Class Action Arbitration in Oil And Gas Leases
August 10, 2020
Under What Circumstances Can a Class Action Arbitration Take Place Where An Oil and Gas Lease Is Involved?
In Marbaker v. Statoil U.S.A. Onshore Properties, Inc., 801 Fed. Appx. 56 (3rd 2020), the Third Circuit Court of Appeals addressed the circumstances under which a class action arbitration can take place where oil and gas leases are involved.
In Marbaker, Alan and Carol Marbaker (and two other landowners) alleged that Statoil underpaid them royalties on their oil and gas leases. The leases had arbitration clauses. The Marbakers asked the District Court to declare either that: (1) Statoil had waived any right to enforce those clauses or else (2) those clauses allowed class arbitration. The District Court dismissed the suit, rejecting the waiver claim as unripe and the class-arbitration claim on the merits.
In addressing Count Two of the Marbakers’’ Amended Complain, wherein the Marbakers pled that the lease clauses permit class arbitration, the Third Circuit found that the Marbakers’ leases did not allow class-wide arbitration. Courts may not force parties to arbitrate unless they have consented to it. Stolt-Nielsen S.A. v. AnnimalFeeds, Int’l Corp., 559 U.S. 662, 682-84 (2010). The terms of the parties’ contract govern who must arbitrate what, with whom, when, and how. Id. at 682-83. Class arbitration is one of those important terms because it differs greatly from bilateral arbitration. It aggregates many more disputes, handles much higher stakes, compromises confidentiality, and binds absent parties. Id. at 686-87. Thus, courts will not force parties “to submit to class arbitration unless there is contractual basis for concluding that the party agreed to do so.” Id at 684. Contractual silence is not enough. Id. at 685. Nor is contractual ambiguity. Lamps Plus, Inc. v. Varela, – U.S. -, 139 S.Ct. 1407, 1416 (2019). The Court will not infer consent. See Id. at 1416. Rather, there had to be an “affirmative ‘contractual basis’” for finding that the parties’ consented specifically to class arbitration. Id. at 1416 (quoting Stolt-Nielsen, 559 U.S. at 684). The Marbakers’ leases fell well short of that standard. Indeed, they did not even mention class arbitration. While the phrase “class arbitration” is not essential, its absence makes it harder to show that the parties consented to it. Chesapeake Appalachia, LLC v. Scout Petroleum., LLC, 809 F.3d 746, 758-59 (3rd Cir. 2016). In addition, extrinsic evidence cannot be used to add to the terms of the leases themselves. Because the Court sat in diversity, it applied the substantive law of the forum state, in this case Pennsylvania. Under Pennsylvania law, “[w]hen the terms of a contract are clear and unambiguous, the intent of the parties is to be ascertained from the document itself.” Zuber v. Boscov’s, 871 F.3d 255, 258 (3rd Cir. 2017)(quoting Kripp v Kripp, 578 Pa. 82, 849 A.2d 1159, 1163 (2004)). The Court saw no ambiguity in the leases.
Finally, the Marbakers noted that the parties agreed to follow the AAA’s rules. By agreeing to follow those rules, they arguably agreed to follow the AAA’s Supplementary Rules too. See AAA, Supplementary Rules for Class Arbitrations (2003) (”AAA Suppl. R.”). The Supplementary Rules sometimes allow class arbitration. See Id. R. 1(a). The Association, however, buries the Supplementary Rules in “a daisy-chain of cross references-going from the Leases themselves to the rules of the American Arbitration Association to the Commercial Rules and, at last, to the Supplementary Rules.” Scout Petroleum, 809 F.3d at 761. In Scout Petroleum, the Third Circuit suggested that a short, general reference to the AAA’s Rules does not “incorporate [ ] a panoply of collective and class action rules.” Scout Petroleum, 809 F.3d at 762.
In Scout Petroleum, the Third Circuit resolved a different question (whether the parties agreed to let an arbitrator decide class arbitrability); however, its reasoning also applied in this case. In Scout Petroleum, the Third Circuit noted that AAA’s general Commercial Rules use bilateral language and anticipate bilateral conduct. Scout Petroleum, 809 F.3d at 759-60, 762-63. And those rules do not mention the Supplementary Rules. Id. at 763. The Third Circuit thus held that a general reference to the AAA’s rules did not manifest the parties’ consent to a class arbitration. Id at 765-66. So too here.
The Third Circuit went on to note that even if the parties had directly mentioned the Supplementary Rules of the AAA, it would still not infer consent. Those rules say that when “construing the applicable arbitration clause,” the reviewer “shall not consider the existence of the “Supplementary Rules” in deciding whether the clause allows class arbitration. AAA Suppl. R. 3 (emphasis added). So at the clause construction stage, Third Circuit could not hold that the Supplementary Rules show that the parties agreed to class arbitration. See Reed Elsevier, Inc. ex. rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 599-600 (6th Cir. 2013).
In sum, the Marbakers’ leases did not affirmatively authorize class arbitration. As such, the Third Circuit affirmed the District Court’s dismissal of Count Two on the merits.
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