Chesapeake Energy 2014 Annual Report Download - page 41

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On March 5, 2014, the Attorney General of the State of Michigan filed a criminal complaint against Chesapeake
in Michigan state court alleging misdemeanor antitrust violations and attempted antitrust violations under state law
arising out of the Company’s leasing activities in Michigan during 2010. On July 9, 2014, following a preliminary hearing
on the complaint, as amended, the 89th District Court for Cheboygan County, Michigan ruled that one count alleging
a bid-rigging conspiracy between Chesapeake and Encana Oil & Gas USA, Inc. regarding the October 2010 state
lease auction would proceed to trial and dismissed claims alleging a second antitrust violation and an attempted antitrust
violation. A trial date of April 15, 2015 has been set for this case. The Michigan Attorney General filed a second criminal
complaint against Chesapeake in the same court on June 5, 2014 which, as amended, alleges that Chesapeake’s
conduct in canceling lease offers to Michigan landowners in 2010 violated the state’s criminal enterprises and false
pretenses felony statutes. On September 9, 2014, following a preliminary hearing, the Court ruled that all charges in
the complaint would be tried. No trial date has been set for this matter.
Redemption of 2019 Notes. See Chesapeake Senior Notes and Contingent Convertible Senior Notes in Note 3
of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a description of
pending litigation regarding our redemption in May 2013 of our 2019 Notes.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business
operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract
actions. With regard to contract actions, various mineral or leasehold owners have filed lawsuits against us seeking
specific performance to require us to acquire their oil and natural gas interests and pay acreage bonus payments,
damages based on breach of contract and/or, in certain cases, punitive damages based on alleged fraud. The Company
has successfully defended a number of these failure-to-close cases in various courts, has settled and resolved other
such cases and disputes and believes that its remaining loss exposure for these claims will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows. In addition, as described
above, the Michigan Attorney General has commenced a criminal proceeding against us based on lease offers to
Michigan landowners in 2010.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits
alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices,
made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates
that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. The
Company has resolved a number of these claims through negotiated settlements of past and future royalties and has
prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty
underpayment in various states, including cases filed by individual royalty owners and putative class actions, some of
which seek to certify a statewide class. The Company also has received DOJ and state subpoenas seeking information
on the Company’s royalty payment practices.
Plaintiffs have varying royalty provisions in their respective leases and oil and gas law varies from state to state.
Royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty
calculations, an issue in a putative class action filed in November 2010 in the District Court of Beaver County, Oklahoma
on behalf of Oklahoma royalty owners asserting claims dating back to 2004. In July 2014, this case was remanded to
the trial court for further proceedings following the reversal on appeal of certification of a statewide class. We and the
named plaintiff participated in mediation concerning the claims asserted in the putative class action litigation and have
negotiated a settlement requiring the Company to pay $119 million cash to compensate the putative settlement class
for alleged past royalty underpayments in exchange for the release of claims for the ten-year period ended December
31, 2014. The plaintiff filed a motion for preliminary approval of the settlement on January 2, 2015. The Company has
accrued a loss contingency for the settlement amount in the 2014 consolidated statement of operations. A fairness
hearing on the settlement has been scheduled for April 17, 2015. Although Chesapeake believes that its royalty
calculation and payment methodologies are appropriate under Oklahoma oil and gas law and denies that it committed
any acts or omissions giving rise to any liability, it also believes that settlement is in the best interest of the Company
considering the questions of law and fact involved and the uncertainty of continued litigation. There can be no assurance
the court will approve the settlement, however, and the final resolution of the Oklahoma royalty claims could differ from
the amount accrued.