State files motion to dismiss federal lawsuit by EQT

CHARLESTON, W.Va. — Lawyers representing the Secretary of the state Department of Environmental Protection have filed a motion to dismiss a lawsuit by the natural gas company EQT over a new West Virginia royalties law.

“Having lost the debate in the halls of the West Virginia Legislature, EQT now turns to federal court seeking damages and coercive relief against the State, challenging the constitutionality of the State’s long-standing and legitimate economic regulation of the payment of royalties for oil and gas produced on flat-rate leases,” begins a memorandum filed by lawyers for the state.

DEP Secretary Austin Caperton

EQT’s lawsuit names Austin Caperton, director of the state Department of Environmental Protection, as the representative of the Justice administration who would have to enforce the new law.

The motion to dismiss was filed Thursday in U.S. District Court for the Northern District of West Virginia. The state is represented by outside counsel from Bailey & Glasser.

The accompanying memorandum contends EQT’s lawsuit lacks constitutional authority because the 11th Amendment bars suits in federal court for money damages against an “unconsenting state.”

Lawyers for the State of West Virginia cite precedent to say that extends to arms of the state, “including state agencies and state officers acting in their official capacity.”

They conclude, “The Eleventh Amendment bars EQT’s claims for damages against Secretary Caperton in this case.”

MORE: Read the motion and the memorandum filed for the State of West Virginia.

EQT, a major natural gas producer in West Virginia, filed its lawsuit against DEP in April.

In addition to the basic conflict, it presents an awkward position for the Justice administration, which has EQT board member Bray Cary as senior adviser.

Gov. Jim Justice signed the bill that would take effect May 31.

EQT says the law violates the U.S. Constitution’s contract clause and due process clause.

“The Flat-Rate Statute thus substantially impairs EQT’s vested drilling rights under its flat-rate leases and imposes unconstitutional conditions on EQT’s exercise of its property rights under those contracts,” wrote lawyers for the company in their original filing.

The situation the bill was intended to address evolved over the years as drilling operations have become larger and more complex.

Back in the 1980s, lawmakers passed legislation requiring old flat rate oil and gas leases pay 1/8 royalty to leaseholders on any new drilling permits. The legislation was silent on post-production expenses.

Post-production expenses could include — but not be limited to — costs related to severance taxes, pipelines, surface facilities, telemetry, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or natural gas and their constituents.

For 30 years, advocates of the bill contend, practice was to pay the royalty owner a check without subtracting post-production expenses.

Once EQT and other companies started subtracting post-production expenses, the issue went to court.

Patrick Leggett, a royalty owner from West Virginia, filed suit — saying the 1980s statute did not allow post-production expenses to be taken out of the royalty payment.

The Supreme Court at first ruled in his favor.

But in 2016, with a new court that took shape after the election of Justice Beth Walker, the court reversed itself.

The bill passed by the Legislature included language to prevent the 1/8th royalties from being subject to post-production expenses.

EQT says it has committed to developing better technology over the years, but — rather than negotiate for amended leases — royalty owners have elected to go to the Legislature.

The company’s lawyers wrote, “the Flat-Rate Statute severely disrupts the contractual expectations of EQT, which has invested significantly in improving the extraction of natural gas, premised on its ability to enjoy the returns of such investments.”

In their memorandum filed this week, lawyers for the state contend EQT cannot claim a substantial impairment because the company should have anticipated evolving regulation.

The lawyers also say the federal court must decline EQT’s attempt to substitute its own preferences for the state’s chosen means of regulation, enacted through the democratic process.

“But even apart from the lack of a ‘substantial’ impairment, EQT cannot overcome the significant and ‘legitimate public purpose’ behind the State’s regulation of royalty payment provisions in flat-rate leases, including ‘the elimination of unforeseen windfall profits,’ which the Supreme Court has expressly recognized as legitimate.”

David McMahon

The West Virginia Surface Owners Rights Organization also asked on Friday for permission to file a brief in support of the state’s position.

MORE: Read the motion by the Surface Owners Rights Organization.

“The named defendant in this action is the State through its Secretary of the West Virginia Department of Environmental Protection,” wrote David McMahon, a lawyer representing the surface owners organization wrote.

“But the effect of the ruling will be primarily not on the State itself, but on thousands upon thousands of individual citizens. So it is even more appropriate and desirable to grant amicus status in this action than in a case between only private persons and entities so interested parties and organizations can have their voices heard.”

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