Chesapeake Appalachia, LLC v. Scout Petroleum, LLC

• Decision Date: 05 January 2016
• Docket Number: No. 15–1275.,15–1275.
• Citation: 809 F.3d 746
• Parties: CHESAPEAKE APPALACHIA, LLC v. SCOUT PETROLEUM, LLC ; Scout Petroleum II, LP, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

809 F.3d 746

CHESAPEAKE APPALACHIA, LLC

v.SCOUT PETROLEUM, LLC ; Scout Petroleum II, LP, Appellants.

No. 15–1275.

United States Court of Appeals, Third Circuit.

Argued Oct. 8, 2015.

Opinion Filed: Jan. 5, 2016.

Michael Coren, Esq., Jacob A. Goldberg, Esq., Alessandra C. Phillips, Esq., Robert L. Pratter, Esq. (Argued), Cohen, Placitella & Roth, Philadelphia, PA, Thomas D. Kitch, Esq., Daniel E. Lawrence, Esq., David G. Seely, Esq., Gregory J. Stucky, Esq., Fleeson, Gooing Coulson & Kitch, Wichita, KS, Counsel for Appellants.

Daniel T. Brier, Esq., Myers, Brier & Kelly, Scranton, PA, Daniel T. Donovan, Esq. (Argued), Ragan Naresh, Esq., Kirkland & Ellis, Washington, DC, Counsel for Appellee.

BEFORE: SHWARTZ, KRAUSE, and COWEN, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

In Opalinski v. Robert Half International Inc., 761 F.3d 326 (3d Cir.2014), cert. denied, ––– U.S. ––––, 135 S.Ct. 1530, 191 L.Ed.2d 558 (2015), we held that the availability of class arbitration constitutes a "question of arbitrability" to be decided by the courts—and not the arbitrators—unless the parties' arbitration agreement "clearly and unmistakably" provides otherwise, id. at 329, 335–36.

Scout Petroleum, LLC and Scout II, LP (collectively, "Scout") appeal from the orders of the United States District Court for the Middle District of Pennsylvania granting Chesapeake Appalachia, LLC's ("Chesapeake") motions for summary judgment and for an order vacating a decision by the arbitrators and denying Scout's own motion to dismiss the complaint as well its motion for reconsideration. The oil and gas leases ("Leases") at issue in this appeal state that, in the event of a disagreement between "Lessor" and "Lessee" concerning "this Lease," performance "thereunder," or damages caused by "Lessee's" operations, "all such disputes" shall be resolved by arbitration "in accordance with the rules of the American Arbitration Association." (A247.) Based on the language of the Leases themselves, the nature and contents of the various AAA rules, and the existing case law, we conclude that the Leases do not "clearly and unmistakably" delegate the question of class arbitrability to the arbitrators. Accordingly, we will affirm.

I.

In 2008, Chesapeake entered into various oil and gas leases with landowners in several northeastern Pennsylvania counties. Chesapeake is the "Lessee," and the "Lessor" is (or originally was) the respective landowner, e.g., "[t]his Lease made this 10th day of January, 2008, by and between: William D. Bergey and Joanne M. Bergey, husband and wife ... hereinafter collectively called ‘Lessor’ and CHESAPEAKE APPALACHIA, L.L.C., an Oklahoma limited liability company ... hereinafter called ‘Lessee.’ " (A246.) The Leases indicate that they were "prepared by" Chesapeake. (A248.) In 2013, Scout purchased the right to several Leases, and, since then, it has been receiving royalties from Chesapeake.

The Leases include the following arbitration provision:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee's operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association. All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.

(A247.)

Over the years, the AAA has adopted and amended several rules applicable to various kinds of arbitration and mediation proceedings. Active Rules, American Arbitration Association, https://www.adr.org/aaa/faces/rules/searchrules/rulesearchresult?x_rule_status=A (last visited Nov. 10, 2015). The AAA website lists more than fifty sets of active rules, including the Commercial Arbitration Rules and Mediation Procedures ("Commercial Rules") as well as the Supplementary Rules for Class Arbitrations ("Supplementary Rules"). Id.

The AAA's "Commercial Arbitration and Mediation Procedures" publication is nearly fifty pages long and includes fifty-eight different "Commercial Rules." These rules are couched in terms of individual or "bilateral" arbitration proceedings as opposed to proceedings on behalf of a class. They also generally address basic procedural issues. For example, there are rules governing the requirements for filing demands and answers, mediation, the arbitration proceeding's locale, pre-hearing production of information, basic guidelines for how the hearing should be conducted, and the timing, form, and scope of the arbitrator's award. Commercial Rule 1 ("Agreement of Parties") provides in relevant part that:

(a) The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the American Arbitration Association (hereinafter AAA) under its Commercial Arbitration Rules or for arbitration by the AAA of a domestic commercial dispute without specifying particular rules. These rules and any amendment of them shall apply in the form in effect at the time the administrative requirements are met for a Demand for Arbitration or Submission Agreement received by the AAA. Any disputes regarding which AAA rules shall apply shall be decided by the AAA. The parties, by written agreement, may vary the procedures set forth in these rules. After appointment of the arbitrator, such modifications may be made only with the consent of the arbitrator.

(A93.) Commercial Rule 7 governs the "Jurisdiction" of the arbitrator:

(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause.

(c) A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrator may rule on such objections as a preliminary matter or as part of the final award.

(A96.) Commercial Rule 8 ("Interpretation and Application of Rules") states, inter alia, that the arbitrator "shall interpret and apply these rules insofar as they relate to the arbitrator's powers and duties." (A97.)

The Supplementary Rules governing class arbitration went into effect in 2003. Entitled "Applicability,"

Supplementary Rule 1 states:

(a) These Supplementary Rules for Class Arbitrations ("Supplementary Rules") shall apply to any dispute arising out of an agreement that provides for arbitration pursuant to any of the rules of the American Arbitration Association ("AAA") where a party submits a dispute to arbitration on behalf of or against a class or purported class, and shall supplement any other applicable AAA rules. These Supplementary Rules shall also apply whenever a court refers a matter pleaded as a class action to the AAA for administration, or when a party to a pending AAA arbitration asserts new claims on behalf of or against a class or purported class.

(b) Where inconsistencies exist between these Supplementary Rules and other AAA rules that apply to the dispute, these Supplementary Rules will govern. The arbitrator shall have the authority to resolve any inconsistency between any agreement of the parties and these Supplementary Rules, and in doing so shall endeavor to avoid any prejudice to the interests of absent members of a class or purported class.

(c) Whenever a court has, by order, addressed and resolved any matter that would otherwise be decided by an arbitrator under these Supplementary Rules, the arbitrator shall follow the order of the court.

(A136.) Supplementary Rule 3 is entitled "Construction of the Arbitration Clause":

Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the "Clause Construction Award"). The arbitrator shall stay all proceedings following the issuance of the Clause Construction Award for a period of at least 30 days to permit any party to move a court of competent jurisdiction to confirm or to vacate the Clause Construction Award. Once all parties inform the arbitrator in writing during the period of the stay that they do not intend to seek judicial review of the Clause Construction Award, or once the requisite time period expires without any party having informed the arbitrator that it has done so, the arbitrator may proceed with the arbitration on the basis stated in the Clause Construction Award. If any party informs the arbitrator within the period provided that it has sought judicial review, the arbitrator may stay further proceedings, or some part of them, until the arbitrator is informed of the ruling of the court.

In construing the applicable arbitration clause, the arbitrator shall not consider the existence of these Supplementary Rules, or any other AAA rules, to be a factor either in favor of or against permitting the arbitration to proceed on a class basis.

(A137.) Under Supplementary Rule 4 ("Class Certification "), the arbitrator, if satisfied that the arbitration clause permits the arbitration to proceed as a class arbitration pursuant to Supplementary Rule 3, determines whether the proceeding should go forward as a class arbitration.

On March 17, 2014, Scout filed an arbitration demand against Chesapeake on behalf of itself and similarly situated lessors, alleging that Chesapeake paid insufficient royalties. In the answering statement it...