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Supreme Court of Ohio Sides with Injection-Well Operator in Takings Case

By Ilya Batikov

On September 23, 2020, the Supreme Court of Ohio ruled that fact issues prevented a lower court from granting summary judgment to the State of Ohio on a takings claim involving the indefinite suspension of a Trumbull County injection well.  See State ex rel. AWMS Water Solutions, L.L.C. v. Mertz, 2020-Ohio-4509.

Read more about this decision after the break.

In 2013, AWMS obtained permits for, and drilled, two injection wells in Trumbull County.  A few months after AWMS began injecting, two earthquakes—of 1.7 and 2.1 magnitude—occurred near AWMS’s second well (the #2 well).  Believing the earthquakes to be related to AWMS’s activities, the State’s Division of Oil and Gas Resources Management ordered AWMS to suspend operations at the wells.  The Division also required AWMS to “submit a written plan to the Division for evaluating the seismic concerns associated with the operation of” the #2 well.  Two days later, the Division issued a clarifying order that the seismic events “may have been related to AWMS’s wells.”  Later, the Division determined that the #1 well was probably unrelated to the seismicity, and allowed operations to resume at that well, but left the suspension of the #2 well in place.  AWMS then submitted a written plan for the #2 well, which the Division found to be “generic and inadequate.”

Later, AWMS and Division staff met and the Division shared that it planned to adopt a statewide policy on induced seismicity, until which time it would not address the suspension of the #2 well. In a second meeting, the Division gave AWMS a single sheet of paper with criteria that the Division was considering in evaluating induced seismicity in the state.  The Division also told AWMS that any implementation of a state policy on induced seismicity was months away.  AWMS eventually submitted a second written plan addressing the Division’s proposed criteria.  The Division never responded to AWMS or otherwise lifted its suspension order on the #2 well.

AWMS then commenced an ultimately-unsuccessful appeal to the Ohio Oil and Gas Commission.  While that appeal pended, AWMS filed a writ of mandamus with the Eleventh District Court of Appeals, alleging that the State’s action effected a taking of its property for which the State owed just compensation.  The Eleventh District ruled for the State on summary judgment, finding that the State did not effect a total taking of AWMS’ property because AWMS could still operate the #1 well.  Nor did the State effect a partial taking because the suspension order was designed to protect the public’s health and safety from the threat of induced seismicity from the #2 well, and that AWMS’ investors were aware of the risks associated with seismic activity in the Youngstown area and with AWMS’s injection wells.

AWMS appealed the Eleventh District’s decision and the Supreme Court of Ohio reversed, finding that fact questions precluded the State from prevailing on summary judgment on AWMS’s claims for a total and partial taking of its property rights.

First, the Court disagreed that the State’s actions were a mere “temporary” taking because the State had not ordered the well permanently plugged, and that AWMS could have remedied the situation by submitting another restart plan.  “The state’s attempt to characterize the suspension of operations at well #2 as temporary founders on its open-endedness.”  There was no practical difference between a plugged well and a suspended well: Neither well is usable.  And there was no telling whether the State would choose to ignore, or disapprove, yet another restart plan should AWMS file one.

Second, AWMS’s expert witness submitted a report that the revenues generated by the sole remaining well, the # 1, did not cover AWMS’ operating expenses because of the shortfall caused by the suspension of the #2 well.  So as a whole, AWMS’ venture was not economically viable.   The Division disagreed with that report, contending that it was well-capacity limitations, and not the suspension order, that were the culprits of AWMS’ declining revenues.  But on a motion for summary judgment, the widely-differing conclusions created fact questions that the lower court should not have summarily resolved in the State’s favor.

The Court also reversed the lower court’s decision to grant summary judgment on AWMS’s partial taking claim under the Penn Central test, which requires a court to consider (1) the economic impact of the regulation on the claimant, (2) the extent to which the regulation has interfered with distinct investment-backed expectations, and (3) the character of the government action.  Here, the Court faulted the lower court for failing to consider the economic impact on AWMS from the State’s suspension order.  Given the “significant numerical disparities in the results of the economic impact analyses between AWMS’s and the state’s expert witnesses,” the lower court could not resolve the “economic-impact” prong in the State’s favor.  Nor could AWMS have reasonably anticipated when it acquired its leasehold rights that the State would take an inconsistent regulatory approach to induced seismicity or fail to respond to AWMS’s multiple restart plans, under the second prong.  The Court did find for the State on the third prong—the character of the government action—finding that there was no genuine issue that the suspension order was directed toward protecting the public health’s and safety.

On remand, the Court directed the lower court to weigh the differing evidence on the economic impact that AWMS suffered from the state’s suspension order to determine if AWMS suffered a total or partial taking of its property rights.

Read the full decision here.

Tags: Injection, Ohio, UIC, Oil and Gas, Class 2 Well, Energy

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