state of Ohio’s regulatory scheme for oil and gas activity. Recognizing that Ohio law “preserves certain powers for local governments, it gives state government ‘sole and exclusive authority’ to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state.” The Ohio Supreme Court rejected the argument that the Home Rule Amendment to the Ohio Constitution grants to the city of Munroe Falls the power to enforce its own permitting scheme on top of the state system and does not allow a municipality to block drilling activities otherwise permitted by the state.

In that case, Beck Energy had obtained a state-issued permit in 2011 to drill a traditional well on private property in Munroe Falls. The city’s resulting suit claimed that Beck Energy had illegally sidestepped local ordinances, rendering its conduct illegal. The Ohio Supreme Court majority rejected Munroe Falls’ claim and held that a town cannot enforce oil and gas drilling regulations that conflict with statewide law and, hence, Munroe Falls had exceeded the limits of Ohio’s Home Rule Amendment. In Justice Terrence O’Donnell’s special concurrence he emphasized that while he agreed with the result, the scope of the majority’s decision was limited, stating: “it remains to be decided whether the General Assembly intended to wholly supplant all local zoning ordinances limiting land uses to certain zoning districts without regulating the details of oil and gas drilling” addressed in state law.

Even though courts in New York and Pennsylvania have ruled in favor of some level of local government control over oil and gas development, decisions rejecting similar local oil and gas activity bans were issued in New Mexico in 2015 by U.S. District Judge James Browning and in 2014 by Boulder District Court Judge D.D. Mallard (now at issue in the Colorado Court of Appeals).

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Colorado Supreme Court Holds That a Revocable Option Agreement Does Not Violate The Common Law Rule Against Perpetuities

The Colorado Supreme Court held that an option to purchase oil and gas properties did not violate the common law rule against perpetuities. Atlantic Richfield Company v. Whiting Oil and Gas Corporation, f/k/a Equity Oil Company, 2014 CO 16. In 1968, Atlantic Richfield Company (ARCO) and Equity Oil Company (Equity) entered into an agreement regarding oil shale research by Equity. The 1968 agreement included provisions for money payments to Equity, conveyance of a partial interest from Equity to ARCO in certain property in western Colorado, and a provision that if oil shale was not in commercial production by 1983, Equity would convey to ARCO an additional interest in the property. Id. ¶ 8. In 1983, the parties entered into an amendment of the agreement. In the 1983 amendment, ARCO granted Equity a non-exclusive option to buy back the interest that ARCO had previously acquired from Equity as part of the 1968 agreement. The option would expire in 2008. The 1983 amendment provided “ ‘ARCO shall retain the sole and exclusive right to cancel this Option at any time during its term,’ with the exception that Equity was granted a right of first refusal if ARCO received an offer from another party to buy its interest” in the property. Id. ¶ 9. ARCO and Equity had negotiated for a year regarding the 1983 amendment. The option exercise price was tied to ARCO’s West Texas sour crude oil benchmark price. Equity exercised the option in 2006. The option exercise price at that time was significantly below the property’s 2006 market value. ARCO refused to convey the interest in the property to Equity. Id. ¶ 10.

Equity sued ARCO for specific performance of the 1983 option. ARCO argued that the 1983 option violated the common law rule against perpetuities and was void. The trial court agreed. The common law rule against perpetuities provides that “ ‘[n]o interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.’” Id. ¶ 25. The Colorado Statutory Rule Against Perpetuities Act (Act), §§ 15-11-1101 to -1216 C.R.S. (2013), supersedes the common law rule against perpetuities for nonvested property interests created after May 31, 1991. (The common law rule may still apply to nonvested property interests created prior to that date, subject to other provisions of the Act.)

The trial court and the court of appeals applied § 15-11-1106(2) of the Act, which is “a reformation provision that requires courts, upon request, to reform nonvested interests created prior to May 31, 1991 to bring them into compliance with the common law rule.” Id. ¶ 4. This reformation provision was at issue in the appeal. The Supreme Court, however, affirmed the court of appeals on different grounds. The reformation provision applies only to reform instruments that are determined “to ‘violate this state’s rule against perpetuities as that rule existed before May 31, 1991.’” Id. ¶ 4. The Supreme Court held that the option did not violate the common law rule against perpetuities. “The commercial option negotiated by the parties posed no practical restraint on alienation because it was fully revocable at any time before its exercise.” Id. ¶ 6. Thus, the court found the option was valid as originally negotiated.

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Arbitration Pitfalls – Failing to Specify Who Decides Arbitrability

Arbitration Series - Part 1 of 3:  Agreements to arbitrate are often viewed favorably during contract negotiations as way to avoid litigation and minimize costs and expense should a dispute arise between the parties. Frequently, however, arbitration may be just as expensive and lead to uncertainties and consequences never contemplated. A party should carefully consider and understand the terms of any arbitration clause and avoid rubber stamping general arbitration clauses, such as those calling for the arbitration of any dispute arising under or relating to the contract under the Rules of the American Arbitration Association (“AAA”). One threshold issue the parties should clearly understand and address is who will have jurisdiction to resolve disputes about whether a given claim falls within the scope of the parties’ arbitration agreement.

The U.S. Supreme Court has ruled that the question of whether a particular dispute is arbitrable is presumptively a question for the court to decide absent “clear and unmistakable” evidence that the parties agreed that the arbitrator would decide this question. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). Following this decision, arbitration associations amended their arbitration rules to provide that the arbitrator has jurisdiction to decide whether a given dispute is arbitrable. Rule R-7 of the AAA Commercial Arbitration Rules, for example, provides that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or the arbitrability of any claim or counterclaims.” All the various sets of arbitration rules promulgated by the AAA now contain a similar rule. A line of cases from federal district and circuit courts subsequently developed (now the majority view) holding that when the parties use a broadly worded arbitration clause incorporating a set of arbitration rules which confers upon the arbitrator the power to determine his own jurisdiction, they “clearly and unmistakably” agree to arbitrate whether a given dispute is arbitrable. Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd, 398 F.3d 205, 208 (2d Cir. 2005). Thus, where a dispute, whether sounding in tort, equity, contract or statute has any arguable connection to the agreement, the arbitrator instead of the courts may have the power to determine if the dispute is arbitrable.

It is important to recognize that arbitrators are usually private practitioners engaged in the business of providing legal services for a fee. They may face significant financial and competitive pressures to earn more money and handle more cases. That is true for many arbitrators suitable for commercial disputes, but is not the case for the judiciary. Most parties would expect that a judge's compensation does not depend on how that judge decides an issue, but they may not appreciate that conferring the power on an arbitrator to determine whether a given dispute is arbitrable or not could have such an effect.

Where parties only intend to arbitrate certain types of disputes but want to have those specific disputes, and only those disputes, resolved by an established arbitration organization and under its established arbitration rules, it is critical that the parties carefully define and narrow what disputes are arbitrable. Unless parties want to arbitrate whether a given dispute is in fact arbitrable, they should also specifically address in the body of the arbitration clause itself the question of who will determine whether a given dispute falls within the scope of their arbitration agreement. The same applies if the parties intend an arbitrator to decide whether a given dispute is arbitrable. Failure to do so may lead to complicated and expensive disputes concerning the scope of the arbitration clause or lead to results the parties never focused on or intended.

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UT Governor Herbert Signs Executive Order on the Greater Sage Grouse to Short Circuit Federal Listing

On Tuesday, February 10, 2015, Utah Governor Gary Herbert signed an executive order directing state agencies to implement additional state-level protection measures aimed heading off a potential federal listing of the sage grouse as “threatened” or “endangered” under the Endangered Species Act. Under a settlement reached in 2012, the U.S. Fish and Wildlife Services have until September 2015 to decide whether the sage grouse should be listed under the ESA. Referring to the consequences of such a designation as potentially “devastating,” Governor Herbert’s executive order requires that all state agencies minimize the impact of activities on sage grouse, consult with the Utah Division of Wildlife Resources on decisions that could affect sage grouse habitat, and incorporate directives from the Utah Conservation Plan into state operations.

While the executive order requires consideration of sage grouse protections in agency decision-making, it does not impose the level of regulation or constraints on private property and federal lands that would be imposed if the sage grouse is listed under the ESA. According to Governor Herbert, "The concern we have here in Utah that in doing so [a federal listing], it will have a significantly devastating impact on our economy," particularly on farmers, ranchers and those involved in natural resource extraction.

The executive order implements a number of proposals contained in the Utah Sage Grouse Conservation Plan, which was completed in April 2013 and contained recommendations for habitat preservation. While many of the recommendations contained in the Conservation Plan have been informally implemented by state agencies, the executive order seeks to make the Plan’s recommendations mandatory. According to Utah’s Public Lands Policy Coordinating Office, informal implementation of the Conservation Plan and other localized habitat preservation efforts have already led to an increase in sage grouse populations throughout the state.

In conjunction with the executive order, Utah lawmakers are seeking a $2 million appropriation to preserve sage grouse habitat. These protections would include projects on state and private lands to improve sage grouse habitat, such as removing pinyon-juniper stands which encroach onto sage brush. According to Senator Kevin Van Tassell, who proposed the appropriation, the executive order and the state habitat preservation projects are intended to show the FWS that state-level management of the species is working and that federal intervention through the ESA is unnecessary.

Governor Herbert’s executive order comes almost five years after former Wyoming Governor Freudenthal’s executive order on Sage Grease Core Area Strategy and is intended to promote the same goal: prevention of an ESA listing. Wyoming has been a leader in this movement, and implementation of its conservation plan—which includes a prohibition on surface disturbing activities in areas designated as core habitat—have proven successful.

It remains to be seen whether these state-level efforts will be sufficient to forestall a federal listing of the Greater sage grouse or whether Utah’s response will prove to be too little too late.

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Interior Will Make Greater Sage-grouse Determination Despite Congressional Rider

In a January 26, 2015 letter responding to the bi-partisan co-chairs of the Western Governors’ Association State-Federal Sage-Grouse Task Force, Interior Secretary Jewell stated that, despite a congressional rider prohibiting the U.S. Fish and Wildlife Service from issuing a listing rule, the Department will make a listing determination for the greater sage-grouse by the court-ordered deadline of September 30, 2015. “In line with that obligation, the [FWS] is on schedule to make a determination by that date, based on revised Bureau of Land Management and U.S. Forest Service land management plans, an enhanced rangeland fire strategy . . . and states’ plans to conserve the greater sage-grouse.”
In a 2011 settlement, FWS committed to making a final listing decision for the greater sage-grouse either as “warranted” (as endangered or threatened) or “not warranted” for listing under Section 4 of the Endangered Species Act September 30th. In December 2014, the appropriations bill signed by the President (H.R. 83) contained language prohibiting the FWS from writing or issuing a rule to list the greater sage-grouse.

Under ESA § 4, if FWS decides to list a species it must be done by notice and comment rulemaking. This process begins with a proposed rule and ends with a final rule between 90 days and 18 months later. The proposed rule must summarize the data upon which it is based, show the relationship of the data to the proposed rule and provide a summary of the factors affecting the species. At least a 60-day comment process is required. Within 12 months of the publication of the proposed rule, FWS must either publish or withdraw the proposed rule or upon a finding of “substantial disagreement regarding the sufficiency or accuracy of the available data” extend the deadline for no more than 6 months. For land users, an important component of a listing rule is the identification of specific activities that will, or will not, likely result in a “take” violation under ESA § 9. This section of the Act prohibits “take” of a listed species anywhere and everywhere – federal, state or fee lands.
With the congressional rider in place, FWS can’t issue a listing determination rule for the greater-sage grouse, or, as in the case of the now-listed as threatened Gunnison sage grouse (see prior post), FWS can’t issue an ESA § 4(d) rule providing for management flexibility. FWS can issue a not-warranted finding, complete the analyses for a listing determination or a ESA 4(d) rule, or issue an emergency listing rule for 240 days under ESA 4(b)(7). The nightmare scenario is that FWS will make a determination in September that the bird should be listed, but because of the rider won’t be able to give guidance in a rule on how the public can avoid “take”. Similarly, the ESA § 7 consultation process for federal actions would grind to a halt as federal agencies comply with the consultation process without any actionable information from FWS.

Over the last several years, the states that would be most affected by a listing have been working on state conservation plans and coordinating with the federal land management agencies in an effort to forestall a listing. On January 16, 2015, Governors Hickenlooper (CO-D) and Mead (WY-R) wrote to the Secretary with two questions, the first concerning the schedule for listing and the second asked “[w]hat funding was provided to support state and federal efforts focused on greater sage-grouse conservation? In particular, how will BLM use the $15 million appropriated to the agency?”
The Secretary’s response to the funding question was not encouraging, “[t]he Department intends to spend the $15 million appropriated . . . to complete the BLM land management plans and implement actions critical to sagebrush conservation and restoration . . . [and] will continue to work with the states to complete our land management plans, solicit their advice in developing our rangeland fire strategy, and prioritize actions on the ground to protect and restore sagebrush landscapes and important habitat.” Emphasis added. Secretary Jewell did conclude her letter by affirming the “shared goal” of getting to a “not warranted” finding.

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The Muddy Waters Surround the FWS's Listing of the Gunnison Sage-Grouse

In the 2015 Appropriations Bill (Cromnibus), via a rider, Congress prohibited Interior from writing or issuing any final listing rule under Section 4 of the Endangered Species Act (“ESA”) for several species of grouse. It now looks like that action could result in some unintended consequences for the recently listed Gunnison Sage-Grouse, a bird whose habitat is found in southwestern Colorado and eastern Utah. On November 12, 2014, the Gunnison Sage-Grouse was listed under the ESA as “threatened.” When a species is listed as threatened rather than “endangered,” the ESA § 4 provides the Fish and Wildlife Service (“FWS”) with significant management flexibility. This regulatory flexibility includes the authority to craft a species-specific rule that can formally recognize state, local and private conservation efforts under ESA § 4(d). At the time of the listing, which was widely criticized in Colorado and Utah for failing to give enough credit to the State’s conservation efforts, the FWS kept the door open for future negotiations. FWS Director Ashe stated that FWS would draft and implement a so-called 4(d) rule in early 2015, which would make ESA compliance easier for landowners and industry.

The Cromnibus prohibition of expenditures for ESA § 4 listing actions appears to have inadvertently put a roadblock to the agency’s intent to draft a special rule for the Gunnison Sage-Grouse under section 4(d) that could have created exceptions and loosened the default requirements associated with the listing. It appears that Congress may have done so unwittingly, on the basis of language drafted long before the Gunnison Sage-Grouse was listed. Regardless of what Congress intended to do, it did not actually prevent the listing and may have made a bad situation worse.

Further muddying the waters on the listing is the fact that, on December 12, 2014, the State of Colorado filed a notice of intent to sue FWS over the listing of the Gunnison Sage-Grouse. The ESA requires that parties planning to sue provide the agency with 60-days’ notice of that intent, and the Colorado Attorney General has indicated that Colorado will file the lawsuit when this period expires. Gunnison County has also filed a notice of intent to sue the FWS over the listing. Similarly, on January 20, 2015, John Harja of Utah's Public Lands Policy Coordination Office announced that his office had filed a notice of intent to sue to challenge the listing. It has yet to be decided whether the State of Utah will file its own litigation or join the State of Colorado’s suit.

Also on January 20, 2015, the Western Watersheds Project and the Center for Biological Diversity filed a complaint in Federal District Court in Colorado arguing that the Gunnison Sage Grouse should have been listed as endangered, rather than threatened under the ESA. In the litigation, the groups are asking the court to remand the final rule listing the bird as threatened to the FWS for “an adequate finding that complies with all requirements of the ESA and the[Administrative Procedure Act.” In the meantime, the groups ask that the threatened listing remains in place.

The question remains whether, in the midst of these competing challenges and the federal governments’ self-inflicted prohibition on monetary expenditures, there will be an opportunity to find a compromise that could provide management flexibility and recognition of State, local, and private conservation efforts.

The listing of the Gunnison Sage-Grouse is available at http://www.fws.gov/mountain-prairie/species/birds/gunnisonsagegrouse/GUSGFinalListingRule_11202014.pdf

  2470 Hits
2470 Hits

Nevada Association of Counties Sue over Candidate Species Settlement

In a new twist in the ongoing debate between states and the federal government over the management of wildlife, the Nevada Association of Counties sued the U.S. Fish and Wildlife Service (“FWS”), arguing that the highly publicized and controversial 2011 settlement of a lawsuit between the FWS and environmental groups that forces listing determinations by a date certain violates the Endangered Species Act (“ESA”). On December 4, 2014, the Nevada Counties filed the suit in the United States District Court for Nevada, Case No. 3:14-cv-00630 challenging the settlement of In re Endangered Species Act Section 4 Deadline Litigation (“2011 Litigation”).

In the 2011 Litigation, a coalition of environmental groups filed multiple actions to compel the FWS to meet statutory deadlines on hundreds of pending ESA § 4 listing petitions. When a species is proposed for listing under the ESA, the ESA requires that the FWS study the candidate species and then issue a determination finding that the listing of the species as “threatened” or “endangered” is either “warranted,” “not warranted,” or “warranted, but precluded by other priorities.” 16 U.S.C. § 1533(b)(3)(B); 50 C.F.R. § 424.14(b). Listed species are entitled to heightened protection by the federal government, state and private actors. Although candidate species may be protected under other federal and state regulation, they are not managed under the ESA.

Over the last decade, wildlife advocates flooded the FWS with listing petitions; FWS lacked the resources to keep up with the statutory listing determination deadlines. For the species targeted by the 2011 Litigation, rather than deciding whether a species should be listed or not, FWS stalled for time (and resources) by finding the listing of the species “warranted, but precluded.” The FWS settled the case by agreeing not to issue determinations of “warranted, but precluded” for the species named in the litigation, but would instead only issue decisions finding that the listing of the candidate species was “warranted” or “not warranted” under the ESA. See Stipulated Settlement Agreements, In re Endangered Species Act Section 4 Deadline Litigation, Misc. Action No. 10-377 (D.D.C. May 10, 2011 and July 12, 2011), available at https://www.fws.gov/endangered/improving_esa/exh_1_re_joint_motion_FILED.PDF and http://www.biologicaldiversity.org/programs/biodiversity/species_agreement/pdfs/proposed_settlement_agreement.pdf.

The Nevada Counties argue that by entering into the 2011 Litigation settlement that prohibits the “warranted, but precluded” option, FWS modified the congressional intent in the ESA. That is, Congress intended that FWS be allowed to determine that the listing of a candidate species is “warranted,” but that there are other species that present more pressing concerns for protection. Moreover, Plaintiffs allege that FWS failed to study the candidate species prior to entering into the settlement, which effectively made listing decisions for all of the targeted species without adequate study. FWS’s answer is due in early February 2015. The 2011 settlement of this litigation by the Administration was a key environmental policy objective so the Nevada challenge bears watching.

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2620 Hits