Arbitration/Class Waiver Clauses in Oil and Gas Leases: The Applicability of Concepcion and Italian Colors Restaurant to the Natural Gas Industry

by K&L Gates LLP

Class action lawsuits filed against natural gas producers have become increasingly common. For example, in Pennsylvania over the last several years, royalty owners have filed a number of royalty and bonus-payment class action lawsuits in state and federal court, which have caused producers to incur significant time and expense to defend. In light of the costs and risks involved in class action litigation, producers have begun contemplating the use of arbitration clauses in their oil and gas leases, which would require all disputes to be resolved in a private and confidential arbitration setting and would prevent a royalty owner from combining his claim with hundreds or thousands of other similar claims by pursuing a class action lawsuit or class arbitration. While such arbitration/class waiver clauses had been declared by certain courts to be unenforceable in the past, two recent decisions from the Supreme Court have endorsed the use of arbitration/class waiver clauses.

In AT & T Mobility, LLC v. Concepcion[1] and American Express Co. v. Italian Colors Restaurant,[2] the Supreme Court recently issued two decisions holding that arbitration/class waiver clauses in consumer contracts can effectively prevent plaintiffs from bringing class actions. As a result of these decisions, parties to oil and gas leases in Pennsylvania have begun considering what effect, if any, arbitration/class waiver provisions would have in their oil and gas leases, and whether, for example, Concepcion and Italian Colors Restaurant would prevent royalty owners from bringing the increasingly common royalty and bonus-payment class actions being filed in Pennsylvania.
In short and as discussed below, it appears likely that Concepcion and Italian Colors Restaurant will apply to oil and gas leases, and thus, in light of these decisions, a well-drafted arbitration clause in an oil and gas lease may potentially be used to preclude class-wide dispute resolution arising out of lease disputes.

How does an arbitration clause preclude the right to pursue a class-wide dispute resolution?
An arbitration clause can be used to essentially “contract out” of class action litigation. Indeed, by their very nature, most arbitration clauses preclude litigation entirely, including class action litigation, arising out of disputes covered by the arbitration clause. Instead, most typical arbitration clauses mandate that defined disputes between the parties will proceed through private arbitration, where the parties select one or more privately retained arbitrators to resolve their disputes in a confidential and less formal setting. What is less clear, however, is whether class arbitration is permitted when the parties include an arbitration clause in the contract.

Class arbitration is a relatively new phenomenon in the United States, and is neither addressed in the Federal Arbitration Act (“FAA”),[3] nor was contemplated by the FAA’s drafters. Class arbitration operates similarly to class action litigation. Thus, if class arbitration is permitted in a contract or lease that has an arbitration clause, the efficiency of bilateral arbitration is typically lost.  For example, class arbitration, similar to class action litigation, can require class member notices, application of formal rules of evidence, including unwieldy class-wide discovery, and formal approval and notice of any class settlement.

Few, if any, arbitration clauses expressly provide for class arbitration. Thus, the key question becomes: In the absence of a class arbitration provision, does the arbitration clause alone open the door to a class arbitration procedure? Courts are somewhat divided on this issue, but most have held that where an arbitration clause is silent as to the permissibility of class arbitration, class arbitration is not permitted.

Nevertheless, to avoid any doubt as to whether an arbitration provision in an oil and gas lease authorizes class arbitration, a carefully crafted arbitration clause should expressly preclude or waive class arbitration.

How have Concepcion and Italian Colors Restaurant affected the limitations on class waivers?
Under the FAA, an arbitration clause is presumed to be valid and enforceable, “save upon such grounds as exist at law or in equity for the revocation of any contract.”[4] Therefore, to be enforceable, an arbitration provision that waives class arbitrations and class actions cannot be considered “unconscionable” under the relevant state contract law.

In the past, courts would oftentimes hold that arbitration provisions that waived the right to class arbitration or class action litigation were unconscionable because the parties had unequal bargaining power, the arbitration provision was in buried boilerplate, or the absence of a class remedy would effectively prevent the plaintiff from pursuing relief (i.e., the amount at issue was too small to pursue except on a class-wide basis).  Concepcion and Italian Colors Restaurant, however, eviscerated this line of reasoning.

In Concepcion, at issue was a judicially crafted rule in California that class arbitration waivers in contracts of adhesion governing disputes over small amounts of money were unconscionable and could not be enforced.  The Supreme Court held that the California state law interfered with the core attributes of arbitration and created a scheme that is inconsistent with the FAA—i.e., in other words, that the FAA’s presumption in favor of enforcing arbitration clauses preempted California state law.

In Italian Colors Restaurant, the Supreme Court considered American Express’s arbitration agreement with merchants that contained a class arbitration waiver. The merchants brought an antitrust class action and opposed American Express’s motion to compel arbitration, arguing that the class arbitration waiver was unconscionable because the cost of arbitrating a single claim far exceeded the potential recovery. Following its decision in Concepcion, the Supreme Court rejected this argument, refused to create such an exception to the FAA’s presumption in favor of enforcing arbitration clauses, and held that contractual waivers of class arbitration are enforceable even if the cost of proving an individual claim in arbitration exceeds the potential recovery of the plaintiff.

Concepcion and Italian Colors Restaurant make clear that arbitration clauses/class waivers governed by the FAA will be strictly enforced, and that contentions that such clauses are unconscionable or otherwise unenforceable are unlikely to prevail.[5]

Do Concepcion and Italian Colors Restaurant apply to oil and gas leases?
In light of Concepcion and Italian Colors Restaurant, the question remains whether those decisions—which concerned consumer contracts—apply to oil and gas leases that have arbitration/class waiver provisions. While there have yet to be any reported decisions to consider the applicability of Concepcion and Italian Colors Restaurant to the oil and gas lease context, it appears likely that those decisions will apply for at least two reasons.

First, the more supported view is that most, if not all, oil and gas leases containing arbitration clauses are governed by the FAA. This is important because the Court’s decisions in Concepcion and Italian Colors Restaurant were predicated on the FAA and the fact that the FAA essentially preempted state unconscionability laws. Thus, if a contract is not governed by the FAA, those decisions may arguably not apply.  Oil and gas leases should be considered to be covered by the FAA because the FAA applies to any contract involving interstate commerce.[6] Like the Supreme Court’s interstate commerce jurisprudence, the interstate commerce nexus that governs the applicability of the FAA is extraordinarily broad. Thus, where the parties to the oil and gas lease are located in multiple states, or the contemplated scope of development under the oil and gas lease is through interstate channels (even where development has not yet occurred), courts have held that the interstate commerce nexus will likely be deemed to be sufficient for the FAA to apply.[7] If the FAA applies, Concepcion and Italian Colors Restaurant apply as well.[8]

Second, Concepcion’s holding has already been extended to the non-consumer contract context. For instance, the Supreme Court relied on Concepcion in Italian Colors Restaurant in an antitrust context. The holding in Concepcion has also been extended to real property,[9] employment discrimination,[10] and employment contract[11] cases by various courts. Thus, it appears that there is no reason why Concepcion and Italian Colors Restaurant would be considered limited to consumer contracts and would not apply to any contract, including oil and gas leases.

After Concepcion and Italian Colors Restaurant, the use of carefully crafted arbitration clauses in oil and gas leases may be an effective way to preclude class arbitrations and class action litigation. As courts continue to apply Concepcion and Italian Colors Restaurant, parties to oil and gas leases may consider reviewing or redrafting their arbitration clauses in such a way as to immunize them from further challenge.


[1]       131 S. Ct. 1740 (2011).

[2]       133 S. Ct. 2304 (2013).

[3]       9 U.S.C. § 1 et seq.

[4]       9 U.S.C. § 2.

[5]       Since Concepcion and Italian Colors Restaurant, the Third Circuit has similarly upheld the enforceability of an arbitration/class waiver clause.  See Homa v. Am. Express Co., 494 F. App’x 191 (3d Cir. 2012).

[6]       Allied-Bruce Terminex Cos., Inc. v. Dobson, 513 U.S. 265 (1995).

[7]       See Alexander v. Chesapeake Appalachia, LLC, 839 F. Supp. 2d 544, 550 (N.D.N.Y. 2012) (holding that FAA applies because “[a]lthough the oil and gas leases at issue involve real property only in New York, the plaintiff landowners in New York negotiated the subject leases with CAP, an Ohio company and CNR, a Delaware limited liability company. Those leases have since been acquired by Chesapeake, an Oklahoma limited liability company, and Statoil, a Delaware corporation”); accord In re Chevron, --S.W.3d--, 2010 WL 299149, at *5 (Tex. Ct. App. 2010) (finding that FAA applied because “[i]t is a matter of common knowledge that the oil industry involves interstate commerce”).

[8]       There is limited authority from the U.S. District Court for the Middle District of Pennsylvania concluding that an oil and gas lease covering only property in a single state renders state law, not the FAA, applicable. This line of authority, however, is based on one largely unsupported slip opinion. See Ulmer v. Chesapeake Appalachia, LLC, No: 4:08–cv–2062, slip op. at 2 (M.D. Pa. Jan. 16, 2009) (citing no authority, but finding that “[t]he oil and gas lease at issue in this case involved property only in Pennsylvania, and therefore, the FAA does not apply”); Eisenberger v. Chesapeake Appalachia, LLC, No. 3:09-cv-1415, 2010 WL 1816646, at *2 (M.D. Pa. May 5, 2009) (citing only Ulmer for the finding that “this Court will apply Pennsylvania law in this case, as it involves a gas and oil lease for a property located entirely in Pennsylvania”); Roman v. Chesapeake Appalachia, LLC, No. 11-1614, 2012 WL 2076846, at *3 n.1 (M.D. Pa. June 7, 2012) (citing Ulmer, but not deciding whether state law or FAA applied); Vosburg v. Chesapeake Appalachia, LLC, No. 11-1615, 2011 U.S. Dist. LEXIS 155364, at *6-7 n.2 (M.D. Pa. Nov. 16, 2011) (citing Ulmer, but not deciding whether state law or FAA applied).

[9]       A-1 A-Lectrician, Inc. v. Commonwealth Reit, No. 12-00607 ACK-BMK, 2013 WL 1817688 (D. Haw. Apr. 26, 2013).

[10]     Wallace v. Red Bull Distribution Co., No. 5:12-CV-02431, 2013 WL 3823130 (N.D. Ohio July 23, 2013).

[11]     D’Antuono v. Service Road Corp., 789 F. Supp. 2d 308 (D. Conn. 2011).


Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.