Class action lawsuits filed against natural gas producers have become increasingly common. For example, in Pennsylvania over the last several years, royalty owners have filed a number of royalty and bonus-payment class action lawsuits in state and federal court, which have caused producers to incur significant time and expense to defend. In light of the costs and risks involved in class action litigation, producers have begun contemplating the use of arbitration clauses in their oil and gas leases, which would require all disputes to be resolved in a private and confidential arbitration setting and would prevent a royalty owner from combining his claim with hundreds or thousands of other similar claims by pursuing a class action lawsuit or class arbitration. While such arbitration/class waiver clauses had been declared by certain courts to be unenforceable in the past, two recent decisions from the Supreme Court have endorsed the use of arbitration/class waiver clauses.
In AT & T Mobility, LLC v. Concepcion[1] and American Express Co. v. Italian Colors Restaurant,[2] the Supreme Court recently issued two decisions holding that arbitration/class waiver clauses in consumer contracts can effectively prevent plaintiffs from bringing class actions. As a result of these decisions, parties to oil and gas leases in Pennsylvania have begun considering what effect, if any, arbitration/class waiver provisions would have in their oil and gas leases, and whether, for example, Concepcion and Italian Colors Restaurant would prevent royalty owners from bringing the increasingly common royalty and bonus-payment class actions being filed in Pennsylvania.
In short and as discussed below, it appears likely that Concepcion and Italian Colors Restaurant will apply to oil and gas leases, and thus, in light of these decisions, a well-drafted arbitration clause in an oil and gas lease may potentially be used to preclude class-wide dispute resolution arising out of lease disputes.
How does an arbitration clause preclude the right to pursue a class-wide dispute resolution?
An arbitration clause can be used to essentially “contract out” of class action litigation. Indeed, by their very nature, most arbitration clauses preclude litigation entirely, including class action litigation, arising out of disputes covered by the arbitration clause. Instead, most typical arbitration clauses mandate that defined disputes between the parties will proceed through private arbitration, where the parties select one or more privately retained arbitrators to resolve their disputes in a confidential and less formal setting. What is less clear, however, is whether class arbitration is permitted when the parties include an arbitration clause in the contract.
Class arbitration is a relatively new phenomenon in the United States, and is neither addressed in the Federal Arbitration Act (“FAA”),[3] nor was contemplated by the FAA’s drafters. Class arbitration operates similarly to class action litigation. Thus, if class arbitration is permitted in a contract or lease that has an arbitration clause, the efficiency of bilateral arbitration is typically lost. For example, class arbitration, similar to class action litigation, can require class member notices, application of formal rules of evidence, including unwieldy class-wide discovery, and formal approval and notice of any class settlement.
Few, if any, arbitration clauses expressly provide for class arbitration. Thus, the key question becomes: In the absence of a class arbitration provision, does the arbitration clause alone open the door to a class arbitration procedure? Courts are somewhat divided on this issue, but most have held that where an arbitration clause is silent as to the permissibility of class arbitration, class arbitration is not permitted.
Nevertheless, to avoid any doubt as to whether an arbitration provision in an oil and gas lease authorizes class arbitration, a carefully crafted arbitration clause should expressly preclude or waive class arbitration.
How have Concepcion and Italian Colors Restaurant affected the limitations on class waivers?
Under the FAA, an arbitration clause is presumed to be valid and enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract.”[4] Therefore, to be enforceable, an arbitration provision that waives class arbitrations and class actions cannot be considered “unconscionable” under the relevant state contract law.
In the past, courts would oftentimes hold that arbitration provisions that waived the right to class arbitration or class action litigation were unconscionable because the parties had unequal bargaining power, the arbitration provision was in buried boilerplate, or the absence of a class...
