Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 1 of 32 PageID #: 351 IN THE UNITED STATES DISTRICT COURT FOR THE THE NORTHERN NORTHERN DISTRICT DISTRICT OF OF WEST WEST VIRGINIA VIRGINIA FOR )) )) )) Plaintiff, Plaintiff, )) )) v. v. )) )) AUSTIN CAPERTON, AUSTIN CAPERTON,in inhis hisofficial officialcapacity capacityasas )) )) Secretary Secretary of of the the West West Virginia Virginia Department Department of of ) Environmental Environmental Protection, Protection, ) Defendant. Defendant. )) )) EQT EQT PRODUCTION PRODUCTION COMPANY, COMPANY, Civil Action Action No. No. 1:18-cv-72 1:18-cv-72 Civil Judge Judge Irene Irene M. M. Keeley Keeley EQT MEMORANDUM OF EQT PRODUCTION PRODUCTION COMPANY’S COMPANY'S MEMORANDUM OF LAW LAW IN OPPOSITION OPPOSITION TO TO SECRETARY SECRETARY CAPERTON’S CAPERTON'S MOTION IN MOTION TO TO DISMISS DISMISS Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 2 of 32 PageID #: 352 INTRODUCTION INTRODUCTION The once private private parties parties strike strike aa bargain, bargain, aa The Contract Contract Clause Clause expressly expressly limits limits state state power: power: once State ensure that that its its preferred preferred party party achieves achieves aa more more favorable favorable outcome. outcome. State cannot cannot intervene intervene just just to to ensure West Virginia Virginia transgressed transgressed that that limitation limitation when when it it enacted—and West enacted—and again again when when it it amended—its amended—its FlatFlatRate Statute, Statute, W. W. Va. Va. Code Code §§ 22-6-8. 22-6-8. Rate Although the West Virginia Virginia Legislature Legislature invoked police power power when passing the the FlatFlatAlthough the West invoked the the police when passing Rate Statute, the State State is is meddling meddling in in private private contracts contracts because because the the Rate Statute, the the purpose purpose of of the the law law is is clear: clear: the Legislature The Flat-Rate Flat-Rate Statute Statute rewrites rewrites critical critical payment payment terms terms in in Legislature prefers prefers one one party party to to the the other. other. The freely negotiated by requiring requiring EQT EQT to to pay pay aa royalty royalty calculated calculated as as aa percentage percentage freely negotiated oil oil and and gas gas leases leases by of the of the sales sales price price of of the the natural natural gas gas it it extracts, extracts, rather rather than than the the flat, flat, periodic periodic sum sum to to which which the the parties parties agreed. In Inother otherwords, words, West West Virginia Virginia decided decided that that the the lessors lessors had had not not made made lucrative lucrative enough enough agreed. deals and The Flat-Rate Flat-Rate Statute Statute thus deals and simply simply shifted shifted the the fruits fruits of of the the bargain bargain to to them. them. The thus falls falls squarely squarely within the prohibition. within the Contract Contract Clause’s Clause's prohibition. Because the the Flat-Rate Flat-Rate Statute Statute cannot cannot withstand withstand Contract Contract Clause Clause scrutiny, scrutiny, the the Secretary Secretary Because tries to to camouflage camouflage itit in facts not not before before the the Court Court and and in in inapplicable inapplicable law. Remarkably, the the tries in facts law. Remarkably, Secretary Rather than than confronting Secretary fails fails to to cite cite the the Complaint Complaint at at all all in in his his discussion discussion of of the the merits. merits. Rather confronting the facts facts as as alleged, alleged, the the Secretary Secretary mischaracterizes mischaracterizes case law and and historical historical sources sources to to suggest suggest the case law erroneously that On the the law, law, the the Secretary Secretary cites erroneously that this this case case has has already already been beendecided. decided. On cites the the State’s State's police power power to to eliminate eliminate "windfall “windfall profits" profits” in in attempting attempting to to justify justify the the Flat-Rate Flat-Rate Statute, Statute, but he police but he fails to fails to engage engage with with the the circumscribed circumscribed nature nature of of that that power, power, or or to to confront confront that that his his argument argument would would require the Further, the the Secretary Secretary mistakenly mistakenly suggests require the Court Court to to make make factual factual findings findings in in his his favor. favor. Further, suggests that rational-basis rational-basis scrutiny scrutiny applies applies to case. that to this this case. 1 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 3 of 32 PageID #: 353 The On the the facts facts as as alleged alleged in in the the Complaint, Complaint, the the Flat-Rate Flat-Rate The Court Court should should not not be be fooled. fooled. On Statute Put simply, simply, the the Constitution Constitution prevents prevents West West Virginia Virginia from from Statute violates violates the the Contract Contract Clause. Clause. Put doing what did here: here: interfering interfering in in private private contracts contracts for for the the purpose purpose of of picking picking winners winners and and doing what it it did losers. EQT EQT has has pleaded pleaded sufficient sufficient facts facts to to state state aa claim, claim, and and the the motion losers. motion to to dismiss dismiss should should therefore therefore be denied. denied. be BACKGROUND BACKGROUND For more more than than aa century, century, EQT EQT has has sought sought to to extract extract natural natural gas gas from from wells wells it it operates operates in in For West Virginia Virginia under under leases that pay pay mineral mineral interest interest owners owners aa flat, flat, annual annual royalty royalty (typically (typically $100 $100 West leases that to $300 Compl. (ECF (ECF No. No. 1) 1) ¶¶ 2, 10. 10. Many Manyof of those those leases leases are are perpetual, perpetual, meaning meaning that to $300 per per well). well). Compl. In 2, that EQT pay the EQT maintains maintains the the right right to to extract extract natural natural gas—and gas—and continues continues to to pay the lessor—as lessor—as long long as as wells wells on the the land land produce Ex. A A to to Compl. Compl. (ECF (ECF No. No. 1-1) 1-1) (sample (sample lease). Lessors are are also also often often on produce gas. gas. Ex. lease). Lessors entitled to Most entitled to use use gas, gas, free free of of charge, charge, in in the the primary primarydwellings dwellingson onthe theproperty. property. Compl. Compl. ¶¶ 10. 10. Most of the royalty for of the leases leases further further provide provide for for an an additional additional in-kind, in-kind, one-eighth one-eighth royalty for any any oil oil produced produced from from the well. well. Id. Id. the During the the period period that that the the leases leases were were executed, executed, natural-gas natural-gas extraction extraction was was aa burgeoning burgeoning During industry, and the parties parties necessarily necessarily understood understood that the technology technology for for extracting extracting natural natural gas gas industry, and the that the would continue continue to to develop develop and and improve. improve. Id. Id. ¶¶ 11. 11. Thus, Thus, the the leases leases provide provide for for the the assignment assignment of would of the right right to to extract extract natural natural gas gas to to the the lessee lessee in in exchange exchange for for payment payment to to the the lessor, lessor, indicating indicating the the the parties’ awareness awareness at at the the time time of of contracting contracting that that the the gas gas had had aa marketable marketable value. value. Id. Id. The The leases leases parties' reflect the agreement that, that, while while the the royalty royalty on on oil oil would would be be volume-based, volume-based, the the royalty reflect the parties’ parties' agreement royalty for for natural gas an annual annual price price for for the the life life of of the the lease. lease. Id. Id. ¶¶ 12. 12. Such Such aa flat flat royalty royalty natural gas would would be be set set at at an apportioned risk preferences at time the the leases leases were were apportioned risk and and benefits benefits according according to to each each party’s party's preferences at the the time executed. Lessors Lessors would would receive receive aa reliable reliable payment payment for for natural-gas natural-gas production production (regardless (regardless of executed. of how how 2 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 4 of 32 PageID #: 354 quickly technology addition (in (in quickly technology developed developed or or how how fruitful fruitful such such development development proved proved to to be), be), in in addition many cases) cases) to to the many the right right to to as as much much gas gas as as they they needed needed for for their their personal personal use use (regardless (regardless of of whether whether the well well was was profitable profitable for for EQT EQT after after the the lessor lessor took took her her share). share). Id. Id. Further, Further, lessors lessors had had neither neither the the obligation obligation nor the nor the the need need to to invest invest in in research research and and development development necessary necessary to to improve improve extraction extraction and production production technologies, well was was and technologies,asas they they would would receive receivetheir their payment paymentso so long long as as the the well producing, but but regardless regardless of of the the volume volume of of its its productivity. productivity. Id. Id. EQT, bore the the producing, EQT, on on the the other other hand, hand, bore obligation to flat amount amount per per producing producing well, well, and and was was thereby thereby incentivized incentivized to to improve improve obligation to pay pay aa flat natural-gas extraction, extraction, production, production, and and marketing. marketing. Id. Id. That over the the natural-gas That is is exactly exactly what what EQT EQT did: did: over years, EQT EQT invested invested millions millions of dollars in in technology technology and and infrastructure infrastructure to grow an an integrated integrated years, of dollars to grow market for for natural gas. Id. Id. ¶¶ 13. 13. As As aa direct direct result result of of EQT's EQT’s long-term long-term investments—in investments—in which which the the market natural gas. lessors did lessors did not not participate participate and and for for which which they they bore bore no no risk—most risk—most wells wells now now produce produce more more natural natural gas than flat-rate leases leases were were executed. executed. Id. Id. gas than they they did did when when the the flat-rate Over time, as EQT Over time, as EQT began began to to collect collect the the rewards rewards of of the the risks risks it it undertook, undertook, while while the the royalty royalty payments remained most cases, cases, their their successors successors in in interest) interest) grew grew payments remained the the same, same, lessors lessors (or, (or, in in most dissatisfied with with the the terms terms to to which which they they were were bound in contract, contract, and and they they used used their their considerable considerable dissatisfied bound in political clout clout to to lobby rights under under the the leases. political lobby the the West West Virginia Virginia Legislature Legislature to to modify modify the the parties’ parties' rights leases. Id. ¶¶ 14. 14. West WestVirginia Virginia thus thusenacted enacted the the Flat-Rate Flat-Rate Statute, Statute, seeking seeking "to “to prevent prevent the the extraction, extraction, Id. production or a lease providingaa flat flat well well royalty." royalty.” W. W. Va. Va. production ormarketing marketingofofoil oilororgas gasunder under a lease. ... .. providing Code §§ 22-6-8(b). The statute statute prohibits prohibits the the issuance issuance of of permits permits for for new new wells wells subject subject to to flat-rate flat-rate Code 22-6-8(b). The leases, but provides aa mechanism the permit permit prohibition" prohibition” if if lessees lessees such such as as EQT EQT agree agree leases, but provides mechanism to to “avoid "avoid the to pay royalty in Id. §§ 22-6-8(e). 22-6-8(e). to pay an an extraction-based extraction-based royalty in place place of of the the contractually contractually agreed agreed flat flat royalty. royalty. Id. Until recently, recently, the the Flat-Rate Flat-Rate Statute Statute provided provided for for the the calculation calculation of of the the royalty royalty based based on on the Until the sale price Leggett v. EQT Production Production Co., Co., 800 850 (W. (W. sale price of of natural natural gas gas “at "at the the wellhead.” wellhead." Leggett v. EQT 800 S.E.2d S.E.2d 850 33 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 5 of 32 PageID #: 355 Va. 2017), 2017), cert. cert. denied, denied, 138 138 S. S. Ct. Ct. 472 472 (2017).1 (2017).1 InIn2018, 2018,however, however,the theLegislature Legislature amended amended the the Va. statute, requiring still higher higher royalty royalty based based on on the the "first “first unaffiliated unaffiliated sale" sale” and and statute, requiring EQT EQT to to pay pay aa still forbidding EQT that forbidding EQT from from deducting deducting the the post-production post-production expenses expenses incurred incurred to to bring bring the the gas gas to to that point of of sale. Compl. ¶¶ 17. 17. As Asaaresult, result,the thecurrent currentversion version of of the the statute statute requires requires the the royalty royalty to to be be point sale. Compl. based on on aa (higher) (higher) downstream downstream price price that that EQT EQT itself itself never never received, received, and and prohibits prohibits EQT its based EQT and and its affiliates from In affiliates from deducting deducting any any of of the the post-production post-production expenses expenses incurred incurredto togenerate generatethat thatprice. price. In essence, the current statute only conditions conditions the the issuance issuance of of new new permits permits required required to to operate operate essence, the current statute not not only wells upon upon EQT’s agreement to to pay pay aa volume-based volume-based premium premium in in lieu lieu of of the the contracted-for wells EQT's agreement contracted-for flat-rate flat-rate royalty, but the post-production post-production labors royalty, but also also assigns assigns the the lessors lessors aa share share of of the the fruits fruits of of the labors of of EQT EQT and and its affiliates. affiliates. its This second, increased, increased, and emboldened redistribution redistribution of contractual benefits forced This second, and emboldened of contractual benefits has has forced EQT bring this this suit suit to to vindicate vindicate its contractual rights. West Virginia Virginia has has twice twice rewritten rewritten the the EQT to to bring its contractual rights. West unambiguous terms EQT now now seeks seeks aa declaration declaration from from this this Court Court that that the the unambiguous terms of of EQT’s EQT's contracts. contracts. EQT Flat-Rate Statute Statute violates violates the the Contract Contract Clause Clause of United States States Constitution. Constitution. Flat-Rate of the the United STANDARD STANDARD OF OF REVIEW REVIEW To survive aa motion claim to to relief relief that that is is To survive motion to to dismiss, dismiss,aa complaint complaintneed needonly only“‘state 'state aa claim plausible on Assessor of of Ohio Ohio County, County, 777 F.3d 186, 186, 192 192 (4th (4th Cir. Cir. 2015) 2015) plausible on its its face.’” face.'" Covey Covey v. v. Assessor 777 F.3d (quoting Ashcroft Ashcroft v. In considering considering aa motion motion to to dismiss, dismiss, aa court court (quoting v. Iqbal, lqbal, 556 556 U.S. U.S. 662, 662, 678 678 (2009)). (2009)). In must accept accept as as true true all all factual factual allegations allegations in in the the complaint complaint and and draw draw all all reasonable reasonable inferences inferences in in must the plaintiff’s favor. See See id. id. the plaintiff's favor. 1 The "at “at the the wellhead" wellhead” price price isis the the interstate interstate pipeline pipeline index index price, price, less less the the post-production post-production expenses The incurred to gather, compress, transport, transport, and and market market the the gas. gas. Compl. ¶ 16. 1 4 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 6 of 32 PageID #: 356 ARGUMENT The was enacted enacted "to “to encourage encourage trade The Contract Contract Clause, Clause, U.S. U.S. Const. Const. Art. Art. I, I, §§ 10, 10, cl. cl. 1, 1, was trade and and credit by by promoting promoting confidence confidence in the stability stability of of contractual contractual obligations." obligations.” United Trust credit in the United States States Trust Co. 431 U.S. During the the Revolutionary Revolutionary era, era, state state legislative legislative schemes schemes Co. v. v. New New Jersey, Jersey, 431 U.S. 1, 1, 15 15 (1977). (1977). During to relieve relieve debt debt obligations—to obligations—to “chang[e] relative situation situation of debtor and and creditor"—were creditor”—were so so to "chang[e] the the relative of debtor abundant that they imperiled imperiled commerce commerce and threatened the very existence existence of of credit. credit. Ogden abundant that they and threatened the very Ogden v. v. Saunders, 25 25 U.S. U.S. 213, 213, 354-355 354-355 (1827). More than than that, that, such such legislative legislative mischief mischief disrupted disrupted the the Saunders, (1827). More ordinary functioning ability to to rely rely on on contractual contractual promises. Id. ordinary functioning of of society society and and destroyed destroyed citizens’ citizens' ability promises. Id. Thus, at the the Constitutional Constitutional Convention, Convention, the “inspire aa general general Thus, at the Contract Contract Clause Clause was was added added to to "inspire prudence and The Federalist Federalist No. No. prudence and industry, industry, and and give give aa regular regular course course to to the the business business of of society.” society." The 44 (James (James Madison). Madison). No Nolonger longercould couldfluctuating fluctuating state statepolicy policyupend upendorderly orderly commercial commercial 44 intercourse built At its its core, core, the the Contract Contract Clause Clause bars bars aa intercourse built upon upon aa foundation foundation of of private private promises. promises. At State its policy" policy” the the alteration alteration of of contractual contractual obligations obligations and and from from abusing abusing its State from from “adopt[ing] "adopt[ing] as as its its police power power only only to to improve improve the the situation situation of of one one contracting contracting party party relative relative to the other. other. Home Home police to the Building & Blaisdell, 290 290 U.S. As the the Founders Founders recognized, recognized, laws Building & Loan Loan Ass’n Ass'n v. v. Blaisdell, U.S. 398, 398, 439 439 (1934). (1934). As laws with such such an an effect to the the first of the with effect are are “contrary "contrary to first principles principles of the social social compact, compact, and and to to every every principle principle of sound The Federalist Federalist No. No. 44 44 (James (James Madison). Madison). of sound legislation.” legislation." The Of course, course, the the Contract Contract Clause Clause does does not not forbid forbid States States from from enacting enacting laws laws designed designed to to Of remedy aa broad broad societal societal problem, problem, even even if if those those laws laws incidentally incidentally affect affect contracts. contracts. See See Allied Allied remedy Structural Steel v. Spannaus, Spannaus, 438 438 U.S. U.S. 234, 234, 240-241 240-241 (1978). Requiring such such aa "legitimate “legitimate Structural Steel Co. Co. v. (1978). Requiring public purpose" purpose” for for laws laws that that the public that impair impair contractual contractual obligations obligations “guarantees "guarantees that the State State is is exercising exercising its police Energy Reserves Reserves Group, Group, Inc. Inc. its police power, power, rather rather than than providing providing aa benefit benefit to to special special interests.” interests." Energy v. Kansas Kansas Power Power & & Light Light Co., 459 U.S. But the the Supreme Supreme Court Court has has made made clear clear v. Co., 459 U.S. 400, 400, 412 412 (1983). (1983). But 55 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 7 of 32 PageID #: 357 that, "if “if the the Contract Contract Clause Clause means Allied Structural Structural Steel, 438 U.S. U.S. at at 250-251, 250-251, that, means anything anything at at all,” all," Allied Steel, 438 it must it must prevent prevent States States from from meddling meddling in in private private contracts contracts merely merely to to “chang[e] "chang[e] the the relative relative situation situation of [the [the parties]" parties]” in in aa manner manner devoid devoid of of any any broader broader social social purpose, purpose, Blaisdell, Blaisdell, 290 290 U.S. U.S. at at 428. 428. of Even Allied Structural Structural Steel, Steel, 438 438 U.S. U.S. at at 243 243 Even when when “the "the public public welfare welfare is is invoked invoked as as an an excuse,” excuse," Allied (internal quotation law and and (internal quotation marks marks omitted), omitted), courts courts must must examine examine the the true true purpose purpose of of the the state state law determine ififititisis“directed right andand notnot . .. . .. [to] [to]the thepublic public interest," interest,” determine "directedmerely merelytoward towarda private a private right Veix Ward Building Building & & Loan Loan Ass Ass’n, 32, 41 41 (1940). (1940). 310 U.S. U.S. 32, Veix v. v. Sixth Sixth Ward 'n, 310 The Flat-Rate Statute law that that the the Contract Contract Clause Clause was was intended intended to to The Flat-Rate Statute is is exactly exactly the the type type of of law forbid. ItItsingles singles out out aa particular particular type type of of natural natural gas gas lease, lease, held held by by aa small small group group of of lessors, lessors, and and forbid. targets those is is thethe policy of of thisthis state . .. . .. to to prevent prevent targets those preexisting preexistingleases, leases,baldly baldlydeclaring declaring“that "thatit it policy state the extraction, extraction, production W. Va. Va. Code Code §§ 2222the production or or marketing marketing of of oil oil or or gas gas under under aa [flat-rate] [flat-rate] lease.” lease." W. 6-8(b). West Virginia “adopt[ed] as as its its policy . .. . .. the thedestruction destruction 6-8(b). West Virginiacould couldnot nothave havemore moreclearly clearly "adopt[ed] policy of contracts.” Blaisdell, 290 290 U.S. And itit adopted adopted that that policy policy because, because, in of contracts." Blaisdell, U.S. at at 439. 439. And in the the Legislature’s Legislature's view, flat-rate flat-rate leases compensation” to to aa small small group group of of lessors, lessors, W. W. Va. Va. Code view, leases provide provide “inadequate "inadequate compensation" Code confirming that that the the law §§ 22-6-8(a)(2)—thus 22-6-8(a)(2)—thus confirming law is is aa naked naked attempt attempt to to “chang[e] "chang[e] the the relative relative situation” situation" of the the contracting contracting parties, Blaisdell, 290 290 U.S. U.S. at at 428. 428. of parties, Blaisdell, Remarkably, the statute itself itself its its unease unease regarding regarding the the Remarkably, the Legislature Legislaturesignaled signaledinin the the statute constitutional validity statutory scheme, scheme, preemptively preemptively asserting enacted the the statute statute constitutional validity of of the the statutory asserting that that it it enacted with "full[] “full[] cognizan[ce]" cognizan[ce]” of W. Va. Va. Code Code §§ 2222with of the the limitations limitations imposed imposed by by the the Contract Contract Clause. Clause. W. 6-8(a)(4). And though, though, like like many many clever clever legislatures legislatures before before it, it, the the West West Virginia Virginia Legislature Legislature 6-8(a)(4). And included aa token of its its police to the included token invocation invocation of police power power and and vaguely vaguely alluded alluded to the effects effects of of flat-rate flat-rate leases leases on "the “the economy economy of 22-6-8(a)(2), (4), Legislature made bones about about what what on of the the State,” State," id. id. §§ 22-6-8(a)(2), (4), the the Legislature made no no bones 66 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 8 of 32 PageID #: 358 it was was doing: doing: rewriting rewriting private private contracts contracts to to benefit benefit aa favored favored special-interest As we we will will it special-interest group. group. As now explain, explain, that that is is exactly exactly what prohibits. now what the the Contract Contract Clause Clause prohibits. I. I. THE SECRETARY SECRETARY IS NOT ENTITLED ENTITLED TO TO DISMISSAL DISMISSAL OF OF EQT'S EQT’S THE IS NOT CONTRACT CLAUSE CLAIMS CLAIMS CONTRACT CLAUSE Under the the Contract Contract Clause, relevant inquiry whether the State has has validly validly exercised exercised Under Clause, the the relevant inquiry is is whether the State its police police power power in in furtherance furtherance of broad, societal societal goal goal or or whether whether it it has has interfered interfered with with private private its of aa broad, contracts to to aid See United 431 U.S. A state state law law violates contracts aid aa particular particular group. group. See United States States Trust, Trust, 431 U.S. at at 21-22. 21-22. A violates the Contract Contract Clause (1)the thelaw lawoperates operatesasasa a"substantial “substantialimpairment" impairment” of of aacontractual contractual the Clause if: if: (1) relationship; (2) (2) is is not relationship; not supported supported by by aa “significant "significant and and legitimate legitimate public public purpose”; purpose"; and and (3) (3) “‘is "`is [not] [not] based upon or isisnot not"`of “‘ofaacharacter characterappropriate appropriate to to the the public public purpose purpose based upon reasonable reasonable conditions’” conditions' or justifying the Energy Reserves Reserves Group, Group, 459 459 U.S. U.S. at at 411-412 411-412 (quoting (quoting justifying the legislation’s legislation's adoption.’” adoption.'" Energy United 431 U.S. United States States Trust, Trust, 431 U.S. at at 22 22 (alterations (alterations omitted)). omitted)). The Complaint adequately First, the the Flat-Rate Flat-Rate Statute Statute The Complaint adequately pleads pleadseach each of of these these elements. elements. First, substantially impairs contractual obligation rewriting an express payment payment term, term, and and substantially impairs EQT’s EQT's contractual obligation by by rewriting an express requiring EQT EQT to to pay pay more than it it agreed See Compl. Compl. ¶¶ 3-4,14-19. 14-19.Second, Second,West West Virginia Virginia requiring more than agreed to to pay. pay. See I 3-4, lacks any the Legislature Legislature candidly candidly admitted admitted in in the the statute statute itself itself that that its its lacks any broad broad social social justification: justification: the motivation was was to to correct of the the leases leases to to aa narrow narrow group group of of preferred preferred parties, parties, the the motivation correct the the “unfairness” "unfairness" of flat-rate lessors. Id. 'Irlf ¶¶ 18, flat-rate lessors. Id. 18,20, 20,42, 42,54. 54. Finally, Finally, the the justification justification that that West West Virginia Virginia conjures conjures up up is is neither reasonable rather than than eliminating eliminating "windfall “windfall profits," profits,” the the neither reasonable nor nor appropriate appropriate to to its its purpose: purpose: rather statute creates creates windfall windfall profits profits in in favor favor of by providing statute of lessors lessors by providing them them aa far far higher higher royalty royalty than than they they bargained for, and even even assigning assigning them them aa share share of of revenues revenues generated generated from from the the post-extraction post-extraction bargained for, and operations of Because EQT EQT has has plausibly plausibly pleaded pleaded that that the the Flat-Rate operations of EQT EQT and and its its affiliates. affiliates. Because Flat-Rate Statute Statute fails on all counts, counts, and and the the Secretary Secretary has has failed failed to to meet meet his his significant significant burden burden of of establishing establishing that that fails on all 77 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 9 of 32 PageID #: 359 the statute, statute, as as aa matter matter of of law, law, survives survives Contract Contract Clause Clause review, review, the the Complaint Complaint is is entitled entitled to to the proceed. proceed. A. A. EQT Has Has Pleaded Pleaded Sufficient Sufficient Facts Facts To To Demonstrate Demonstrate That West Virginia's Virginia’s FlatFlatEQT That West Rate Statute Statute Substantially Contractual Rights Rate Substantially Impairs Impairs EQT’s EQT's Contractual Rights A state state law law substantially A substantially impairs impairscontractual contractualobligations obligationswhen whenit it“superimpose[s] "superimpose[s]. . .. . obligations upon upon [a obligations [a party] party] conspicuously conspicuously beyond beyond those those that that it it had had voluntarily voluntarily agreed agreed to to undertake.” undertake." Allied Structural Structural Steel, Steel, 438 438 U.S. U.S. at at 240. 240. AAstate statelaw lawthus thusconstitutes constitutesaasubstantial substantial impairment impairment Allied where it it interferes interferes with with the the parties' parties’reasonable reasonable expectations, expectations, abridges abridges contractual contractual rights rights that that where induced the contract in the first first place, place, or or prevents prevents aa party party from from "safeguarding “safeguarding or or induced the parties parties to to contract in the reinstating” its its rights. Sveen v. Melin, 138 138 S. S. Ct. see also also Baltimore Baltimore Teachers Teachers reinstating" rights. Sveen v. Melin, Ct. 1815, 1815, 1822 1822 (2018); (2018); see Union Mayor of of Baltimore, Baltimore, 66 F.3d The Flat-Rate Flat-Rate Statute Statute requires requires Union v. v. Mayor F.3d 1012, 1012, 1017 1017 (4th (4th Cir. Cir. 1993). 1993). The EQT leases—a term term on on which EQT to to alter alter aa specific, specific, bargained-for bargained-for payment payment term term in in EQT’s EQT's leases—a which EQT EQT relied relied for decades—by agreement to to pay pay more more than than for decades—by conditioning conditioning the the issuance issuance of of new new permits permits on on EQT’s EQT's agreement the leases leases require. Compl. I¶¶3-4, 3-4,14-19. 14-19.ByByany anymeasure, measure,the theFlat-Rate Flat-RateStatute Statutesubstantially substantially the require. Compl. impairs EQT’s contractual obligations. obligations. impairs EQT's contractual When it it executed executed the the leases, leases, EQT EQT agreed agreed to pay aa flat, flat, periodic periodic fee fee for for the the right right to to extract extract When to pay natural gas, gas, regardless regardless of the volume volume of of gas gas extracted. extracted. Id. Id. ¶¶ 10. 10. The The lessors lessors agreed agreed to to accept accept that that natural of the payment, as as well well as as (in gas to payment, (in many many cases) cases) free free natural natural gas to use use in in the the primary primary dwellings dwellings on on the the property. property. Id.'Irlf ¶¶ 10, 10, 12. 12. The Theleases leases provide provide that that the the royalty royalty for for natural natural gas gas is is set set at at aa specific specific price price for for the the Id. life of decision that that the life of the the lease—an lease—an agreement agreement that that necessarily necessarily reflects reflects the the parties’ parties' decision the lessors lessors would would enjoy the stability and fixed payment payment while while EQT EQT would would bear the benefits benefits and and risks risks enjoy the stability and certainty certainty of of aa fixed bear the of extracting extracting natural natural gas. gas. Id. Id. Now Now that that EQT EQT is is in in position position to to reap reap the the rewards rewards of bargain after after of of its its bargain decades of development and the flat, flat, annual annual payment payment decades of development and investment, investment, West West Virginia Virginia has has decreed decreed that that the does not not "adequately" “adequately” compensate W. Va. Va. Code Code §§ 22-622-6does compensate the the lessors lessors who who negotiated negotiatedthe theleases. leases. W. 88 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 10 of 32 PageID #: 360 8(a)(2). West Virginia Virginia has has thus thuseffectively effectively altered altered the the payment payment term term by by legislative legislative fiat, fiat, 8(a)(2). West withholding necessary necessary permits permits unless unless EQT EQT accedes accedes to to the the payment payment structure imposed by by the withholding structure imposed the State. State. By changing changing the the express express payment payment term term in in these these private private contracts, contracts, the the Flat-Rate Flat-Rate Statute Statute By substantially impairs leases. substantially impairs the the leases. The Flat-Rate Statute Statute is is indistinguishable indistinguishable from statutes the Supreme Court Court has has The Flat-Rate from other other statutes the Supreme invalidated. For For example, example, in in Allied Allied Structural the Court invalidated. Structural Steel, Steel, the Court held held that that aa law law imposing imposing aa “pension "pension funding charge” certain companies companies and and accelerating accelerating the timeline for for vesting vesting employees' employees’ funding charge" on on certain the timeline benefits substantially substantially impaired contracts because because the the law law "superimpose[ed] “superimpose[ed] pension pension benefits impaired pension pension contracts obligations .. .. . conspicuously . conspicuouslybeyond beyondthose thosethat that[the [thecompanies] companies]had hadvoluntarily voluntarily agreed agreed to to obligations undertake.” 438 438 U.S. U.S. at at 239-240. 239-240. Because Becausethe thelaw lawretroactively retroactively modified modified aa "basic “basic term term of of the the undertake." pension contract"—the contract”—the compensation companies had agreed to to pay pay their their employees—it employees—it pension compensation that that the the companies had agreed worked aa substantial substantial impairment. Id. at at 246. 246. worked impairment. Id. Courts across across the the country country have Allied Structural guidance. In In Baltimore Baltimore Courts have followed followed Allied Structural Steel’s Steel's guidance. Teachers supra, the the Fourth Fourth Circuit Circuit held held that that aa law law temporarily temporarily reducing reducing public public employee employee Teachers Union, Union, supra, salaries imposed right to salaries imposed aa substantial substantial obligation obligation on on union union contracts contracts because because “the "the right to compensation compensation at at the contractually contractually specified Similarly, in in the specifiedlevel” level"was was“central” "central"totothe theagreement. agreement. 66 F.3d F.3d at at 1018. 1018. Similarly, Southern California City of of Santa Santa Ana, Ana, 336 336 F.3d F.3d 885 885 (2003) (2003) (per (per curiam), curiam), the the Ninth Ninth Southern California Gas Gas Co. Co. v. v. City Circuit struck an ordinance ordinance imposing imposing charges company was was already already Circuit struck down down an charges for for permits permits that that aa company contractually entitled financial contractually entitled to to because because the the ordinance ordinance “indefinitely "indefinitely increase[d] increase[d] the the [company’s] [company's] fmancial obligations beyond in the the contract. contract. Id. Id. at at 892. And in in Western obligations beyond those those specified” specified" in 892. And Western National National Mutual Mutual Insurance v. Lennes, 46 46 F.3d F.3d 813 813 (1995), (1995), the the Eighth Eighth Circuit Circuit held held that that aa law law that that retroactively retroactively Insurance v. Lennes, redistributed excess originally entitled entitled to to redistributed excess insurance insurance premiums premiums away away from from companies companies that that were were originally them constituted constituted an substantial” impairment. impairment. See See id. id. at at 819-820. 819-820. them an “obviously "obviously substantial" 99 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 11 of 32 PageID #: 361 The facts pleaded pleaded in in the the Complaint Complaint establish establish that, that, like like those those laws, laws, the the Flat-Rate Flat-Rate Statute Statute The facts imposes “direct, the imposes "direct, immediate immediate and and measureable” measureable" costs costs on on an an essential essentialprovision provisionof ofEQT’s EQT's leases: leases: the payment term term of of aa lease lease establishing establishing royalties royalties for for natural-gas natural-gas extraction. extraction. So. So. Cal. Cal. Gas, Gas, 336 336 F.3d F.3d payment at 892. 892. The TheSecretary Secretary would would have have the the Court Court conclude conclude that that the the payment payment terms terms of of the the leases leases are are at somehow ancillary Mem. of of Law Law in in Supp. Supp. of of Mot. Mot. to to Dismiss Dismiss ("Mem.") (“Mem.”) (ECF (ECF somehow ancillary to to the the transaction. transaction. Mem. No. 18) 18) at at 99 (arguing the payment terms of of the No. (arguing that that the the Flat-Rate Flat-Rate Statute Statute “merely "merely modifies” modifies" the payment terms the leases). leases). But the the Secretary cannot with with aa straight But Secretary cannot straight face face dispute dispute that that the the compensation compensation that that EQT EQT agreed agreed to to pay pay lessors in contract.” Id. Id. The The lessors in exchange exchange for for the the right right to to extract extract natural natural gas gas is is aa “basic "basic term term of of the the contract." object of of the the leases leases is is the the development development of and the the payment payment terms the leases leases object of natural natural gas gas and and oil, oil, and terms of of the reflect the agreements regarding Because the the Flat-Rate Flat-Rate Statute Statute imposes imposes aa reflect the parties’ parties' agreements regarding those those rights. rights. Because different payment beyond” that that to to which which EQT different payment scheme—one scheme—one “conspicuously "conspicuously beyond" EQT agreed—it agreed—it constitutes constitutes substantial impairment. impairment. aa substantial Faced with First, Faced with this this obvious obvious logic, logic, the the Secretary Secretary seeks seeks to to obfuscate obfuscate the the relevant relevant inquiry. inquiry. First, the Secretary Secretary introduces introduces aa factual factual assertion, assertion, extraneous extraneous to to the the pleadings, that the the amount amount EQT EQT was the pleadings, that was willing to to pay pay for for the the right right to to extract extract natural natural gas gas was was not not the the "primary “primary consideration" consideration” or or "central “central willing undertaking” of That assertion assertion has has no no basis basis in in the the record; record; in in fact, fact, it it is is contradicted contradicted by undertaking" of the the leases. leases. That by the sample sample lease lease attached attached to the Complaint, Complaint, which which shows shows that that the the flat-rate flat-rate leases leases are are short, short, the to the standardized contracts, few terms terms tailored tailored to to reflect reflect the the standardized contracts, with with the the payment payment terms terms being being one one of of the the few parties’ specific specific bargain. bargain. See See Garris Garris v. Hanover Insurance, Insurance, 630 630 F.2d F.2d 1001, 1001, 1006 1006 (4th (4th Cir. Cir. 1980) 1980) parties' v. Hanover (holding that specific "bargained" “bargained” over over contract contract provision provision "must “must be be accounted accounted aa critical critical feature feature (holding that aa specific of [the] [the] total total contractual contractual relationship[]”). further contradicted contradicted by by longstanding longstanding case case law law of relationship[]"). ItIt isis further recognizing the that, in in aa lease lease providing providing for for the the extraction extraction of of oil oil and and gas gas in in exchange exchange recognizing the obvious: obvious: that, for royalties, element to to be be for royalties, the the provision provision of of mineral mineral rights rights in in exchange exchange for for royalties royalties is is aa “material "material element 10 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 12 of 32 PageID #: 362 considered in interpretation of contract.” Ohio Greenleaf, 99 S.E. 274, 274, 278 278 considered in the the interpretation of the the contract." Ohio Fuel Fuel Co. Co. v. v. Greenleaf 99 S.E. (W. Va. Va. 1919). 1919). More Morebroadly, broadly, the the notion notion that that monetary monetary consideration consideration is is not not aa fundamental fundamental term term (W. of most Indeed, that that notion notion is own of most any any contract contract begs begs economic economic reason. reason. Indeed, is belied belied by by West West Virginia’s Virginia's own action in the Legislature Legislature here here deemed deemed the the payment payment terms terms of of these these action in enacting enacting the the Flat-Rate Flat-Rate Statute: Statute: the leases to to be leases be so so critical critical so so as as to to require require state state intervention, intervention, purportedly purportedly in in service service of of aa public public purpose, purpose, to shift shift them them in in favor favor of of the the lessors. lessors. to Again seeking seeking to to resist resist the the common-sense common-sense proposition proposition that that rewriting rewriting an an express express payment payment Again term constitutes constitutes aa substantial substantial impairment, impairment, the Secretary and his amici weave aa narrative narrative of the term the Secretary and his amici weave of the development of of the See Mem. Mem. 17-18; 17-18; Br. Br. of of West development the natural-gas natural-gas industry. industry. See West Virginia Virginia Land Land and and Mineral Mineral Owners’ Ass’n as amicus (ECF No. Owners' Ass'n as amicus curiae curiae (ECF No. 34) 34) at at 5-9; 5-9; Br. Br. of of West West Virginia Virginia Surface Surface Owner’s Owner's Rights Rights Organization as curiae (ECF (ECF No. 6-8. Specifically, Specifically, they they contend contend that that the the original original Organization as amicus amicus curiae No. 24) 24) at at 6-8. contracting parties contracting parties did did not not consider consider the the natural-gas natural-gas royalty royalty provisions provisions of of aa lease lease for for the the “right "right of of drilling .. . .. for . for Natural Gas,”Compl., Compl.,Ex. Ex.A, A,totobe beaacentral central part part of of the the contract. contract. As As aa drilling Natural Gas," preliminary matter, historical theorizing theorizing and and factual factual assertions assertions contradict contradict the the facts facts preliminary matter, the the Secretary’s Secretary's historical asserted in Complaint. At At best, best, the thesources sources the the Secretary Secretary cites cites raise raise factual factual questions questions that that asserted in the the Complaint. cannot be be resolved at this See Fayetteville Commercial Builders, Builders, Inc., cannot resolved at this stage. stage. See Fayetteville Investors Investors v. v. Commercial Inc., 936 936 F.2d F.2d 1462, 1472 1472 (4th (4th Cir. Cir. 1991) 1991) (noting, (noting, in the context context of of aa Rule Rule 12(b)(6) 12(b)(6) motion, motion, that that "[t]he “[t]he Fourth Fourth 1462, in the Circuit [has] consistently held district court court [cannot] [cannot] act upon facts facts alleged alleged or or proven proven Circuit [has] consistently held that that the the district act upon beyond what what [is] [is] stated stated in in aa complaint" complaint” (internal (internal quotation quotation marks marks omitted)). omitted)). beyond As the the Secretary Secretary readily readily admits, admits, moreover, moreover, natural had substantial substantial value value when when the the As natural gas gas had leases were were executed. executed. leases See Mem. Mem. 2 2 (noting (noting the the profitable profitable use use of of natural natural gas gas in in glassware glassware See manufacturing). That That isis reflected reflected by by the the facts facts that that EQT EQT and and the the lessors lessors assigned assigned specific specific value value to to manufacturing). natural gas gas and and that that the in many the right natural the lessors, lessors, in many cases, cases, reserved reserved the right to to take take delivery delivery of of as as much much natural natural 11 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 13 of 32 PageID #: 363 gas as as they they could could use use on on their their premises. premises. See See Compl., Compl., Ex. Theleases leasesthemselves, themselves, which which gas Ex. A. A. The specifically address rights and and obligations obligations with with regard regard to to natural-gas natural-gas extraction, extraction, belie belie specifically address the the parties’ parties' rights the Secretary's Secretary’s specious specious claim claim that that the the payment payment terms terms were agreement. the were not not central central to to the the parties’ parties' agreement. Indeed, single case Indeed, the the Secretary Secretary does does not not cite cite aa single case finding finding no no substantial substantial impairment impairment when when aa law abridges That is is probably probably because because the the cases cases in in which which the the law abridges aa specific, specific, negotiated negotiated contract contract term. term. That courts have have found impairment to to exist exist have have involved involved altogether altogether different different scenarios. courts found no no substantial substantial impairment scenarios. For example, 379 U.S. For example, in in City City of of El El Paso Paso v. v. Simmons, Simmons, 379 U.S. 497 497 (1965), (1965), Texas Texas sold sold public public lands lands through through contracts requiring If aa buyer buyer failed failed to contracts requiring modest modest down down payments payments and and annual annual interest interest payments. payments. If to pay pay interest, he State but but had had aa statutory statutory right right to to redeem redeem at at any any time. time. See See id. id. interest, he forfeited forfeited the the land land to to the the State at 499. 499. Texas Texaslater laterenacted enacted aa five-year five-year time time limitation limitation on on the the right right to to reinstatement. reinstatement. See See id. id. The at The Supreme Court concluded that the the new Supreme Court concluded that new law law did did not not substantially substantially impair impair the the contracts, contracts, on on the the ground ground that the the right right to to reinstatement reinstatement “was not the the central central undertaking undertaking of the seller seller nor nor the the primary primary that "was not of the consideration for buyer’s undertaking." undertaking.” Id. Id. at at 514. 514. As Asthe theCourt Courtexplained, explained, itit could could not not consideration for the the buyer's “seriously be be contended contended that that the the buyer buyer was was substantially substantially induced "seriously induced to to enter enter into into these these contracts” contracts" by by the right right to to reinstatement reinstatement or interpreted that be of of everlasting everlasting effect.” Id. That the or that that “he "he interpreted that right right to to be effect." Id. That makes sense, sense, because because the the object object of of those those contracts contracts was was the the sale sale of of land makes land for for money, money, not not aa tangential tangential right to reinstatement. right to reinstatement. Similarly, Charleston v. Public Service Service Commission Commission of of West West Virginia, Virginia, 57 F.3d Similarly, in in City City of of Charleston v. Public 57 F.3d 385 (1995), (1995), the the Fourth Fourth Circuit Circuit found found no no substantial substantial impairment impairment where relating to bond 385 where aa law law relating to bond obligations explicitly terms were were subject subject to change by by state state law. law. See See obligations explicitly recognized recognized that that the the contract contract terms to change id. at at 392-393. 392-393. Accordingly, Accordingly, the the parties parties could could not not reasonably reasonably rely rely on on the the legislative legislative status status quo quo as as id. it existed existed when when the the contracts contracts were were executed. executed. See See id. id. On On the the facts facts pleaded pleaded here, here, EQT EQT contracted contracted it 12 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 14 of 32 PageID #: 364 for aa specific specific payment payment term and relied relied on on that that payment payment term term for for decades.2 decades.2 See See Compl. Compl. ¶¶ 14. The for term and 14. The Flat-Rate Statute leases and and imposes imposes aa substantial substantial Flat-Rate Statute thus thus disrupts disrupts aa central central undertaking undertaking of of EQT’s EQT's leases impairment. impairment. After arguing arguing the royalty term for natural natural gas gas cannot cannot have have been been critical critical to to the the contract contract After the royalty term for because the value of of natural natural gas gas was was not not yet yetunderstood, understood, the the Secretary Secretary makes makes aa directly directly because the value contradictory argument, anticipated price that contradictory argument, contending contending that that EQT EQT should should have have anticipated price regulation regulation of of that commodity. But But despite despite the the Secretary's Secretary’s insistence insistence that that "extensive “extensive regulation regulation in in aa particular particular commodity. industry means the parties parties contracting contracting in in that that industry industry should should have have reasonably reasonably anticipated anticipated industry means that that the future regulation,” Mem. 16, 16, "a “a history history of of regulation regulation is is never never aa sufficient sufficient condition for rejecting future regulation," Mem. condition for rejecting aa challenge based the contracts contracts clause," clause,” Chrysler Kolosso Auto Auto Sales, Sales, Inc., Inc., 148 148 F.3d F.3d challenge based on on the Chrysler Corp. Corp. v. v. Kolosso 892, While heavy heavy regulation regulation of of an an industry industry might reliance on on 892, 895 895 (7th (7th Cir. Cir. 1998). 1998). While might reduce reduce parties’ parties' reliance their contractual contractual rights, “does not not automatically automatically foreclose foreclose the the possibility possibility of of contract contract their rights, it it "does impairment.” Western 46 F.3d F.3d at at 820. impairment." Western National, National, 46 820. Here, the the Secretary Secretary cannot cannot establish, establish, much at this this preliminary preliminary stage, stage, that that West West Here, much less less at Virginia’s regulatory regulatory regime indication that State would would one one day day rewrite rewrite royalty royalty Virginia's regime gave gave any any indication that the the State provisions in In order order to to reduce reduce reliance reliance interests, interests, aa State State must must have have provisions in private private oil oil and and gas gas leases. leases. In regulated the contractual subject subject matter at issue issue at at the the time time of of the the contract. contract. See, See, e.g., e.g., regulated the “particular” "particular" contractual matter at Veix, U.S. at 38; Garris, F.2d at at 1007; 1007; Equipment Equipment Manufacturers Manufacturers Institute Janklow, Veix, 310 310 U.S. at 38; Garris, 630 630 F.2d Institute v. v. Janklow, 300 F.3d Put another another way, way, "[t]he “[t]he fact fact that that some of aa commercial 300 F.3d 842, 842, 859 859 (8th (8th Cir. Cir. 2002). 2002). Put some incidents incidents of commercial 2 2 Amicus Bounty Bounty Minerals, purchased lease rights in reliance reliance the the Flat-Rate Flat-Rate Amicus Minerals, LLC LLC contends contends that that it purchased lease rights Statute’s royalty royalty provisions. (ECF No. 32). Amicus suggests suggests that Flat-Rate Statute Statute Statute's provisions. (ECF that its reliance on the Flat-Rate substantial impairment That argument argument merely merely underscores underscores somehow makes makes itit less of a substantial impairment of of EQT’s EQT's leases. leases. That EQT relied relied on the plain terms of its leases the prejudice that the Flat-Rate Statute wrought in the first place: place: EQT decades before before West Because the the State State upset upset EQT's EQT’s decades-long decades-long for many decades West Virginia Virginia upended upended them. them. Because reliance on its negotiated lease terms, the Flat-Rate Statute is a substantial impairment. 13 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 15 of 32 PageID #: 365 activity are heavily regulated the regulated regulated firm firm on on notice notice that that an an entirely entirely different different activity are heavily regulated does does not not put put the scheme of 148 F.3d F.3d at at 895. scheme of regulation regulation will will be be imposed.” imposed." Chrysler, Chrysler, 148 895. Energy Reserves Reserves Group, Kansas Power Power & & Light 459 U.S. U.S. 400 400 (1983), is not Energy Group, Inc. Inc. v. v. Kansas Light Co., Co., 459 (1983), is not to to the contrary. contrary. InInthat thatcase, case,although althoughKansas Kansasdid didnot notspecifically specificallyregulate regulate intrastate intrastate natural-gas natural-gas the prices, interstate interstate natural-gas natural-gas prices been regulated regulated for for decades. decades. Id. Id. at at 414. In fact, fact, the the "very “very prices, prices had had been 414. In existence” of of the the contractual contractual provisions provisions at at issue issue demonstrated demonstrated that the parties parties contracted contracted “against existence" that the "against the background background of Id. at at 415. 415. As Asaaresult, result, price price regulation regulation was was foreseeable foreseeable the of regulated regulated gas gas prices.” prices." Id. to the the parties parties “as the type of law Id. at at 416. 416. to "as the type of law that that would would alter alter contract contract obligations.” obligations." Id. Here, by by contrast, no history history of of regulating royalty payments Here, contrast, the the Secretary Secretary identifies identifies no regulating royalty payments before before West Virginia Virginia enacted The mere mere fact fact that that West West Virginia Virginia had had previously previously West enacted the the Flat-Rate Flat-Rate Statute. Statute. The regulated “natural gas transportation transportation and and fixed fixed aa maximum maximum price price for for selling selling natural natural regulated "natural gas and storage” storage" and gas to to end-use end-use consumers, consumers, Mem. Mem. 15-16, 15-16, does does not not give give the the State State carte carte blanche blanche to to enact enact any any law law it it gas wants. Those Thoseperipheral peripheral regulations regulations are are inadequate inadequate to to give give EQT EQT notice, notice, before before entering entering into into the the wants. leases, that that its its freely freely negotiated negotiated contractual contractual royalty terms would This is is not not to to say, say, leases, royalty terms would be be disrupted. disrupted. This as the the Secretary Secretary suggests, suggests, that that any regulation affecting leases would would be be unconstitutional. unconstitutional. as any regulation affecting EQT’s EQT's leases For example, example, EQT is subject subject to to safety safety and and environmental environmental regulations they have have an an For EQT is regulations even even ifif they incidental effect leases. Under Underthe theSecretary's Secretary’sinterpretation interpretation of of the the Contract Contract Clause, Clause, incidental effect on on its its leases. however, West Virginia could could constitutionally constitutionally enact enact any any regulation—or regulation—or even even abolish abolish outright outright however, West Virginia EQT’s contractual covenants—simply That EQT's contractual covenants—simplybecause becauseEQT EQToperates operatesininaa regulated regulatedindustry. industry. That ambitious position position is is inconsistent inconsistent with with decades decades of of Contract Contract Clause Clause jurisprudence. jurisprudence. ambitious Finally, the Secretary halfheartedly halfheartedly urges to conclude conclude that that no no substantial substantial Finally, the Secretary urges the the Court Court to impairment exists to recover recover and and impairment exists because because the the Flat-Rate Flat-Rate Statute Statute “does "does not not abolish abolish EQT’s EQT's right right to market natural Mem. 17. 17. But Butthe theFourth FourthCircuit Circuit has has squarely squarely rejected rejected that that argument, argument, stating market natural gas.” gas." Mem. stating 14 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 16 of 32 PageID #: 366 that "there “there is is plainly plainly no no requirement requirement of of total total repudiation." repudiation.” Baltimore Baltimore Teachers Teachers Union, Union, 66 F.3d F.3d at at that 1017; see see also also Energy Energy Reserves, Reserves, 459 459 U.S. U.S. at at 411 411 (noting (noting that that "Moth.' “[t]otal destruction destruction of of contractual contractual 1017; expectations is expectations is not not necessary necessary for for aa finding finding of of substantial substantial impairment”). impairment"). As the the Complaint Complaint plausibly plausibly alleges, alleges, West West Virginia Virginia has has nullified nullified an an express express payment payment term term As in private That substantial substantial impairment impairment of of aa basic basic contract contract term term triggers triggers the in private contracts. contracts. That the next next step step of of the Contract Contract Clause examination of purpose” of the the Clause inquiry, inquiry, requiring requiring aa “careful "careful examination of the the nature nature and and purpose" of the legislation. Allied Allied Structural 438 U.S. As we we will will now now explain, explain, the the Flat-Rate Flat-Rate Statute legislation. Structural Steel, Steel, 438 U.S. at at 245. 245. As Statute stumbles at at that that step step too. stumbles too. B. B. The Secretary Fails To The Secretary Fails To Demonstrate Demonstrate A A Significant Significant And And Legitimate Legitimate Public Public Purpose Purpose For For Applying Applying The The Flat-Rate Flat-Rate Statute Statute Retroactively Retroactively Any law law having having the the effect effect of of substantially substantially impairing contract must supported by Any impairing aa contract must be be supported by aa “significant and and legitimate legitimate public Energy Reserves, Reserves, 459 459 U.S. That limitation limitation "significant public purpose.” purpose." Energy U.S. at at 411. 411. That “guarantees that that the the State State is is exercising exercising its its police police power, power, rather rather than than providing providing aa benefit benefit to to special special "guarantees interests.” Id. Id. at at 412. 412. Contrary Contrary totothe theSecretary's Secretary’ssuggestion, suggestion, EQT EQT need need not not "negative “negative every every interests." conceivable basis basis which which might might support" support” the the Flat-Rate Flat-Rate Statute, Statute, as as it it would would in in an an equal-protection equal-protection conceivable case applying Mem. 22 22 (citing (citing Heller Heller v. Doe, 509 U.S. 312, 312, 320 320 (1993)). (1993)). case applying rational-basis rational-basis review. review. Mem. v. Doe, 509 U.S. The into the The Supreme Supreme Court Court has has explicitly explicitly declined declined to to import import Fifth Fifth Amendment Amendment principles principles into the Contract Contract Clause analysis. analysis. Pension Pension Benefit Benefit Guaranty R.A. Gray Gray & & Co., Co., 467 467 U.S. U.S. 717, 717, 733 733 (1984). (1984). Clause Guaranty Corp. Corp. v. v. R.A. In defer to judgment as as to In the the context context of of the the Contract Contract Clause, Clause, although although courts courts “properly "properly defer to legislative legislative judgment to the necessity necessity and and reasonableness reasonableness of particular measure[,]” Co., 431 431 U.S. U.S. at at the of aa particular measure[,]" United United States States Trust Trust Co., 23, no no deference deference is due at at this this second second step step of of the the analysis, analysis, which which considers considers whether is 23, is due whether aa law law is supported by significant and and legitimate legitimate public the first first place. place. See See Equipment Equipment supported by aa significant public purpose purpose in in the Manufacturers Institute, Davis, 602 F.3d 618, 618, 631 631 Manufacturers Institute, 300 300 F.3d F.3d at at 859; 859; United United Healthcare Healthcare Ins. Ins. Co. Co. v. v. Davis, 602 F.3d (5th Cir. Cir. 2010). 2010). Instead, Instead, the theSecretary Secretary bears bears the the burden burden of of demonstrating demonstrating to the Court's Court’s (5th to the 15 15 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 17 of 32 PageID #: 367 independent satisfaction significant and and legitimate legitimate public public purpose purpose underlies underlies the the Flat-Rate Flat-Rate independent satisfaction that that aa significant Statute. Equipment Manufacturers Manufacturers Institute, Institute, 300 300 F.3d The Secretary Secretary has has failed failed to to Statute. See See Equipment F.3d at at 859. 859. The demonstrate aa legitimate legitimate public public purpose purpose here, here, and and his his motion motion to to dismiss dismiss must must therefore therefore be be denied. denied. demonstrate The Secretary offers offers only only one one purported purported justification justification for for impairing impairing EQT's EQT’s contractual contractual The Secretary obligations: "discouraging “discouraging unfair unfair and and inadequate inadequate compensation" compensation” to to mineral mineral interest interest holders. holders. obligations: Mem. 4. He and and his his amici attempt to to dress dress up up this this justification justification as preventing “windfall Mem. 4. He amici attempt as preventing "windfall profits,” profits," see Mem. Mem. 19, The State see 19, but but the the West West Virginia Virginia Legislature Legislature gave gave away away the the game game in in the the statute statute itself. itself. The State deemed the “inadequate[,] . .. . .. unfair, unfair,[and] [and] oppressive." oppressive.” deemed the agreed-upon agreed-uponcontractual contractualpayments payments "inadequate[,] W. Va. Va. Code Code §§ 22-6-8(a)(2). 22-6-8(a)(2). W. The Secretary’s weak weak effort effort to to concoct concoct this this "justification" “justification” cannot cannot support support the the Flat-Rate Flat-Rate The Secretary's Statute’s radical impairment To begin begin with, with, States States Statute's radical impairment of of the the payment payment provisions provisionsininEQT’s EQT's leases. leases. To may abridge abridge contractual contractual obligations valid exercise exercise of Pure may obligations only only with with aa valid of the the police police power. power. Pure redistribution of from aa private private contract—just contract—just because thinks the the bargain bargain is is redistribution of the the gains gains from because the the State State thinks “unfair”—does not not constitute constitute such Beyond that, that, the the so-called so-called “windfall "unfair"—does such aa valid valid exercise. exercise. Beyond "windfall profits” profits" justification for for abrogating abrogating contract contract rights rights has has been been applied applied only only in in extraordinary extraordinary circumstances, circumstances, justification and even In and even then then only only when when supported supported by by an an otherwise otherwise significant significant and and legitimate legitimatepublic publicpurpose. purpose. In this case, case, as as the alleges—and as as this this Court Court must must accept accept as as true this the Complaint Complaint alleges—and true at at this this stage—there stage—there was was no unforeseen unforeseen windfall, foreseeable, long-term natural gas gas no windfall, only only the the foreseeable, long-term appreciation appreciation of of the the value value of of natural resulting from 11-13. West West Virginia Virginia resulting from EQT’s EQT's decades-long decades-longinvestment investmentinintechnology. technology.Compl. Compl.¶¶I 11-13. has no no power power to to rewrite rewrite private private contracts contracts solely solely to to benefit benefit aa small small but but favored favored special-interest special-interest has group. group. 16 16 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 18 of 32 PageID #: 368 1. 1. Redistributing The Not Constitute Constitute A A Redistributing The Benefits Benefits Of Of Private Private Bargains Bargains Does Does Not Legitimate Exercise Exercise Of Of The The Police Police Power Power Legitimate West Virginia Virginia does enjoy plenary plenary police exercise [of [of that that power] power] West does not not enjoy police power power when when “[the] "[the] exercise effects substantial substantial modifications private contracts." contracts.” Allied Allied Structural Structural Steel, Steel, 438 438 U.S. U.S. at at 244. 244. effects modifications of of private Even public purpose purpose that that might might clearly clearly undergird undergird aa general general exercise police power” not Even “a "a public exercise of of police power" is is not exempt from from Contract see also also United United States States Trust, Trust, exempt Contract Clause Clause limitations. limitations. Garris, Garris, 630 630 F.2d F.2d at at 1008; 1008; see 431 U.S. U.S. at at 21 21 (noting (noting that existence of 431 that “the "the existence of an an important important public public interest interest is is not not always always sufficient” sufficient" to validate validate aa substantial substantial impairment What separates separates aa valid valid exercise exercise of of the the to impairment of of contract contract rights). rights). What police power legislation designed designed to to protect protect aa “basic police power from from an an invalid invalid one one is is its its breadth: breadth: legislation "basic interest interest of of society” may may constitutionally constitutionally impair impair contracts, contracts, but but legislation legislation "for “for the the mere society" mere advantage advantage of of particular particular individuals” cannot. cannot. Blaisdell, Blaisdell, 290 290 U.S. U.S. at 445. The TheComplaint Complaint plausibly plausibly alleges alleges that that the the FlatFlatindividuals" at 445. Rate Statute Statute was was intended intended specifically specifically to advantage particular particular individuals Rate to advantage individuals who who entered entered into into aa particular type who, in the State's State’s view, view, are are not not reaping reaping enough enough rewards rewards from from their their particular type of of lease lease and and who, in the contracts. Compl. Compl. ¶¶ 22. 22. The TheSecretary Secretarycannot cannotestablish establishas as aa matter matter of of law law that that West West Virginia contracts. Virginia acted acted in the the “broad societal interest” necessary to contracts. in "broad societal interest" necessary to justify justify its its substantial substantial impairment impairment of of EQT’s EQT's contracts. See Allied Allied Structural 438 U.S. U.S. at at 249. 249. See Structural Steel, Steel, 438 The State has has redistributed redistributed the The Secretary Secretary does does not not cite cite aa single single case case in in which which aa State the benefits benefits of of That aa private private contract contract solely solely to to benefit benefit its its chosen chosen party party and and survived survived aa Contract Contract Clause Clausechallenge. challenge. That is probably probably because protectionism” does does not not constitute constitute aa valid valid use use of of the the police police power power is because “economic "economic protectionism" when it it impairs impairs preexisting preexisting contractual contractual obligations. obligations. United Healthcare, 602 Even when United Healthcare, 602 F.3d F.3d at at 631. 631. Even lesser measures lesser measures than than the the Flat-Rate Flat-Rate Statute Statute have have run run afoul afoul of of the theContract ContractClause: Clause: merely merely “leveling "leveling the playing gains and and giving the playing field field between between contracting contracting parties,” parties," much much less less taking taking one one party’s party's gains giving them them to the the other, other, is is "expressly “expressly prohibited prohibited as as aa significant significant and and legitimate legitimate public public interest." interest.” Equipment Equipment to Manufacturers Institute, Manufacturers Institute, 300 300 F.3d F.3d at at 861. 861. 17 17 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 19 of 32 PageID #: 369 That Above all, all, the the Contract Contract That understanding understanding of of the the Contract Contract Clause Clause makes makes eminent eminent sense. sense. Above Clause is concerned with parties to be able able to to rely rely on on binding binding contractual contractual Clause is concerned with balancing balancing the the need need for for parties to be obligations with States "to “to safeguard safeguard the the vital vital interests interests of of [their] [their] people." people.” obligations with the the authority authority of of States Blaisdell, 290 290 U.S. As such, such, valid valid exercises exercises of of the the police police power power are are those those that that “protect the Blaisdell, U.S. at at 434. 434. As "protect the lives, health, Id. at at 437. Such exercises exercises “for lives, health, morals, morals, comfort, comfort, and and general general welfare welfare of of the the people.” people." Id. 437. Such "for the promotion promotion of the common common weal" weal” benefit benefit the the public public generally, generally, rather rather than than narrow, narrow, special special the of the interests. Id.; Id.; see 459 U.S. U.S. at at 412 412 (explaining (explaining that that state state justifications justifications must must interests. see also also Energy Energy Reserves, Reserves, 459 have aa public public purpose). purpose). have Cases upholding upholding laws that impair impair contracts contracts uniformly uniformly involve the Cases laws that involve classic classic exercises exercises of of the police power. For example, example, promoting promoting mass mass transportation, transportation, encouraging encouraging energy energy conservation, police power. For conservation, and and protecting the environment are all justifications justifications "of “of legitimate legitimate public public concern." concern.” United States protecting the environment are all United States Trust, 431 U.S. U.S. at at 28. 28. So Sotoo tooare arecorrecting correctingimbalances imbalances between between interstate interstate and and intrastate intrastate natural natural Trust, 431 gas prices, prices, Energy Energy Reserves, Reserves, 459 459 U.S. U.S. at at 417; 417; ensuring ensuring the the financial financial integrity integrity of of aa municipality, municipality, gas Baltimore Teachers Teachers Union, and protecting from crime, crime, Bannum, Bannum, Inc. Baltimore Union, 66 F.3d F.3d at at 1019; 1019; and protecting the the public public from Inc. v. v. Town Town of of Ashland, Ashland, 922 922 F.2d F.2d 197, 197, 203 203 (4th (4th Cir. Cir. 1990). 1990). Laws do not not address address "broad “broad and and general" general” problems, problems, by contrast, fail to pass pass Laws that that do by contrast, fail to constitutional muster. Nullifying vesting vesting provisions provisions in in preexisting preexisting pension pension contracts, contracts, for for example, constitutional muster. Nullifying example, does not not target target "an “an important important general general social social problem." problem.” Allied Allied Structural Structural Steel, Steel, 438 438 U.S. U.S. at at 247. 247. does Nor does does changing changing the the circumstances circumstances under under which which preexisting preexisting insurance insurance agency agency contracts contracts can can be be Nor terminated. Garris, Likewise, States States cannot cannot enact enact laws laws benefiting benefiting only only aa small small terminated. Garris, 630 630 F.2d F.2d at at 1009. 1009. Likewise, group of of in-state in-state health health insurance insurance organizations, organizations, Davis, Davis, 602 F.3d at at 631, 631, or or require require the the forfeiture forfeiture group 602 F.3d of vested vested retirement retirement benefits, benefits, Mascio Mascio v. v. Public Public Employees Employees Retirement Retirement System, System, 160 160 F.3d F.3d 310, 310, 313 313 of (6th Cir. Cir. 1998). 1998). (6th 18 18 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 20 of 32 PageID #: 370 The West Virginia Virginia decided decided that that the the contracts The purpose purpose of of the the Flat-Rate Flat-Rate Statute Statute is is plain. plain. West contracts were were not favorable favorable enough enough to to aa specific specific class class of not of lessors, lessors, so so it it required required EQT EQT to to pay pay the the lessors lessors more more than than the parties Although the the Legislature Legislature invokes invokes its its "police “police power" power” and and suggests suggests that that the the law law the parties agreed. agreed. Although benefits the the "economy “economy of of the the State," State,” those those vague vague and and unsubstantiated unsubstantiated statements statements cannot cannot justify justify the benefits the law—especially at factual allegations allegations as as true. true. law—especially at this this early early stage, stage, when when the the Court Court must must accept accept EQT’s EQT's factual And the generic references The FlatFlatAnd the Legislature’s Legislature's generic references to to the the State’s State's economy economy are are plainly plainly pretextual. pretextual. The Rate Statute Statute does serve any any broad broad societal societal interest; does not not even even purport purport to to benefit benefit all all Rate does not not serve interest; itit does natural-gas lessors Instead, the the beneficiaries beneficiaries are are aa narrow narrow class class of of oil oil and and gas gas interest interest natural-gas lessors in in the the State. State. Instead, holders who the parties parties to to the the contracts. contracts. Worse, Worse,the theFlat-Rate Flat-RateStatute Statutedisproportionately disproportionately holders who are are the burdens EQT There burdens EQT as as the the holder holder of of the the most most unmodified unmodifiedflat-rate flat-rateleases leasesininthe theState. State. Compl. Compl. ¶¶ 5. 5. There is simply simply "no “no broad broad public public policy policy interest interest in in readjusting readjusting contractual contractual rights is rights and and obligations obligations in in prepreexisting contracts.” Equipment Manufacturers Manufacturers Institute, 300 F.3d That is is sufficient sufficient existing contracts." Equipment Institute, 300 F.3d at at 861 861 n.22. n.22. That to defeat defeat the proffered justification, justification, and and thus thus his his argument argument for for dismissal. dismissal. to the Secretary’s Secretary's proffered 2. 2. EQT Pleaded Pleaded Facts EQT Facts Establishing Establishing That That It It Is Is Not Not Collecting Collecting A A ‘Windfall’ 'Windfall' Even Even if if this this Court Court were were to to credit credit the theSecretary’s Secretary's purported purported “windfall” "windfall" justification, justification, it it would would not save save the the Flat-Rate Flat-Rate Statute. Statute. The TheSecretary Secretaryfundamentally fundamentally misunderstands misunderstands what what constitutes constitutes aa not “windfall” for for Contract Contract Clause Clause purposes. purposes. "windfall" As an an initial initial matter, matter, the the Secretary Secretary and and amici’s argument that now receiving receiving aa As amici's argument that EQT EQT is is now windfall depends depends entirely entirely on on the the unsubstantiated unsubstantiated factual factual claim, claim, which which contradicts contradicts the the Complaint, Complaint, windfall that the the parties parties did But as as the the Complaint Complaint explains, explains, that did not not foresee foresee the the eventual eventual value value of of natural natural gas. gas. But the parties parties “necessarily understood that that the the technology technology [in [in this this emergent emergent industry] the "necessarily understood industry] would would continue continue to develop develop and Compl. ¶¶ 11. 11. That Thatunderstanding understanding informed informed the the parties' parties’ agreement agreement to to to and improve.” improve." Compl. apportion the the benefits lessors opted opted for for aa reliable reliable payment payment and and no no risk, risk, and and EQT apportion benefits as as they they did: did: lessors EQT chose chose to pay pay aa royalty royalty no no matter matter how how much much gas gas it it extracted extracted in in exchange exchange for realizing any upside of its to for realizing any upside of its 19 19 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 21 of 32 PageID #: 371 technological investments. investments. Id. Id. ¶¶ 12. 12. On Onthe thefacts factsasasalleged alleged in in the theComplaint, Complaint, there there is no technological is no “windfall”—only aa contractual contractual agreement agreement creating creating an an incentive incentive for for one one party party to to develop develop the the value value "windfall"—only of natural That is of natural gas, gas, with with the the possibility possibility of of reward reward resulting resulting from from its its investment investment and and risk. risk. That is exactly exactly how the the arrangement arrangement played played out. out. Id. Id. ¶¶ 13. 13. To Tothe theextent extent that that the the Secretary's Secretary’s windfall windfall argument argument how depends on disputed facts, should deny motion to dismiss and allow the the parties parties to to depends on disputed facts, the the Court Court should deny the the motion to dismiss and allow proceed to to discovery.3 discovery.3 proceed Aside from He cites cites Energy Energy Aside from any any factual factual disputes, disputes,the theSecretary Secretaryisiswrong wrongon onthe thelaw. law. He Reserves, which which in turn cites cites United States Trust, Trust, for the existence existence of of the the "windfall “windfall profits" profits” Reserves, in turn United States for the doctrine. Mem. Mem. 19. 19. Neither Neitherofofthose thosecases casesactually actuallyapplied applied anything anything like like the the "windfall “windfall profits" profits” doctrine. justification. Indeed, Indeed,the the origins origins of of this this justification justification lie lie in in Depression-era Depression-era cases cases upholding justification. upholding changes changes to statutory statutory deficiency deficiency judgment judgment procedures. procedures. United States Trust, Trust, 431 431 U.S. The to United States U.S. at at 31 31 n.30. n.30. The “windfall profits" profits” justification justification has has never never been been applied applied in in aa case case like like this this one, "windfall one, where where aa State State simply simply decided that In fact, fact, the the "windfall “windfall profits" profits” decided that one one party party was was making making out out too too well well under under aa contract. contract. In justification has first, where where aa State State responds responds to to justification has been been applied applied only only in in two two narrow narrow circumstances: circumstances: first, crippling emergency, emergency, and created an unexpected boon aa crippling and second, second, where where the the State State itself itself created an unexpected boon for for aa contracting party. Even then, then, the the justification justification has has been been applied applied only only where where there there is is an contracting party. Even an independent independent “significant and legitimate” public The "windfall “windfall profits" profits” "significant and legitimate" public purpose purpose undergirding undergirdingthe the legislation. legislation. The 3 In order to prevail at the motion to dismiss stage on this argument, Secretary Caperton would have to establish not only that the facts alleged in Paragraphs 11-13 of the Complaint are implausible, but that the factual predicate on which he relies for application of the windfall-profits justification—that the value of natural gas was neither known nor foreseeable at the time of contracting—can be resolved resolved as a matter of Secretary Caperton Caperton seems seems to to be be arguing arguing that that the the purported purported non-foreseeability non-foreseeability of the value of natural law. Secretary gas is a fact subject to judicial notice, see Mem. 19-20, but the opposite is is true. true. The West Virginia Supreme Court, for example, has recognized that natural gas was already in use in manufacturing in the 1890s, and “plausible that the [flat-rate] lessee was aware of the burgeoning market for natural gas and that it is thus "plausible bargain” and and "arguable “arguable that that the the original original lessor lessor bore bore the the risk risk of a rise in of natural struck a very advantageous bargain" gas by accepting a fixed price for the production of it on his land.” land." McGinnis v. Cayton, 312 S.E.2d 765, 769 & n.2 (1984). 20 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 22 of 32 PageID #: 372 justification has has never never been been used used simply justification simply to to improve improve the the economic economic position position of of one one contracting contracting party party over the the other. other. over Take Blaisdell, the the Supreme leading modern-era There, Take Blaisdell, Supreme Court’s Court's leading modern-era Contract Contract Clause Clause decision. decision. There, the Supreme mortgage moratorium the Supreme Court Court upheld upheld against against aa Contract Contract Clause Clause challenge challenge Minnesota’s Minnesota's mortgage moratorium law enacted As the the Fourth Fourth Circuit Circuit has has law enacted in in the the depths depths of of the the Great Great Depression. Depression. 290 290 U.S. U.S. at at 898. 898. As recognized, Blaisdell Blaisdell "turned “turned on on the the specific specific facts When recognized, facts of of the the case.” case." Garris, Garris, 630 630 F.2d F.2d at at 1005. 1005. When the housing housing market market collapsed 1930s, creditors creditors stood reap massive, massive, unforeseen unforeseen gains the collapsed in in the the 1930s, stood to to reap gains if if they were were able able to to exercise exercise their their contractual contractual rights rights to to foreclose foreclose on on defaulted defaulted properties. properties. See See they Blaisdell, 290 U.S. at at 419. 419. That Thatisisbecause becausethe theGreat GreatDepression Depressionprevented prevented debtors debtors from from Blaisdell, 290 U.S. redeeming their the property property greatly greatly exceeded exceeded the the redeeming their defaulted defaulted mortgages, mortgages, even even when when the the value value of of the balance of of their their mortgage. See id. id. Creditors Creditors thus the balance mortgage. See thus stood stood to to gain gain aa “windfall” "windfall" upon upon foreclosure: foreclosure: the value of of the the mortgage mortgage already already collected plus the the even greater value value collected plus even greater value of of the the property property itself. itself. Then enacted aa temporary temporary mortgage mortgage moratorium, moratorium, extending extending the the Then Minnesota Minnesota stepped stepped in. in. ItIt enacted redemption period for defaulted defaulted debtors. debtors. See See 290 290 U.S. U.S. at at 416. 416. The Themortgage mortgagemoratorium moratorium redemption period for possessed several Most possessed several critical critical features features that that allowed allowed itit to to pass pass muster muster under under the the Contract Contract Clause. Clause. Most importantly, Minnesota response to to an an economic economic emergency. emergency. See See id. id. at at 444. 444. But But even even importantly, Minnesota acted acted in in response then, the the mortgage mortgage “moratorium” law that that preserved preserved creditors’ basic then, "moratorium" was was just just that, that, aa temporary temporary law creditors' basic contractual rights: the creditors creditors still still held held the the mortgages, mortgages, and and the the debtors debtors were were still still obligated contractual rights: the obligated to to pay pay the balances. balances. See See id. id. at at 447. 447. Finally, Finally, the thelaw lawwas wasgenerally generally applicable; applicable; it it was was not not directed directed to to the benefit aa particular particular class class or or subset subset of of debtors. debtors. See See id. id. at at 445. 445. InInshort, short,although although the the Court Court benefit recognized that law effectively effectively prevented securing an available “windfall,” it recognized that the the law prevented creditors creditors from from securing an available "windfall," it did not not conclude conclude that that that that effect effect alone to sustain sustain the the law law under under the did alone was was sufficient sufficient to the Contract Contract Clause. Clause. Beyond merely merely preventing to creditors, creditors, Minnesota Minnesota had had other, Beyond preventing aa “windfall” "windfall" to other, distinct distinct public public purposes purposes 21 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 23 of 32 PageID #: 373 supporting the allaying the the effects effects of of the the Great Great Depression Depression and and ensuring ensuring the the stability stability of the supporting the law: law: allaying of the credit market. See id. id. at at 444-445. 444-445. credit market. See In the other other Supreme Supreme Court Court case case applying applying the the "windfall “windfall profits" profits” justification, justification, City El In the City of of El Paso v. Simmons, 379 379 U.S. the state Paso v. Simmons, U.S. 497 497 (1965), (1965), the state law law at at issue issue was was also also supported supported by by an an independent independent public purpose. purpose. In Inthe the late late 1800s, 1800s, as as Texas Texas was was transitioning transitioning from from aa frontier frontier state state to to aa modern public modern one, one, it enacted See id. id. at at 509. it enacted statutes statutes to to sell sell public public lands lands in in order order to to finance finance aa public-education public-education system. system. See 509. The sale contracts contracts provided provided for for modest modest down down payments payments and and annual annual interest interest payments. payments. See See id. id. at at The sale 510. buyerstopped stopped paying paying interest, interest, the the land land was was forfeited forfeited to to the the State, State, but but the the buyer buyer could could 510. IfIfaabuyer redeem at any time time in in the the future. future. See See id. id. at at 498-499. 498-499. Years Years after after the the initial initial sales, sales, oil oil and and gas gas redeem at any deposits were were discovered. discovered. See See id. id. at at 511. 511. Speculators Speculators swooped swooped in, in, taking taking advantage advantage of of the the deposits boundless redemption they boundless redemptionperiod periodtoto buy buy land, land, immediately immediatelydefault, default,and and seek seek to to redeem redeem if if they discovered oil gas under under their their property property (even (even after after the the land land had had been been resold). resold). See See id. id. The discovered oil or or gas The predictable result “imbroglio” over land titles; titles; in in response, response, Texas Texas enacted enacted aa five-year five-year predictable result was was an an "imbroglio" over land limitation on on redemption. redemption. See See id. id. at at 499, 499, 513. 513. limitation In law, the the Supreme Supreme Court Court noted noted that that speculators speculators could could be be restricted restricted to to In upholding upholding Texas’s Texas's law, “those gains gains reasonably reasonably to to be be expected expected from See City City of El Paso, Paso, 379 at 515. 515. "those from the the contract.” contract." See of El 379 U.S. U.S. at Crucially, however, restrict speculators speculators simply did not not favor favor Crucially, however, Texas Texas did did not not seek seek to to restrict simply because because itit did speculators. Instead, Instead, the the redemption redemption limitation limitation was was intended intended to to "restore “restore confidence confidence in in the speculators. the stability stability and integrity integrity of land titles titles and and to to enable enable the the State State to to protect protect and and administer administer property property in and of land in aa businesslike manner.” Id. at at 511-512. 511-512. And And itit was was the the State State itself itself that that created created the the situation situation in in the the businesslike manner." Id. first place. place. See See id. id. at at 515 515 (noting (noting that that the the Court Court would would allow allow aa State State to to change change laws laws that that impose impose first “unforeseen advantages advantages or or burdens burdens on on aa contracting see also also So. 336 F.3d "unforeseen contracting party”); party"); see So. Cal. Cal. Gas, Gas, 336 F.3d at at 895 895 (noting that, statute causes (noting that, “if "if aa statute causes unforeseen unforeseen and and unintended unintended consequences consequences such such that that private private parties parties 22 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 24 of 32 PageID #: 374 would obtain obtain windfalls windfalls they would they never never expected, expected, later later amendment amendment to to realign realign aa statute statute with with the the parties’ parties' expected bargain In stark expected bargain may may be be reasonable” reasonable" (emphasis (emphasis added)). added)). In stark contrast contrast to to West West Virginia’s Virginia's FlatFlatRate Statute, Statute, then, then, Texas's Texas’s law law was was supported supported by by public public purposes purposes other other than than redistributing redistributing the the Rate benefits of of the the contracts. contracts. benefits Blaisdell and and El El Paso thus define It applies Blaisdell Paso thus define the the scope scope of of the the “windfall "windfall profits” profits" justification. justification. It applies only in in narrowly narrowly delimited when aa State State responds responds to to an an emergency emergency like like the the Great Great only delimited situations: situations: when Depression or Even then, then, an an independent independent public public Depression or when when state state laws laws themselves themselves created created the the windfall. windfall. Even purpose beyond beyond restricting gains must must be be offered offered to to support support aa law law that that impairs purpose restricting aa particular particular party’s party's gains impairs contractual obligations. That requirement requirement ensures ensures that that the the State State is is validly validly exercising exercising its its police police contractual obligations. That power, rather rather than Energy Reserves, Reserves, 459 459 U.S. U.S. at at 412. 412. power, than “providing "providing aa benefit benefit to to special special interests.” interests." Energy In this case, case, the the Secretary Secretary fails fails to to demonstrate demonstrate that that the the Flat-Rate Flat-Rate Statute Statute falls falls in in either either In this “windfall profits" profits” category. category. The TheSecretary Secretarycannot cannot seriously seriously contend contend that that the the Flat-Rate Flat-Rate Statute Statute was was "windfall enacted in in response to aa crisis enacted response to crisis on on the the order order of of the the Great Great Depression, Depression, or or to to any any widespread widespread economic economic crisis at Heoffers offers no no evidence evidence that that unforeseen unforeseen events events frustrated frustrated the the proper proper functioning functioning of of the the crisis at all. all. He leases; to the contrary, contrary, the the leases leases succeeded succeeded in creating incentives incentives for the leases; to the in creating for producers producers to to invest invest in in the expansion of of natural-gas Nordoes does he he demonstrate demonstrate that that the the statute statute is is supported supported by by an an expansion natural-gas production. production.44 Nor independent public purpose. See See Part Part I.B.1, I.B.1, supra. supra. The Flat-Rate Statue, upheld independent public purpose. The Flat-Rate Statue, then, then, cannot cannot be be upheld based on on aa “windfall profits” justification. justification. based "windfall profits" Aside from from lacking lacking support support in in Blaisdell Blaisdell and and El El Paso, Paso, the the Secretary's Secretary’s more more expansive expansive Aside understanding of Is aa understanding of the the “windfall "windfall profits” profits" justification justification creates creates difficult difficult line-drawing line-drawingproblems. problems. Is “windfall” measured measured in in absolute absolute dollars dollars or or the the relative relative economic economic positions positions of of lessors lessors and "windfall" and lessees? lessees? 4 4 Tothe theextent extent that that this this Court Court concludes concludes that At a minimum, the Complaint Complaint states states aa claim claim for for relief. relief To EQT’s claims claims rise rise and and fall on factual issues, it is entitled EQT's entitled to to challenge challenge the the Secretary’s Secretary's unsupported assertions in discovery and to develop a record regarding, among other other things, things, the the Legislature’s Legislature's intent in passing the Flat-Rate Statute and the foreseeability of the increased value of natural gas. 23 23 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 25 of 32 PageID #: 375 What does And if if the the price price What does the the price price of of natural natural gas gas have have to to be, be, exactly, exactly, to to constitute constitute aa“windfall”? "windfall"? And of natural natural gas gas goes goes down, down, could could the the original original contract contract terms reinstated? Understanding Understanding aa of terms be be reinstated? “windfall” as as "collecting “collecting more more benefits benefits than than your your contract contract partner," partner,” as as the the Secretary Secretary does, has no no "windfall" does, has basis in in law law or Yet that that isis the the sole sole justification justification given given by by the the West West Virginia Virginia Legislature Legislature and and basis or logic. logic. Yet proffered by by the the Secretary Secretary in in this this case. case. proffered Finally on definition, the the Flat-Rate Flat-Rate Statute Statute does does not not Finally on this this point, point, even even under under the the Secretary’s Secretary's definition, eliminate “unforeseen As the the Complaint Complaint alleges, alleges, EQT EQT and and the the lessors lessors entered entered in eliminate "unforeseen windfall windfall profits.” profits." As in contracts with indefinite term, term, knowing knowing full well that, that, as as technology technology developed, developed, natural natural gas gas contracts with an an indefinite full well would become become more more lucrative. lucrative. See See Compl. Compl. ¶¶ EQT would 'Irlf11-13. 11-13.And Andthat thatisis exactly exactly what whathappened: happened: EQT invested millions millions of of dollars dollars in in improving improving natural-gas natural-gas extraction, extraction, storage, storage, and and transportation transportation invested technology. See See id. id. ¶¶ 13. 13. By Byagreeing agreeing to to aa flat flat royalty, royalty, lessors lessors explicitly explicitly agreed agreed to to allow allow EQT EQT to technology. to reap the the fruits fruits of of its its own own investment investment (based (based on on risk risk borne borne only only by by EQT). EQT). See See id. id. ¶¶ 12. 12. Merely Merely reap permitting EQT EQT to to receive receive the the benefit benefit it it contracted to receive receive does to aa windfall permitting contracted to does not not amount amount to windfall profit. profit. See Western Western National, National, 46 46 F.3d F.3d at at 821. 821. Under Underany anyunderstanding understanding of of the the "windfall “windfall profits" profits” See justification, therefore, therefore, that justification cannot substantial burden burden that the Flat-Rate Flat-Rate justification, that justification cannot validate validate the the substantial that the Statute contracts. Statute imposes imposes on on EQT’s EQT's contracts. C. C. The Secretary Secretary Fails Fails To To Show Show That That The The Flat-Rate Flat-Rate Statute Statute Is Is A A Reasonable Reasonable Means Means The Of Achieving Achieving Even Even West West Virginia’s Stated Purpose Purpose Of Virginia's Stated Even this Court Court were were to to credit credit the the Secretary's Secretary’s definition definition of of the the "windfall “windfall profits" profits” Even if if this justification, the his burden burden to to demonstrate demonstrate that that the the Flat-Rate Flat-Rate Statute Statute is is justification, the Secretary Secretary has has not not met met his “reasonable” and and "necessary" “necessary” as as aa means means of goal. "reasonable" of achieving achieving the the State’s State's goal. 24 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 26 of 32 PageID #: 376 For starters, starters, although although courts legislative judgments of the the For courts “properly "properly defer” defer" to to legislative judgments at at this this step step of analysis, the the standard standard is is not not as as deferential deferential as as rational-basis rational-basis scrutiny.5 scrutiny.5 And Andbecause because the the Flat-Rate Flat-Rate analysis, Statute few identifiable identifiable lessors and disproportionately disproportionately burdens the holder holder Statute benefits benefits only only aa few lessors and burdens EQT EQT as as the of the the most most unmodified unmodified flat-rate flat-rate leases leases in in West West Virginia, Virginia, see see Compl. Compl. ¶¶ 5, 5, itit isis "particularly “particularly of vulnerable to is not not reasonably reasonably related Nieves vulnerable to the the charge charge that that it it is related to to the the asserted asserted public public purposes.” purposes." Nieves v. Hess Hess Oil Oil Virgin Virgin Islands Islands Corp., Laws with with similarly 819 F.2d F.2d 1237, 1237, 1249 1249 (3d (3d Cir. Cir. 1987). 1987). Laws similarly narrow narrow v. Corp., 819 aims have have not not survived survived constitutional constitutional review. review. See, See, e.g., e.g., Allied Allied Structural Structural Steel, Steel, 438 438 U.S. U.S. at at 248248aims 249 (rejecting because it it applied applied to to only only aa few 249 (rejecting aa pension pension law law that that had had “an "an extremely extremely narrow narrow focus” focus" because few employers that met specific specific statutory statutory criteria); criteria); United Healthcare, 602 F.3d at at 631 631 (rejecting (rejecting an an employers that met United Healthcare, 602 F.3d insurance law Mascio, 160 160 F.3d insurance law focused focused on on benefiting benefiting in-state in-state health health maintenance maintenance organizations); organizations); Mascio, F.3d at 314 314 n.2 n.2 (rejecting (rejecting aa law law that that targeted targeted aa small small number number of of public public employees). employees). at Rather than than eliminating eliminating “windfall profits,” as as the the Secretary Secretary suggests, suggests, the the Flat-Rate Flat-Rate statute statute Rather "windfall profits," has the creating aa windfall For all all his his protestations protestations about about the has the perverse perverse effect effect of of creating windfall in in favor favor of of lessors. lessors. For the necessity of of restricting EQT to to the necessity restricting EQT the gains gains it it purportedly purportedly expected expected when when the the contracts contracts were were executed, executed, the Secretary Rather than than limiting the Secretary ignores ignores the the concomitant concomitant effects effects of of the the statute statute on on lessors. lessors. Rather limiting lessors lessors to the the gains gains they they expected receive—i.e., the flat, annual annual payments payments to to which which they they agreed—the agreed—the to expected to to receive—i.e., the flat, Flat-Rate Statute on lessors lessors aa more more lucrative lucrative extraction-based extraction-based royalty royalty that that they they could could not not Flat-Rate Statute bestows bestows on possibly have The Flat-Rate Flat-Rate Statute Statute thus thus achieves achieves the the exact exact opposite opposite effect effect of the possibly have expected. expected. The of the Secretary’s asserted justification. justification. Secretary's asserted 5 “less searching" searching” rational-basis scrutiny with the standards imposed by The Secretary again conflates "less the Contract Clause. Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 733 (1984); see Mem. 21-23 (citing due-process due-process and and equal-protection equal-protection cases). cases). The Contract Clause’s Clause's stiffer restrictions on state power, however, require a correspondingly more more stringent stringent review. review. At any rate, under any standard of review, the Secretary Secretary has Flat-Rate Statute is a reasonable reasonable method of achieving achieving the review, has not shown that the Flat-Rate State’s asserted purpose. State's 5 25 25 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 27 of 32 PageID #: 377 The “windfall profits” support for the recent recent The "windfall profits" justification justificationmakes makeseven even less less sense sense as as support for the amendment to In 2018, 2018, West West Virginia Virginia doubled doubled down down on on its amendment to the the Flat-Rate Flat-Rate Statute. Statute. In its redistribution redistribution of of the benefits the benefits of of flat-rate flat-rate leases leases by by mandating mandating that that the the royalty royalty be be based based on on the the “first "first unaffiliated unaffiliated sale” sale" and prohibiting prohibiting lessees lessees such such as as EQT EQT from from deducting deducting from from the the royalty royalty post-production post-production expenses expenses and incurred in gathering, compressing, compressing, transporting, gas upon upon extraction. extraction. incurred in gathering, transporting, and and marketing marketing the the natural natural gas The contractual payment payment provisions provisions The Secretary Secretary tries tries to to explain explain away away this this second second rewrite rewrite of of EQT’s EQT's contractual by citing citing the the withdrawn withdrawn and and superseded superseded opinion opinion of the West West Virginia Virginia Supreme Supreme Court Leggett, by of the Court in in Leggett, supra. See See Mem. Mem. 6-8. 6-8. supra. That In the the operative operative opinion, opinion, the the West West Virginia Virginia That withdrawn withdrawn opinion opinion is is simply simply not not the the law. law. In Supreme that lessees lessees such such as as EQT EQT could could deduct deduct the the post-production post-production Supreme Court Court actually actually held held only only that expenses they incur when when the the natural-gas natural-gas market market was was deregulated deregulated in the 1970s. 1970s. See See expenses they began began to to incur in the Leggett, 800 That was was simply simply aa reiteration reiteration of of what what the the law Leggett, 800 S.E.2d S.E.2d 850. 850. That law has has always always been, been, withdrawn withdrawn opinion notwithstanding. Both before before and and after after Leggett, Leggett, the the state if EQT EQT paid paid opinion notwithstanding. Both state of of affairs affairs was was this: this: if the statutory statutory extraction-based extraction-based royalty, could deduct deduct post-production post-production expenses, royalty the royalty, it it could expenses, and and the the royalty was based based on But with with the the 2018 2018 amendment, amendment, West West Virginia Virginia chose chose was on the the first first sale sale “at "at the the wellhead.” wellhead." But to shift shift even even more more benefits benefits to lessors—benefits that of the the to to lessors—benefits that do do not not even even derive derive from from EQT’s EQT's use use of leased right extract, but but instead instead from from the the post-production post-production labors affiliates and and leased right to to extract, labors of of EQT EQT and and its its affiliates the vagaries Now, instead instead of of sharing sharing the the post-production post-production the vagaries of of how how natural natural gas gas is is brought brought to to market. market. Now, expenses, lessors lessors are are purportedly purportedly entitled entitled to to aa royalty royalty free free of of any and based based on on aa higher, expenses, any deductions deductions and higher, “unaffiliated” sale sale price price that that EQT EQT did did not not itself itself receive. Thus, the the 2018 2018 amendment amendment increases increases the the "unaffiliated" receive.66 Thus, windfall already already bequeathed share of of the the revenues revenues gained gained from from windfall bequeathed to to lessors lessors and and provides provides lessors lessors aa share 6 6 In this way, the 2018 amendment disregards corporate separateness and requires a royalty based on a higher, downstream price, without regard to whether the price that EQT actually received received “at "at the the wellhead” wellhead" was fair and legitimate. 26 26 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 28 of 32 PageID #: 378 the post-extraction post-extraction operations The Secretary Secretary fails fails to to explain explain how how the operations of of EQT EQT and and even even its its affiliates. affiliates. The any "windfall “windfall profits" profits” justification justification rationally rationally supports additional impairment EQT’s any supports this this additional impairment of of EQT's contractual obligations. obligations. contractual II. THE SECRETARY ACKNOWLEDGES, HIS HISPROCEDURAL PROCEDURAL II. ASAS THE SECRETARY ACKNOWLEDGES, ARGUMENTS DISMISSAL ARGUMENTS DO DO NOT NOT WARRANT WARRANT DISMISSAL The the weakness weakness of of his his position on the The Secretary Secretary telegraphs telegraphs the position on the merits merits by by leading leading his his argument argument with four four pages pages of procedural posturing. As he he readily readily admits, admits, however, however, even all of of those those with of procedural posturing. As even if if all procedural arguments request for for declaratory declaratory judgment judgment on its Contract Contract Clause Clause procedural arguments prevail, prevail, EQT’s EQT's request on its claims remain. Mem. 14. 14. claims remain. Mem. The makes clear clear that that it The Complaint Complaint makes it seeks seeks aa declaration declaration that that the the Flat-Rate Flat-Rate Statute Statute violates violates the the Contract Clause. Clause. See See Compl. Compl. at EQT intends intends to to amend amend Contract at 11 (“Complaint ("Complaint for for Declaratory DeclaratoryRelief”). Relief'). EQT the Complaint Complaint to strike the the claims claims for for "special “special damages" damages” and and "pre-judgment “pre-judgment and and post post-judgment the to strike judgment interest” in in the interest" the prayer prayer for for relief, relief, Compl. Compl. 17, 17, so so the the Court Court need need not notconsider consider the theSecretary’s Secretary's Eleventh Eleventh Amendment arguments. EQT’sdecision decision to to forgo forgo any any monetary monetary relief relief also also defeats Amendment arguments. EQT's defeats the the Secretary’s Secretary's complaint that is not not aa suable suable "person" “person” for for Section Section 1983 1983 purposes purposes under under Will Michigan complaint that he he is Will v. v. Michigan Department of State Police, Police, 491 491 U.S. U.S. 58 58 (1989). (1989). See See Mem. Mem. 12. Section 1983 1983 suits suits against against state state Department of State 12. Section officers in their official official capacities capacities are are plainly plainly allowed allowed when when the the claims claims seek seek prospective prospective relief. relief. officers in their Will, 491 U.S. U.S. at at 71 71 n.10. n.10. Will, 491 In any event, event, the the Secretary's Secretary’s contention contention that that Contract Contract Clause Clause claims claims cannot cannot ordinarily ordinarily be be In any brought under wrong on the law. law. See See Mem. Mem. 12-13 12-13 (citing (citing Crosby City of of brought under Section Section 1983 1983 is is wrong on the Crosby v. v. City Gastonia, The case case the the Secretary Secretary cites, cites, Crosby, does not not Gastonia, 635 635 F.3d F.3d 634, 634, 641-42 641-42 (4th (4th Cir. Cir. 2011)). 2011)). The Crosby, does help him. him. InInaa"typical" “typical”Contract Contract Clause Clause case, case, aaparty party who who thought thought that that his his obligations obligations were were help impermissibly impaired their counterparty counterparty or “breach” the the impermissibly impaired by by aa state state statute statute would would simply simply sue sue their or "breach" contract and the Contract Contract Clause Clause as as aa defense. defense. See, See, e.g., e.g., Garris, Garris, 630 630 F.2d F.2d at at 1003, 1003, 1006. 1006. contract and assert assert the 27 27 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 29 of 32 PageID #: 379 But as where aa State attempt to But as the the Fourth Fourth Circuit Circuit recognized recognized in in Crosby, Crosby, where State thwarts thwarts aa party’s party's attempt to vindicate vindicate its Contract Contract Clause courts, Section Section 1983 1983 is is aa proper proper vehicle vehicle for for the the claims. claims. its Clause rights rights by by resort resort to to the the courts, Crosby, Crosby, 635 635 F.3d F.3d at at 642. 642. That With the the Flat-Rate Flat-Rate Statute, Statute, West West Virginia Virginia That is is precisely precisely what what West West Virginia Virginia did did here. here. With introduced an seek to to vindicate vindicate its its introduced an intermediate intermediate step step before before aa flat-rate flat-rate lessee lessee such such as as EQT EQT can can seek rights. EQT EQT cannot cannot simply simply withhold withhold the the statutory statutory royalty royalty payments payments and and wait wait to to be be sued sued by by lessors. rights. lessors. In order to to operate operate aa well well under under its its flat-rate flat-rate leases, leases, EQT EQT must must have have aa permit, permit, and and the the application application In order for aa permit permit for for any any new new well well under under the the leases leases now now requires requires EQT certify that will pay pay the the for EQT to to certify that it it will extraction-based royalty its leases. leases. See See W. W. Va. Va. Code Code extraction-based royalty rather rather than than the the flat flat royalty royalty provided provided for for in in its 22-6-8(d). Thus, Thus, EQT EQT has has no no effective effective recourse recourse in in the the courts, courts, aside aside from from bringing bringing aa suit suit against against §§ 22-6-8(d). the Secretary Secretary directly. Section 1983 1983 is is aa perfectly perfectly acceptable acceptable method method of of so so doing, doing, although although as as the directly. Section explained above, above, this this issue election not not to to pursue pursue claims explained issue is is academic academic in in light light of of EQT’s EQT's election claims for for damages damages against the Secretary and the Contract Contract Clause's Clause’s independent independent right right of of action action for for Declaratory Declaratory against the Secretary and the Judgment Act purposes. Judgment Act purposes. The Secretary is The Flat-Rate Flat-Rate The Secretary is also also wrong wrong that that Count Count II II should should be be dismissed dismissed as as moot. moot. The Statute by requiring requiring payment payment Statute continues continues to to violate violate the the Contract Contract Clause Clause in in two two independent independent ways: ways: by of royalties royalties calculated volume produced produced (as of calculated as as aa percentage percentage of of the the sales sales price price based based on on the the volume (as it it has has always done) done) and and by always by amending amending the the royalty royalty calculation calculation to to base base in in on on the the “first "first unaffiliated unaffiliated sale” sale" and and eliminate deduction Both alterations alterations eliminate deduction of of post-production post-production expenses expenses (as (as the the 2018 2018 amendment amendment does). does). Both of the the payment payment terms EQT’s leases leases lack lack aa "significant “significant and and legitimate" legitimate” public public purpose purpose and and are are of terms in in EQT's unreasonable. unreasonable. 28 28 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 30 of 32 PageID #: 380 * * * The Contract Clause dead letter." letter.” Allied Allied Structural Structural Steel, Steel, 438 438 U.S. It The Contract Clause “is "is not not aa dead U.S. at at 241. 241. It remains aa vital remains vital check check on on state state power, power, preventing preventing aa State State from from arbitrarily arbitrarily picking picking winners winners and and losers losers in private private contracts. On the the facts facts as as alleged alleged in in the the Complaint, Complaint, West West Virginia's Virginia’s Flat-Rate Flat-Rate Statute Statute in contracts. On works aa severe, severe, permanent permanent change EQT’s contractual contractual relationships. EQT has has adequately adequately works change to to EQT's relationships. EQT pleaded the the elements elements of of aa Contract Contract Clause Clause claim claim and and their their application application to facts at at hand, hand, and pleaded to the the facts and the the Secretary Indeed, it it is Secretary has has failed failed to to meet meet his his burden burden to to demonstrate demonstrate that that he he is is entitled entitled to to dismissal. dismissal. Indeed, is the Secretary Secretary who cannot prevail prevail on his claims, claims, as as the the Flat-Rate Flat-Rate Statute Statute fundamentally fundamentally alters the who cannot on his alters aa specified, agreed-upon so simply simply because because the the Legislature Legislature deemed deemed the the specified, agreed-upon payment payment term, term, and and it it does does so bargain “unfair” to aa narrow narrow class West Virginia Virginia lacked lacked the the power power to bargain "unfair" to class of of leaseholders leaseholders itit preferred. preferred. West to enact that to dismiss dismiss should should accordingly accordingly be enact that law, law, and and the the motion motion to be denied. denied.77 Respectfully submitted, Respectfully submitted, By Counsel: Counsel: By 7 believes that EQT believes that the the Flat-Rate Flat-Rate Statute Statute isis unconstitutional unconstitutionalasasaamatter matterofoflaw. law. This Court has the power to convert the pending motion to a motion for summary judgment in favor of EQT if it agrees. See Fed. R. Civ. P. 12(d); Bosiger v. U.S. Airways, 510 F.3d 442, 450 (4th (4th Cir. Cir. 2007). 2007). In the alternative, if this Court concludes that it needs additional development of the facts and historical context of flat-rate leases and the Flat-Rate Statute, this Court should deny the motion to dismiss and permit the parties to develop the record on those issues. 29 29 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 31 of 32 PageID #: 381 BABST CALLAND CALLAND CLEMENTS CLEMENTS and and ZOMNIR, ZOMNIR, BABST P.C. P.C. OF COUNSEL: OF COUNSEL: WILLIAMS & & CONNOLLY CONNOLLY LLP LLP WILLIAMS Kannon K. K. Shanmugam Kannon Shanmugam Katherine M. Turner Turner Katherine M. Eden Eden Schiffmann Schiffmann Matthew J. J. Greer Greer Matthew (admitted (admitted pro pro hac hac vice) vice) 725 725 Twelfth Twelfth Street, Street, N.W. N.W. Washington, DC 20005 Washington, DC 20005 (202) 434-5000 (202) 434-5000 kshanmugam@wc.com kshanmugam@wc.com kturner@wc.com kturner@wc.com eschiffmann@wc.com eschiffmann@wc.com mgreer@wc.com mgreer@wc.com By: /s/ /s/ Timothy Timothy M. Miller By: M Miller Timothy Timothy M. M. Miller Miller (W. (W. Va. Va. Bar Bar No. No. 2564) 2564) Katrina N. Bowers (W. Va. Bar No. 12337) Katrina N. Bowers (W. Va. Bar No. 12337) BB&T Square BB&T Square 300 Street, Suite 300 Summers Summers Street, Suite 1000 1000 Charleston, WV WV 25301 25301 Charleston, (681) 205-8888 (681) 205-8888 tmiller@babstcalland.com tmiller@babstcalland.com kbowers@babstcalland.com kbowers@babstcalland.com Attorneys for EQT Production Attorneys for Plaintiff Plaintiff EQT Production Company Company 30 30 Case 1:18-cv-00072-IMK Document 39 Filed 07/20/18 Page 32 of 32 PageID #: 382 CERTIFICATE OF SERVICE I, Timothy M. Miller, do do hereby hereby certify certify that on July July 20, 20, 2018, 2018, II electronically electronically filed filed the the I, Timothy M. Miller, that on foregoing foregoing "EQT “EQT Production Production Company’s Opposition to Secretary Company's Memorandum Memorandum of of Law Law in in Opposition to Secretary Caperton’s Motion Motion to to Dismiss" Dismiss” with with the the Clerk Clerk of of the the Court Court using using the the Court's Court’s electronic electronic filing filing Caperton's system, which will send notification of such filing to the following CM/ECF participants: system, which will send notification of such filing to the following CM/ECF participants: BAILEY BAILEY & & GLASSER, GLASSER, LLP LLP Benjamin L. L. Bailey Bailey (WVSB Benjamin (WVSB #200) #200) Michael Michael B. B. Hissam Hissam (WVSB (WVSB #11526) #11526) J. Zak Ritchie J. Zak Ritchie (WVSB (WVSB #11705) #11705) 209 Capitol Capitol Street Street 209 Charleston, WV WV 25301 25301 Charleston, (304) 345-6555 345-6555 (304) bbailey@baileyglasser.com bbailey@baileyglasser.com zritchie@baileyglasser.com zritchie@baileyglasser.com mhissam@baileyglasser.com mhissam@baileyglasser.com Attorneys for for Defendant Defendant Austin Austin Caperton Caperton Attorneys David David B. B. McMahon McMahon 1018 Kanawha Kanawha Blvd. 1018 Blvd. East East 1200 1200 Blvd Blvd Tower Tower Charleston, WV WV 25301 25301 Charleston, (304) 415-5288 (304) 415-5288 wvdavid@wvdavid.net wvdavid@wvdavid.net Attorney for Attorney for West West Virginia Virginia Surface Surface Owners’ Owners' Rights Rights Association Association CAREY, CAREY, SCOTT, SCOTT, DOUGLAS DOUGLAS & & KESSLER KESSLER PLLC PLLC David R. R. Pogue Pogue David Michael W. Michael W. Carey Carey 901 901 Chase Chase Tower Tower 707 Virginia Virginia Street 707 Street East East P.O. Box Box 913 913 P.O. Charleston, WV WV 25323 25323 Charleston, (304) 345-1234 345-1234 (304) drpogue@csdlawfirm.com drpogue@csdlawfirm.com mwcarey@csdlawfirm.com mwcarey@csdlawfirm.com Attorneys for Attorneys for Bounty Bounty Minerals, Minerals, LLC LLC PERSINGER & & PERSINGER, PERSINGER, L.C. L.C. PERSINGER Howard Howard M. M. Persinger, Persinger, III III 101 Dickenson Dickenson Street Street 101 Williamson, WV WV 25661 25661 Williamson, (304) 235-2000 235-2000 (304) hmp3@persingerlaw.com hmp3@persingerlaw.com Attorneys for for West West Virginia Land & & Mineral Attorneys Virginia Land Mineral Owners’ Association, West West Virginia Virginia Royalty Royalty Owners' Association, Owners’ Association, West West Virginia Virginia Farm Farm Bureau, Bureau, Owners' Association, and National Association Association of of Royalty Royalty Owners, Owners, and National Appalachia Appalachia /s/ Timothy Timothy M. Miller /s/ M Miller Timothy M. Timothy M. Miller Miller (WVSB (WVSB #2564) #2564) 31 31