In Kerns v. Chesapeake Exploration, LLC, No. 18-3636 (6th Cir. Feb. 4, 2019), released on Monday, February 4, the Sixth Circuit Court of Appeals held that a pipeline’s use of Ohio’s forced pooling law is not a taking under the Fourteenth Amendment. This decision, although not recommended for full text publication, is significant as more states enact and/or expand the scope of such laws, and may influence a similar suit brought in Colorado, within the Tenth Circuit, challenging the constitutionality of Colorado’s forced pooling regulations.
At issue before the Sixth Circuit was a challenge to Ohio’s forced pooling law, Ohio Rev. Code §§ 1509.27, 1509.28. This law addresses the conflict between the reality of oil reservoirs, where new drill sites result in decreased pressure, potentially resulting in oil being unrecoverable, and the rule of capture, by which a landowner can only control a resource that she actually obtains. In essence, it requires unitization of the resource prior to drilling – oil located under different tracts is combined into a single “unit” and then drilling operations are coordinated across the unit. This process can be voluntary, but the statute can compel pooling if the landowners cannot agree.
The case arose in Harrison County, Ohio, where Chesapeake Exploration (“Chesapeake”) obtained ownership interests in 472 acres of a 592-acre plot, but was unable to reach an agreement with owners of the remaining 120 acres. Chesapeake applied to the Ohio Division of Oil and Gas Resources Management for forced pooling in November 2014, which, while opposed by the landowners, was granted by the Division in 2015. The landowners then appealed to the Oil & Gas Commission, alleging that this was an unconstitutional taking of their property. The Commission dismissed the case for lack of jurisdiction over a constitutional claim and the landowners then sought a writ of mandamus from the Ohio Supreme Court, which was denied in January 2018. The landowners then filed in federal court, essentially making the same argument, which the district court dismissed on a number of grounds. They then appealed the district court’s ruling.
Initially, the Sixth Circuit found that the landowners had standing, despite leasing their property to another entity, and further that the claims were ripe, despite the landowners not seeking just compensation in state court. However, the appellate court affirmed the lower court’s dismissal of a § 1983 claim against Chesapeake, as it was not a state actor. The Court held that Chesapeake’s “mere use of the state’s pooling order process without the overt, significant assistance of state officials does not transform it into a state actor.” (citing Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 54 (1999) and Tulsa Prof’l Collection Servs., Inc. v. Pope, 485 U.S. 478, 486 (1988)). However, the landowners’ action against Richard Simmers, Chief of the Ohio Division of Oil and Natural Gas Resources, could be maintained as he was a state actor.
The Court then turned to the landowners’ takings claim. In essence, the landowners argued that the Fifth Amendment, incorporated against the states through the Fourteenth Amendment, barred the taking of their interest in the oil resource, as it was neither for a public use, nor was it done with just compensation. However, the Sixth Circuit decided that, based on state law, the forced pooling was not an actual taking. While Ohio law recognized that a landowner had a property interest in the subsurface minerals on her lot, Supreme Court precedent recognized that a state could adopt “reasonable regulations to prevent economic and physical waste of natural gas.” Cities Serv. Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179, 185 (1950). The Sixth Circuit held that Ohio’s pooling scheme fit comfortably within this precedent. Additionally, the appellate court pointed out that not a single case, in federal or state courts, had yet held that unitization was unconstitutional and declined to be the first.
The Sixth Circuit separately addressed the occupation of the subsurface land, but ultimately reached the same conclusion. While Ohio law, in theory, recognized that such a takings claim could exist, a “party’s mere presence below the ground is not enough to make out a takings claim.” Instead, the appellate court held that Ohio law required pleading there was actual interference with the landowners’ reasonable and foreseeable use of the subsurface, summarizing that there must be “some type of physical damages or interference with use.”
Finally, the Court briefly analyzed both above-ground taking, dismissing it as there was no allegation that hydraulic fracturing would make the surface unusable, and a due process claim, which was premised on property interests which, as discussed above, the Court had already determined the landowners lacked.
In short, the Sixth Circuit affirmed that a state has the right to force unitization on landowners that are resistant to such pooling. Simply stated, “[e]ach landowner’s property interest in the minerals remains intact; it is simply regulated. The landowners therefore have no takings claim as to the minerals below the subsurface of their land.”