Historical Litigation Trends/Impact on Oil and Gas Development (C2083262;1)

HISTORICAL LITIGATION TRENDS AND THEIR IMPACT ON OIL AND GAS DEVELOPMENT

Albert F. Sebok Jackson Kelly PLLC P. O. Box 553 Charleston, WV 25322 I. INTRODUCTION

There are few reported cases dealing with groundwater contamination from gas wells.

With the development and wide-spread use of hydraulic fracturing, the plaintiffs’ bar and environmentalists have begun a campaign claiming that hydraulic fracking can contaminate groundwater. See e.g., Mark J. Bern and Tate J. Kunkle, A Plaintiff’s Primer on Litigating

Natural Gas Cases, 31 No. 23 Westlaw Journal Environmental (June 8, 2011). There are several pending cases in Pennsylvania alleging groundwater contamination in Pennsylvania due to hydraulic fracturing.

Environmental regulators have acknowledged the lack of evidence that “fracking” causes groundwater production. As recently as May 24, 2011, the administrator of the EPA, Lisa

Jackson, acknowledged before Congress that there have been no reported cases showing that the

“fracking” process has had any adverse effect on groundwater. See http://www.energyindepth.org/2011/05/u-s-epa-not-aware-of-any-proven-case-where-hf-has- affected-drinking-water/. (accessed June 2, 2011). Additionally, the Pennsylvania Department of

Environmental Protection has indicated that “disruption of water quality or flow in water wells from drilling activities is often rare and generally temporary.” Pennsylvania Department of

Environmental Protection, Marcellus Shale Fact Sheet, 0100-FS-DEP4217 (Jan. 2010 rev.) available at http://www.dep.state.pa.us/dep/deputate/minres/oilgas/new_forms/marcellus.htm.

(accessed June 2, 2011). II. WEST VIRGINIA PRECEDENT

A. Oil and Gas Statutes.

W. Va. Code § 22-6-35 recognizes a cause of action for the deprivation or contamination of a water supply by the drilling of an oil and gas well. In this regard, the statute provides “[i]n any action for contamination or deprivation of a fresh water source or supply within one thousand feet of the site or drilling for an oil and gas well, there shall be rebuttable presumption that such drilling, and such oil and gas well, or either, was the proximate cause of the contamination or deprivation of such fresh water source or supply.” W. Va. Code § 22-6-35 does not identify whether land owner must establish the driller’s negligence to prevail on such a claim. The West Virginia Supreme Court has never construed this statute and there is likely to be litigation on how the distance from the site or drilling is determined and whether the statute requires a showing of negligence.

B. The Oil and Gas Production Damage Compensation Act.

W.Va. Code § 22-7-1 et al., recognizes the necessity to protect the surface owners of the state of West Virginia regarding the potential damage to their properties as a result of drilling operations and entitles them to compensation for such damages, notwithstanding the ability to bring other causes of action against the drilling operator. The statute specifically provides that an oil and gas developer “shall be obligated to pay the surface owner compensation for . . . any damage to a water supply in use prior to the commencement of the permitted activity.” See W.

Va. Code § 22-7-3(a)(3).

W. Va. Code § 22-7-1(d) narrowly qualifies the class of intended beneficiaries of the statute: “It is the purpose of this article to provide constitutionally permissible protection and compensation to surface owners of lands on which oil and gas wells are drilled . . .” CSX

C2083262 3 Transp. Inc. v. PKV Ltd. Partnership, 906 F.Supp. 339, 344 (S.D. W.Va. 1995). Therefore, landowners of properties adjoining oil and gas wells are not protected by this statute.

To receive compensation under this Act, the surface owner must notify the oil and gas developer of damages within two years after the developer files its notice of reclamation under

W.Va. Code § 22-6-30. The oil and gas developer then has sixty days to either settle or reject the claim. W.Va. Code § 22-7-6. If the claim is not settled, the surface owner, within eighty days of the notification date, may commence an action in circuit court or elect to have the claim resolved by binding arbitration. See W. V. Code § 22-7-7(a).

C. Common law.

There are several potential common law causes of action that a plaintiff may pursue against oil and gas producers for alleged contamination of water: (1) negligence; (2) private nuisance; (3) trespass; (4) strict liability; (5) outrageous conduct; (6) negligent infliction of emotional distress; (7) fraud (if representations were made in negotiating the lease); and (8) medical monitoring.

With the exception of the strict liability claim, these causes of action will generally require a plaintiff to show some type of fault on the part of the driller. With regard to strict liability, our West Virginia Supreme Court has not decided whether drilling a gas well is subject to strict liability as an abnormally dangerous activity. However, the Court has declined to find that coal mining is ultrahazardous and noted that “extractive activities such as coal mining and timbering are common activities in Southern West Virginia. . . we are unable to conclude that the great economic value of some of these extractive activities, such as coal mining, is outweighed by their dangerous attributes.” In re Flood Litigation, 607 S.E.2d 863, 874 (W. Va. 2004).

C2083262 4 Accordingly, we believe that it is unlikely that our court would find that oil and gas activities are ultrahazardous.

III. RECENT PENNSYLVANIA CASES REGARDING HYDRAULIC FRACTURING

Some of the issues pertaining to these sorts of suits has recently surfaced in opinions from Pennsylvania. In Berish, et al. v. Southwestern Energy Production Co., et al., No. 10-1981,

2011 WL 462087 (M.D.Pa. Feb. 3, 2011), the United States District Court for Middle District of

Pennsylvania denied defendants’ motion to dismiss the portion of the plaintiffs’ complaint alleging that the defendants were strictly liable for engaging in hydraulic fracturing. Id. In

Berish, the plaintiffs—residents of Susquehanna County—filed suit alleging that defendant

Southwestern Energy Production Company’s (“SEPCO”) drilling activities were injurious to their health and their property. Id. Specifically, the plaintiffs brought claims for (1) violation of the Hazardous Sites Cleanup Act, (2) Negligence, (3) Private Nuisance, (4) Strict Liability, (5)

Trespass, and (6) to set up a Medical Monitoring Trust Fund. Id. The plaintiffs demanded compensatory and punitive damages, the costs of future health monitoring, and preliminary and permanent injunctions barring the defendants from engaging in further drilling activities. Id.

After a pre-trial stipulation, the only issues before the Berish Court in February were (a) the defendants’ motion to dismiss the strict liability prong of the plaintiffs’ complaint and (b) defendant’s motion to dismiss the plaintiffs’ demand for damages for emotional distress. Id.

Regarding the strict liability claim, the defendants argued (a) that the claim was insufficiently pleaded and (b) that pursuant to previous Pennsylvania case law, underground gas drilling is not an abnormally dangerous activity. Id. In rejecting this argument, the court found that (a) the plaintiffs’ had sufficiently pleaded their complaint and (b) that, though several

C2083262 5 Pennsylvania cases had concluded that analogous activities were not abnormally dangerous, those holdings were not reached until the summary judgment stage of the proceeding. Id.

Regarding the defendants’ first argument, the court noted that Pennsylvania courts have adopted the standard for strict liability from the Restatement (Second) of Torts. Id. (quoting

RESTATEMENT (SECOND) OF TORTS § 519(1) (“One who carries on an abnormally dangerous activity is subject to liability to the person, land or chattels of another resulting from the activity, although he has exercised the utmost care to prevent the harm.”) In determining whether an activity is “abnormally dangerous,” courts will look to several factors: (1) the existence of a high degree of risk of some harm to the person, land or chattels of others; (b) the likelihood that the harm that results from it will be great; (c) the inability to eliminate the risk by the exercise of reasonable care; (d) the extent to which the activity is not a matter of common usage; (e) the inappropriateness of the activity to the place where it is carried on; and (f) the extent to which its value to the community is outweighed by its dangerous attributes.” Id. (quoting RESTATEMENT

(SECOND) OF TORTS § 520).

Applying that standard, the court found that, at the summary judgment stage, the plaintiffs would likely have difficulty overcoming the “common usage,” “inappropriateness of the activity,” and “value to the community” prongs. Id. However, because the determination of whether a particular activity is abnormally dangerous is highly “fact intensive,” the court declined to dismiss the plaintiffs’ claim at the 12(b)(6) stage of the proceeding. Id.

Regarding the defendants second contention, the court found that the analogous cases were not controlling because those decisions had come at the summary judgment stage, after the completion of discovery. Id. Accordingly, the court held that it would wait until that time to determine whether the defendants had engaged in inherently dangerous activity. Id.

C2083262 6 Finally, noting that only one plaintiff had properly pled an attendant physical injury in the complaint, the court dismissed the remaining plaintiffs’ claims for emotional distress. Id. (citing

Houston v. Texaco, Inc., 538 A.2d 502, 505 (Pa. Super. Ct. 1988). The Court did, however, allow the plaintiffs to amend their complaint to include a claim for “inconvenience and discomfort,” based on the alleged “interference with another’s peaceful possession of his or her real estate.” Id.

In Fiorentino v. Cabot Oil & Gas Corp., 750 F.Supp.2d 206 (M.D.Pa. Nov. 15, 2010) the

United States District Court for Middle District of PA addressed a variety of issues rising from a tort claim for personal injuries and property damages allegedly caused by Marcellus Shale gas drilling. The plaintiffs were 63 individuals who either reside or have resided in the towns of

Dimock and Montrose Pennsylvania. Id. at 509. They asserted claims under 1) Pennsylvania’s

Hazardous Sites Cleanup Act (HSCA); 2) negligence; 3) private nuisance; 4) strict liability; 5) breach of contract; 6) fraudulent misrepresentation; 7) medical monitoring trust funds; and 8) gross negligence. Id. at 510. The defendants—Cabot Oil & Gas Corporation and Gas Search

Drilling Services Corporation—filed a motion to dismiss, asserting that (a) the claims dealing with the HSCA, strict liability, medical monitoring, and gross negligence fail to state claims upon which relief may be granted and (b) that the court should strike the following allegations from the complaint: (1) Plaintiffs’ alleged injuries and damages based on “fear of future physical illness,” (2) allegations related to emotional distress, (3) allegations of punitive damages, (4) allegations related to the recovery of attorneys fees, and (5) allegations of “negligence per se.”

Id. at 10.

First, the court rejected the defendants’ motion to dismiss Plaintiffs’ HSCA claims. Id.

Specifically, defendants alleged that the plaintiffs failed to plead two requirements: (1) that they

C2083262 7 had given the defendants 60 days notice prior to commencing the action and (2) that the PA DEP was not diligently prosecuting the suit. Id. The court rejected these contentions on the ground that the plaintiffs’ HSCA claims were exclusively under the provisions of the HSCA that dealt with liability for response costs and not the personal injury portions, which had more stringent pleading requirements. Id. Accordingly, the two pleading requirements cited by the defendant were inapplicable to the plaintiff’s complaint. Id.

Second, the court rejected the defendants’ motion to dismiss the strict liability portions of the complaint. Id. at 511. In support of this contention, the defendant cited several Pennsylvania cases in which courts ruled that analogous activities were not “abnormally dangerous.” Id.

(citing Smith v. Weaver, 665 A.2d 1215, 1220 (Pa.Super. 1995) (operation of underground storage tanks at a gasoline station is not an abnormally dangerous activity); Melso v. Sun Pipe

Line Co., 576 A.2d 999 (Pa.Super.1990) (reversing a lower court determination and holding that the operation of a petroleum pipeline is not an abnormally dangerous activity). Id. at 512. The court observed that, while Pennsylvania courts have found that storage and transmission of gasoline is not abnormally dangerous, there is no similar holding dealing with drilling and operation. Id. Citing the Restatement sections listed above, the court noted that the record was insufficiently developed to permit the court to render a decision on whether the activity in question was “abnormally dangerous.” Id. Accordingly, the court denied the defendant’s motion to dismiss on this question. Id.

Third, the court found that the plaintiffs’ had adequately pleaded a medical monitoring cause of action. Id. at 513. The defendants argued that the plaintiffs merely recited the elements of a medical monitoring cause of action.1 Id. The court disagreed with this characterization, 1 In Pennsylvania, a cause of action for medical monitoring contains seven elements: (1) exposure greater than normal background levels; (2) to a proven hazardous substance; (3) caused by defendant’s negligence; (4) as a proximate result of the exposure, plaintiff has a significantly increased risk of contracting serious latent illness; (5) a monitoring procedure exists that makes early detection of the disease possible; (6) the proscribed monitoring regime

C2083262 8 noting that the plaintiffs had alleged that (1) the defendants’ negligently drilled wells and engaged in fracking (which uses toxic chemicals); (2) the defendants’ utilized other materials, such as diesel fuel, lubricating agents, etc. that are similarly harmful; (3) these activities were conducted in close proximity to the plaintiffs homes, resulting in increased exposure; and (4) the plaintiffs had shown some signs of illnesses related to diseases potentially caused by this exposure. Id. Accordingly, the court rejected the defendants’ motion to dismiss on this question.

Fourth, the court rejected the defendants’ arguments that the plaintiffs’ allegations regarding fear of future illness and emotional distress as Pennsylvania law does not allow recovery for such damages without a manifestation of actual physical injury. Id. at 514.

Specifically, the court agreed with the defendants’ recitation of the law on this question. Id.

However, the court found that the plaintiffs had sufficiently alleged such damages by alleging that they experienced “neurological, gastrointestinal, and dermatological symptoms” and by demonstrating “blood study results consistent with toxic exposure.” Id.

Fifth, the Court rejected defendants’ argument that the plaintiffs had failed to plead facts to support an award of punitive damages. Id. at 515. The court noted that the Pennsylvania standard for punitive damages is that “punitive damages may be awarded for conduct that is outrageous, because of the defendants’ evil motive or reckless indifference to the rights of others.” Id. (quoting RESTATEMENT (SECOND) OF TORTS § 908). Specifically, the defendants argued that punitive damages could not be awarded, because they had been engaging in a legitimate business activity. Id. The court rejected this argument as disingenuous, as the bulk of the case hinged upon whether defendants had negligently engaged in this lawful activity. Id.

is different than that normally recommended in the absence of exposure; and (7) the proscribed monitoring regime is reasonably necessary according to contemporary scientific principals. Id. at 513 (citing Redland Soccer Club, Inc. v. Dept. of the Army, 696 A.2d 137, 145-46 (Pa.1997)).

C2083262 9 Sixth, the court rejected the defendants’ motion to dismiss the plaintiffs’ claim for attorney’s fees and costs, holding that the facts were not sufficiently developed to allow the court to ascertain whether an award of such costs would be appropriate. Id.

Finally, the court rejected defendants’ motion to strike plaintiffs’ negligence per se claims. Id. at 515. In so doing, the court noted that, in order to prove negligence per se in the context of a statutory violation, a plaintiff must establish four elements:

(1) the purpose of the statute must be, at least in part, to protect the interest of a group of individuals, as opposed to the public generally; (2) the statute or regulation must clearly apply to the conduct of the defendant; (3) the defendant must violate the statute or regulation; and (4) the violation of the statute or regulation must be the proximate cause of the plaintiff’s injuries.

Id. (citing Wagner v. Anzon, 684 A.2d 570, 574 (Pa.Super.1996). The court found that, while the defendants disputed whether these allegations contained sufficient facts, they did not offer any response to the plaintiffs’ claims with respect to the elements listed above. Id. at 516.

Accordingly, the court rejected the defendants’ arguments in favor of striking these allegations. 2

IV. WEST VIRGINIAS MUNICIPAL ORDINANCES

The City of Wellsburg has recently passed an ordinance prohibiting drilling of a well for the purpose of extracting oil or gas within the limits of the City of Wellsburg. In addition, the

City of Wellsburg prohibited fracturing within one mile of the corporate limits of the City of

Wellsburg. The City of Morgantown is considering an ordinance that prohibits extracting or

2 Cabot Oil & Gas has apparently entered into a Consent Order with the PA DEP wherein it agreed to pay a total $4.1 million to nineteen of the homeowners in lieu of the DEP’s proposal for Cabot to fund the construction of an extension of a public water line to the affected homes at a cost of approximately $12 million. See http://www.examiner.com/energy-industry-in-houston/cabot-settles-pennsylvania-fracking-case-for-4-6-million (accessed on June 2, 2011).

C2083262 10 storing oil or gas using horizontal drilling and/or facturing or fracking methods within the limits of the City of Morgantown or within one mile of the corporate limits of the City of Morgantown.

These types of ordinances are certain to be challenged on numerous statutory and constitutional grounds.

C2083262 11