Since 2009, the Delaware River Basin Commission (“DRBC”) has effectively placed a moratorium on fracking activity within the Delaware River Basin (the “Basin”), premised on its assertion that any such activity is a “project” over which the DRBC has authority. But in Wayne Land & Mineral Group LLC v. Del. River Basin Comm’n, No. 17-1800, 2018 WL 3233784 (July 3, 2018), the Third Circuit, overturning a Pennsylvania District Court decision, has held that Delaware River Basin Compact’s (the “Compact”) definition of “project” is ambiguous, and that the DRBC may be without authority over fracking. The Third Circuit’s decision creates uncertainty regarding the scope of the DRBC’s authority and the future of fracking and other land use activities in the Basin.

Factual Background

The DRBC was created in 1961, when the United States and the states of Delaware, New Jersey, New York, and Pennsylvania signed the Compact. Article 3 of the Compact imposes a planning responsibility on the DRBC to develop a plan for the use and development of the Basin’s water resources. Pursuant to this responsibility, the DRBC has authority to review “projects” in the Basin if they will have a “substantial effect on water resources” of the Basin. A “project” is defined as “any work, service or activity. . . for the conservation, utilization, control, development or management of water resources.” See Delaware River Basin Compact, Pub. L. 87-328, 75 Stat. 688, §1.2(g). The Compact further sets forth the requirements of this review process.

Natural gas reserves are located within the Basin, making land within the Basin attractive for fracking activities and, thus, potentially lucrative for landowners. Natural gas extraction in the Basin would require a combination of horizontal drilling and hydraulic fracturing, injecting drilling fluid consisting of water and other chemicals into the ground at a well pad to release natural gas. Fracking operations use large quantities of water. Motivated by a concern over fracking’s impact on water resources, the DRBC issued a partial moratorium on such activity in 2009, and a full moratorium in 2010, ostensibly until the DRBC could implement final natural gas regulations, something which still has not happened eight years later.

Wayne Land and Mineral Group, LLC (“WLMG”) owns land in Pennsylvania, a portion of which is located within the Basin and contains shale formations with natural gas reserves. WLMG desires to build a natural gas well pad and related infrastructure to drill an exploratory well and, depending on the results, drill a horizontal well and use fracking to extract natural gas for profit. WLMG alleged that the DRBC’s moratorium is “wrongly impeding its investment-backed expectations.” Wayne, 2018 WL 3233784, at *4.

The District Court Decision Under Review

In 2016, WLMG filed a complaint with the United States District Court for the Middle District of Pennsylvania against the DRBC, seeking a declaratory judgment that that WLMG’s proposed fracking activities are not a project subject to the DRBC’s review. In response, the DRBC moved to dismiss for lack of subject matter jurisdiction on the basis of ripeness and standing, and for failure to state a claim on the basis of statute of limitations and a lack of final agency in that WLMG did not first file an application seeking to have the DRBC determine whether WLMG’s proposed activities trigger the DRBC’s project review jurisdiction.[1] The District Court denied the Motion to Dismiss but instead sua sponte dismissed WLMG’s complaint for failure to state a claim because, on the merits, the court found that WLMG’s proposed fracking activities constituted a project as defined under the Compact. Wayne Land & Mineral Group, LLC v. Del. River Basin Comm’n, 247 F.Supp.3d 477 (M.D. Pa. 2017). The District Court emphasized two points in reaching its decision: (1) WLMG would use water in its fracking operations, and (2) fracking activities are encompassed by the definition of “project” when the term is read together with the Compact’s definition of “water resources,” which the Compact defines as “water and related natural resources in, on, under, or above the ground, including related uses of land, which are subject to beneficial use, ownership or control.” See Delaware River Basin Compact, Pub. L. 87-328, 75 Stat. 688, §1.2(i).

The Third Circuit Decision

WLMG appealed to the Third Circuit. The DRBC and the Intervenors argued that the Third Circuit should affirm the District Court’s decision one any one of three grounds: because the court lacked jurisdiction over the claim, because WLMG failed to state a claim to relief for the reasons set forth in its Motion to Dismiss, or because the District Court’s finding that WLMG’s proposed fracking constituted a “project” under the Compact was correct. The Third Circuit found that the District Court correctly decided jurisdiction but erred in concluding that the Compact’s text unambiguously covers WLMG’s proposed activities. Accordingly, the Third Circuit held that the District Court’s decision on the merits was premature and remanded for further proceedings.

Jurisdictional Analysis

The Third Circuit first addressed the jurisdictional challenges based on ripeness, standing, final agency action and exhaustion of administrative remedies, and rejected all of them. First, the court found that WLMG satisfied the three elements of ripeness: an adversity of interests because WLMG faced a real and substantial risk of harm, a sufficiently concrete facts for a conclusive judgment, and a request for a ruling would have particular utility because, as the court explained, a grant or denial of relief would “clarify the legal relationship between [WLMG] (and other similarly situated natural gas companies) and the [DRBC] so that fracking firms can operate with a better understanding of their legal constraints.” Wayne, 2018 WL 3233784, at *9. The court then addressed and found that WLMG had standing under Article III of the Constitution, having suffered an injury in fact (the inability to realize the market value of natural resources and the threat of sanctions if it proceeded without DRBC approval), which had a causal link to DRBC’s conduct and would be redressed by a favorable decision removing fracking from the DRBC’s authority.

Next, the court addressed and rejected in turn the DRBC’s arguments that dismissal was appropriate because there was no final agency action or exhaustion of administrative remedies. The court explained that WLMG was not asking for review of an agency action, but instead WLMG’s dispute amounted to contract interpretation. Thus, the final agency action requirement was not controlling because no administrative law was implicated. For the same reasons, the court agreed with the District Court’s refusal to dismiss WLMG’s complaint based on a failure to exhaust administrative remedies. Because the question before the court involved the interpretation of the Compact, administrative law was not implicated and, therefore, exhaustion was not applicable. The court, therefore, found that it had jurisdiction.

Ambiguity of the Compact

Having established that the Third Circuit had jurisdiction over the appeal, the court then proceeded to address whether the District Court erred by dismissing WLMG’s complaint for failure to state a claim. Because the Compact is an interstate agreement, the Third Circuit applied principles of contract law to find that the Compact was ambiguous with respect to WLMG’s proposed fracking activities. The Court articulated three reasons for its decision.

First, Third Circuit found that the District Court’s interpretation of the word “project” essentially omitted the word “for” from the Compact, thus granting the DRBC more power than originally intended. Specifically, WLMG argued that its fracking activities are not “for” the purpose of using water but rather to capture natural gas. Water is merely a component, rather than the goal, of the process. Thus, WLMG argued, the DRBC and District Court’s interpretation changes the definition of “project” to encompass any project that involves water. The Third Circuit found WLMG’s contention persuasive, noting that “[n]o matter how ‘reasonably and liberally’ we construe the Compact’s terms, we cannot ignore that the word ‘for’ must have some purposeful meaning and limiting function. Doing so would sweep nearly any activity that happens to use Basin water into the Compact’s definition of ‘project,’ which could potentially include the construction of a new sky scraper in New York City or a small housing development in Pennsylvania.” Id. at *14 (internal citations omitted). The DRBC’s review authority thus extends only to those projects “having a substantial effect on the water resources,” and no finding was made as to whether WLMG’s proposed activities did so.

Second, the Court found that the ambiguity of the term “project” was not resolved by interpreting it in conjunction with the term “water resources,” as had been done by the District Court when it found that fracking fell within the definition of a project because it involved “water and related natural resources in, on, under, or above the ground, including related uses of land, which are subject to beneficial use, ownership or control.” See Delaware River Basin Compact, Pub. L. 87-328, 75 Stat. 688, at §1.2(i)(emphasis added). The WLMG argued that this interpretation flips the words “land” and “water” in the definition of “project,” and changes a project to be any activity for the use of “‘land and related natural resources. . . including related uses of water’ in the Basin,” rather than the opposite meaning as indicated by a plain reading of the Compact. Id. at *16. The Third Circuit acknowledged that both interpretations are reasonable, thus creating doubt over the District Court’s interpretation.

Lastly, WLMG argued that the term “project,” when read in the context of the whole Compact, is only intended to refer to water resource projects or those projects intending to utilize or manage water resources. Taking the opposite approach, the DRBC argued that the Compact as a whole evidences the opposite, namely that it evidences an intent to assert authority over any activity or facility which has a major impact on water quantity or quality. The Third Circuit found here that “neither party has the better of the argument,” further supporting its conclusion that the term “project” is ambiguous.

Accordingly, the Third Circuit found that the parties’ reasonable, but conflicting, interpretations of the term “project” demonstrated that the District Court erred in finding that the DRBC’s project review authority unambiguously extends to WLMG’s proposed fracking activities. The Third Circuit made a point to clarify its own position, emphasizing that it was neither adopting nor endorsing any interpretation of “project.” Because the Third Circuit determined that the Compact is ambiguous with respect to WLMG’s proposed fracking activities, the Third Circuit vacated the District Court’s decision and remanded to the lower court for additional fact-finding regarding the intent of the original drafters.

Impacts of the Third Circuit’s Opinion

The Third Circuit’s decision in Wayne raises new questions about the scope of the DRBC’s authority as it relates to fracking and other land use activities within the Basin. A ruling on whether the DRBC has authority over fracking activities may have far reaching implications beyond fracking that will essentially reshape legal relationships in the Basin. The scope of the DRBC’s authority may be either expanded or narrowed by the lower court’s findings with respect to the intended meaning of “project” under the Compact. Unfortunately, the Third Circuit’s opinion provides little indication of which side’s interpretation of “project” will emerge victorious. Thus, parties wishing to conduct activities in the Basin should keep a close eye on how WLMG’s claim is resolved.