On July 23, 2019, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) ruled that state substantive law should be used as the federal standard when determining landowners’ compensation in condemnation actions brought by private entities acting under the Natural Gas Act of 1938 (“NGA”). The Third Circuit ruling reversed a decision by the U.S. District Court for the Middle District of Pennsylvania (“District Court”) and remanded the case for further proceedings.

The dispute arose between Tennessee Gas Pipeline Company, LLC (“Tennessee Gas”) and King Arthur Estates, L.P. (“King Arthur”) as part of a condemnation action filed by Tennessee Gas, wherein Tennessee Gas sought easements over land owned by King Arthur in Pennsylvania in order to construct an interstate natural gas pipeline. Under the NGA, natural gas companies, such as Tennessee Gas, may exercise eminent domain to acquire certain rights on private property in order to construct, operate, and maintain natural gas pipelines, so long as such pipelines have been authorized by FERC.

In the instant condemnation proceedings, the parties stipulated that Tennessee Gas could obtain the necessary easements but disagreed as to the amount of compensation due to King Arthur. Notably, under Pennsylvania law, consequential damages may be included in the compensation calculation. Under federal law, just compensation does not include consequential damages. After Tennessee Gas moved for summary judgment, the District Court found that federal substantive law should be used, thus excluding consequential damages. King Arthur filed a petition for interlocutory appeal, which was granted by the Third Circuit.

The Third Circuit found that the condemnation question was a federal issue because the NGA is a federal statute. However, the court found that neither the NGA nor federal common law provided clear guidance on the issue. As such, the court noted that the task fell to it to develop one and considered whether it should fashion a uniform federal rule or instead incorporate state law as the applicable federal rule.

Ultimately, the Third Circuit decided that state law should be applied. The court held that, while application of a federal rule of decision on compensation is appropriate when determining just compensation in eminent domain actions initiated by the federal government, that same rule does not necessarily apply to condemnations brought by private entities. The court added that the development of natural gas pipelines is not an essential governmental function, and there was no risk of subjecting the federal government to different states’ compensation regimes by adopting a state law approach. According to the court, because neither of these powerful federal interests applied, fashioning a federal rule that incorporates substantive state law was appropriate.

In a dissenting opinion, Judge Michael Chagares argued that the same standard that applies in federal government eminent domain actions should also apply in condemnations brought by private entities acting under governmental authority. Therefore, under the facts of the case, federal substantive law should be the standard used in determining compensation.

A copy of the Third Circuit’s opinion is available here.