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Landowners Should Seek a No Deductions Clause in Oil and Gas Leases

When negotiating a lease with an oil and gas company, it is important to seek to include a clause stating that no deductions from royalty payments will be permitted for costs. Landowners who leased their property to Chesapeake Energy for natural gas drilling have recently been reminded of the importance of a “no deductions” clause.

In August 2011, Chesapeake Energy sent notices to royalty owners saying that the company would begin subtracting “post-production costs” from the prices for natural gas used to calculate royalty payments. Chesapeake claimed that it had always been permitted to deduct such costs, but had foregone the deductions in the past. In the notices, Chesapeake said that landowners with lease clauses prohibiting such deductions would not see a change.

Today, Chesapeake is involved in multiple lawsuits in different states over alleged underpayment of royalties. One class action lawsuit has been filed by Johnson County, Texas landowners. The royalty owners claim that Chesapeake deducted costs even though their leases prohibited such deductions. On the other hand, a neighborhood association in Arlington, Texas was successful in convincing Chesapeake to reinstate higher royalty payments based on the “no deductions” clause in their lease.

Chesapeake Energy took the action at a time when natural gas prices were dropping precipitously. The price of natural gas dropped below $2 per 1,000 cubic feet (mcf) in 2012. The fall in prices meant that the post-production costs for processing and transporting natural gas, which can sometimes amount to $1 per mcf or even more, constituted a large percentage of what the landowner believed they should receive.

Lawsuit Against Chesapeake Over Reduced Royalties Seeks Class Action Status

Texas landowners have filed a lawsuit against Chesapeake Energy over reduced royalty payments; unlike similar lawsuits, this one is seeking class action status. Charles and Robert Warren joined with a Johnson County couple to file the lawsuit in U.S. District Court in Dallas.

Beginning in August 2011, Chesapeake began deducting “post-production costs” from the prices for natural gas used to determine payments to royalty owners. These costs include expenses such as compressing and treating natural gas to prepare it for sale. According to Chesapeake, the company previously had the legal right to charge for those costs but had chosen not to do so. At the time, the company stated that the costs would not be deducted if a royalty owner’s lease prohibited such charges. The Warrens claim that although their lease did prohibit charging for post-production costs, they were charged anyway.

Post production costs can be about 80 cents to $1 per 1,000 cubic feet (mcf) depending on what must be done to the gas, which is significant when natural gas prices drop to around $2 per mcf, as they did in 2012. According to the Warrens, by March 2012 they were being paid as low as 42.4 cents per mcf for the natural gas Chesapeake extracted from their eight wells, and the difference in payments ran to six figures.

Several other lawsuits have been filed by Texas landowners against Chesapeake over the reduced royalty payments. The Warrens’ suit seeks class action status, a rarity for this type of lawsuit.

Chesapeake has scrambled to adjust to falling gas prices, which reached $1.90 per mcf by April 2012, a 10-year low.

Dell Accuses Optical Disk Drive Manufacturers of Fixing Prices

Dell Inc. has filed a lawsuit claiming that Hitachi-LG and other optical disk drive makers conspired to fix prices. The lawsuit by the Round Rock, Texas-based personal computer manufacturer claims that the price fixing occurred between 2004 and 2010.

According to the lawsuit, filed in federal court in Austin, the manufacturers shared information about sales, pricing and production and agreed to rig bids and fix prices for their products sold in the United States. As a result, Dell said, the company was charged inflated prices for disk drives it bought from the manufacturers.

The lawsuit claims that billions of dollars of purchases over several years were affected. The companies are accused of breach of contract and violation of U.S. antitrust laws. Under antitrust law, Dell is seeking triple damages for the overcharges.

Dell is Central Texas’ largest private employer, with about 14,000 workers in the area. The company is the third-largest manufacturer of personal computers in the world, after HP and Lenovo. Optical drives are components of personal computers and Blu-ray and DVD players. In 2011, the Justice Department said that Hitachi-LG pleaded guilty to fixing prices and rigging bids for disk drives, agreeing to pay a $21.1 million fine.

According to the Justice Department, Hitachi-LG and other companies conspired to fix prices for disk drives to be sold to Dell during a period from 2004 to 2009. Hitachi-LG is a joint venture of Hitachi Ltd., based in Tokyo, and LG Electronics Inc., based in Seoul. According to Dell’s lawsuit, four Hitachi-LG executives pleaded guilty to participation in the price-fixing conspiracy.

The lawsuit also names as defendants Koninklijke Philips Electronics NV, based in Amsterdam; BenQ Corp., based in Taiwan; Samsung Electronics Co., based in Suwon, South Korea; and Sony Corp. and Toshiba Corp., both based in Tokyo. The defendant companies declined comment, citing the pending litigation.

The lawsuit comes at a time when Michael Dell, the founder and CEO of the company, is leading a push to take the company private at a bid of $24.4 billion, or $13.65 per share. Other large Dell shareholders have said they are prepared to make a different offer to investors to take over the company, which would then continue to be publicly traded.

Dell, founded in Austin, Texas in 1984, is one of the world’s largest tech companies, employing more than 100,000 people worldwide. The company is listed as number 38 in the Fortune 500 list of top publicly traded and closely held companies.

Television Station Sued for Employment Discrimination

A fired television station worker has sued Houston station KRIV, claiming that he was a victim of age discrimination.

Charles Hobson was employed by KRIV from 1990 to 2011 as a live truck operator, staff photographer and editor. According to Hobson, the station fired him because of his age. Fox Television Stations, Inc., Fox Entertainment Group and News Corp. are also named in the lawsuit.

Hobson claims that in 2009 he suddenly began receiving negative comments in his employment evaluations, as well as vague negative verbal remarks, after having received only positive or neutral comments in the 19 years previous. The complaint alleges that the station’s news director inserted negative remarks into Hobson’s evaluation without the input of his immediate supervisor. Hobson also said he was blamed for errors that were actually the result of inclement weather or computer breakdowns. Hobson claims he was the oldest or one of the two oldest of the 18 station employees who had job descriptions similar to his.

According to the complaint, the station had begun downsizing, targeting employees who had been hired before 2004 and therefore had larger pension and benefit packages. Hobson sued under the Age Discrimination in Employment Act (ADEA), which protects workers over 40 years old from discrimination, and the Employee Retirement Income Security Act (ERISA), which among other things, prohibits interference with employee benefit plans.

In the lawsuit, the plaintiff demands a jury trial and asks for damages for loss of wages, emotional pain and suffering and loss of enjoyment of life.

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