In Lutz v. Chesapeake Appalachia, the Sixth Circuit considered a putative class action complaint brought for breach of contract and other related claims concerning alleged breaches of mineral leases.  The district court had dismissed the contractual claims based on Ohio’s statute of limitations, and that was the only basis of the plaintiffs’ appeal, as they abandoned the other grounds at issue.  The Sixth Circuit, in an opinion by Judge Griffin, engaged in a lengthy analysis of Ohio’s statute of limitations and its application in the lease royalty context.

The Court began by considering whether the breach of contract claim for underpayment of natural gas royalties accrued when the contracts were initially breached or whether the contracts for monthly lease payments were divisible, such that the statute of limitations would run from each separate breach.  The Court began by rejecting the notion that plaintiffs’ argument amounted to a continuous violation claim, and instead framed the issue as a question of divisibility of the contract.  The Court ultimately concluded that the contracts were divisible such that the statute of limitations ran from each separate breach, and it reached this conclusion based on two principles.  First, Ohio courts had endorsed the principle of divisibility of contracts in other contexts.  Second, the Court turned to authority outside Ohio in the gas, oil, and mineral leasing contexts that also found such contracts to be divisible or severable.  But this conclusion only salvaged part of plaintiffs’ claim, rather than the entirety of it.  As a result, the Sixth Circuit had to consider both the discovery rule and related tolling concepts.

Although the plaintiffs argued for a more liberal interpretation of the discovery rule, the Sixth Circuit essentially rejected that argument.  The Court placed great weight on the legislative history behind Ohio’s statute of limitations which did not definitively answer the question, but indicated that Ohio courts would be reluctant to apply the discovery rule in commercial transaction cases.  But even though the discovery rule did not aid the plaintiffs, the Court found that they had adequately alleged the necessary predicates for the invocation of equitable tolling. As a result, the plaintiffs secured reversal on that point as well.

Given recent developments in natural resource exploration in Ohio, royalty disputes are sure to follow.  The Sixth Circuit’s opinion in this case will provide significant guidance in this area as future parties assess litigation options and the potential for statute of limitation defenses.  And, while this case revolves around Ohio law, given the apparent paucity of cases in this area (judging from the Court’s citation to outside authority) it almost certain that this opinion will be influential on other states’ law within the Circuit.