BLM Fracking Rule Dead—For Now

It was an interesting week for BLM’s hydraulic fracturing rule first finalized and then immediately challenged on March 26, 2015. On Monday (June 20, 2016), the BLM filed its final brief in the Tenth Circuit arguing that the Wyoming Federal District Court erred when it issued a nationwide injunction of the rule on September 30, 2015. On Tuesday (June 21, 2016), the Wyoming Federal District Court set aside the BLM’s fracking rule, finding "The BLM has attempted an end-run around the 2005 EPAct; however, regulation of an activity must be by congressional authority, not administrative fiat.”

The central question the court addressed was did Congress give BLM the authority to regulate fracking?

In addressing this question, the court examined the broad management authority granted to BLM/Interior in the several statutes relied on by BLM – Mineral Leasing Act (MLA), Federal Land Policy and Management Act (FLPMA) and two Indian mineral statutes—and then analyzed the more narrow authority granted to EPA in the Safe Drinking Water Act (SDWA) to regulate underground injections into drinking water and the specific exemption from the SDWA for non-diesel hydraulic fracturing in the Energy Policy Act of 2005 (EPAct 2005). Judge Skavdahl concluded that neither the MLA nor FLPMA give BLM specific authority to regulate fracking and that, further, neither statute gives BLM environmental regulatory authority.

In examining the MLA, the court found the statute was focused on protecting oil and gas formations—not groundwater— and “surface-disturbing” activities—not downhole activities. The court also rejected BLM’s argument that fracking falls directly within its “regulatory sphere” and that the Bureau had long-regulated fracking. “BLM’s only regulation addressing hydraulic fracturing worked to prevent any additional surface disturbance and impose reporting requirements and did not regulate the fracturing process itself.” The court next examined FLPMA and concluded the statute is a land use planning law and not an environmental law. “Congress delegated regulatory authority for environmental protection of underground water sources to the [EPA], not the BLM.”

Finally, the court looked to SDWA and EPAct 2005. CRS Report on SDWA/fracking. The court determined it was clear that “Congress intended to remove hydraulic fracturing operations (not involving diesel fuels) from EPA regulation under the SDWA’s UIC program.” The court’s decision to invalidate BLM’s fracking rule rested on the rationale that “it makes no sense to interpret the more general authority granted by the MLA and FLPMA as providing the BLM authority to regulate fracking when Congress has directly spoken to the ‘topic at hand’ in the 2005 EPAct.”

The decision is widely expected to be appealed by the BLM and the environmental group intervenors have already declared they will appeal. The BLM’s Tenth Circuit brief on overturning the preliminary injunction of the fracking rule is a likely preview of what those arguments will be. BLM understandably argues that the MLA and FLPMA have been read too narrowly by the court and that, rather, these federal statutes contain “capacious delegations” to BLM to regulate “all operations on federal leases.” BLM adds that, “FLPMA further enhances BLM’s authority to protect natural resources and the environment” and that authority is not limited to planning. Finally, in addressing the crux of the court’s analysis that the SDWA and the EPAct 2005 non-diesel fracking exemption are evidence of a congressional decision to exclude BLM from the regulation of fracking, the government points to legislative history of the SDWA that states, “The committee intends . . . that EPA will not duplicate efforts of the USGS [BLM’s regulatory predecessor] to prevent groundwater contamination under the Mineral Leasing Act.”  Good discussion of legal issues on appeal.

The government has 60 days to file an appeal, but given the importance of this rule, don’t be surprised if an appeal is filed in advance of 60 days.

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Tenth Circuit Grants Remittitur, Dramatically Reducing Large Wyoming Punitive Damages Award in Carbon Monoxide Poisoning Case

On April 1, 2016 the United States Court of Appeals for the Tenth Circuit issued a significant opinion in the personal injury case Amber Nicole Lompe, Plaintiff-Appellee, v. Sunridge Partners, LLC and Apartment Management Consultants, LLC, Defendants-Appellants, 10th Cir. No. 14-8082, vacating and reducing significant punitive damages awards against the owner and property manager, respectively, of a Casper, Wyoming apartment complex. In doing so, the Court further spelled out the legal “guideposts” that govern punitive damages awards, and brought more clarity to this controversial topic.

In February 2011, Ms. Lompe, a tenant in the Sunridge Apartments, suffered carbon monoxide poisoning from malfunctioning furnaces in her apartment building. She brought suit against Sunridge Partners, LLC (“Sunridge”), as the building owner and Apartment Management Consultants, LLC (“AMC”), as the property manager. At trial in Wyoming’s United States District Court, a jury found both defendants negligent and awarded Ms. Lompe compensatory damages totaling $3,000,000, and punitive damages totaling $25,500,000, of which $3,000,000 was apportioned against Sunridge and $22,500,000 against AMC. On appeal, defendants argued that the district court erred by failing to grant their motion for judgment as a matter of law (JMOL) as to punitive damages, and in the alternative, they contended that the district court’s jury instructions on punitive damages were incorrect and the amount of punitive damages awarded against each defendant was excessive under common law and constitutional standards.

The Tenth Circuit held the evidence at trial was insufficient even to present the issue of punitive damages to the jury as to Sunridge (as Sunridge’s conduct did not rise to the threshold level of “willful and wanton misconduct,” as required by Wyoming law), and accordingly vacated entirely the $3,000,000 award of punitive damages against Sunridge. The Court also held that, while Ms. Lompe presented sufficient evidence of AMC’s misconduct to send the question of punitive damages to the jury, the $22,500,000 punitive damages jury award against AMC was “grossly excessive and arbitrary in violation of the Due Process Clause of the Fourteenth Amendment,” and reduced that award to $1,950,000.

In reaching its decision, the Tenth Circuit provided a thorough and detailed discussion of Wyoming’s substantive law on punitive damages (e.g., what conduct amounts to “willful and wanton misconduct,” and what does not), along with a very thorough review and discussion of Tenth Circuit and United States Supreme Court precedent on punitive damages. In particular, the Court focused on “the ‘exacting de novo’ review the Supreme Court has mandated in reviewing constitutional challenges to punitive damages awards,” and then applied the Supreme Court’s “guidepost analysis” found in BMW of North America v. Gore, 517 U.S. 559 (1996). See also, State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003) and Jones v. United Parcel Serv., 674 F.3d 1187, 1208 (10th Cir. 2012). The Court stated:

“Consequently, ‘the Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor.’ In reviewing a constitutional challenge to an award of punitive damages under the Due Process Clause of the Fourteenth Amendment, a federal court must ‘consider three guideposts: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award [at times referred to as “the ratio” between the compensatory damages award and the punitive damages award]; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.’”

Applying this “guidepost analysis,” the Court determined that the $22,500,000 punitive damages award against AMC was excessive, as it was 11.5 times AMC’s share of the $3,000,000 compensatory damages award, which was $1,950,000 [the jury had assigned AMC 65% of the total fault, so 65% of $3,000,000 = $1,950,000], and that, under the facts of this case, a 1:1 ratio of punitive damages to compensatory damages was appropriate “[to] satis[fy] ‘the State’s legitimate objectives’ of punishing and deterring future misconduct”.

In sum, in the Lompe decision, it is encouraging that the Tenth Circuit has taken such a principled and disciplined approach to the review of punitive damages awards. The complete text of the Lompe opinion is available here. If you have questions about a specific legal matter that involves a possible punitive damages issue or claim, please contact Hampton O’Neill or any other WSMT attorney.

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Proposed Colorado Legislation Would Modify the Reasonable Accommodation Doctrine

Colorado House Bill 16-1310 was introduced on March 2, 2016, by State Senator Morgan Carroll (D) and State Representative Joseph Anthony Salazar (D). Under current Colorado law, to prevail on a claim against an oil and gas operator, the surface owner must present evidence that the operator's use of the surface “materially interfered” with the surface owner's use of the surface. Colo. Rev. Stat. § 34-60-127(3)(a). The proposed legislation, however, provides that an operator is strictly liable (i.e. liable without proving fault) if the operator’s oil and gas operations (including a hydraulic fracturing treatment or reinjection operation) cause an earthquake that damages real or personal property or injures an individual. Under the bill, the plaintiff establishes a prima facie case of causation if the plaintiff shows that (1) an earthquake has occurred; (2) the earthquake damaged the plaintiff’s property or injured the plaintiff; and (3) the oil and gas operations occurred within an area that has been determined to have experienced induced seismicity by a study of induced seismicity that was independently peer-reviewed.

The proposed legislation also expands the pool of potential claimants. The current law provides a cause of action to the surface owner, while the proposed bill provides that if the liability arises from an earthquake as described above, then the owner of the property or the injured person would have a cause of action.

Currently, an action under the statute must be commenced within one year of the date of the alleged violation. Colo. Rev. Stat. § 34-60-115. The bill provides that a plaintiff would have five years after discovery of the damages or injury to file an action pursuant to this statute.

The introduction of strict liability is a substantial change to the reasonable accommodation doctrine in Colorado. The full text and status of House Bill 16-1310 may be found at:

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Electronic Communication in Modern Litigation

It goes without saying that use of electronically stored information constitutes a fundamental component of any modern, successful company, but state and federal courts have only recently adjusted their rules of discovery to reflect that. For example, the federal courts recently revised their Rule 37, which concerns sanctions for failing to preserve or produce documents relevant to a claim or defense. Previously, Federal Rule 37(e) permitted sanctions for a party’s failure to preserve electronic information only in “exceptional circumstances.” Now, Rule 37(e) places an affirmative duty on parties to take “reasonable steps to preserve” electronic information, and that duty begins the moment litigation is anticipated, not merely commenced. State courts often follow the federal judiciary’s example—whether by expressly revising their rules in accordance or simply as an example to guide decisions when their rules are silent on an issue (as Colorado’s rule is)—so these changes are significant regardless of forum.

For businesses and individuals, the added focus on electronic information both increases a party’s discovery obligations but also protects against destruction of evidence, thereby ensuring that litigation proceeds fairly and reaches a just result in light of all the facts. Gone are the days where “routine” or “automatic” system maintenance could destroy large swatches of evidence adverse to a party. In practice, a party could easily defend against its opposition’s requests for electronic information by hiding behind a wall of technological jargon designed to excuse (or confuse) the issue entirely. The old rule placed the burden on the requesting party to prove “exceptional circumstances”—an almost impossible standard to meet without smoking-gun evidence, especially in light of judges’ reluctance to wade into the “new world” of technology.

The revised rule, however, essentially flips the burden to rest on the party unable to produce electronic evidence. Now, it must explain what “reasonable steps” it put in place to preserve this information from the moment litigation was anticipated. Given the amorphous meaning of “anticipated,” companies now must be very careful not only to begin preserving electronic information once a dispute is foreseen, but they must also disable automatic system maintenance and inform employees about routine procedures that could delete or affect such information. In light of these rule changes, electronic discovery now takes a much larger role in any case, but it is a role commensurate with the already widespread use of technology in the modern, successful company

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Get out of my sandbox! Expulsion of a LLC Member under Wyo. Stat. 17-29-602

So, you have a bad apple as a member of your Wyoming limited liability company (LLC), how do you get rid of them? The best option is usually to reach an agreement for the company or a specific member to purchase the troublemaker’s membership interest. If, however, an amicable solution cannot be reached, the company may be able to expel the member pursuant to Wyo. Stat. 17-29-602. Section 602 governs the general circumstances when dissociation of a member occurs but also provides for expulsion of a member in the following circumstances: i) pursuant to the company’s operating agreement; ii) with unanimous consent of the other members; and iii) by judicial action.

Pursuant to Section 602, the easiest course of action is to expel the member under the company’s operating agreement but, unfortunately, few operating agreements address the expulsion of troublemakers. The next simplest course of action under Section 602 is to vote them out. However, this option is only available in very limited circumstances. Specifically, voting the bad apple out pursuant to the statute is available when it is either: unlawful to carry on the company’s activities as long as the troublemaker remains a member or there has been a transfer of all of the troublemaker’s transferable membership interest. Note: even if the troublemaker’s membership interest has been fully transferred, they cannot be expelled if the transfer was: a transfer for security purposes or due to a charging order in effect under Wyo. Stat. 17-29-503.

The company may be left with the most expensive and least desirable but still possible remedy of filing a lawsuit to expel the member. In order to expel the troublemaker by judicial action, the company (as opposed to an individual member) must bring the action and prove one of the following:

(A) the member has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) the member has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s fiduciary duties or obligations under Wyo. Stat. 17-29-409; or

(C) the member has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

Beyond the expense and general litigation risk for the company, even if the member is judicially expelled, there are a couple of caveats that require careful consideration. First and foremost, expulsion of the troublemaker will successfully remove him from all management and other business operations BUT the troublemaker will continue to own his interest in the company as a “transferee interest” also known as an “economic interest”. See Wyo. Stat. 17-29-603. Accordingly, the former member will be entitled to certain financial information owned by the company and, perhaps more importantly, will continue to be entitled to his share of the profits, losses and distributions under the company’s operating agreement. So, effectively, the company may kick the offending member out of the sandbox but still have to pass him buckets of sand to build his castle. Secondly, if the company is member-managed, the troublemaker’s fiduciary duties as a member end with regard to matters arising and events occurring after his dissociation. Terminating fiduciary duties owed by the troublemaker may be too disadvantageous to the company for the company to expel him, particularly if the member begins competing with the company while still receiving distributions as an economic interest owner.

Expulsion of a member is, obviously, an aggressive course of action and must be thoroughly examined. The risk of litigation to the company and its other members must be studied even if expulsion occurs under the operating agreement or by unanimous vote. However, Section 602 does provide some options for a company to remove a problem member at least from the company’s management and business operations.

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Preliminary Considerations in Condemnation Actions

In condemnation actions in Colorado, the condemning party must take great care to satisfy legal prerequisites prior to initiating suit and, in most cases, moving for immediate possession of the subject property. By statute, immediate possession will only be granted upon a showing that: 1) a public agency with condemnation power has properly determined that it is necessary to acquire the landowner’s property; 2) the property is being acquired for a public use; 3) immediate possession is necessary; 4) the parties have failed to agree upon compensation; and 5) the probable market value of the property to allow the court to set the amount to be deposited with the Court as security the ultimate payment of compensation. C.R.S. §§ 38-1-105(6)(a) and 38-1-109. Good faith negotiation between the condemning entity and the landowner is also mandatory prior to an exercise of the power of eminent domain. C.R.S. § 38-1-102. In addition to these statutory requirements, fundamental constitutional rights to notice and due process also constrain any attempt to condemn and take possession of private land.

While these constitutional and statutory considerations have been in place for some time, Colorado courts are applying them with renewed vigor recently. One essential lesson from this increased attention on foundational legal prerequisites is the importance of the language within the documents describing the rights to be acquired. Whether a deed in fee simple or the varied access and utility easements frequently condemned, these legal documents must be carefully drafted to provide appropriate notice to the landowner of the rights being subjected to the power of eminent domain. Not only does this satisfy the constitutional guarantee of due process, but it also benefits the parties and the court. Without a clear definition of such rights, neither the property owner nor the condemning agency can accurately determine the value to be paid for these rights or their impact on any remaining property. Properly delineating the rights being acquired can save significant expense and frustration for the condemning entity, which will be paying just compensation for the property taken. Conversely, the landowner whose property rights will be impacted by the taking will have certainty and security in their property going forward, not to mention a much smoother, shorter, and less costly trial process. Thus, when fulfilling the statutory prerequisite mandating good-faith negation between the parties prior to commencement of a condemnation suit, both the condemning entity and the landowner should discuss and work collaboratively to craft specific title language for any condemnation.

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Employer Alert: Tenth Circuit Expands Scope of Hostile Environment Claims in Flashing Case

Last week, the Tenth Circuit Court of Appeals delivered new guidance as to the type of conduct that can support a hostile work environment claim in Macias v. Southwest Cheese Co.,(10th Cir. August 24, 2015) (

Hostile environment claims require discriminatory conduct that is severe or pervasive enough to create an abusive working environment. When only one or two incidents of harassment are involved, the conduct must rise to the level of “extremely serious.” Up until now, the Tenth Circuit’s opinions have only addressed satisfaction of this high standard in cases where the isolated conduct is some sort of physical assault. In Macias, however, the Tenth Circuit signaled broader application of the standard by making clear that physical contact is not required for a single incident of harassment to be actionable. Specifically, the court ruled that a male co-worker’s genital exposure to the female plaintiff could support a hostile environment claim, finding that this act “was not only physically threatening and humiliating—if true, it was also criminal. …The environment was objectively hostile, and Ms. Macias subjectively perceived it to be so, fearing that [her coworker] might expose himself to her again or assault her in some way.”

The takeaway from this decision is that every complaint or known instance of sexual harassment must be taken seriously and addressed appropriately – even if it involves only one incident. It appears that the employer in Macias failed woefully in this regard, although the opinion admittedly focuses on the facts alleged by the plaintiff without presenting the whole story. According to the opinion, the plaintiff reported the flashing to her supervisor but company management never followed up with an investigation or response. A second female employee who reported flashing by the same coworker was fired within a week (albeit for unrelated reasons, according to the employer). There’s no suggestion in the opinion of the employer’s investigation of the plaintiff’s report or any disciplinary action against the flashing coworker. Furthermore, the court suggests the employer’s prior knowledge of the flasher’s penchant for genital exposure by noting that, a year prior to the alleged workplace flashings, the same employee had taken a picture of his genitals while attending a company social function and passed the photo around to company managers who were present – including the director of human resources. Had the employer been proactive in addressing this prior instance of inappropriate behavior despite its presumably humorous intent at a party, the company might have spared its female employees the flashings and avoided at least three lawsuits alleging hostile work environment based in part on this same employee’s conduct. The lesson? Turning a blind eye to an employee’s pattern of inappropriate conduct is not likely to end well for an employer.

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Underground Rights are Defined in Texas

     On August 19, 2015 the Fourth District Court of Appeals in San Antonio, Texas, ruled that, because the surface estate owner controls “the matrix of the underlying earth,” it could grant an oil and gas operator the right to site wells on the surface owner’s property and drill through the earth within the boundaries of the surface owner’s property to reach adjacent minerals.

     In Lightning Oil Co. v. Anadarko E&P Onshore LLC, Case No. 04-14-00903, Lightning Oil sued Anadarko to prevent it from locating an oil and gas well on land subject to Lightning’s oil and gas lease. In 2009 Lightning leased the Briscoe Ranch from the owner of the mineral estate. Later, Anadarko obtained a surface use agreement from the owner of the Briscoe Ranch surface estate. Anadarko planned to place drilling rigs on the Briscoe Ranch, drill into an adjacent tract and complete the wells in an adjacent tract where it owned an oil and gas lease. Anadarko was not going to test or complete the well in the Briscoe Ranch tract. In the lawsuit Lightning Oil asserted that it had exclusive rights to drill through the Briscoe Ranch tract. Both the trial court and the appeals court, however, found that absent an express grant to the mineral owner, the surface owner controls the earth beneath that tract.

     This issue has not been directly addressed in Colorado, Utah or Wyoming. Wyoming’s statutes, however, provide that ownership of all pore space below the surface is vested in the owner of the surface estate. A conveyance of the surface estate in a tract of land shall be a conveyance of the pore space below the surface of that tract of land although the owner of the mineral estate has the right to inject substances to facilitate production of minerals. And no agreement conveying mineral or other interests underlying the surface shall act to convey ownership of any pore space in that tract unless the conveyance explicitly conveys that ownership interest. Although this Wyoming law was passed in 2008 with the intent of clarifying ownership of pore space underlying the surface, it indicates a legislative intent that the surface owner rather than the mineral owner controls at least some of the rights underneath a tract of land.

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The U.S. Supreme Court Disagreed with 10th Circuit's Analysis in a Refusal-to-Hire Case Focused on the Wearing of a Religious Headscarf

On June 1, 2015, in an 8-1 decision, the U.S. Supreme Court ruled against Abercrombie & Fitch and for a Muslim job applicant, Elauf, who had been rejected for employment because her headscarf would conflict with the store's "Look Policy" which prohibited the wearing of caps on the sales floor. E.E.O.C. v. Abercrombie & Fitch Stores, Inc., No. 14-86, 2015 WL 2464053. The evidence showed that the store's interviewer believed Elauf wore her headscarf because of her faith. The EEOC sued Abercrombie on Elauf's behalf for violation of Title VII. The U.S. District Court granted summary judgment for Elauf and awarded $20,000 in damages. The U.S. Court of Appeals for the 10th Circuit reversed, awarded Abercrombie summary judgment instead, and held that employer liability under Title VII ordinarily requires the job applicant to first prove that the employer had actual knowledge of her need for an "accommodation." 731 F.3d 1106, 1131 (2013).

Writing for the Court, Justice Scalia noted at the outset that the case was a “really easy” one. Scalia wrote Title VII proscribes two employment-practice categories described as "the 'disparate treatment' (or 'intentional discrimination') provision and the 'disparate impact' provision," and that the "word 'religion' is defined to “'includ[e] all aspects of religious observance and practice, as well as belief, unless an employer demonstrates that he is unable to reasonably accommodate to' a 'religious observance or practice without undue hardship on the conduct of the employer's business.'” 42 U.S.C. § 2000e–2(a) and § 2000e(j). 2015 WL 2464053, at *2-3. The Court rejected the argument that a Title VII plaintiff must show that the an employer had “actual knowledge” of the applicant's need for an accommodation and that, instead, the plaintiff "need only show that his need for an accommodation was a motivating factor in the employer's decision….[T]he intentional discrimination provision prohibits certain motives, regardless of the state of the actor's knowledge. Motive and knowledge are separate concepts. An employer who has actual knowledge of the need for an accommodation does not violate Title VII by refusing to hire an applicant if avoiding that accommodation is not his motive. Conversely, an employer who acts with the motive of avoiding accommodation may violate Title VII even if he has no more than an unsubstantiated suspicion that accommodation would be needed. Thus, the rule for disparate-treatment claims based on a failure to accommodate a religious practice is straightforward: An employer may not make an applicant's religious practice, confirmed or otherwise, a factor in employment decisions." 2015 WL 2464053, at *3 (emphasis added). The Court rejected Abercrombie's argument that the store's neutral policy cannot constitute “intentional discrimination” because "Title VII does not demand mere neutrality with regard to religious practices…. Rather, it gives them favored treatment, affirmatively obligating employers not 'to fail or refuse to hire or discharge any individual ... because of such individual's' 'religious observance and practice.' An employer is surely entitled to have, for example, a no-headwear policy as an ordinary matter. But when an applicant requires an accommodation as an 'aspec[t] of religious ... practice,' it is no response that the subsequent 'fail[ure] ... to hire' was due to an otherwise-neutral policy." 2015 WL 2464053, at *4 (emphasis added). Finding that the 10th Circuit had misconstrued Title VII, the case was remanded for further consideration.

Justice Alito concurred in the result but disagreed with the Court's "knowledge" analysis. Justice Thomas (a former EEOC Chairman) concurred in part and dissented: "I would hold that Abercrombie's conduct did not constitute 'intentional discrimination.' Abercrombie refused to create an exception to its neutral Look Policy…. To be sure, the effects of Abercrombie's neutral Look Policy, absent an accommodation, fall more harshly on those who wear headscarves as an aspect of their faith. But that is a classic case of an alleged disparate impact" and not "disparate treatment because Elauf received the same treatment from Abercrombie as any other applicant who appeared unable to comply with the company's Look Policy." 2015 WL 2464053, at *8.

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Case Management and Rejection of “Lone Pine Orders” in Colorado

On April 27, 2015, the U.S. Supreme Court denied a petition for writ of certiorari to review a Colorado rancher's attempt to prevent oil development and related access on his ranch. Petitioner Stull Ranches had requested that the high court review and reverse a 2014 decision of the 10th U.S. Circuit Court of Appeals decided in favor of the federal mineral lessee, Entek GRB, which allowed Entek reasonable surface access to drill for oil and to use a road to access another unitized Entek well.

The federal mineral rights at issue had been reserved by and for the federal government pursuant to the Stock-Raising Homestead Act of 1916 [Pub.L. No. 64–290, 39 Stat. 862 (codified at 43 U.S.C. §§ 291–301)] and, pursuant thereto, the land-grant surface successor acquired its real property interests subject to the government's reservation of mineral rights and interests, which includes: "(1) the right to enter and use so much of the surface as might be 'reasonably incident' to the exploration and removal of mineral deposits, and (2) the right to enact future laws and regulations regarding the 'disposal' of the mineral estate." Entek GRB, LLC v. Stull Ranches, LLC, 763 F.3d 1252, 1254 (10th Cir. 2014), cert. denied sub nom. Stull Ranches, LCC v. Entek GRB, LCC, No. 14-1007, 2015 WL 730880 (U.S. Apr. 27, 2015). According to the 10th Circuit, this "second right … sweeps broadly when it places the minerals at the government's 'disposal,' signifying not just the government's power to 'bestow[ ]' or 'assign[ ]' the minerals, but also a power to 'manage[ ],' 'make use of,' and 'deal with [them] as [it] pleases.'" Id. (Citation omitted.) The legal framework for disposition is that provided by the 1920 Mineral Leasing Act [Pub.L. No. 66–146, 41 Stat. 437 (codified in scattered sections of 30 U.S.C.)] as amended, which entitles the federal lessee the reasonable right to access and explore the mineral estate, a statutory right to unitize, and a reasonable right to access unitized wells and minerals.

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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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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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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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Federal Judge Strikes Down County Ordinance Banning Hydraulic Fracturing

On January 19, 2015, in a 199-page summary judgment opinion in SWEPI, LP v. Mora County, New Mexico (CIV 14-0035 JB/SCY), New Mexico U.S. District Court Judge James Browning declared that a 2013 Mora County ordinance banning corporate oil and gas drilling and hydraulic fracturing unconstitutional and in violation of the corporate-plaintiff developer's property rights and the Supremacy Clause under the U.S. Constitution. The law, titled the Mora County Community Water Rights and Local Self-Government Ordinance, banned such activity within a substantially rural county approximately 100 miles northeast of Santa Fe. The Plaintiff is a subsidiary of Royal Dutch Shell PLC.

Although subject to review by the Tenth Circuit U.S. Court of Appeals, this federal court's decision is a setback for local control activists. Judge Browning found that the Ordinance expressly attempted to circumvent corporate rights protected by federal law. In fact, the Ordinance declared that companies "shall not have the rights of 'persons' afforded by the United States and New Mexico Constitutions," including First Amendment rights and due process. Judge Browning noted that the "Defendants' argument that corporations should not be granted constitutional rights, or that corporate rights should be subservient to people's rights, are arguments that are best made before the Supreme Court -- the only court that can overrule Supreme Court precedent -- rather than a district court." Although the federal court did not find Plaintiff's "takings" claim to be ripe because Plaintiff had not sought just compensation through a state inverse condemnation action, Judge Browning further found the Ordinance violative of, and impliedly preempted by state law since it would create waste and prohibit activity that New Mexico law allows.
Although state 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 oil and gas activity bans were issued in 2014 by Boulder District Court Judge D.D. Mallard, which are now at issue in the Colorado Court of Appeals.

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