The PIOGA Press
(by Robert Max Junker)
The argument that the Pennsylvania Constitution compels municipalities to classify natural gas extraction from shale formations as a “heavy industrial use” and therefore mineral development cannot occur in agricultural and rural residential zoning districts was roundly rejected by both the Commonwealth Court and the Supreme Court in the case of Frederick v. Allegheny Township Zoning Hearing Board, 196 A.3d 677 (Pa. Cmwlth. 2018) (en banc), appeal denied, ___ A.3d ___ (Pa., No. 449 WAL 2018, filed May 14, 2019). Nevertheless, opponents of natural gas development continue to be undeterred and refuse to give up this mantra. Attacks on municipalities’ legislative decisions on where natural gas development is appropriate within their own borders are still playing out in several Western Pennsylvania communities, with opponents seeking just one judicial decision that will breathe life into this moribund concept. With the June 26 decision from the Commonwealth Court in Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board, No. 2609 C.D. 2015 (Pa. Cmwlth. June 26, 2019) (unreported decision), this tenuous theory was put on life support and yet its few remaining proponents stubbornly refuse to acknowledge the inevitable demise.
Middlesex Township is a rural community in Butler County. In 2014, the Board of Supervisors enacted a zoning ordinance amendment to expressly provide for the use and regulation of oil and gas operations within the township. The board decided that oil and gas well site development should be a permitted use by right in the rural residential, agricultural, residential agricultural and the restricted industrial districts; should be allowed as a conditional use following a public hearing in the commercial districts; and should not be permitted in certain other districts.
R.E. Gas Development, LLC applied for and received a zoning permit authorizing construction and operation of a well site on the farm owned and operated by Robert G. Geyer in the residential agricultural district. Opponents to the well site, led by the out-of-town Delaware Riverkeeper Network and Clean Air Council, challenged the validity of Middlesex’s zoning ordinance and appealed the permit claiming that the zoning ordinance was invalid under the Pennsylvania Constitution for three reasons. First, the objectors claimed the ordinance was not a valid exercise of the township’s police power because it was not designed to protect the health, safety, morals and public welfare in violation of Article 1, Section 1 of the Pennsylvania Constitution. Second, they argued that injecting incompatible industrial uses into a non-industrial zoning district was irrational and again in violation of Article 1, Section 1. Third, the objectors asserted that permitting the Geyer well site in the residential agricultural district unreasonably infringes on the objectors’ rights under Article 1, Section 27 of the Pennsylvania Constitution to clean air, pure water and a healthy local environment. After nine nights of hearings, the Middlesex Township Zoning Hearing Board denied the objectors’ challenge and appeal. The Court of Common Pleas of Butler County likewise denied the appeal.
This case presents an interesting and unusual background at a time when other judicial decisions were trying to make sense of the post-Robinson Township II legal landscape. The Commonwealth Court first addressed this case in an unpublished opinion filed June 7, 2017 (“Middlesex I”). The court found that the objectors did not meet their heavy burden to prove that the zoning ordinance was unconstitutional. In a brief mention, the court analyzed the Article 1, Section 27 claims under the three-part Payne v. Kassab test for reviewing government action that impacts the environment, and concluded that zoning ordinance was valid. The objectors appealed to the Supreme Court. At the time, the Supreme Court was considering but had not yet decided the Gorsline v. Fairfield Township case. That case had been accepted by the Supreme Court to address the question of whether natural gas development was fundamentally incompatible with residential zoning. Around the same time, the Supreme Court decided the PEDF case regarding the Commonwealth’s use of funds generated from the leasing of state forest and park lands for oil and gas exploration and extraction and expressly overruled the Payne v. Kassab test for claims under Article 1, Section 27. In an unusual move, the Supreme Court entered an order stating that it would not consider the Delaware Riverkeeper Network’s appeal until Gorsline was decided.
As it turned out, the Supreme Court did not address the constitutional questions accepted for review in Gorsline and instead only reversed the well pad approval there on narrow evidentiary grounds. But the court did conclude Gorsline by observing that “this decision should not be misconstrued as an indication that oil and gas development is never permitted in residential/agricultural districts, or that it is fundamentally incompatible with residential or agricultural uses.” The Supreme Court recited this quotation when it directed the Commonwealth Court to reconsider the Middlesex I decision in light of PEDF and Gorsline.
Returning to case on remand, the Commonwealth Court quoted heavily from its first opinion. It also now had the benefit of its opinion in Frederick, and found that case controlled the disposition of the Delaware Riverkeeper Network’s substantive due process claims. As in Frederick, the evidence considered by the Zoning Hearing Board could not be disturbed. The testimony and evidence showed that Middlesex had a long history of oil and gas development, which was viewed as an integral part of agricultural preservation and agriculture in general. The ordinance struck a careful balance between limiting suburban sprawl and benefitting agricultural preservation.
On the Article 1, Section 27 claim, the court again referred to Frederick and the interpretation of PEDF as expressed therein. The court found that the Zoning Hearing Board made proper conclusions with respect to environmental concerns. The board acted in its role as trustee for future generations by helping to preserve agricultural resources by permitting oil and gas development in agricultural areas. Oil and gas activities were excluded from exclusively residential districts, but the Zoning Hearing Board noted that “oil and gas drilling provides a financial mechanism by which the free market can preserve agriculture.” The Commonwealth Court held that based on Frederick and the Supreme Court’s decision in PEDF, that the Middlesex zoning ordinance did not violation Article 1, Section 27.
On July 26, the objectors continued the fight, filing a Petition for Allowance of Appeal with the Supreme Court.
The Delaware Riverkeeper decision is just the latest in a series of similar attacks that have been severely blunted by Frederick. The Commonwealth Court has scheduled oral argument in October to address these same claims in an appeal of a challenge to the Penn Township, Westmoreland County zoning ordinance that was rejected by the Westmoreland County Common Pleas Court. This month, the Murrysville Zoning Hearing Board is expected to render its decision in a validity challenge to Murrysville’s use of a zoning overlay district for mineral extraction. Finally, Washington County Common Pleas Court has scheduled a hearing for December of this year on a challenge to the Robinson Township, Washington County zoning ordinance. The irony is that Robinson Township was the named petitioner in the challenge to the provisions of Act 13 limiting the authority of local governments to regulate oil and gas development. After succeeding in having the Supreme Court invalidate those provisions, Robinson’s ordinance is now being challenged based on that decision for having an ordinance which objectors claim is too permissive with regard to the regulation of oil and gas development.
All of these substantive validity challenges do reveal one truth. Active engagement with the community and local officials must continue if the industry hopes to capture the momentum from the string of successes in the Supreme Court and Commonwealth Court. Confronting this narrative that natural gas development must be relegated to industrial areas cannot occur only in appellate courtrooms. By conducting safe operations, minimizing temporary inconveniences and by shouldering the burden of a defense when opponents attack local decisions, the energy sector can partner with local officials to optimize the rights of property owners to develop their mineral interests.
In all of the cases discussed in this article, an attorney for a production company stood with the municipal solicitor to defend the ordinance. This type of cooperation should be celebrated as a counterpoint to media portrayals trying to paint the industry and local government as constant adversaries.
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The Legal Intelligencer
(by Alexandra Farone)
As social media continues to play an ever-more prominent role in our culture, employers are frequently faced with the uncomfortable situation of encountering an employee’s social media post that, at best, reflects unfavorably upon the employer or, at worst, is outright harassment or discrimination. Pennsylvania court decisions on the intricacies or enforceability of employers’ social media policies are few and far between, and do not create particularly useful guidance for employers in navigating the minefield of social media. Without such clarity, employers are encouraged to be mindful when drafting, revising or enforcing these policies to ensure compliance with existing guidance.
While public employers face the unique challenge of balancing employees’ constitutional free speech rights against protection of the employer’s reputation, private sector employers must also consider federal law when drafting a social media policy. The National Labor Relations Act (NLRA) gives unionized and nonunionized employees the right to act together to address wages, hours, and the terms and conditions of employment. Such “protected, concerted activity” could come in the form of an employee’s social media post complaining about, for example, vacation time, inadequate supervision or perceived poor safety measures. As early as 2012, the National Labor Relations Board (the board) issued a decision finding that a Facebook conversation can be protected, concerted activity, see Hispanics United of Buffalo and Carlos Ortiz, 359 NLRB No. 37 (2012). To qualify for protection, the speech has to be more than “mere griping.” Moreover, if the speech is egregiously offensive or knowingly and maliciously false, or if it disparages the employer without relating complaints to a term or condition of employment, it will likely not be protected. If, however, the speech raises a concerted or group complaint about a term or condition of employment, the employer must take care not to discipline the employee in a manner that runs afoul of the NLRA.
The following tips should help minimize the risk of adverse action against an employer that encounters an issue stemming from its employees’ social media activity:
- Include the social media policy in an existing employee handbook. Employees should acknowledge in writing that they have read and that they understand the contents of the handbook, including social media policies. This is particularly important because these policies can apply to conduct and postings on the internet that occur outside of the workday and workplace. Such an acknowledgement could minimize an employee’s ability to persuasively claim he was unaware of the social media policy and its scope, or that he did not understand the policy.
- Prohibit “speaking on behalf of the company” in the manner of a de facto spokesperson without prior written authorization from management and the marketing team. However, do not categorically prohibit use of a company name or logo, as this could be overly broad and could affect NLRA-protected activity.
- Ban disclosure of trade secrets and other confidential information. This is particularly important if the employer does not have an existing nondisclosure policy or agreement with its employees. In their social media policies, employers should prohibit the disclosure of trade secrets and other confidential information.
- Prohibit harassment and discrimination. The same statements that would be prohibited and grounds for discipline if made in the workplace should be equally prohibited in the digital forum of social media. In their social media policies, employers should prohibit harassment and discrimination on the basis of race, ethnicity, national origin, sex, religion, age and disability, as well as additional state and local protected classes.
- Encourage civility and respect. This message should apply to employees’ interactions with customers, clients and coworkers alike. Civility can always be required, but vague policy language demanding respect, particularly for the company, could be found to be overly broad by the NLRB. Employees could interpret such phrasing to prohibit any and all criticism of supervisors or the company as a whole, including protected, concerted activity.
- Closely review controversial posts concerning the terms or conditions of employment. As stated, only certain conduct constitutes protected, concerted activity. Consider: whether the posting refers to hours, wages, management or supervisors, a problematic coworker, or other terms or conditions of employment; whether the post is directed to, “liked,” “reacted” to, or commented upon by other employees, or otherwise appears to be made on behalf of other employees in addition to the individual poster; and whether the post is egregiously offensive, or knowingly and maliciously false as evaluated based upon the expected scope of knowledge of the posting employee given his role and position. It is important to note that the NLRB has a high standard for egregiously offensive statements, and often finds traditionally profane or offensive conduct to be protected. Employers should consult counsel for assistance in determining whether a particular post triggers NLRA concerns.
- Be consistent with disciplinary measures. Employers should take care not to open themselves up to a discrimination suit by failing to discipline online harassment in the same manner by which they would discipline harassment that occurred in person. For example, if an employee of a protected class is terminated for making harassing posts on social media but an employee outside of that protected class is not terminated for similar postings, the employer could be susceptible to a disparate treatment claim.
- Establish that there is no expectation of privacy when using a company’s email address, email server or internet system. Always preserve evidence as soon as possible by, for instance, taking a screenshot or making a copy of the questionable post, as an employee can quickly delete a prior post or manipulate privacy settings to hide the post. Maintaining screenshots for the disciplinary process and to defend against any litigation commenced by the employee. Documented screenshots with time stamps, where possible, can bolster an employer’s argument that disciplinary action was made pursuant to legitimate, nondiscriminatory reasons.
Alexandra G. Farone is an associate in Babst Calland Clements & Zomnir’s litigation and employment and labor groups. She counsels corporate clients regarding employment matters including best practices and procedures, and compliance with the FLSA, ADA, ADEA and Title VII. Contact her at 412-394-6521 or afarone@babstcalland.com.
For the full article, click here.
The Legal Intelligencer
(by Jean Mosites and Matthew Wood)
Editor’s note: Author Jean M. Mosites of Babst, Calland, Clements & Zomnir represents MSC in this litigation. Matthew C. Wood, an associate with the firm, reported on the decision.
On July 22, the Pennsylvania Commonwealth Court issued an opinion addressing an industry trade group’s challenges to parts of the state’s unconventional well regulations (25 Pa. Code § 78a). The regulations impose obligations on the development of natural gas wells in unconventional formations such as the Marcellus Shale and Utica. In 2016, petitioner, the Marcellus Shale Coalition, (MSC) challenged specific portions of the new regulations governing public resources, area of review, on-site processing, well development and centralized impoundments, site restoration, spill remediation and waste reporting. Following its August 2018 decision largely invalidating the public resource provisions challenged in count one of MSC’s petition, and oral argument on the remaining counts in October 2018, the court’s en banc panel decided applications for partial summary relief by MSC and respondents, the Department of Environmental Protection (DEP) and the Environmental Quality Board (EQB).
In its petition, MSC contended that the DEP and EQB lacked statutory authority to adopt the rules, that the new regulations conflicted with current law and were unconstitutional special laws, and that the new regulations were unreasonable. The agencies largely countered that they derived their authority from multiple statutory sources and that the new regulations were necessary for the protection of the environment.
The court reviews the challenges to regulations under the three-part standard articulated in Tire Jockey Services v. Department of Environmental Resources, 915 A.2d 1165, 1187 (Pa. 2007). Under Tire Jockey a regulation is valid if it was adopted within the agency’s granted power, issued pursuant to proper procedure, and is reasonable. Respondents moved for partial summary judgment only on the first part of the three-part test—whether the agencies had statutory authority to promulgate, implement, and enforce the regulations. On the three counts where MSC did not cross move, the court did not reach the third part of the test, whether the regulations were reasonable.
The Unconventional Well Regulations
The court’s opinion is the latest in a series of decisions considering specific elements of MSC’s challenge. Following the passage of Act 13 of 2012 (which enacted more stringent environmental standards regarding shale drilling), the new regulations became effective in October 2016. They amended Pennsylvania’s then-current oil and gas well regulations by adding a new chapter to include additional requirements for unconventional well development. Shortly thereafter, MSC filed its eight-count petition with the court, seeking pre-enforcement review, asserting the substantial impact the new rules would have on industry operations, and requesting an order enjoining enforcement of the regulations.
MSC obtained partial interim relief on four of its counts, which the agencies appealed to the Pennsylvania Supreme Court. In July 2018, the Supreme Court affirmed in part and reversed in part. Injunctions remain in place for area of review obligations related to off-site wells and the obligation to close or re-permit centralized impoundments, which operate under existing permits to store produced water for reuse. The injunction related to public resources has been replaced by a decision on the merits when the Commonwealth Court reviewed and decided MSC’s application for summary relief on count one. The court invalidated new definitions of “public resources” and confirmed the scope of DEP’s consideration of public resources. The court’s instant decision addressed the parties’ respective applications and cross-applications for partial summary relief on counts two through seven of MSC’s petition.
The Court’s Decision
The decision addressed select portions of the challenge and the regulations.
In count two, the area of review regulations would obligate a well operator to identify and, regardless of access, monitor all active, inactive, orphan, abandoned, and plugged wells it does not own within 1,000 feet of its well; and plug any such wells, should they be impacted by the operator’s hydraulic fracturing activities. The court held “that the agencies have failed to identify any statutory authority to justify regulations that impose entry, inspection and monitoring obligations with respect to wells on the lands of others and over which the stimulating well operator has no control, particularly in the absence of any actual pollution or threatened pollution on those lands attributable to the stimulating well operator’s activities.” The court determined, however, that the agencies had legislative authority to require a well operator to conduct a survey of the area around its well, to the extent that the survey did not require access to property not owned or operated by the well operator.
On count three, the court denied MSC’s application for summary relief on regulations governing on-site processing. MSC argued that subsection 78a.58(f) conflicted with an express exemption in Act 13. The court found no conflict between the parties’ positions, in light of the DEP’s briefing whereby it informed the court that the DEP would not require bonding or permitting under the Solid Waste Management Act (SWMA) for any onsite waste processing.
Regarding the re-permitting of centralized impoundments under the SWMA (count four), MSC’s petition argued the regulation conflicted with established law, was an unconstitutional special law, and was unreasonable. The court agreed that the SWMA did not authorize the DEP to require permits for waste storage impoundments, but found broad statutory authority under the Clean Streams Law. The court reached no conclusion as to whether the new obligation to obtain new permits was reasonable. Regarding the well development impoundment requirements, MSC’s petition contended that the new obligations amounted to a constitutionally prohibited special law that improperly targeted this industry without a rational basis to create higher standards than those for other industries. The court noted a lack of information comparing well impoundments across industries and denied the agencies’ application for summary relief.
The court sided with MSC on its challenge to the requirement that a well operator restore areas of its well site to “approximate original conditions” within nine months of completing drilling. MSC argued, and the court agreed, that the obligation conflicted with the restoration requirements in Act 13 and granted MSC’s application for summary relief. The court otherwise denied MSC’s application and granted the agencies’ application for summary relief on count five.
The court declined to rule on requirements governing spill remediation (count six), which among other things, require operators to follow new and unique obligations to remediate spills or releases in areas on or adjacent to a well site or access road, concluding it was not ripe for review. Writing for the court, Judge P. Kevin Brobson stated, “Here, absent a regulated spill, no immediate obligation flows to the industry to comply with the spill remediation regulation and thus no current hardship is evident.”
Conclusion
The court’s opinion provides its interpretation of the applicable law on six counts, addressing the applications for partial summary relief before it. As noted above, the court did not reach all questions presented by MSC’s petition.
The case is Marcellus Shale Coal. v. Department of Environmental Protection, No. 573 M.D. 2016 (Pa. Commw. Ct. July 22, 2019).
Jean M. Mosites is a shareholder in Babst, Calland, Clements & Zomnir’s environmental, energy and natural resources, and the public sector groups. Her practice includes client counseling on environmental compliance in the energy sector, resolving liabilities under federal and state remediation programs, as well as administrative appeals and environmental litigation in state and federal courts. Contact her at jmosites@babstcalland.com.
Matthew C. Wood is an associate in the firm’s environmental group. Contact him at mwood@babstcalland.com.
For the full article, click here.
Mobility, Transport & Safety Practice Leader Tim Goodman interviewed NHTSA’s Christopher Perry, the agency’s chief legal officer for enforcement, on regulatory oversight, recalls and safety standards at ACI’s annual Automotive Product Liability Litigation Conference in Chicago on July 19. Chris Perry described NHTSA’s regulatory approach as promoting communication and innovation, including in AV technology, while maintaining NHTSA’s mission of safety.
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Law360
(by Keith Coyle)
The Gas Pipeline Advisory Committee, or GPAC, the federal advisory committee that reviews the U.S. Pipeline and Hazardous Materials Safety Administration’s gas pipeline safety rulemaking proposals, met in Washington, D.C., late last month to consider proposed changes to PHMSA’s regulations for onshore gas gathering lines. Driven by recent developments in the oil and gas industry, particularly the expansion of pipeline infrastructure in the nation’s shale plays, PHMSA published a notice of proposed rulemaking in April 2016 that contained significant amendments to the federal safety standards and reporting requirements for rural gas gathering lines.
While the Trump administration had signaled a willingness to pursue a more measured approach, the GPAC largely endorsed the prior administration’s position, a decision that could ultimately produce a final rule with far-reaching impacts for the industry. According to PHMSA’s latest estimates, the GPAC’s recommended proposal would make about 90,000 miles of additional gas gathering lines subject to the agency’s gas pipeline safety standards. The Trump administration’s alternative would only extend the agency’s gas pipeline safety standards to about 25,000 miles of additional gas gathering lines greater than 12 inches in diameter.
The GPAC’s decision to back more ambitious rules for rural gas gathering lines could represent a dramatic turning point for the industry. Most of the nation’s gas gathering infrastructure has remained outside the reach of PHMSA’s jurisdiction for decades, due to a long-standing statutory exemption and the absence of sufficient safety data to justify federal regulations.
But the emergence in recent years of larger-diameter, higher-pressure gas gathering lines in the nation’s shale plays has raised concerns about the need for new safety standards and reporting requirements. Whether those concerns warrant the expansive rules contemplated by the GPAC, which would extend PHMSA’s safety standards to approximately 32,000 miles of 8-inch-diameter gas gathering lines in sparsely populated rural locations, will likely remain the primary point of contention throughout the remainder of the rulemaking process.
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Smart Business
(by Jayne Gest with Justine Kasznica and Timothy Goodman)
At times, automated vehicles (AV) have dominated the headlines, so it can be easy to forget that the technology is still in the early stages of development and commercialization.
Justine Kasznica, shareholder at Babst Calland, is routinely asked: Why are AV companies and their automotive partners missing their stated deployment dates?
“This question raises an important point about current challenges to AV commercialization, with direct analogy to other autonomous mobility platforms, such as drones, personal delivery robots and more,” she says.
Some resources are being held back by the industry because of regulatory uncertainty, safety and security concerns, and the need for infrastructure that supports the technology, says Timothy Goodman, shareholder at Babst Calland.
“Even in view of this, progress is happening, particularly with regard to electrification and advanced driver-assistance systems (ADAS),” he says.
Smart Business spoke with Kasznica and Goodman, in the firm’s Mobility, Transport and Safety practice group, about AV development and commercialization.
Why should business executives stay aware of AV and other mobility development?
Automation has penetrated every segment of industry. In fact, warehousing, shipping, logistics and transportation are becoming more automated at a greater pace than ever before. In the future, whether it’s a drone, a legged robot or a wheeled delivery vehicle that solves the last mile problem, nearly every business will be impacted by AV. In addition, there’s plenty of opportunity to participate in this mobility evolution, even if it’s indirectly.
How is regulatory uncertainty playing a role in AV commercialization?
The federal government controls motor vehicle safety, with input from the automotive industry. Historically, National Highway Traffic Safety Administration regulations assumed vehicles would have a steering wheel, brake pedal and driver. The rules need to catch up to AV technology, which may or may not have these legacy items. However, federal rulemaking can take years, and this technology is changing rapidly.
In the absence of a strong federal framework, states are stepping in. A patchwork of laws ranges from hands-off and hesitant, to the proactive approach of Pennsylvania and California, which want to lead the way in developing sound regulations for AV testing and deployment. In addition, industry groups are creating voluntary standards for AV companies, which may influence future legislation.
The lack of a consistent regulatory frameworks had led many AV companies to start missing their projected targets for commercial deployment, in part because these regulations often dictate design features in their products.
What other challenges need to be overcome?
Autonomy is described in different levels, from zero to five. The technology is currently at level two, which is partial automation, i.e. lane assist, where the driver is still critical. Moving up to level three, four or five will require more than regulatory certainty — although that’s a big part of it. There are many transportation and infrastructure factors, like the advent of 5G, that need to catch up to the technology. This, in turn, further complicates AV development cycles.
The industry — and regulators — want AV systems to function well and not take unreasonable safety risks. AV systems in beta mode can become confused by unusual conditions, such as dust/rain/snow, pedestrians or unique road obstacles. Built-in redundancies are also required to combat software fails, while expensive and complicated technology, production cycles and implementation delays create barriers. Other concerns related to the cybersecurity and data privacy of integrated software systems need to be fleshed out before there will be full-scale commercialization. Solutions will require industry collaboration, public-private partnerships and data sharing.
While level five automation is years away, it will happen. Regulators are still trying to figure out how to promote safety without chilling innovation or picking winners and losers. In turn, resources are being held back by companies until there is more clarity with regard to regulations and the science.
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Legaltech News
(By Christian A. Farmakis)
Stories of how AI will change the legal ecosystem forever are endless, yet ‘rubber meets the road’ proof that this is actually happening are few and far between. Here’s what one firm learned about knowing what AI can do and what they didn’t know it could do.
Like many law firms, Babst Calland is acutely focused on providing the best client service. However, pick up any corporate counsel survey and you quickly realize that the lack of quality legal service delivery by outside counsel is the number one point of dissatisfaction by GCs. While there’s disagreement between firms and clients about the degree of top-notch service delivery, there’s absolute agreement in identifying technology as the greatest service and innovation accelerator.
Enter artificial intelligence and machine learning, the proverbial silver bullets for every law firm looking to ‘do more with less’ and satisfy every client need. Stories of how AI will change the legal ecosystem forever are endless, yet ‘rubber meets the road’ proof that this is actually happening are few and far between. In fact, according to a Bloomberg Law survey on the state of legal operations and legal technology released during the recent Corporate Legal Operations Consortium (CLOC) Institute annual meeting, less than 25 percent of survey respondents indicated that they are using legal technology with artificial intelligence or machine learning. And of those deploying AI, I guarantee not all are game changing.
Our firm, along with our affiliate technology division Solvaire Technologies, are not only AI believers but after exhaustive AI tool evaluations, trials, and numerous AI projects under our belt, we have become our clients’ go-to resource in how we can leverage AI for their benefit. Our firm, with the guidance of Solvaire, has developed its own sophisticated internal systems and processes to better serve clients, and now with AI tools like Diligen, it can more rapidly and accurately identify and extract key clauses in hundreds of thousands of contracts.
We spent the first 36 months of our AI journey reviewing nine different due diligence and contract assistant AI tools, and, within the last 12-18 months, have incorporated specific AI tools as part of the firm’s due diligence, content management, discovery process. With that being said, we are all the wiser when it comes to knowing what AI can do and what we didn’t know it could do. Here are some learnings:
“Taking Out the Trash” with AI: New tools are helping us group document types and get a better overall sense of the type of content our clients have and what they need to focus on. For example, when we have a due diligence project, our ability to get back to our client within the first 48-72 hours with a better sense of the scope of documents and relevant document categories is critical. Clients can then go back to their departments and practice groups internally and better assess and deploy resources as needed since they have a better understanding of the ‘where’ and ‘what.’
Key AI ingredients … Relevancy and Accuracy: We used to spend a lot of time finding the stuff we needed to review, which meant we reviewed unimportant documents and content to get to the relevant information. The ability with AI contract assistant tools to better catalog disparate document sets and then, through complex clause extraction, go directly to the needle in the haystack versus going through every piece of straw to find the needle has been game changing for service delivery.
Training Makes Perfect: Some tools are better than others at allowing you to train it to identify new types of clauses quickly. Some tools are more rigid and require the vendor to be involved in the training. Due diligence projects are always time sensitive so there’s rarely enough time to wait for this external training. It’s important to understand what your requirements are in a specific time frame. Preferably, find an AI tool which is trained to find the most important clauses for your client’s needs out-of-the-box, and which can be quickly trained to find new concepts on the fly.
AI Lets You ‘Think Big’: Since deploying AI tools to help address our clients’ due diligence and review needs, we have been able to do more, quicker, more accurately and on time while offering flat fee predictable pricing. We can now take on bigger projects—and deliver them faster—thanks to our streamlined, best practices process.
Sweat the Small Stuff: For us, the biggest challenge when working with AI tools is that they are typically not being designed by lawyers and legal professionals who deeply understand the due diligence or discovery process. Vendors will offer up provisions that we rarely use or are not critical to the due diligence process, which tells us they don’t understand our business. When finding the perfect AI tool for your specific process and client need, it is critical that everybody speaks the same language. Streamlined functions and simple user interfaces in our AI tools are preferred.
Less + Less = More: A big challenge Babst Calland and many firms face with AI is most providers’ lack of big picture understanding related to more efficient legal service delivery. This often starts and ends with pricing; efficiency gains on the client end do not necessarily translate into extraordinary profit gains on the firm and vendor end. The gains are realized on the process improvement and service delivery end (something that quite frankly, most law firms don’t desire or seek). Law firms need to be able to drive client value based on a valuation process that works for everybody—the client, the law firm and the AI vendor. Law firms that fail at striking that delicate balance will fail in the age of AI.
Invisible AI: Well over a year into leveraging AI to deliver better and faster for our clients, we never hear “wow, we are so excited that you used AI.” Instead, we hear “I can’t believe how fast and accurate that was!” or “we would have never been able to do that.” We do not tout AI as the silver bullet but have silently and effectively worked it into our best practice delivery service model.
Christian Farmakis is a shareholder, management committee member and chairman of the board of directors at Babst Calland, and president of Solvaire Technologies. Having a reputation for delivering reliable, practical, and efficient business-oriented advice to his clients, he is always seeking better ways to serve them. Leveraging technology and developing measurable processes and quality standards to undertake large diligence and document management projects on time and on budget are just two of the ways that make him and his team a legal provider of choice.
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Reprinted with permission from the July 11, 2019 edition of Legaltech News © 2019 ALM Media Properties, LLC. All rights reserved.
The PIOGA Press
(The 2019 Babst Calland Report)
This article is an excerpt of The 2019 Babst Calland Report, which represents the collective legal perspective of Babst Calland’s energy, environmental and pipeline safety attorneys addressing the most current business and regulatory issues facing the oil and natural gas industry. A full copy of the report is available by writing info@babstcalland.com.
Pennsylvania
Emerging trend of allocation wells and cross unit drilling in the Appalachian Basin
Allocation wells and cross unit drilling have the potential to create more economic wells using longer laterals, while overcoming unit size limitations commonly found in oil and gas leases. An allocation well is a lateral wellbore that crosses multiple lease boundaries of tracts that have not been pooled or unitized. Similarly, cross unit drilling involves laterals that traverse multiple units.
The use of allocation wells and cross unit drilling in Texas and Oklahoma has evolved out of legislation, administrative rulings and case law. Allocation drilling and cross unit drilling are not yet widely used in the Appalachian Basin, but as drilling technology evolves it is likely that operators will look to the feasibility of employing that technology across the basin.
The biggest risk with allocation wells in the Appalachian Basin is the lack of specific authority under most standard Appalachian Basin leases granting the operator the authority to drill allocation wells. Consequently, possible claims might be asserted challenging an operator’s transportation of non-native gas across leased lands or the commingling of native and non-native gas produced from separate units or leases. Another issue associated with the potential use of allocation wells is determining the appropriate method of allocating production royalties between the different lessors. Absent an agreement between the lessors, there is no comprehensive guidance in the Appalachian Basin for the appropriate method for allocation of royalties between lessors from production via an allocation well.
There are signs that these risks and unanswered questions will be addressed in the near future. In 2019, House Bill 247 was introduced in the Pennsylvania House of Representatives which provides for a process and accounting method for allocation wells. Similarly, operators in Texas and Oklahoma are beginning to obtain production sharing agreements from the various lessors that explicitly govern how payments will be made via production from an allocation well. This is a practice that could work in the Appalachian Basin if operators include allocation well language in a standard lease form or amend existing leases to allow for allocation wells.
Briggs v. Southwestern Energy
In November 2018, the Pennsylvania Supreme Court agreed to hear the appeal of the Superior Court’s decision in Briggs v. Southwestern Energy Production Company, which held that the rule of capture does not preclude liability for trespass due to hydraulic fracturing. The Supreme Court’s acceptance of the appeal and the court’s rephrasing of the question it will decide has led the Pennsylvania Independent Oil & Gas Association, Pennsylvania Chamber of Commerce, American Petroleum Institute and other industry groups to file friend of the court briefs advocating that the decision be overturned. The Supreme Court reframed the issue as:
Does the rule of capture apply to oil and gas produced from wells that were completed using hydraulic fracturing and preclude trespass liability for allegedly draining oil or gas from under nearby property, where the well is drilled solely on and beneath the driller’s own property and the hydraulic fracturing fluids are injected solely on or beneath the driller’s own property?
On January 30, 2019, Southwestern Energy filed its brief with the court. In addition, various amicus briefs were filed in support of overturning the Superior Court’s decision. The Briggs’ brief was filed on April 3, 2019, and reply briefs are expected to follow. Oral argument has yet to be scheduled.
Interpretation of oil and gas reservations in conveyances
The holding in a recent Superior Court unpublished decision, Julia v. Huntley, is a reminder that exception and reservation clauses should be specific and any restrictions or limitation to an interest should be clearly expressed. The Julia court resolved a deed interpretation issue on whether a 1931 exception and reservation of an oil and gas interest applied only to the lease then in effect or to all subsequent leases. The court held that the reserved interest survived the expiration of subsequent 1933 lease recited in the deed. The oil and gas reservation stated that the conveyance was “made subject to the terms, conditions and stipulation of a certain lease entered into by the said William E. Huntley with Northern Pa. Development Co.” and reserved to the grantor, and his heirs, “one-half of any and all royalties and income or return from any oil or gas which may be produced on or from the premises hereby conveyed.” On appeal, the plaintiff argued that the deed only reserved onealf of the royalty payments from the oil and gas produced under the then existing lease. Ultimately, the Superior Court disagreed, holding that the reservation clause successfully reserved to the grantor one-half of the royalties under any future lease. By the intentional placement of the word “and” between the clauses “one half of any and all royalties” and “income or return from any oil or gas,” the grantor intended to reference circumstances in addition to the lease, i.e., royalties and oil and gas rights. The court further reasoned that if the grantor had sought to limit the reservation to the then existing lease, he would have included “language reflecting that intent.”
West Virginia
Co-tenancy reform implementation begins
Development of co-owned properties has often been delayed or even avoided because West Virginia courts long followed a minority position requiring 100 percent consent from co-owners. To alleviate that constraint, the legislature passed HB 4268, entitled the “Co-Tenancy Modernization and Majority Protection Act,” which went into effect on July 1, 2018. The act permits operators to develop certain mineral tracts with less than 100 percent consent from co-owners by providing a statutory defense to claims of trespass and waste where the specific requirements and procedures of the act are followed. The act applies solely to the formation targeted for development. If additional formations are developed later, the operator must also comply with the act as to those formations.
Eligibility under the act is determined by three criteria, including whether: (1) the tract has seven or more “royalty owners;” (2) the operator has made “reasonable efforts” to negotiate with all royalty owners to develop the tract; and (3) the operator has secured consent to develop the oil and gas from at least three-fourths of the royalty owners. Consent to develop typically means obtaining a lease, but can also include acquiring fee title, subleases, farmouts and other joint venture arrangements.
The act addresses both unwilling royalty owners and unknown or unlocatable owners. For unwilling owners, the operator is required to give the unwilling owner a final lease offer and provide notice of their right to elect either a production royalty or to participate in development. The operator must then send a final lease offer which advises that if the lease offer is not accepted, the operator is proceeding under the act and sets forth the owner’s election rights. The owner then has 45 days to either accept the lease offer or elect either a production royalty or to participate in development. An owner who doesn’t respond is deemed to have elected a production royalty.
Owners who elect to share in production receive their pro rata market share of revenue and costs to be calculated once their share of production is double their share of the costs. These owners are also subject to, and benefit from, the terms governing participation in deep wells under W.Va. Code §22C-9-7(b)(5)(B). Owners who elect or are deemed to have elected a production royalty are entitled to the highest royalty rate paid to other co-owners of the tract and to a bonus based on a net weighted average of bonus, rentals and other nonroyalty payments. The owner is also entitled to the most favorable lease terms granted to other owners.
Finally, there are certain lease provisions which may not be enforced against a nonconsenting co-owner including arbitration, choice of law, title warranty, injection wells and storage rights. In essence, a statutory lease is created under the terms set by the act. A nonconsenting owner who doesn’t agree with the terms of the production royalty has 30 days from the end of the election period to file an appeal to the Oil and Gas Conservation Commission. Although the act does not require that the operator record its development plan, an operator filing of some form is beneficial to put third parties on notice of the targeted formation.
For unknown or unlocated owners, the election process does not apply, and those owners are automatically provided a production royalty. The operator is required to search certain sets of public records and other sources to attempt to identify and/or locate owners.
Although not required, it is recommended that these efforts be documented by affidavit or other means to demonstrate compliance with the Act. In summary, the act is a positive step forward for operators in developing co-owned properties.
Clarity on title issues involving tax sales
An analysis of tax sales and the interests that they convey is critical to determining correct oil and gas ownership. A relatively common problem arises when the tax sale involves an interest that is assessed multiple times.
Since 2016, the West Virginia Supreme Court of Appeals has issued three opinions stemming from the duplicate assessment of oil and gas interests located in Harrison County. Most recently, in L&D Investments, Inc. v. Mike Ross, Inc., the court reaffirmed long-standing precedent holding that in the case of two assessments of the same land under the same claim of title, the state can only require one payment of taxes under either assessment.
In L&D Investments, the oil and gas underlying a parcel was severed from the surface in 1903 and conveyed through various instruments to several parties. From 1946 through 1999, 100 percent of the interest was assessed under one “master assessment.” In 1988, the county assessor’s office reworked its real property assessments to include production-based assessments for the same properties that were also subject to the master assessment in the personal property tax books. As to those properties where the personal property assessment could not be matched with a real property assessment, a double assessment occurred.
In 2000, taxes under the master assessment became delinquent and the tax lien was purchased at tax sale by the respondent. At the time of the tax sale, L&D Investments’ predecessors were paying the production-based tax assessments for the owners’ undivided interests in the mineral tract. The court found that the production-based assessments were double assessments because they covered the same interests encompassed by the master assessment. Since L&D Investments’ predecessors continuously paid the production-based assessments, the court held that those payments were all that the state could require and ruled that the tax deed issued to respondent was void as a matter of law. Further, the court held that L&D Investments’ claims were not time barred by W.Va. Code §11A-4-4 because tax sales that are the result of duplicate assessments are not subject to a statute of limitations.
Ohio
Dundics and landman registration statute
On September 25, 2018, the Ohio Supreme Court ruled in Dundics v. Eric Petro. Corp. that independent landmen, who acquire oil and gas leases on behalf of operators, are required to be licensed real estate brokers under O.R.C. §4735.01(A) since an oil and gas lease constitutes “real estate” as defined in O.R.C. §4735.01(B). The court found that the statute was unambiguous as to the definition of “real estate” and “real estate broker,” and it did not provide for an exception for independent landmen. The court stated that determining whether a landman should be required to be a licensed real estate broker is a policy decision for the Ohio General Assembly and not the court’s responsibility to create an exception that clearly does not exist in the statute.
Following the Dundics decision, the Ohio General Assembly acted in response to the ruling and passed SB 263, effective March 19, 2019. SB 263 revised O.R.C. §4735 to specifically exclude from the licensed real estate broker requirement an “oil and gas land professional” employed by a person or company for which they are performing his or her duties or a professional that complies with the conditions of O.R.C. §4735.023(A). The statute defines an oil and gas land professional as a “person regularly engaged in the preparation and negotiation of agreements for the purpose of exploring for, transporting, producing, or developing oil and gas mineral interests, including, but not limited to, oil and gas leases and pipeline easements.”
It also requires an independent professional to register annually with the superintendent of real estate and pay an annual fee set, which shall not exceed $100. O.R.C. §4735.023. In order to register with the superintendent, the professional must provide evidence of membership in good standing in a professional organization with an established set of performance and ethics standards. Additionally, prior to beginning negotiations with a landowner, the professional is required to disclose that he or she is a registered oil and gas land professional and a member of a landman professional organization, but is not a licensed real estate broker.
Under this new legislation, a registered, independent landman is no longer required to be a licensed real estate broker in order to acquire oil and gas leases. However, this exception does not apply to fee simple transactions involving oil and gas rights, which continue to require the landman to be a licensed real estate broker.
Developments in Marketable Title Act and Dormant Mineral Act
Ohio’s Marketable Title Act (MTA) continues to be a contentious statute for disputes involving ownership of oil and gas. The MTA extinguishes various property rights, including severed oil and gas rights, existing prior to the root of title (i.e., the most recent instrument of record older than 40 years) unless an exception applies. As to the exceptions, the MTA provides a mechanism that allows an owner to actively preserve a severed interest from extinguishment. In addition, even with no action by its owner, MTA preserves a severed interest specifically identified in the record chain of title of the individual claiming the extinguished interest. This past year, Ohio courts have applied the MTA to both severed fee and royalty interests, but have undertaken drastically different approaches to whether those interests were extinguished under the statute.
On December 13, 2018 the Supreme Court in Blackstone v. Moore determined that a severed royalty interest had not been extinguished under the MTA because the surface owners’ root of title specifically referenced the severed interest. While the Supreme Court refrained from establishing a bright-line rule as to what information was necessary to distinguish a general reference from a specific reference, the court instead looked to whether the reference to the severed interest included details and particulars to accurately describe the interest. Because the root of title in Blackstone identified the type of interest created and identified to whom the interest was originally reserved, the court found that the reference was sufficiently specific to preserve the interest under the MTA.
The Seventh District Court of Appeals recently issued two opinions which appear to divert from the Supreme Court’s holding in Blackstone. Tasked with determining whether the roots of title contained sufficiently specific references to preserve severed mineral interests from extinguishment under the MTA, in Soucik and Mellott the Seventh District held that because the roots of title contained exceptions, the surface owners were precluded from claiming the mineral interest had been extinguished under the MTA. The Seventh District even held that a perfunctory exception to oil and gas “as heretofore reserved” in the root of title barred the surface owner from claiming title to the mineral interest. These decisions appear to disregard the Blackstone holding requiring a reference to include sufficient details and particulars accurately describing the interest.
Ohio courts also continue to address claims to minerals by surface owners under the Ohio Dormant Mineral Act (DMA). In Soucik and Mellott, the Seventh District confirmed that for a surface owner’s DMA attempt to avoid being declared void, the surface owner must attempt service by certified mail on the holders of the mineral interest. If, after “reasonable due diligence” the surface owner is unable to locate the holders of the mineral interest, then service of notice by publication may be utilized. While refraining from establishing a bright-line rule, the court looked to see if surface owners searched probate and deed records, Ohio Department of Natural Resources records, and conducted an internet search. Additionally, the Seventh District made it clear that, if challenged, the surface owner must be prepared to present their efforts to locate holders in the form of an affidavit before proceeding with notice by publication. The decision calls into question previously completed DMA attempts where notice was served through publication only.
With the likelihood of Soucik and Mellott being appealed, the Ohio Supreme Court will probably have an opportunity to address the apparent conflict between its holding in Blackstone and the holdings in Soucik and Mellott. Although not squarely at issue in Blackstone, the Supreme Court may also address the potential conflict between the MTA and DMA and whether both statutes can be utilized by a surface owner to claim severed mineral interests.
For the full article, click here.
Pittsburgh Catholic
(by Paula A. Smith)
Dwayne Coleman, 24, speaking to a group of graduates at a college signing ceremony in May, said that if someone had told him as a teenager that he would travel to China and teach English he would have never believed them.
But with help from the Crossroads Foundation, his mother and the staff at Cardinal Wright Regional School, he came to believe in his academic abilities and potential for success.
Coleman, who was raised by a single mother with two younger children on Pittsburgh’s North Side, graduated from Central Catholic High School in 2012, thanks to assistance from Crossroads.
For the past nine months he worked with the Rand Corp. on the Phresh Project for Pittsburgh Hill/Homewood Research on Neighborhood Change and Health.
“Crossroads really fosters a sense of community,” Coleman said. “It’s easy for students like us to feel out of place because of having a lower socioeconomic background or for being disadvantaged students. But Crossroads provided financial support and tried to make sure the emphasis was on the whole person.”
The Crossroads Foundation is an organization like no other in Pittsburgh. It is a college preparatory program that began with 11 students in 1988 and recently celebrated its 30th academic year with 580 alumni.
Crossroads provides an integral approach committed to helping promising students of all ethnicities with a limited income to obtain a quality Catholic high school education and receive academic support to attend college. Students do not need to be Catholic.
Esther Mellinger Stief, executive director of Crossroads, said, “I make sure Crossroads keeps its commitment to every scholar of providing financial support, but more than that, the opportunities these young people need to fulfill their potential.
“Every young person has innate potential, but not every young person has a path for that potential,” she said. “We provide that path for them.”
Students are recommended to the scholarship program by their principals and teachers. A partnership is created with the student, family, school and community.
“Scholars will be most successful if their families are part of their journey,” Steif said.
The scholars are enrolled from the city of Pittsburgh and nearby suburbs. Acceptance is based on income, potential, significant obstacles that might interfere with a student’s academic pursuits and a need for support to achieve success. Three significant risk factors for students are poverty, neighborhoods with poorly performing public schools and personal circumstances.
Six Catholic high schools with outstanding academics and extracurricular opportunities are available for scholars to attend: Bishop Canevin, Oakland Catholic, Central Catholic, Seton LaSalle, Our Lady of the Sacred Heart and Serra Catholic.
The program assists with tuition costs since applicants come from low-income families. All families pay something, including personal expenses, lunches and social activities. Scholarship funds go directly to the schools for four years. Scholars never need to pay it back.
“What is truly unique is we’re not just about tuition support,” said Stief about the nonprofit organization. “We offer year-round holistic programming that includes summer workshops, college experiences and counselor support in school, which is unusual.”
Additional services include English and mathematics enrichment programs, SAT and ACT preparation classes, tutoring and peer mentoring.
Coleman went on to earn a bachelor’s degree in political science and international studies with a minor in Chinese language in 2016 from Case Western Reserve University in Cleveland, Ohio.
While an undergraduate, he studied abroad and received a certificate in Chinese language, culture and business from Capital University of Economics and Business in Beijing.
Following graduation, he worked for 14 months with Aston International Educational Co. in Xi’an, Shaanxi Province, and co-taught English and SAT preparation with a Chinese instructor to Chinese students and technical executives.
In August, Coleman plans to attend St. John’s University School of Law in Jamaica, Queens, New York. Thanks to a full-tuition scholarship, his career objectives are to pursue international studies in law, obtain a law degree, a master’s in business administration, and work in law and business.
The key to the overall success of the scholars is the counseling they receive through Crossroads.
St. Joseph Sister Sandy Kiefer, director of academics, was the first employee to be hired and is a former director of the organization. She has been ministering in the program for 29 years. The counselors provide guidance and work one-on-one with the students in their schools.
“I love it,” Sister Sandy said. “It’s very inspiring. When students come in, they’re nervous and not sure of a career path. Our team helps them begin to explore their own potential and envision themselves as college students and professionals.”
For the team, triumph is measured in the long term, she said. That means scholars pursue careers in which they are able to achieve personal goals and give back to the community. Scholars serve 20 hours a year in volunteer programs.
Stief credits Dean Calland, board president, as a crucial component in the success of Crossroads and its impact on young people.
“His visionary leadership has helped us build a sustainable organization,” she said.
There are 130 students enrolled in six Catholic high schools for the fall, with the largest class of 38 freshmen.
A recent study of Crossroads graduates from 2010-2018 indicates high rates of educational achievement:
- 100 percent high school graduation rate.
- 96 percent college enrollment rate; more than 90 percent in four-year degree programs.
- 72 percent college graduation rate within six years.
Collectively, 70 percent of the students are minorities and 70 percent are the first generation in their family to earn a college degree.
“This year, everyone is going to college,” Stief said.
Michele Betts is the mother of Nyla Betts, 18, who graduated this year from Oakland Catholic High School. Her daughter was one of 27 graduating scholars honored at Crossroads’ Annual Senior Recognition Dinner in April. Nyla received six college acceptances, and plans to attend Robert Morris University to pursue a degree in criminal justice.
“Crossroads has been very beneficial and supportive, especially in academic work and in sensitive subjects such as racial diversity, inclusion and financial support,” Michele said.
Crossroads was founded by Susie Gillespie and her father, Edward Ryan, businessman and founder of Ryan Homes. As a 16-year-old high school student in the 1960s, she tutored students weekly for two years at the former Epiphany School in Pittsburgh’s Uptown neighborhood and the former St. Richard School in the city’s Hill District.
Gillespie felt God planted a seed in her heart when she recalled driving home across the Fort Pitt Bridge after hearing stories from the students who were experiencing many obstacles in their lives. She realized she was living in “a very different world.”
When her father asked her in the 1980s what she wanted to do with her life, Gillespie remembered the children she tutored as a teenager. She met with four Catholic grade school principals: Mercy Sister Elizabeth Ann Herbert at St. Agnes in Oakland (who died June 22 at age 90); St. Joseph Sister Valerie Zottola, Holy Rosary in Homewood; St. Joseph Sister Margery Kundar, St. Benedict the Moor; and a former St. Joseph sister at St. Canice.
All of the principals had capable students with limited incomes who could benefit from a Catholic high school education, and they combined to form Crossroads’ first class.
“The sisters had such understanding hearts and knew how best to develop the students’ God-given talents and abilities,” said Gillespie, who recalled the first year of the program as a learning process for everyone. She worked with the organization for the first 25 years.
“We all need somebody to believe in us,” she said. “We knew these kids needed someone to believe in them. They deserve a good education, they can do it. When they believe in themselves they realize that, through the grace of God in their lives, nothing will be impossible.”
For the full article, click here.
Babst Calland congratulates our friends at LifeWhere on their successful exit. We are proud to have represented you from formation through exit. Resideo and the LifeWhere team are well-positioned to continue the growth opportunities afforded by the LifeWhere technology.
Chris Farmakis, Sara Antol and Michael Fink from Babst Calland’s Emerging Technologies Group represented LifeWhere in the sale.
For more information, click here.
Smart Business
(by Jayne Gest with Carl Ronald)
Intellectual property (IP) drives value, especially in industries like robotics or medical devices. However, engineers would rather be developing new products. They dislike spending time on invention disclosures. Carl Ronald, shareholder at Babst Calland, believes patent attorneys can help fill this gap in younger companies that have started taking on outside investors.
“Sometimes, I will get a call from an engineering manager who just approved an employee request to present a poster at a conference. They’re wondering, ‘Is this is something that could affect patentability? Can you look at it? The conference is in five days,’” Ronald says.
It’s better to be proactive and strategic, where an attorney works with your engineering team — reducing the barriers to getting disclosures on paper, identifying what you should patent and what you should keep secret.
Smart Business spoke with Ronald about developing relationships between engineers and attorneys to build up an IP portfolio.
Why is it important to involve a patent attorney early in the development pathway?
It is critical to set the tone early. Executives that position the business as an innovative company need to make sure their employees are educated about IP, and that the organization is utilizing patents, trade secrets and other forms of IP to protect that value.
Let’s say, a Ph.D. student working with a company wants to publish an article. Some magazines have confidentiality around peer reviewers and some do not. So, a submittal to peer review could be a disclosure that could destroy novelty, thus destroying patentability. While in the U.S., you can disclose something and still file a patent within a year, overseas that is not the case.
Some engineers know about IP but do not understand the nuances around publication or the differences between U.S. and foreign patent laws; others know very little. And some feel hopeless, that the idea will be stolen anyway. If a patent attorney is brought in early, he or she can educate the R&D team about the IP process and pitfalls, while helping establish invention disclosure and incentive programs. This also applies to companies with in-house counsel; they typically prefer to work with an expert who deals with IP every day when these issues arise.
What are invention disclosure and incentive programs? How can an attorney help?
Invention disclosure programs are an organized way to identify and evaluate IP. An invention disclosure document is usually completed by an engineer if the group thinks it has solved a problem in a novel way. This starts the process to see if it infringes on someone else’s IP and protects the advancement if the team is creating something new.
In incentive programs, employees are rewarded, through money or stock, if the company files a patent application that lists them as the inventor. Employees may get another reward if a patent issues. Once incentives are attached to disclosures, the number of disclosures typically increases.
Traditionally, a three- or four-page invention disclosure provides an explanation of the problem being solved, along with the proposed solution. Some members of an engineering team lack interest in finding time to take on the burden of completing this document; having a patent attorney the engineer already knows can help. The attorney can touch base at critical junctions, such as a sprint review, to see what problems have been solved and take verbal disclosures, if appropriate. Or, engineers could email minimal disclosures as they go, and the attorney reviews those with the engineering manager or chief technology officer.
If these procedures are easier to follow, and properly incentivized, then the R&D team and attorney can work together to ensure IP value is maximized.
Why aren’t more companies working closely with an IP attorney early in the product development lifecycle?
While some companies feel they can handle IP on their own, others are concerned about cost. Many law firms, however, are starting to think outside the box with alternative fee arrangements, such as a flat fee for service or a lower initial rate until an agreed-upon amount of capital is raised. If you have an innovative company in a competitive market, it’s never too early to introduce a patent attorney to your engineering team.
For the PDF, click here.
For the full article, click here.
The Legal Intelligencer
(by Krista-Ann Staley and Jenn Malik)
On April 26, the Pennsylvania Supreme Court announced its opinion in Slice of Life v. Hamilton Township Zoning Hearing Board, No. 7 MAP 2018 (Pa. 2019), addressing the permissibility of short-term vacation rentals in residential zoning districts. Specifically, the Supreme Court addressed “whether a zoning ordinance that defines ‘family’ as requiring ‘a single housekeeping unit’ permits the purely transient use of property located in a residential zoning district.”
The Slice of Life litigation arose from a notice of zoning violation issued to the owner of a short-term rental property, a limited liability company whose only member resided in Brooklyn, New York. The owner operated several other properties as short-term vacation rentals. The property in question in Slice of Life operated solely as a short-term vacation rental and was located in Hamilton Township’s single-family residential zoning district. The zoning district only permitted “single family detached dwellings and accessory uses and essential services.” The applicable provisions of the township’s zoning ordinance are as follows:
- “Dwelling” is defined as a building on a lot intended for and occupied exclusively as a residence for one family and specifically excludes hotels, motels, rooming houses or other tourist homes.
- “Family” is defined as a “single housekeeping unit.”
- “Single family housekeeping unit,” “rooming house” and “tourist home” are undefined by the zoning ordinance.
The subject property is a six-bedroom house that sleeps up to 17 people. One individual is responsible for signing the lease; however, no one associated with the property rental made any effort to ascertain the relationship between the individuals occupying the property. The rental company responsible for handling reservations collects no information concerning additional guests. Within 36 hours after a guest departs the property, a cleaning crew arrives to clean the property and fix anything that’s broken.
The property was the subject of numerous complaints from neighbors—in particular, noise complaints, complaints about the use of fireworks and bonfires, and complaints concerning public urination, loud music, nudity and lewd contact. In addition, the property’s septic system was inadequate to accommodate the number of people routinely utilizing the property.
In response, the township’s zoning officer issued a notice of violation identifying the owner’s short-term rental use as a “hotel or other type[s] of transient lodging, rental of single family residential dwelling for transient tenancies,” a use that was not permitted on the residentially zoned property. The property owner appealed the notice of violation. The issue was whether the property’s use as a short-term vacation rental was more consistent with a permitted residential use or a prohibited lodging use. The township zoning hearing board upheld the notice, finding that the subject property was “part of a transient lodging business enterprise” typical of a hotel or a motel and the trial court affirmed.
On appeal, the Commonwealth Court reversed, focusing its analysis on the plain language of the zoning ordinance and noting that a zoning hearing board is bound by the ordinance as-written and cannot attempt to amend the ordinance by shoe-horning a new use into an existing defined term, see Slice of Life v. Hamilton Township Zoning Hearing Board, 164 A.3d 633 (Pa. Cmwlth. 2017). Specifically, the Commonwealth Court held that the evidence established that the individual who signed the short-term lease for the property was the “family” for purposes of the ordinance and any remaining individuals were “guests” of the “family,” Finding that the ordinance did not prohibit the cited rental, the court overturned the notice of violation.
The Pennsylvania Supreme Court reversed the decision of the Commonwealth Court, holding that “the purely transient use of a house is not a permitted use in a residential zoning district limiting use to single-family homes by ‘a single housekeeping unit.’” Focusing its analysis on the undefined “single housekeeping unit” in the township’s zoning ordinance, the court adopted the common definition used by other courts throughout the country, which requires the person or persons residing in the home to function as a family and to be sufficiently stable and permanent and not purely transient. Citing its opinion in Albert, the court stated “the very benefit of and purpose behind the creation of residential zoning districts was to ‘create residential neighborhoods in which the residents may develop a sense of community and a shared commitment to the common good of that community’… In the absence of ‘stability and permanence’ of the individuals residing in those districts, ‘the goal is necessarily subverted.’” See Albert v. Zoning Hearing Board of North Abington Township, 854 A.2d 401 (Pa. 2004). The court held that by defining a “family” as a “single housekeeping unit,” the zoning ordinance excluded purely transient uses such as a short-term vacation rental.
Following Slice of Life, many municipalities may examine their zoning ordinances and maps to determine whether to limit the location of short-term vacation rentals to certain zoning districts within their boundaries. Factors to be considered when deciding where to permit short-term vacation rental uses within a municipality include potential increases in noise, the number of visitors occupying a limited space, and traffic, and the necessity for more parking associated with the use. It may be advisable to require a property owner who wishes to use her property as a short-term vacation rental to obtain conditional use or special exception approval from the appropriate governing body. Conditional use or special exception approval, as opposed to permitting the use by-right, would require the applicant to demonstrate compliance with enumerated criteria that are specific to short-term vacation rental use. (Permitting short-term vacation rentals as a use by-right would only require the applicant to obtain a zoning permit from the zoning officer and would not require public notice or a public hearing as mandated under the Municipalities Planning Code).
Before considering performance standards or criteria regulating short-term vacation rentals, municipalities should review their existing regulations and determine whether is necessary to distinguish short-term vacation rentals from other existing uses permitted by the applicable zoning ordinance. Specifically, short-term vacation rental uses can be quite similar to hotels, bed and breakfasts, and single-family dwellings (as was the case in Slice of Life). Defining “hotel,” “bed and breakfast” and “short-term vacation rental” to differentiate between the uses can be quite challenging; however, the municipality’s failure to do so may result in unexpected short-term vacation rentals in districts ill-equipped to handle the use.
Once the use is defined to meet the municipality’s needs, the municipality should consider potential standards and criteria that could apply to the use. Standards applicable to short-term vacation rental use could include those that regulate noise, signage, vibration, smoke, dust, electrical disturbance, odors, heat or glare. Ordinances can also require applicants to demonstrate that they can provide adequate off-street parking, given that short-term rentals often require additional parking for patrons. General requirements that the use will not cause an increase in the use of water, sewage, garbage, public safety or any other municipal services beyond that which is normal for the residences in the neighborhood is advisable. The municipality may also want to consider having the applicant demonstrate that the short-term vacation rental use will not significantly increase vehicular and pedestrian traffic.
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Pipeline Safety Alert
(by James Curry, Keith Coyle and Brianne Kurdock)
On June 13, 2019, the Pennsylvania Public Utilities Commission (PAPUC) voted 5-0 to issue an Advance Notice of Proposed Rulemaking (ANOPR) soliciting public comment on whether to amend the pipeline safety requirements for public utilities that transport hazardous liquids. PAPUC is seeking input on the following topics within 60 days of the date the ANOPR is published, or by no later than August 28, 2019:
- Construction: Bare steel and vintage pipe, material and specification requirements for new and used pipe, depth of cover, underground clearance, valve location and spacing, and prior notification for construction activities.
- Operations and Maintenance: Pressure test requirements and frequency, line markers, right-of-way inspections, leak detection, odorant, emergency response, and public awareness.
- Corrosion Control: External and internal corrosion control measures, adequacy of cathodic protection, in-line inspections, and hydrostatic testing and pigging for assessing corrosion or cathodic protection.
- Other topics:
- Conversion of Service
- Emergency Flow Restricting Devices
- Operator Qualification
- Accident Notification
- Transparency and Protection for Security Information
- Horizontal Directional Drilling
- Geophysical Testing and Baselining
- Protecting Public and Private Water Wells and Supplies
- Eminent Domain
In issuing the ANOPR, PAPUC is taking an approach that is similar to the Pipeline and Hazardous Materials Safety Administration (PHMSA), which issued an Advance Notice of Proposed Rulemaking (ANPRM) in 2010 asking for public comment on whether to amend the federal safety standards for hazardous liquid pipelines. After reviewing the comments submitted in response to the ANPRM, PHMSA issued a Notice of Proposed Rulemaking (NPRM) in 2015 containing new safety standards addressing a number of topics. The Liquid Pipeline Advisory Committee, the federal advisory committee that reviews PHMSA’s proposed changes to the hazardous liquid pipeline safety regulations, reviewed the NPRM in 2016, and PHMSA expects to issue a final rule this year.
Although PAPUC has the authority to issue additional or more stringent safety standards for hazardous liquid pipelines operated by public utilities, the significant progress that PHMSA has already made in addressing the topics raised in the ANOPR, and the impending release of a final rule with new federal safety standards for hazardous liquid pipelines, raises some interesting considerations in this proceeding. PAPUC will need to consider the prior decisions that PHMSA has rendered in addressing many of these topics, including whether new regulations are justified. PAPUC will also need to consider whether any new safety standards are consistent with the preemption provision in the Pipeline Safety Act, which requires additional or more stringent state regulations to be consistent with PHMSA’s federal requirements.
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Natural gas production continues to increase in each of the nation’s seven largest shale basins
Babst Calland today released its annual energy industry report: The 2019 Babst Calland Report – The U.S. Oil and Gas Industry: Federal, State and Local Challenges & Opportunities; Legal and Regulatory Perspective for Producers and Midstream Operators.
In this Report, Babst Calland energy attorneys provide perspective on issues, challenges, opportunities and recent developments in the oil and gas industry that are relevant to producers and midstream operators.
According to the International Energy Agency, “the second wave of the U.S. shale revolution is coming” and the United States will account for a 70 percent increase in global oil production and a 75 percent expansion in LNG trade in the next five years.
On a year-over-year basis, natural gas production continues to increase in each of the seven largest shale basins in the United States. Most notably, oil and natural gas production is being driven by three of the largest producing basins including Appalachia in Pennsylvania, West Virginia and Ohio, the Permian Basin in Texas and New Mexico, and the Haynesville Basin in southwestern Arkansas, northwest Louisiana, and east Texas.
Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “Domestic shale producers and operators continue to face myriad legal and regulatory challenges by regulatory agencies, the courts, activists, and the market. This annual review is a snapshot of the issues and trends on the federal, state and local level in the oil and gas industry over the past year.”
The 92-page Babst Calland Report covers a range of topics from the industry’s business outlook, regulatory enforcement and rulemaking to developments in pipeline safety and litigation trends. A few of the Report’s highlights include:
- The U.S. Department of Energy’s Energy Information Administration (EIA) reports both oil and dry natural gas production set U.S. records this year. Oil production hit 12.4 million barrels per day in May, natural gas soared above 90 billion cubic feet per day. U.S. production of gas liquids also set records and now account for over a quarter of U.S. petroleum product output.
- This year, the oil and gas industry received mixed messages regarding environmental matters. On the federal level, the Trump administration generally loosened regulatory and/or statutory constraints, such as narrowing the Clean Water Act definition of “Waters of the United States.” In contrast, at the state level, some agencies introduced or considered more rigorous standards, including Pennsylvania’s proposed cap-and-trade program.
- Public interest in pipeline safety has grown significantly in recent years. Consequently, operators’ installation of new pipeline infrastructure to transport energy products from the nation’s shale plays to domestic and foreign markets has resulted in increased scrutiny.
- In Pennsylvania, the contours of the Robinson Township II decision continue to be litigated and legislated by local governing bodies, while the Commonwealth Court provided clarity concerning a municipality’s right to determine the location of oil and gas operations. In West Virginia, the extent of a county government’s ability to investigate alleged nuisances is being considered in the state’s highest court. In Colorado, new legislation has empowered local governments to take a much more active role in regulating oil and gas development.
- Significant title issues concerning oil and gas property rights continue to be addressed in states in shale plays throughout the country. The desire to improve efficiencies has resulted in the use of allocation wells and cross unit drilling, particularly in Texas and Oklahoma.
- Nuisance claims, alleging that excessive noise, traffic, dust, light, air pollution and impaired water quality interfere with the use and enjoyment of private property, continue to be asserted across the shale plays.
- An increasing number of oil and gas companies recognize the advancements in commercial unmanned aircraft systems (UAS) technology and the utility and cost savings associated with using UAS to inspect and monitor assets such as pipelines and infrastructure.
After more than a decade, the shale gas industry continues to expand its reach and impact on our country’s energy supply and independence. Babst Calland’s Energy and Natural Resources attorneys support clients operating in multiple locations throughout the nation’s shale plays. To request a copy of the Report, contact info@babstcalland.com.
Energy Alert
(by Timothy Miller and Mychal Schulz)
The West Virginia Supreme Court issued an opinion in Andrews v. Antero Resources Corp. and Hall Drilling, LLC, No. 17-0126 (W. Va. June 10, 2019), an eagerly-awaited decision arising out of the In re: Marcellus Shale Litigation, in which hundreds of lawsuits have been filed against E&P and midstream oil and gas companies alleging that activities related to the production, compression, and transportation of natural gas represented a private nuisance.
The Property Owners in Andrews, which represented the first trial group in In re: Marcellus Shale Litigation, alleged that the fracking operations of Antero and Hall Drilling “in relation to their development of the Marcellus shale have caused Property Owners to lose the use and enjoyment of their properties due to the annoyance, inconvenience, and discomfort caused by excessive heavy equipment and truck traffic, diesel fumes and other emissions from the trucks, gas fumes and odors, vibrations, noise, lights, and dust.” They filed a complaint alleging claims for “private temporary continuing abatable nuisance and negligence” against Antero and Hall Drilling arising from their “natural gas exploration, extraction, transportation and associated activities in close proximity to [Property Owners’] properties.”
Eventually, the Property Owners voluntarily dismissed all claims for (1) property damages, (2) physical or medical injury, and (3) negligence. By the time the Mass Litigation Panel (MLP) addressed the motions for summary judgment filed by Antero and Hall Drilling only the Property Owners’ private nuisance claims remained.
While the MLP granted Antero’s and Hall Drilling’s motion for summary judgment, it “declined to apply principles of nuisance law, and instead ruled on the summary judgment motions based upon Antero’s contractual and property rights.” Specially, the MLP’s Order stated that “[b]ecause the Court resolves summary judgment based upon Antero’s contractual and property rights, it does not address the issues to which common law private nuisance principles would be applied. The Court, therefore, reaches no conclusion regarding whether Antero’s actions would otherwise meet the legal definition of a nuisance.” In doing so, the MLP relied upon the fact that the Property Owners owned the surface of their respective properties only, as the minerals had been severed in the early 1900s and the latest mineral deed for each property had given Antero “leasehold rights to develop the oil and gas underlying the properties that are the subject of [Property Owners’] complaint. Those development rights were retained by the oil and gas mineral owners in the severance deeds separating the surface estates from the mineral estates.” As such, the MLP found that the severance deeds constituted an easement and that the activities of Antero and Hall Drilling did not exceed the scope of that easement.
In a 3-2 decision, Justice Evan H. Jenkins, writing the majority opinion, affirmed the summary judgment granted by the MLP based on “contract and property rights.” The Court found that the mineral leases in question permitted the use of the surface for operations to remove the oil and gas, and it rejected the Property Owners’ argument “that a mineral owner does not have the right to extract natural gas using methods that were uncontemplated when the operative severance deeds were executed, where those uncontemplated methods are not necessary to the extraction of the minerals and substantially burden the surface.”
Having determined that the Property Owners’ properties were all subject to mineral leases that allowed the reasonable use of the surface to develop the minerals underneath, the Court acknowledged that none of the Property Owners’ surface properties were actually being used to access the minerals: “Reportedly, five of the six well pads at issue were located within a range of .42 mile to 1 mile from Property Owners’ properties.” As a result, the Court turned to the “standard for balancing the rights of surface owners and mineral owners in relation to implied uses of the surface estate” as outlined in Buffalo Mining Co. v. Martin, 165 W. Va. 10, 267 S.E.2d 721 (1980), where the Court held that “[i]n order for a claim for an implied easement for surface rights in connection with mining activities to be successful, it must be demonstrated not only that the right is reasonably necessary for the extraction of the mineral, but also that the right can be exercised without any substantial burden to the surface owner.”
Noting that the MLP found that the Property Owners “did not offer evidence ‘to establish . . . what is reasonable and necessary to develop the underlying minerals, other than self-serving assertions that Defendants’ activities . . . are excessive[,]’” the Court determined that “Property Owners have failed to develop an argument to show the existence of a material fact as to whether or not Antero’s activities to develop its mineral estate are reasonably necessary.” Thus, the Property Owners failed to satisfy the first part of the test in Buffalo Mining.
The Court also determined that the Property Owners failed to present evidence to satisfy the second part of the test in Buffalo Mining; i.e., that the “right can be exercised without any substantial burden to the surface owner.” In doing so, the Court noted that where a severance deed “severs the mineral and surface estates and plainly allows for the extraction of the mineral estate, certain uses of the surface by the mineral owner are necessarily implied.” The Court noted that cases which found more modern methods of mineral extraction to be a “substantial burden” to the surface owner focused on the destruction of the surface owners’ ability to use the surface (such as strip mining or auger mining), which contrasts with evidence that horizontal fracking actually results in less surface disturbance because it uses fewer well pads and was less intrusive than traditional vertical drilling that required numerous wells. As a result, the Court determined that “it was incumbent upon Property Owners to present evidence to establish how the burdens resulting from the off-site horizontal drilling of which they now complain (i.e., dust, traffic, lights, noise, and fumes) has prohibited them from using their land in any way that would be compatible with the physical presence of vertical wells directly on their land. They have failed to do so.” The Court listed the Property Owners’ complaints about the activities in detail, and determined that none of those activities arose to the level of “substantial burden to the surface owner.”
While this is an important win for Antero and Hall Drilling that will generate a considerable amount of attention, the long-term impact is less clear. First, the Court emphasized that its decision was based “upon Antero’s contractual and property rights” and not on principles of nuisance law. In fact, Justice Elizabeth D. Walker filed a concurring opinion to emphasize what the majority opinion does not do.
“The Court does not decide whether Respondents’ activities on Petitioners’ surface estates created a nuisance. And, the Court does not answer the broader question of whether the owner of mineral rights underlying Surface Estate A may or may not create a nuisance on Surface Estate A to develop the minerals below Surface Estate B. The Court does not decide those issues because this particular case did not present the opportunity to do so.”
Justice Jenkins also noted in the majority opinion that “Petitioners did not challenge on appeal the Panel’s decision to apply contract and property law, rather than principles of nuisance law, in deciding Respondents’ motions for summary judgment. Instead, they argued that the Panel applied the wrong contract and property law.” In reaching this conclusion, the Court acknowledged that “Property Owners reference the term ‘nuisance’ in two assignments of error that we decline to address” because “they have not raised as an assignment of error the MLP’s failure to apply principles of nuisance law in reaching its summary judgment decision.”
Second, the Court’s analysis focuses on situations where a party owns the leasehold right to develop the mineral estate under the property of a surface owner who brings claims related to the party’s activities on the surface to extract the minerals. While this may be the case for companies involved in horizontal drilling activity, midstream companies generally do not own leasehold rights to develop the mineral estate around compressor stations or gas processing facilities.
Third, an unanswered question specifically identified in Justice Walker’s concurrence centers on whether an activity on the surface of Property A may by a “reasonable use” of the surface of Property A to develop the mineral estate of Property A and Property B, but is nonetheless a “nuisance” to the surface owner of Property B. The MLP avoided this question when it granted summary judgment on the Property Owners’ nuisance claims by focusing on the contractual and legal principles, which the Property Owners did not adequately challenge on appeal.
Finally, the Court’s decision in Andrews stands in stark contrast to its recent opinion in Crowder v. EQT, No. 17-0968 (June 5, 2019), in which the Court held that “a mineral owner or lessee does not have the right to use the surface to benefit mining or drilling operations on other lands, in the absence of an express agreement with the surface owner permitting those operations.” In reaching this conclusion, the Court emphasized that a mineral owner’s right to “reasonably use” the surface to extract minerals extended only to the minerals underneath the surface subject to the mineral lease. That right does not extend to using the surface to extract minerals from adjacent parcels regardless of how reasonable the use may be. The result is that absent an express agreement to the contrary with the surface owner of the property on which a well pad is located, an operator could be liable to the surface owner for trespass, yet the same activities would not give rise to trespass or negligence claims by adjacent surface owners.
If you have any questions about the Andrews decision or its impact on the oil and gas industry, please contact Timothy Miller at (681) 265-1361 or tmiller@babstcalland.com, or Mychal S. Schulz at (681) 265-1363 or mschulz@babstcalland.com.
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