Oil and Gas Update
Federal court in Pennsylvania Invalidates Township Ordinance Prohibiting Oil and Gas Waste Disposal
April 12, 2017
By opinion of March 31, 2017, the U.S. District Court for the Western District of Pennsylvania invalidated an ordinance adopted by Pennsylvania’s Grant Township. The Township’s “Community Bill of Rights Ordinance” prohibited corporations from “engaging in the depositing of waste from oil and gas extraction” and invalidated any “permit, license, privilege, charter or other authority issued by any state or federal entity which would violate [this prohibition] or any of the rights secured by [the Ordinance], the Pennsylvania Constitution, the United States Constitution, or other laws.” PGE owns and operates natural gas wells in the Township, and its exploration and development activities include drilling and operating gas wells and managing brine and other produced fluids. In addition, its predecessor drilled a deep gas production well that PGE intends to use to inject produced fluids pursuant to an underground injection control permit. After the Ordinance was adopted in 2014, Pennsylvania General Energy Company, LLC (PGE) sued the Township to set the Ordinance aside. The Township, in turn, counterclaimed, arguing that PGE’s lawsuit violated the Township’s constitutional right to “local community self-government.”
Ruling first on the Township’s claim, the court observed that the Township sought to enforce its purported right to local community self-government through 42 U.S.C. § 1983. That statute requires proof that the defendant (here PGE) acted “under color of [state law] to deprive the Township of rights secured by the Constitution. Effectively, a § 1983 action requires that the defendant is a state actor. According to the court, the argument by the Township was that PGE was a state actor because: 1) the state created it through its incorporation law; 2) the state granted permits to PGE and regulates the construction operations of its proposed injection wells; and 3) the state and federal governments have given the corporation certain unnamed legal and constitutional rights. The court concluded these arguments are insufficient to transform PGE from a private entity into a state actor for the purposes of § 1983.
The court then moved on to PGE’s claims that the Township’s Ordinance was invalid. PGE argued first that the Ordinance was invalid because it violated the supremacy clause of the U.S. Constitution by divesting corporations of all of their constitutional rights. The court denied this claim, observing that the supremacy clause did not provide a private right of action. Next, the court considered an equal protection claim. PGE argued under § 1983 that it had been denied equal protection because the Ordinance discriminates against corporations by stripping only them, and not individuals, of their rights. The court observed that it must first determine whether corporations and individuals are “similarly situated” and, if so, then the Township must justify its disparate treatment of the two by demonstrating that the Ordinance is rationally related to a legitimate government purpose.
The court agreed that individuals and corporations are similarly situated for the purposes of this action, noting that the federal regulations on underground injection control wells apply equally to both and that there is a large body of case law finding that corporations and individuals are similarly situated with respect to most of the protections afforded by the U.S. Constitution. Accordingly, the court shifted its analysis to whether the Township could show that the disparate treatment of individuals and corporations was rationally related to a legitimate governmental purpose. Here, the court observed that there is a presumption of rationality and that the standard of review is “highly deferential” to the Township. Nonetheless, the court rejected the Township’s arguments that there was any rational relationship between the stated goals of the Ordinance and the disparate treatment of corporations and individuals. The court concluded, “While the goals of the Ordinance [the prohibition of oil and gas waste disposal] are legitimate, there is no evidence of a rational relationship between the disparate treatment of corporations and the stated goals of the Ordinance. If these goals can only be achieved through the elimination of fracking, it makes no constitutional sense to allow the same activity by individuals.”
Likewise, the court found that the Ordinance violated PGE’s right under the First Amendment to petition the government for redress of grievances. In particular, the Ordinance provided that corporations seeking to violate its terms “shall not be deemed to be ‘persons,’ nor possess any other legal rights … which would interfere with the rights or prohibitions in enumerated by this Ordinance.” PGE argued that the Ordinance was designed to divest corporations such as PGE of their constitutional right to petition government for redress grievances by doing such things as filing lawsuits. The court agreed, and noted that while the Ordinance did not actually prevent PGE from filing a lawsuit, that was its aim and that was unconstitutional.
The court also granted judgment to PGE on a substantive due process claim. Here, the court found that the Ordinance is a legislative act, which determined the appropriate standard of review for a substantive due process challenge. Under the appropriate standard, challenging a legislative act, a plaintiff need not establish a protected property interest to which the 14th Amendment’s due process protection applies. In the Third Circuit, when reviewing legislative acts on their face, courts have looked for arbitrary or irrational legislation that impermissibly goes beyond serving a legitimate state interest. Applying this test, the court found that the Ordinance fails to survive a substantive due process challenge because the Ordinance ran afoul of constitutional protections afforded corporations and attempted to immunize the Township from clashes with current federal and state law.
Finally, the court denied two additional grounds for invalidating the Ordinance advanced by PGE. The first was a procedural due process challenge. Here, the court ruled that the protections of the procedural aspects of the due process clause require a plaintiff to show a property or liberty interest. PGE argued that it had a property interest in its underground injection control permit and its leases with landowners in the Township. The court observed that PGE had not produced the leases and ruled that PGE did not have a property interest in a UIC permit. And, the court also rejected a claim that the Ordinance violated the contract clause of the Constitution by impairing PGE’s ability to realize the benefits of its existing leases with owners of subsurface estates. Again, because PGE had failed to produce its leases, it failed to prove the basis of the contracts on which its claim was asserted. Accordingly, the court denied this claim.
This article was authored by Robert G. McLusky.