Diehl v. SWN Production Company, LLC

UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

ROBERT W. DIEHL, JR., and :

MELANIE L. DIEHL, :CIVIL ACTION NO. 3:19-CV-1303

:(JUDGE MARIANI)

Plaintiffs, :

:

v. :

:

SWN PRODUCTION COMPANY, LLC, :

:

Defendant. :

:

MEMORANDUM OPINION

I. INTRODUCTION

Here the Court considers Defendant SWN Production Company, LLC’s Motion to

Dismiss the Amended Complaint (Doc. 9). The above-captioned matter is a diversity action

brought by Robert W. Diehl, Jr., and Melanie Diehl (“Plaintiffs”) against SWN Production

Company, LLC (“SWN” “Defendant”) regarding an oil and gas lease between the parties.

As set out in the Amended Complaint (Doc. 8), Plaintiffs assert three counts based on

“Breach of Contract – Implied Covenant to Market Hydrocarbons” (Counts I-III), a count for

“Breach of Contract – Implied Covenant to Develop Hydrocarbons” (Count IV), a count for

“Declaratory Relief” (Count V), and a count for “Quiet Title” (Count VI). (Doc. 8 at 7-21.)

With the pending motion, Defendant seeks dismissal of the entire Amended Complaint with

prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 9 at 1; Doc. 9-2 at 1.)

For the reasons that follow, the Court will deny Defendant’s motion in part and grant it in

part.

II. BACKGROUND

Plaintiffs own approximately 160.94 acres in Oakland Township, Susquehanna

County, Pennsylvania ("Subject Property") which was leased to Cabot Oil & Gas

Corporation ("Cabot") on October 25, 2007. (Doc. 8 ¶¶ 3-4.) The Lease was assigned from

Cabot to Southwestern Energy Production Company ("Southwestern") on November 17,

2011. (Doc. 8 ¶ 6.) Southwestern converted to SWN and is the sole lessee and working

interest holder in the Lease. (Doc. 8 ¶¶ 8-9.)

The Lease had a primary term of five years, with an option to extend for five

additional years by paying $100.00 per acre, and remains in force “as long thereafter as oil

or gas is produced, or considered produced under the terms of this lease, in paying

quantities from the premises or from land pooled therewith[.]”1 (Doc. 8-1, Am. Compl., Ex.

1 This is known as the “habendum clause” of a lease which, in this case, states:

This lease shall remain in force for a term of fine (5) years from this date

(called “primary term”) and as long thereafter as oil or gas is produced, or

considered produced under the terms of the lease, in paying quantities from

the premises or from lands pooled therewith or the premises are used for

storage purposes as provided in paragraph 6 hereof, or this lease is

maintained in force under any subsequent provisions hereof.

(Doc. 8-1 ¶ 2.)

A, ¶¶ 2, 13.) Should production occur, SPC must pay Plaintiffs royalties based on the

“amount realized from the sale of the gas at the well,” and SPC is expressly permitted to

deduct post-production expenses incurred downstream from the wellhead.2 (Id. ¶ 3.) In

addition to actual production, oil or gas is “considered produced” if the lessee pays a “shut-

in royalty” of $1.00/acre/year. (Id. ¶ 4.) Further, should lessee fail to make a required

payment, the Lease does not terminate; the lessor simply is entitled to a “correcting

payment or tender with interest at the rate of eight (8%) annum[.]” (Id.)

On September 11, 2012, Southwestern exercised its option to extend the Lease.

(Doc. 8 ¶ 7.) Accordingly, the Lease's primary term ended on October 25, 2017. (Doc. 8-3.)

Portions of the Subject Property were placed into the Walker Diehl North Gas Unit and the

Walker Diehl South Gas Unit (collectively, the "Units"). (Docs. 8-4, 8-5.) The Units

2 The royalty clause reads as follows:

Lessee shall deliver to the credit of Lessor, free of cost, into Lessor's tanks

on the premises or in the pipeline thereon which Lessor may designate, the

equal one-eighth (1/8 ) part of all oil or liquid hydrocarbons produced and

saved from the premises, and shall pay the Lessor on gas, including

casinghead gas or other gaseous substances, produced and sold from the

premises one-eighth (1/8 ) of the amount realized from the sale of gas at

the well (meaning the amount realized less all costs of gathering,

transportation, compression, fuel, line loss and other post-production

expenses incurred downstream of the wellhead). Payment for royalties in

accordance herewith shall constitute full compensation for the gas and all

of its components. No royalty shall be due on stored gas produced from the

premises or on gas produced from a storage formation or formations

hereunder.

(Doc. 8-1 ¶ 3.)

encompass 1,376.097 acres and each unit has one operational well producing natural gas

from the Marcellus Shale formation. (Doc. 8 ¶¶ 13-15.)

Plaintiffs’ factual recitation also contains the following averments:

SWN sells gas from the Units where it enters interstate pipelines and

not at the wellhead. [ECF Doc. 8-6]. The prices SWN receives have been less

than published index prices on the leg of the Tennessee Gas Pipeline which is

believed to traverse through Susquehanna County - the location of the nearest

interstate pipeline to the Subject Property. [ECF Doc. 8 at ¶ 32]. It is believed

that SWN sells to an affiliate at the interstate pipeline rather than attempt to

market the gas itself to other buyers for greater value. [ECF Doc. 8 at ¶ 54]. In

addition to depressed pricing, the Diehls' royalties are significantly reduced by

deductions taken by SWN. [ECF Doc. 8-8]. Given the low prices and high costs,

it is averred that the Lease is not producing hydrocarbons in paying quantities.

[ECF Doc. 8 at ¶ 98].

(Doc. 13 at 8.)

III. STANDARD OF REVIEW

A complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6) if it

does not allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). “A claim

has facial plausibility when the plaintiff pleads factual content that allows the court to draw

the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft

v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).

“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need

detailed factual allegations, a plaintiff’s obligation to provide the grounds of his entitlement

to relief requires more than labels and conclusions, and a formulaic recitation of the

elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (internal citations,

alterations, and quotations marks omitted). A court “take[s] as true all the factual allegations

in the Complaint and the reasonable inferences that can be drawn from those facts, but . . .

disregard[s] legal conclusions and threadbare recitals of the elements of a cause of action,

supported by mere conclusory statements.” Ethypharm S.A. France v. Abbott Labs., 707

F.3d 223, 231 n.14 (3d Cir. 2013) (internal citation, alteration, and quotation marks omitted).

Thus, “the presumption of truth attaches only to those allegations for which there is

sufficient ‘factual matter’ to render them ‘plausible on [their] face.’” Schuchardt v. President

of the U.S., 839 F.3d 336, 347 (3d Cir. 2016) (alteration in original) (quoting Iqbal, 556 U.S.

at 679). “Conclusory assertions of fact and legal conclusions are not entitled to the same

presumption.” Id.

“Although the plausibility standard ‘does not impose a probability requirement,’ it

does require a pleading to show ‘more than a sheer possibility that a defendant has acted

unlawfully.’” Connelly v. Lane Constr. Corp., 809 F.3d 780, 786 (3d Cir. 2016) (internal

citation omitted) (first quoting Twombly, 550 U.S. at 556; then quoting Iqbal, 556 U.S. at

678). “The plausibility determination is ‘a context-specific task that requires the reviewing

court to draw on its judicial experience and common sense.’” Id. at 786-87 (quoting

Iqbal, 556 U.S. 679).

The Third Circuit Court of Appeals has identified the following three-step inquiry as

appropriate to determine the sufficiency of a complaint pursuant to Twombly and Iqbal:

First, the court must take note of the elements a plaintiff must plead to state a

claim. Second, the court should identify allegations that, because they are no

more than conclusions, are not entitled to the assumption of truth. Finally,

where there are well-pleaded factual allegations, a court should assume their

veracity and then determine whether they plausibly give rise to an entitlement

for relief.

Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir.2011); see also Connelly v. Steel

Valley Sch. Dist., 706 F.3d 209, 212 (3d Cir. 2013); Santiago v. Warminster Twp., 629 F.3d

121, 130 (3d Cir.2010).

Even “if a complaint is subject to Rule 12(b)(6) dismissal, a district court must permit

a curative amendment unless such an amendment would be inequitable or futile.” Phillips v.

Cty. of Allegheny, 515 F.3d 224, 245 (3d Cir. 2008).

[E]ven when plaintiff does not seek leave to amend his complaint after a defendant

moves to dismiss it, unless the district court finds that amendment would be inequitable

or futile, the court must inform the plaintiff that he or she has leave to amend the

complaint within a set period of time.

Id.

IV. ANALYSIS

Defendant asserts that the Court should dismiss all counts contained in Plaintiffs’

Amended Complaint (Doc. 8) because Plaintiffs have failed to state a claim as a matter of

law on their four breach of contract claims based on the implied covenant to market and

implied covenant to reasonably develop (Counts I-IV) and Counts V and VI are derivative of

the breach of contract claims. (Doc. 9 ¶¶ 13-15.) As discussed below, Plaintiffs maintain

that each claim is sufficiently supported and Counts V and VI are not derivative of the

breach of contract claims.

A. Implied Covenant to Market

Defendant contends that Plaintiffs’ implied duty to market claims fail both because

they lack factual support and because Plaintiffs are attempting to substitute their business

judgment for that of SWN.3 (Doc. 11 at 17.) Plaintiffs respond that they have pled

substantial facts to support their claims in Counts I, II, and III. (Doc. 13 at 18.) The Court

concludes that Defendant has not satisfied its burden of showing that Plaintiffs have not

pled sufficient facts to satisfy the plausibility standard as applied to their implied duty to

market claims.

As a threshold matter, Defendant does not concede that an implied duty to market

exists under Pennsylvania law. (Doc. 11 at 17 n.5.) However, Defendant states that it will

not dispute the existence of the duty here. (Id.) Rather, Defendant notes that “[a]lthough

the Pennsylvania Supreme Court has not recognized an implied duty to market, federal

courts in Pennsylvania have identified such a duty.” (Id. at 17-18 (citing Chambers v.

Chesapeake Appalachia, LLC, 359 F.Supp.3d 268, 279 (M.D. Pa. 2019)).) Chambers

stated the following:

Pennsylvania recognizes [an “implied duty to market,”] which requires a lessee

operating under a proceeds lease “to market the gas found ‘but only at a

reasonable profit[,]’ taking into consideration ‘the distance to market, the

expense of marketing, and everything of that kind.’”4 Canfield [v. Santoil USA

Onshore Props., Civ. A. No. 3:16-CV-85,] 2017 WL 1078184, at *22 [M.D. Pa.

3 The words “covenant” and “duty” are used interchangeably when discussing this issue.

4 A “proceeds” lease pays royalties based on the proceeds received for sale of the gas. Canfield v.

Statoil USA Onshore Props., Civ. A. No. 3:16-CV-85, 2017 WL 1078184, at *17 (M.D. Pa. Mar. 22, 2017).

The Lease at issue in this case is a proceeds lease. (Doc. 8-1 ¶ 3.)

Mar. 22, 2017] (quoting Iams v. Carnegie Nat. Gas Co., 194 Pa. 72, 45 A. 54,

54 (1899)). Texas imposes a similar duty on lessees. See, e.g., Union Pac.

Res. Grp., Inc. v. Hankins, 111 S.W.3d 69, 72 (Tex. 2003) (“[A] lessee under a

proceeds lease has ‘an obligation to obtain the best current price reasonably

available[.]’ ” (quotation omitted)). The essence of the duty to market is that the

lessee must exercise its business judgment in good faith, acting as a

reasonably prudent operator would. See Canfield, 2017 WL 1078184, at *23-

24 (predicting the good faith judgment standard applicable to habendum

clauses “would likely apply to the implied duty to market”). Thus “[u]nder some

circumstances, a reasonable marketer may sell gas for more or less than

market value,” Hankins, 111 S.W.3d at 74; however, “failure to sell at market

value may be relevant evidence of a breach of the covenant to market in good

faith,” Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 373-74 (Tex. 2001)

(quotation omitted). See, e.g., Anderson Living Trust v. WPX Energy Prod.,

LLC, 312 F.R.D. 620, 653 (D.N.M. 2015) (“[C]ourts facing situations in which a

lessee sells hydrocarbons in non-arm's length transactions typically conclude

that the lessee did not behave as a reasonably prudent operator unless it sold

the hydrocarbons for the highest obtainable price.”).

Chambers, 359 F. Supp. 3d at 279.

Reliance on Texas law was explained in Canfield: though the Pennsylvania Supreme

Court has not addressed the scope of the implied duty to market in any recent decisions, an

adequate explanation of the implied duty to market can be found in Texas Supreme Court

decisions, and Texas law, like Pennsylvania law, allows parties to calculate royalties based

on a wellhead price. 2017 WL 1078184, at *24. Canfield then set out the following scope

of the implied duty to market:

In Yzaguirre v. KCS Resources, Inc., the Texas Supreme Court explained that

“[t]he implied covenant to reasonably market oil and gas serves to protect a

lessor from the lessee’s self-dealing or negligence.” Yzaguirre v. KCS Res.,

Inc., 53 S.W.3d 368, 374 (Tex. 2001). Accordingly, where the lease is silent,

the lessee has a duty to market the oil and gas reasonably. 53 S.W.3d at 373.

Where the lease is a proceeds lease, this obligation includes an “obligation to

obtain the best current price reasonably available.” Union Pacific Res. Grp.,

Inc. v. Hankins, 111 S.W.3d 69, 72 (Tex. 2003) (quoting Yzaguirre, 53 S.W.3d

at 374). This same protection is not needed in a lease requiring royalties based

on a market value. Id.

A central inquiry in determining whether the duty has been breached is

whether the transaction was a fraud or a sham, particularly where the allegation

is based on an inter-affiliate sale. Id. at 74. This list is not exhaustive and the

implied duty may extend beyond allegations of fraud or a sham,

however. See Occidental Permian Ltd. v. Helen Jones Found., 333 S.W.3d

392, 401 (Tex. App. 2011). The ultimate purpose of the duty is “to protect a

lessor from the lessee’s self-dealing or negligence.” Yzaguirre, 53 S.W.3d at

374. However, at no point does the implied duty convert the proceeds clause

into a market value clause as “[u]nder some circumstances, a reasonable

marketer may sell gas for more or less than market value.” Hankins, 111

S.W.3d at 74.

Canfield, 2017 WL 1078184, at *24.

In Flanagan v. Chesapeake Exploration, the district court stated that the duty

to reasonably market “is two-pronged: (1) ‘the lessee must market the production with due

diligence,’ and (2) must ‘obtain the best price reasonably possible.’” Flanagan v.

Chesapeake Exploration, LLC, Civ. A. No. 3:15-CV-0222-B, 2015 WL 6736648, at *2 (N.D.

Tex. Nov. 4, 2015) (quoting Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1987)).

In this legal framework, the Court will now review the parties’ arguments as to

Counts I, II, and III which rely on the implied duty to market.

1. Count I

Count I of Plaintiffs’ Amended Complaint addresses the implied duty to market as it

relates to “[h]ydrocarbons’ value.” (Doc. 8 at 7.) Plaintiffs generally aver that “the prices of

hydrocarbons reported by SWN in the royalty check statements and upon which the Diehls'

royalties are calculated, are not representative of the best price reasonably available or a

reasonable profit.” (Id. ¶ 37.) Defendant maintains that Count 1 of Plaintiffs’ Amended

Complaint must be dismissed because the “unsupported conclusory allegations” set out in

support of the claim “are not enough.” (Doc. 11 at 20.) In response, Plaintiffs state that

“Count I focuses on SWN’s sale of hydrocarbons at the interstate pipeline rather than at

downstream locations” and point to the following as factual support for the claim:

SWN sells hydrocarbons from the Units at the point where [sic] enter the

interstate pipeline. [ECF Doc. 8 at ¶ 17]. The "marketing" fees that SWN

charges are small compared to other post-production costs. [ECF Docs. 8 at ¶

39; 8-8]. SWN is not a "shipper" on interstate pipelines in the vicinity of the

Subject Property. [ECF Doc. 8 at ¶ 39]. As a result, SWN is unable to transport

the gas downstream on interstate pipelines. [ECF Doc. 8 at ¶ 39]. Not only is

SWN forced to sell hydrocarbons where they enter the interstate pipeline, but

the value received by SWN has at times been less than transparent index

pricing on an interstate pipeline segment in Susquehanna County. [ECF Doc.

8 at ¶ 32].

(Doc. 18 at 25.)

Plaintiffs state that “[t]hese facts plead a plausible claim that SWN failed to meet its

obligation to obtain the best price reasonably possible under the implied covenant to

market.” (Id. (citation omitted).) Defendant refutes this conclusion in its reply brief,

asserting that Plaintiffs’ Amended Complaint lacks allegations of a better price at the correct

sales location and any meaningful calculation would have to deduct from the downstream

sales price all of the post-production costs, i.e., the costs incurred to get the gas from the

wellhead to the actual sales point, something Plaintiffs have not done. (Doc. 14 at 14 (citing

Doc. 8-1 ¶ 3).)

Rule 12(b)(6) motions invoke the pleading requirements of Federal Rule of Civil

Procedure 8(a)(2). Under Rule 8(a)(2), “a pleading must contain a ‘short and plain

statement of the claim showing that the pleader is entitled to relief.’” Iqbal, 556 U.S. at 677-

78. “That is to say, there must be some showing sufficient to justify moving the case

beyond the pleadings to the next stage of litigation.” Phillips v. Cty. of Allegheny, 515 F.3d

224, 234-35 (3d Cir. 2008).

Defendant posits that the pleading stage standard requires “some factual averment

that the purported other sales location would have resulted in a higher royalty to the lessor

after all post-production costs associated with getting the gas to that purported other sales

point are deducted.” (Doc. 14 at 15 (citing Flanagan, 2015 WL 6736648; Kilmer v. Elexco

Land Services, Inc., 990 A.2d 1147, 1154, 1157-58 (Pa. 2010) (recognizing that while prices

further downstream may be higher, costs increase as well and those post-production costs

must be netted out in order to determine sale price at wellhead to ensure proper evaluation

of gas value and determination)).) Defendant states that this is “the factual basis the

Plaintiffs here are missing.” (Doc. 14 at 15.)

Defendant’s conclusion does not show it is entitled to dismissal of the claim. First,

Plaintiffs aver that “[d]espite demand by the Diehls, SWN has not provided the Diehls with

further information regarding the disposition of the hydrocarbons upon which their royalty is

calculated.” (Doc. 8 ¶ 18.) Second, Plaintiffs assert that a different sales location would

have resulted in a higher royalty after all post-productions costs are deducted in that they

relate their claim to a diminishment in their royalties based on the lower price obtained by

SWN (see, e.g., Doc. 8 ¶¶ 37, 45), and their royalties, by contract, are calculated by

deducting post-production costs (Doc. 8-1 ¶ 3). Third, insofar as Defendant seeks more

specificity in Plaintiffs’ pleading of the claim related to the calculation of post-production

costs (see, e.g., Doc. 11 at 22-23, Doc. 14 at 15-16), the calculation of these costs which,

according to the Lease, includes “all costs of gathering, transportation, compression, fuel,

[and] line loss” (Doc. 8-1 ¶ 3) is properly the subject discovery going forward.

While the Court agrees that Plaintiffs will have to make the showing identified by

Defendant to prevail on their claim in Count I, the Court concludes at this early stage of the

proceedings that Plaintiffs have satisfied the federal notice pleading standard required to go

forward with their breach of contract under an implied duty to market theory based on the

prices of hydrocarbons reported in Plaintiffs’ royalty check statements. Therefore,

Defendant’s motion will be denied as to this claim.

2. Count II

Count II of Plaintiffs’ Amended Complaint, pled in the alternative to Count I,

addresses the implied duty to market as it relates to “[h]ydrocarbons’ value” if, as alleged,

SWN is selling it to its affiliate, Southwestern Energy Services Company, LLC (Doc. 8 at 7;

id. ¶¶ 49, 54, 57.) Defendant states that “mere allegations of affiliate sales are insufficient

to state a claim for a breach of an implied duty to market claim.” (Doc. 11 at 23 (citing

Flanagan, 2015 WL 6736648, at *2 (“asserting self-dealing, by itself, is insufficient to plead

a breach” of the implied duty to market); Gottselig v. Energy Corp., Civ. A. No. 15-971, 2015

WL 5820771, at *6-7 (W.D. Pa. Oct. 5, 2015) (no obligation on the part of the lessee to

inform the lessor of the relationship between the lessee and its marketing affiliate)).)

Here Plaintiffs make “more than a mere allegation of affiliate sales” in that their

allegations include the following:

57. It is averred that if SWN is "selling" the gas produced from the

Walker Diehl #1H Well and the Walker Diehl #5H Well to Southwestern Energy

Services Company, LLC, that said activity is not demonstrative of a diligent

effort to market hydrocarbons and to secure the best price reasonably

available, or a reasonable profit, by SWN because it is a non-transparent, non-

arms'-length sale to an affiliate and no effort is made by SWN to secure better

pricing from other buyers.

58. It is averred that the prices of hydrocarbons reported by SWN in the

royalty check statements and upon which the Diehls' royalties are calculated,

are not representative of the best price reasonably available or a reasonable

profit.

59. It is averred that if SWN is selling to its affiliate, the price received

by SWN does not represent a fair market price, but instead a price determined

by related, affiliated or non-arms'-length parties and is not a diligent effort to

secure the best price reasonably available or a reasonable profit.

(Doc. 8 ¶¶ 57-59.) In their opposition brief, Plaintiffs summarize their claim as follows:

a decision to sell hydrocarbons only to an affiliate at a location before

hydrocarbons reach the interstate pipeline and not to explore downstream

markets, an array of possible buyers and potentially better pricing

environments is not demonstrative of an exercise of business judgment in good

faith by a reasonably prudent operator to obtain the best price reasonably

available.

(Doc. 13 at 21 (citing Chambers, 359 F. Supp. 3d at 279).)

As set out above, Chambers quoted Anderson approvingly, recognizing that “‘courts

facing situations in which a lessee sells hydrocarbons in non-arm's length transactions

typically conclude that the lessee did not behave as a reasonably prudent operator unless it

sold the hydrocarbons for the highest obtainable price.’” See supra p. 6; Chambers, 359 F.

Supp. 3d at 279 (quoting Anderson, 312 F.R.D. at 653).

Defendant asserts that “to the extent the implied duty to market has any application

here with respect to affiliate transactions . . . , it is limited only to situations involving sham

transactions that justify veil piercing.” (Doc. 14 at 18 (citing Texas Oil & Gas Corp. v.

Hagen, 683 S.W.2d 24, 28 (Tex. App. 1984) (holding that royalty in a market-value lease

should be measured by a downstream point of sale only when lessee’s corporate veil was

pierced in sham transactions with wholly-owned subsidiary)).) Contrary to Defendant’s

assertion, relevant authority does not limit the implied duty in the context of an affiliate sale

to “sham” transactions. As set out above, the inquiry into whether a transaction between

affiliates was a fraud or a sham is not the only manner in which the breach of the implied

duty to market can occur in an affiliate sale situation: the implied duty may extend beyond

allegations of fraud or a sham, and the ultimate purpose of the duty is to protect a lessor

from the lessee’s self-dealing or negligence. See supra p. 7; Canfield, 2017 WL 1078184,

at *24 (internal quotations and citations omitted). Thus, Defendant’s argument does not

show that Plaintiffs have failed to state a plausible claim in Count II of their Amended

Complaint, and the Court will deny their motion as to this count.

3. Count III

In Count III, Plaintiffs assert that Defendant breached its duty to market, maintaining

that “[t]he implied covenant to market hydrocarbons also obligates an operator to act

prudently to reduce the costs associated with moving products to market, as part of the

obligation to maximize the value of the hydrocarbons” and the costs associated with their

wells “are unreasonably high when compared to the value SWN receives for the ‘sale’ of the

hydrocarbons upon which the Diehls' royalty is calculated, which is a breach of SWN's

implied duty to keep such costs low.” (Doc. 8 ¶¶ 67-68.) Defendant contends that Count III

lacks factual allegations and fails as a matter of law. (Doc. 11 at 24.) The Court disagrees.

Plaintiffs assert that the post-production costs that are charged against their royalty

“do not provide value . . . that is commensurate with the costs that are charged” because

they “are charged substantial post-production costs but do not see any resultant benefit

because [they] have been paid less than the index price at the marketplace where the gas is

delivered, [while] having been charged for the costs of getting the gas to that location.”

(Doc. 8 ¶¶ 71-72.) Clearly, Count III is related to the allegations in Counts I and II that

Defendant has breached the implied duty to market because it has not marketed the gas

from Plaintiffs’ wells to secure the best price reasonably available.” (Id. ¶¶ 37, 52.) Thus,

as another aspect of the duty to market, the Court does not find that Plaintiffs’ have failed to

state a claim upon which relief can be granted.

4. Allegations of Bad Faith

Defendant separately argues that Counts I, II, and III fail because they do not allege

that SPC acted in bad faith. (Doc. 11 at 25-26.) Plaintiffs respond that they plead in their

Amended Complaint that “SWN failed ‘to act in good faith with requisite diligence’ in

marketing the hydrocarbons and that SWN failed to develop the hydrocarbons ‘in a

reasonable and good faith manner.’” (Doc. 13 at 22-23 (citing Doc. 8 ¶¶ 43, 60, 87).) The

Court has confirmed these citations and finds that allegations stating Defendant did not act

in a good faith manner are equivalent to asserting Defendant acted in bad faith. Insofar as

“the essence of the duty to market is that the lessee must exercise its business judgment in

good faith, acting as a reasonably prudent operator would,” Chambers, 359 F. Supp. 3d at

279; Canfield, 2017 WL 1078184, at *24, the Court finds that Plaintiffs’ pleading includes the

relevant allegation. Further, the Court agrees with Plaintiffs that the determination of

whether a defendant exercised business judgment in good faith regarding the implied duty

to market is a factually intensive inquiry which is not appropriately decided at this stage of

the litigation. (See Doc. 13 at 23.)

In making the foregoing findings, the Court concurs with Judge Caputo’s observation

in Chambers that because “oil and gas leases are laden with terms of art” and a judge’s

“linguistic filed of expertise may not overlap with the parties,” deciding issues related to gas

leases is often best undertaken on summary judgment. 359 F. Supp. 3d at 281. Here

Judge Caputo’s words reinforce the Court’s conclusion that the terms of art in play and the

guidance provided by relevant authority indicate that summary judgment is the better

vehicle to decide the issues raised in Counts I, II, and III regarding the implied duty to

market.

B. Implied Covenant to Develop

Defendant asserts that Plaintiffs’ implied duty to develop claim in Count IV of the

Amended Complaint fails because the Lease’s terms preclude the application of the duty

and Plaintiffs have not alleged that Defendant was not acting in good faith in its

development of the property. (Doc. 11 at 15, 17.) Plaintiffs respond that they have pled a

viable claim for breach of the implied duty to develop hydrocarbons: 1) they explicitly

contracted that “[a]ll express or implied covenants of this lease shall be subject to Federal

and state laws, executive orders, rules and regulations” (Doc. 13 at 12 (citing Doc. 8-1 ¶

14)); 2) the well-pleaded facts in the Amended Complaint show that “the Lease is in its

secondary term and there is no gas storage and no savings clause has been implicated, so

any purported ‘payments’ to the lessor are solely based on hydrocarbon production [which]

does not negate the implied covenant to develop” (Doc. 13 at 15-16 (citation omitted)); 3)

the authority upon which Defendant relies is distinguishable (Doc. 13 at 15-16); and 4) they

allege that Defendant failed to develop the hydrocarbons “in a reasonable and good faith

manner” and this is a factual question that cannot be summarily decided (id. at 22-24). The

Court concludes Plaintiffs have not pled a plausible claim for relief pursuant to the implied

duty to develop.

As a federal court sitting in diversity, this Court is required to apply the substantive

law of the state whose law governs the action. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78,

(1938). The parties agree that Pennsylvania law governs this dispute.

In Spence v. ESAB Grp., Inc., 623 F.3d 212 (3d Cir. 2010), the Court of Appeals for

the Third Circuit explained how a federal court should determine the governing state law:

When ascertaining Pennsylvania law, the decisions of the Pennsylvania

Supreme Court are the authoritative source. State Farm Mut. Auto. Ins. Co. v.

Coviello, 233 F.3d 710, 713 (3d Cir.2000). In the absence of a controlling

decision by the Pennsylvania Supreme Court, we must predict how it would

rule if faced with the issue. Covington v. Cont'l Gen. Tire, Inc., 381 F.3d 216,

218 (3d Cir.2004). In making such a prediction, “we must look to decisions of

state intermediate appellate courts, of federal courts interpreting that state's

law, and of other state supreme courts that have addressed the issue,” as well

as to “analogous decisions, considered dicta, scholarly works, and any other

reliable data tending convincingly to show how the highest court in the state

would decide the issue at hand.” Norfolk S. Ry. Co., 512 F.3d at 92 (internal

quotation marks omitted). We must be mindful that “our duty is to apply state

law ... irrespective of what we may regard as its merits,” Krauss v.

Greenbarg, 137 F.2d 569, 571 (3d Cir.1943); we may not impose our own view

of what state law should be, McKenna v. Pac. Rail Serv., 32 F.3d 820, 825 (3d

Cir.1994), nor “expand state law in ways not foreshadowed by state

precedent.” City of Philadelphia v. Beretta U.S.A. Corp., 277 F.3d 415, 421 (3d

Cir.2002).

Spence, 623 F.3d at 216–17. Regarding the decisions of lower state courts, a federal court

is to give such decisions “due regard, but not conclusive effect.” See Nationwide Mut. Ins.

Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000) (citing Burke v. Maassen, 904 F.2d 178,

182 (3d Cir.1990)). Buffetta added that “[t]he opinions of intermediate appellate state courts

are ‘not to be disregarded by a federal court unless it is convinced by other persuasive data

that the highest court of the state would decide otherwise.’” 230 F.3d at 637 (quoting West

v. American Telephone & Telegraph Co., 311 U.S. 223, 237 (1940).

In Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001), the Supreme Court

of Pennsylvania addressed a petition for certification from the Court of Appeals for the Third

Circuit questioning “whether Pennsylvania jurisprudence recognizes an implied covenant to

develop and produce oil or natural gas that would impose upon a lessee the obligation to

produce oil and gas from property leased for that purpose.” Id. at 452. Jacobs held that

[a]n implied covenant to develop the underground resources appropriately

exists where the only compensation to the landowner contemplated in the lease

is royalty payments resulting from the extraction of that underground resource.

Where, however, the parties have expressly agreed that the landowner shall

be compensated if the lessee does not actively extract the resource, then the

lessee has no implied obligation to engage in extraction activities. Thus, so long

as the lessee continues to pay the landowner for the opportunity to develop

and produce oil or gas, the lessee need not actually drill wells. At the point

where that compensation ceases due to the expiration of the term of the lease,

or pursuant the terms of the lease itself, the lessee then has an affirmative

obligation either to develop and produce the oil or gas or terminate the

landowner's contractual obligations. As this Court stated in McKnight v.

Manufacturers' Natural Gas Co., 146 Pa. 185, 204, 23 A. 164, 166 (1892): “The

defendant cannot hold the premises and refuse to operate them.”

772 A.2d at 455. Regarding agreed upon compensation in the absence of active extraction,

the Court noted that “[w]hat constitutes adequate compensation for this purpose obviously

must be determined by taking into consideration the facts and circumstances of each

individual case.” Id. at 455 n.5. At the end of its decision, the Court stated the following:

This Court . . . offers no opinion as to whether the agreement of the parties in

this case forecloses implication of a covenant to reasonably develop the

leasehold, as that is one of the ultimate questions facing the Third Circuit. We

merely respond to the question under review by noting in the affirmative that

Pennsylvania law recognizes an implied covenant but also recognizes that the

specific agreement of the parties may preclude the application of the doctrine.

772 A.2d at 455.

Relying on Jacobs, Defendant argues that here the application of the duty to develop

is precluded by the agreement of the parties because the Lease provides for compensation

in the absence of production on the leased premises. (Doc. 11 at 15.) Specifically,

Defendant points to the following methods of compensation in support of its assertion that

the implied duty does not apply: “the Lease [is] to remain in force as long as oil or gas is

‘produced in paying quantities’, including by actual production from acreage pooled into a

unit; by annual shut-in payments; by operations either on the Property or a unit; and by

storing gas.” (Id.)

As noted above, Plaintiff argues that the alternative methods of compensation

identified in the lease do not moot the implied duty to develop because “the Lease is in its

secondary term and there is no gas storage and no savings clause has been implicated, so

any purported ‘payments’ to the lessor are solely based on hydrocarbon production. That

does not negate the implied covenant to develop.” (Doc. 13 at 15 (citing Jacobs, 772 A.2d

at 455).)

The Court concludes that the fact that the Lease is in its secondary term and is being

held by production presents considerations distinct from those explicitly addressed by

Jacobs. However, post-Jacobs Pennsylvania Superior Court decisions have considered

situations where the lease at issue is held by production under the terms of the habendum

clause of the lease. The Court will now look to the Superior Court’s analysis of the implied

duty to develop in situations where the production phase of the lease has commenced.

In Caldwell v. Kriebel Resources Co., 72 A.3d 611, 613 (Pa. Super. Ct. 2013), the

Superior Court considered the issue in the context of the plaintiffs’ appeal of the lower

court’s order sustaining the defendants’ preliminary objections. The plaintiffs asserted that

the defendant was in breach of the implied duty to develop where it had conducted drilling

activities on the leased premises but had not initiated drilling activities in the Marcellus

Shale formation. 72 A.3d at 613. The lease in Caldwell provided for an initial 24–month

term that would be extended so long as oil or gas was being produced, and the parties did

not dispute that gas was being produced. Id. The lease also provided that “[n]o inference

or covenant shall be implied as to either party hereto since the full contractual obligations

and covenants of each party [are] herein fully and expressly set forth.” Id. at 615. In

support of their appeal, the plaintiffs asserted that the defendants failed to either pay delay

rentals or to produce natural gas from the Marcellus Shale strata. Id. at 613.

In analyzing the implied duty to develop issue, Caldwell first set out the Jacobs

holding identified above. 72 A.3d at 614-15. After quoting the Pennsylvania Supreme

Court’s statement in Hutchison v. Sunbeam Coal Corp., 519 A.2d 385 (Pa. 1986), that “‘[n]o

inference or covenant shall be implied as to either party hereto since the full contractual

obligations and covenants of each party [are] herein fully and expressly set forth,’” 72 A.3d

at 615 (quoting Hutchison, 519 A.2d at 388; citing Jacobs, 772 A.2dd at 455 (“Pennsylvania

law recognizes an implied covenant but also recognizes that the specific agreement of the

parties may preclude the application of the doctrine.”)), Caldwell concluded that,

under Pennsylvania law, we are not authorized to impose an implied duty on

the lessee to develop the various strata in light of the language contained in

their contract. This is so, particularly in light of the fact that the Defendants are

producing gas pursuant to the Agreement, a fact that Appellants acknowledge.

Appellants also overlook the guarantee that they would receive delay rentals if

no gas were produced. . . . Appellants have failed to persuade this Court that

in Pennsylvania a lessee, as a party to an oil and gas lease, is required to drill

additional wells to different depths to completely develop the entire property.

72 A.3d at 615.

In Norm’s Ltd. v. Atlas Noble, LLC, No. 1377 WDA 2014, 2015 WL 7112968 (Pa.

Super. Ct. May 8, 2015), a non-precedential decision,5 the Pennsylvania’s Superior Court

considered whether the trial court erroneously granted summary judgment to the defendant

as to the plaintiff’s breach of the implied covenant to develop. Id. at *2. The lease provided

in relevant part that the plaintiff would receive a 1/8th royalty for any oil or gas extracted

from the leased premises; the initial term of the lease was 18 months and would continue

indefinitely as long as “oil or gas or their constituents are produced or are capable of being

produced on the premises in paying quantities, in the judgment of [Atlas], or as the premises

shall be operated by [Atlas] in the search for oil or gas”; and the lease provided that it would

5 Despite Plaintiffs’ assertion that Norm’s is a non-precedential decision and of no authoritative

value (Doc. 13 at 15 & n.1), this Court is free to consider the decision as a non-precedential Superior Court

opinion.

terminate within three months if Atlas did not commence a well on the premises, unless

Atlas tendered a “delay rental of $1,180.00 [ ] each year, payments to be made quarterly

until the commencement of a well.” Id. at *1.

Like Caldwell, Norm’s began the analysis of the implied duty to develop issue by

identifying the Jacobs’ holding set out above. 2015 WL 7112968, at *5. The court then

reasoned that

[i]n this case, the terms of the Lease preclude the imposition of an implied

covenant to develop under Jacobs. The Lease provides two compensation

schemes for Norm's depending on Atlas' drilling activity. Norm's is entitled to a

royalty payment if Atlas extracts oil or gas from the leased premises.

Alternatively, if Atlas is not actively extracting oil or gas, Atlas still must

compensate Norm's in the form of a quarterly “delay rental” payment. The

language of the Lease provides that it continues “indefinitely” as long as Atlas

is making one of those payments. Accordingly, we will not impose an implied

duty to develop on Atlas because it is precluded by the terms of the Lease,

which provide that Norm's would be compensated a “delay rental” fee if Atlas

was not extracting oil or gas. See id.

Additionally, Norm's acknowledges that Atlas was actively operating a

well on the consolidated [unit] and was paying Norm's royalties for the

extraction of oil or gas from that well. Under the terms of the Lease, this well is

deemed to be located upon the leased premises. . . . By the terms of the Lease,

one well on any portion of the 99 acres, providing Norm's royalties, is sufficient

to allow the Lease to continue indefinitely. We will not impose a covenant to

develop that differs from the express terms of the Lease. See Jacobs,

supra. To the extent that Norm's is arguing Atlas has a duty to completely

develop and extract all exploitable resources on the leased premises, there is

no provision of the Lease that imposes such a duty and we will not imply it for

the above reasons. See Caldwell v. Kriebel Res. Co., LLC, 72 A.3d 611, 615

(Pa.Super.2013) (declining to “impose an implied duty on the lessee to develop

[all economically exploitable] strata [of natural gas] in light of the language

contained in their contract[, and] particularly in light of the fact that the [lessee

is] producing gas pursuant to the [a]greement[.] [Lessee] would also

receive delay rentals if no gas were produced[ ]”), appeal denied, 81 A.3d 74

(Pa.2013). Therefore, Norm's cannot recover for Atlas' alleged breach of an

implied duty to develop because the Lease's specific language precludes the

imposition of such a duty.

2015 WL 7112968, at *5.

In Seneca Resources Corp. v. S&T Bank, 122 A.2d 374 (Pa. Super. Ct. 2015), the

lessee filed suit against the lessor for a declaration that it had not breached the oil and gas

lease between them but that lessors had breached. Id. at 376. The lessor appealed the

lower court’s order granting summary judgment for the lessee. Id. The lease at issue

allowed the lessee to produce, store, withdraw, or transmit oil and gas from the

‘leased premises,’ which constituted approximately 25,000 acres . . . . The

Lease had a primary term of 40 years, with a secondary term to continue as

long as oil or gas was stored, produced or withdrawn from any portion of the

leased premises. At the inception of the Lease, approximately 10,000 acres of

the leased premises were undeveloped (unoperated), and 15,000 acres were

developed (operated). The Lease stated that the lessee would pay royalties on

any oil or gas produced from the operated acreage on the leased premises.

The Lease outlined a ‘lump sum or rental payment’ schedule for the unoperated

acreage.

122 A.3d at 377. In considering the appellants’ claim that the trial court erred in refusing to

apply Pennsylvania’s doctrine of implied covenant to fully develop an oil and gas lease for

the 3,131 acres of land which was unoperated at the time, the court provided the following

context:

the Appellants assert that the implied covenant to develop imposes an

obligation on the lessee to develop the entire leased premises, and to hold

otherwise would allow lessees to hold a vast amount of undeveloped land in

perpetuity. The Appellants claim that Seneca is obligated to demonstrate that

it acted with reasonable diligence to develop the land, and by failing to do so,

must explain and excuse the lack of activity. The Appellants point out that

Seneca has only drilled wells in the operated acres of the Lease, and has failed

to develop the 3,131 acres of unoperated land, despite the land being

commercially viable. The Appellants argue that because the unoperated

acreage was commercially viable, and Seneca has failed to explain its failure

to develop the land, the implied covenant to develop has been breached and

the Appellants are entitled to enter into a new oil and gas production agreement

with another party.

Id. at 384 (internal citations to the record omitted).

As in Caldwell and Norm’s, the Superior Court began its analysis with Jacobs, noting

that Jacobs stated the “‘basis for the implied covenant ... is a recognition that the lessor has

entered into a bargain expecting to be compensated for the lease of the land, and principles

of fairness dictate that the lessee be obligated to make diligent efforts to ensure that the

lessor receives the benefit of his bargain.’” 122 A.3d at 385 (quoting Jacobs, 772 A.2d at

454). Seneca further noted that “while the implied covenant to develop doctrine exists, ‘the

specific agreement of the parties may preclude the application of the doctrine,’” id. at 395-96

(quoting Jacobs,772 A.2d at 455) (citing Hutchison, 385 A.2d at 388), and, by way of

illustration pointed to the Jacobs holding that where “the parties have expressly agreed that

the landowner shall be compensated if the lessee does not actively extract the resource,

then the lessee has no implied obligation to engage in extraction activities,’” id. at 386

(quoting Jacobs, 772 A.2d at 455).

In applying the foregoing principles to the facts of the case, the Superior Court

reasoned as follows:

It is undisputed that the Appellants and Seneca were operating under the

habendum clause of the Lease, which provides that the Lease would be

extended, beyond the primary term of 40 years, if “oil or gas or either of them

is stored in, produced or withdrawn from all or any portion of said leased

premises[.]” Lease, 4/17/62, at 2 (emphasis added). As noted above, the

leased premises was comprised of approximately 25,000 acres, including the

3,131 acres at issue here, and did not constitute separate operated and

unoperated acreages. Id. at 1. It is undisputed that Seneca continues to drill

and withdraw gas from a portion of the leased premises.

Thus, as the parties have stipulated that the drilling and operating

requirements under the Lease are satisfied, the Lease will extend for an

indefinite secondary term as long as any portion of the leased premises are

being drilled or operated for the production of oil or gas. See Hutchison, 519

A.2d at 388 (stating that the law does not imply a different contract than that

which the parties have expressly adopted). Indeed, as noted in the above

discussion regarding severability, the Lease makes no mention of any duty or

mandate to drill or operate the unoperated acreage for the production of gas to

continue the Lease as to that acreage in full force and effect. See Jacobs, 772

A.2d at 453. Based upon the foregoing, we conclude that the Lease between

the Appellants and Seneca forecloses a finding of a breach of the implied

covenant to develop and produce oil and gas on the unoperated

acreage. See Caldwell v. Kriebel Res. Co., LLC, 72 A.3d 611, 615

(Pa.Super.2013) (concluding that the implied duty to develop various strata

was inapplicable where the parties were operating under the habendum clause

of their agreement, which provided that the agreement would be extended “so

long as oil or gas was being produced,” and the drilling activities to date had

involved only shallow gas drilling); see also Exco Resources (PA), LLC, 2014

WL 585884, at *7–8 (holding that implied covenant to develop acreage outside

that drained by the current wells, and the entire premises below 3,500 feet, did

not apply where the parties' agreement extended for an indefinite secondary

term so long as, inter alia, the premises are being drilled or operated for the

production of oil or gas).

122 A.2d at 387-88 (emphasis added in Seneca).

The review of Pennsylvania Superior Court decisions indicates that the Superior

Court has consistently concluded that an implied duty to develop was not applicable or was

not breached when the lessor was not holding the property without developing it—where

development had commenced it was the express terms of the lease that controlled. This

was true when the lease contained a provision like that in Plaintiffs’ lease regarding implied

covenants. See Seneca, 122 A.3d at 385 n.11. Notably, the plaintiffs in Norm’s and

Caldwell appealed the Superior Court’s decisions to the Pennsylvania Supreme Court and

the Court denied review. Norm’s, 129 A.3d 1243 (Pa. 2015) (noting reconsideration denied

February 5, 2016, id. at n.44; Caldwell, 81 A.3d 74 (Pa. 2013).

In Count IV, Plaintiffs make the following assertions:

85. By only producing hydrocarbons from the Marcellus formation from one (1)

well in each of the units that includes the Subject Property for the past several

years without drilling and producing other wells, SWN has breached its implied

covenant to reasonably develop hydrocarbons from those drilling units and the

Subject Property which is included therein for the purpose of producing oil and

gas.

86. It is reasonably believed and therefore averred that the single Marcellus

well in each of the Walker Diehl North Gas Unit and the Walker Diehl South

Gas Units do not reasonably develop, produce or drain the entirety of the

Marcellus formation in those units.

87. SWN has had ample time to drill any additional wells to fully develop the

Marcellus formation in each of the Walker Diehl North Gas Unit and the Walker

Diehl South Gas Units in a reasonable and good faith manner and has failed to

do so.

88. As a result of SWN's failure to reasonably develop and produce

hydrocarbons from the units in which the Subject Property is included by drilling

additional wells in the Marcellus formation the drilling units that include the

Subject Property, the Diehls' production royalty has been unlawfully reduced

and diluted, which has damaged them and is a breach of SWN's implied

covenant to develop hydrocarbons.

(Doc. 8 ¶¶ 85-88.) As set out in the margin above, see supra p.2 n.1, the habendum clause

in the Lease provides as follows:

This lease shall remain in force for a term of fine (5) years from this date (called

“primary term”) and as long thereafter as oil or gas is produced, or considered

produced under the terms of the lease, in paying quantities from the premises

or from lands pooled therewith or the premises are used for storage purposes

as provided in paragraph 6 hereof, or this lease is maintained in force under

any subsequent provisions hereof.

(Doc. 8-1 ¶ 2.)

Defendant analogizes the situation here to those considered by the Superior Court,

asserting that the Lease does not require production from every acre to remain in force after

the primary term and alternative methods of compensation are set out in the Lease. (Doc.

11 at 16.) Defendant therefore concludes that it is entitled to dismissal of Count IV under

Pennsylvania Superior Court precedent. (Doc. 11 at 16; Doc. 14 at 12.)

Plaintiffs dispute Defendant’s reliance on the cited authority and attempt to

distinguish each of the cases upon which Defendant relies. (Doc. 13 at 16.) Plaintiffs

assert that the lessor in Caldwell argued that the lessee had to develop every strata of gas

to satisfy the implied duty to develop, a broad claim which Plaintiffs do not make. (Doc. 13

at 16.) Plaintiffs distinguish Seneca on the basis that the lease explicitly provided for delay

rentals to hold unoperated acreage and that unoperated acreage could be converted to

operated acreage at any time thus they expressly bargained for payments in lieu or rentals

which the parties here did not. (Doc. 13 at 15.) Plaintiffs distinguish Norm’s on the basis

that the court found that the delay rental could be paid indefinitely which is not the case

here. (Doc. 13 at 16.)

While Plaintiffs have pointed to differences in the cases reviewed, they have not

cited to contrary authority. (See Doc. 13 at 11-16.) Moreover, the distinctions identified fail

to legally distinguish the cases in that the decisions in favor of the lessees in Caldwell,

Norm’s, and Seneca were based on the fact that the leases provided payment alternatives

in lieu of development and, once production had commenced under the terms of the lease,

the lessee were not “holding the properly without developing it, which would not be in

compliance with the dictates of Jacobs.” Caldwell, 72 A.3d at 616. In other words, during

the production phase of operations, absent express development terms in the lease, the

terms of the habendum clause represent the only bargain of the parties and no implied duty

to develop reasonably can be imposed upon the lessee thereafter. As stated in Aye v.

Philadelphia Co., 44 A. 555, “where the parties have agreed on what shall be done, there is

no room for the implication of anything not so stipulated for.” Id. at 456.

Here the lease does not contain express terms related to the number of wells to be

drilled or other specific aspects of development, but the parties agreed upon “what shall be

done” in terms of the development needed to hold the lease.in the habendum clause. As to

production, one well can satisfy the habendum clause provision that the Lease will remain in

force based on the production of oil or gas in paying quantities. (Doc. 8-1 ¶ 2.) Because

Defendant is producing gas from two wells, it is not holding the property without developing

it under Jacobs and the Superior Court cases. As in the Superior Court cases, Plaintiffs

were entitled to alternative compensation in the event that drilling did not commence,

including delay rental payments. (See Doc. 8-1 ¶ 13.) Though Plaintiffs were not receiving

any alternate payments because the production phase had begun, that fact does not

distinguish this case in that alternate payments were not being made for unused portions of

land at the time the Superior Court decided Caldwell, Norm’s, and Seneca—it was the fact

that the leases had provided for alternative compensation before, or in lieu of, development

that mattered. In Jacobs’ terms, Defendant is not “hold[ing] the premises and refus[ing] to

operate them.” 772 A.2d at 455. Thus, based on Pennsylvania Superior Court precedent

grounded in the Pennsylvania Supreme Court’s decision in Jacobs, the Court concludes

that Plaintiffs have not stated a plausible claim for relief in Count IV that the implied duty to

develop requires further natural gas development of their property by Defendant.6

Insofar as the distinctions between the circumstances presented here and those at

issue in Caldwell, Norm’s, and Seneca could be considered indicative of a different result

such that an implied duty to develop may apply in this case, the Court will address

Defendant’s alternative argument that Plaintiffs have not alleged that Defendant was not

6 Any claim that Defendant is violating an express provision of the lease is a separate claim.

Although Plaintiffs assert in Count V that they are entitled to a declaration that the habendum clause has

not been satisfied and the Lease has terminated because hydrocarbons have not been produced in paying

quantities (Doc. 8 ¶¶ 91-101), they do not associate their contention with their assertion of an implied duty

to develop in Count IV. (See Doc. 8 ¶¶ 77-90; Doc. 13 at 10-16.) The allegations contained in Count V do

not warrant a different conclusion as to Count IV in that if it were to be determined that gas is not being

produced in paying quantities from the two wells which are producing gas, it would follow that the lease

would not be held by production, and, in the absence of an alternative method of holding the lease, the

implied duty to develop would not arise because the lease would be terminated. Insofar as the parties’

arguments regarding production in paying quantities are made in the margin (both parties relying on T.W.

Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012)) (see Doc. 11 at 16 n.4; Doc. 13 at 24 n.3;

Doc. 14 at 6 n.1), the issue is not deemed to be properly presented for the Court’s consideration.

acting in good faith on its business judgment relative to the property.7 (Doc. 11 at 17 (citing

Young v. Forest Oil Co., 45 A. 121 (Pa. 1899); Colgan v. Forest Oil Co., 45 A. 119 (Pa.

1899); Adams v. Stage, 18 Pa. Super. 308 (Pa. Super. 1901)).) On this point, Defendant

maintains that “whether additional wells should be drilled and, if so, when and where is left

to the business judgment of the lessee” and the lessor “must show that the lessee was not

acting in good faith on his business judgment.” (Doc. 11 at 14 (internal quotation omitted)

(citing Adams, 18 Pa. Super. at 311-13 (citing Young, 45 A. 121; Colgan, 45 A. 119)).)

Colgan v. Forest Oil Co., 45 A. 119 (Pa. 1899), provides perspective on court

intervention in disputes regarding oil and gas leases once production has commenced.

Colgan involved an action in equity where the defendant contracted to put down one well on

the plaintiff’s land and had, in fact, put down five, but the plaintiff charged that the five were

put down on the eastern half of the property to the neglect of the western half. Id. at 119.

The Court recognized that the lessor was seeking relief under “covenants [that] are merely

implied,” id. at 119, but did not specifically discuss the issue in terms of an implied duty to

develop and Jacobs did not cite the case. Nonetheless, in that Colgan remains good law,

see, e.g., T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261, 270 (Pa. 2012), the Court

will consider its application to the case at bar.

7 The Superior Court cases did not address the issue of the lessee’s good faith development of the

property in the context presented here. Caldwell considered a good faith standard as to an “implied duty to

develop in paying quantities,” and rejected the lessors’ argument. 72 A.3d at 616.

The Pennsylvania Supreme Court disagreed with the lower court that the western

half of the farm would furnish at least one paying well and the lower court’s decree that a

well should be put down there by the lessee. 45 A. at 121. The Court considered evidence

which had been proffered by the lessor which was only that wells had been drilled on

adjoining farms and the lessor’s testimony that he thought he could get others to take the

land. Id. The Court found that this was

far short of what is required. So long as the lessee is acting in good faith on

business judgment, he is not bound to take any other party's, but may stand on

his own. Every man who invests his money and labor in a business does it on

the confidence he has in being able to conduct it in his own way. No court has

any power to impose a different judgment on him, however erroneous it may

deem his to be. Its right to interfere does not arise until it has been shown

clearly that he is not acting in good faith on his business judgment, but

fraudulently, with intent to obtain a dishonest advantage over the other party to

the contract. Nor is the lessee bound, in case of difference of judgment, to

surrender his lease, even pro tanto, and allow the lessor to experiment.

Lessees who have bound themselves by covenants to develop a tract, and

have entered and produced oil, have a vested estate in the land, which cannot

be taken away on any mere difference of judgment. It is not within the

jurisdiction of any court to oust the owner and forfeit the title to estates in that

way, and the jurisdiction of equity to decree any specific act or declare forfeiture

depends on fraud averred and fully proved. Experimental drilling of other wells

on the western portion of this tract may work injury to defendant's wells already

down, without any corresponding advantage to the plaintiff. The weight of the

evidence is that such would be the probable result, but, whether it would or not,

the defendant is not bound to submit to the experiment. It has an estate in the

whole tract, has fully performed its agreement in relation thereto, and not a

single fact has been shown to authorize the court to interfere with its title or

possession.

Id. at 121.

In response to Defendant’s argument that Plaintiffs did not allege that Defendant was

not acting in good faith on its business judgment relative to the property (Doc. 11 at 17),

Plaintiffs contend that Count IV should go forward because they have alleged that

Defendant “failed to develop the hydrocarbons ‘in a reasonable and good faith manner’”

(Doc. 13 at 22-23 (quoting Doc. 8 ¶¶ 43, 60, 87)). In Count IV of the Amended Complaint,

Plaintiffs state that “SWN has had ample time to drill any additional wells to fully develop the

Marcellus formation in each of the Walker Diehl North Gas Unit and the Walker Diehl South

Gas Units in a reasonable and good faith manner and has failed to do so.” (Doc. 8 ¶ 87.)

While Plaintiffs correctly assert that whether a party acts in good faith is generally a

question for a jury (Doc. 13 at 23 (citing Pressey v. McCornack, 84 A. 427 (Pa. 1912)), more

is required to state a plausible claim for relief when the established good faith standard

related to the matter at issue must be grounded “on fraud averred.” Colgan, 45 A. at 121.

Plaintiffs conclusory assertion that Defendant’s failed to develop the hydrocarbons in a

“reasonable and good faith manner” (Doc. 8 ¶ 87) cannot sustain a claim under Colgan.

Because fraud is not averred in Plaintiffs’ Amended Complaint, Count IV cannot go forward

on Plaintiffs’ claim as pled.

Though the facts alleged by Plaintiffs do not suggest fraudulent behavior, the Court

cannot say for certain that granting leave to amend would be futile. Therefore, under Third

Circuit precedent, the Court will allow Plaintiffs to file an amended complaint as to Count IV.

Phillips, 515 F.3d at 245. In so doing, Plaintiffs are reminded that, under the Federal Rules

of Civil Procedure, in alleging a claim for fraud, “a party must state with particularity the

circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).

C. Counts V and VI

Defendant asserts that because Plaintiffs’ implied covenant claims fail as a matter of

law, their derivative Declaratory Judgment and Quiet Title Claims also fail. (Doc. 11 at 26.)

Defendant specifically maintains that “Plaintiffs’ declaratory judgment and quiet title claims

require a finding that SPC breach an implied duty. But, the implied duty claims fail as noted

above. Thus, Plaintiffs’ declaratory judgment and quiet title claims fail as a matter of law.”

(Id. (citng Wheeland Family Ltd. P’ship v. Rockdale Marcellus, LLC, Civ. A. No. 2019 WL

4687665 (M.D. Pa. July 3, 2019) (granting judgment on pleadings on quiet title claims

because implied covenants could not usurp lessee’s express rights), Norm’s Ltd., 2015 Pa.

Super. Unpub. (declining to address declaratory judgment claim and quiet title claim that

were derivative of meritless oil and gas lease breach claim).) Plaintiffs respond that Counts

V and VI are not derivative claims and Defendant does not substantively dispute them.

(Doc. 13 at 24.)

Discussion of these claims is not needed in that the basis for Defendant’s argument

for dismissal is the presumed dismissal of the breach of covenant claims. Because Counts

I, II, and III go forward, Defendant has articulated no basis upon which to dismiss Counts V

and VI as is its burden at this stage of the proceedings . Therefore, Defendant’s motion will

be denied as to these counts.

V. CONCLUSION

For the foregoing reasons, Defendant SWN Production Company, LLC’s Motion to

Dismiss the Amended Complaint (Doc. 9) will be denied in part and granted in part. The

Motion will be denied as to Counts I, II, III, V, and VI. The Motion will be granted as to

Count IV. Count IV will be dismissed without prejudice and Plaintiffs will be granted an

opportunity to file an Amended Complaint. With this determination, the Court makes no

findings on the merits or ultimate success of Plaintiffs’ remaining claims. An appropriate

Order will be filed simultaneously with this Memorandum Opinion.

_s/ Robert D. Mariani________________

Robert D. Mariani

United States District Judge