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Antero Resources Corporation v. South Jersey Resources Group, LLC

United States Court of Appeals, Tenth Circuit

August 6, 2019

ANTERO RESOURCES CORPORATION, Plaintiff - Appellee,
v.
SOUTH JERSEY RESOURCES GROUP, LLC, and SOUTH JERSEY GAS COMPANY, Defendants - Appellants.

          APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 1:15:CV-00656-REB-MEH)

          William R. Peterson (John M. Deck with him on the briefs), Morgan, Lewis & Bockius LLP, Houston, Texas, for Appellants.

          Marie R. Yeates (James D. Thompson III and Phillip B. Dye, Jr., Vinson & Elkins LLP, Houston, Texas, and Michael John Gallagher, Davis, Graham & Stubbs, Denver, Colorado, with her on the brief), Vinson & Elkins LLP, Houston, Texas, for Appellee.

          Before TYMKOVICH, Chief Judge, MURPHY, and HARTZ, Circuit Judges.

          TYMKOVICH, CHIEF JUDGE

         Antero Resources Company and South Jersey Gas Company entered into a eight-year contract for Antero to deliver natural gas from the Marcellus Shale formation to gas meters located on the Columbia Pipeline in West Virginia. The parties tied gas pricing to the Columbia Appalachia Index-an index created by a private publisher and widely used in the natural gas industry. During performance of the contract, the price of natural gas linked to the Index increased. South Jersey contested the higher prices, arguing that modifications to the Index materially changed the pricing methodology, and that the Index should be replaced with one that reflected the original agreement.

         Antero disagreed. South Jersey then sued Antero in New Jersey state court for failing to negotiate a replacement index, and began paying a lower price based on a different index. Antero then sued South Jersey in federal district court in Colorado, where its principal place of business is located, for breach of contract for its failure to pay the Index price. The lawsuits were consolidated in the District of Colorado and the case proceeded to trial. The jury rejected South Jersey's claims, finding South Jersey breached the contract and Antero was entitled to $60 million damages.

         South Jersey argues on appeal that the district court erred in denying its motion for judgment in its favor as a matter of law, or, alternatively, that the court erred in instructing the jury. We affirm the district court. We conclude South Jersey is not entitled to a judgment as a matter of law because a reasonable jury could find South Jersey breached its contract with Antero because the Index was not discontinued nor did it materially change. We further hold South Jersey is not entitled to a new trial based on any defects in the jury instructions.

         I. Background

         The contract between Antero and South Jersey took effect in October 2011 and will end in October 2019.[1] The contract requires Antero to ship and deliver natural gas to gas meters located in West Virginia, where South Jersey purchases the gas and transports it to customers. South Jersey purchases the gas at a price determined by the Columbia Appalachia Index. But pursuant to the contract, this pricing term can be renegotiated under specific circumstances. Here, Antero delivered natural gas to the agreed-upon gas meters, but South Jersey argues the contract must be renegotiated and South Jersey is no longer bound to pay the price listed by the Columbia Appalachia Index. The three terms of the contract that are significant for purposes of this litigation are the delivery term, the pricing term, and the renegotiation term.

         We will address each of these components of the contract in turn.

         A. The Delivery Term

         The gas meters where Antero delivers the gas fall within the boundaries of The Columbia Pipeline (or TCO Pipeline), which covers parts of Kentucky, Ohio, Pennsylvania, West Virginia, New York, New Jersey, and Virginia. The Columbia Gas Transmission Corporation, which oversees the transportation of gas on The Columbia Pipeline, designated numerous pools, or natural gas storage systems, along the pipeline. These pools allow sellers to aggregate their gas with other sellers prior to sale of the gas.

         In addition to physical storage pools, Columbia Gas created a so-called "virtual aggregation pool" called the Interruptible Paper Pool (IPP).[2] Under the Antero-South Jersey contract, Antero had to deliver the gas to physical meters located in Doddridge County, West Virginia, where South Jersey would take possession. While Antero's meters are part of The Columbia Pipeline, they are outside the IPP pool, meaning the gas delivered by Antero to fulfill this particular contract is not aggregated in the IPP pool.

         Because Antero sold its gas to South Jersey outside the IPP pool, Antero only had to deliver the gas to meters in West Virginia. The parties agreed to a discount from the Index price because they recognized that South Jersey would incur costs in transporting gas back into the IPP pool if it wanted to resell some of its gas[3] or incur transportation costs to deliver gas to its customers in New Jersey. Antero's meters were located relatively close to the production site, which made it advantageous for Antero to deliver the gas to the meters outside the pool and for South Jersey to transport any gas it wanted to resell to the pool. At the time the contract was executed, anyone could transport gas to the pool without cost, so South Jersey did not have to pay to transport the gas to the pool.

         B. The Pricing Term

         Antero and South Jersey needed a way to establish pricing for the duration of the eight-year contract. Like other market participants, they agreed to use a gas price index published by Platts McGraw Hill Financial, an industry leader in collecting and publishing average benchmark daily and monthly prices reflecting market conditions. The benchmark prices allow industry participants to enter long-term purchase agreements and are based on the average price of natural gas trades in a given market. Buyers and sellers in the given market voluntarily share price information with Platts, which then uses it to calculate the daily or monthly index price. Platts's methodologies evolve "to reflect changing market conditions through time," and Platts retains some level of editorial discretion over its Index. App. 1736. The methodology statement for Platts was divided into seven parts that explained the "entire process of producing price values for the specified market period." Id. For their contract, Antero and South Jersey agreed to use Platts's Columbia Appalachia Index minus the agreed upon discount.[4]

         At the time the contract was drafted and signed, any gas producer could deliver gas to the IPP pool. But due to the success of hydraulic fracking, gas production from the Marcellus Shale formation increased dramatically between 2011 and 2014. Reaching its capacity, The Columbia Pipeline, which previously had accepted gas from all shippers, began limiting access to those shippers with "firm transportation rights"-rights previously negotiated for a fee to guarantee access to the IPP Pool. These shippers[5] thus received a first right of access on the pipeline to move their gas. As a result, the IPP pool became an exclusive club of shippers with firm transportation rights. Because fewer shippers were able to access the pipeline, more trades occurred outside the pool. South Jersey lacked firm transportation rights for the gas purchased from Antero, so South Jersey was unable to transport gas it purchased from Antero into the pool. In contrast, Antero had purchased $15 billion worth of transportation rights and had full access to the IPP pool for its other contracts.

         All of this matters because South Jersey challenges the gas trades that are included in Platts's Index. If transactions outside the IPP pool are included, they drive down the average price of the Index because gas without transportation rights to the IPP pool is generally cheaper than gas with access to the IPP pool. As we discuss below, the parties contest whether transactions outside the IPP pool (non-IPP pool transactions) should have been included by Platts in calculating Index prices. According to South Jersey, all non-IPP pool transactions should have been included in calculating the Index. If non-IPP pool transactions were included in the Index, South Jersey argues that the average Index price would go down, and it would pay a cheaper price for gas purchased from Antero.

         Under the terms of the contract, South Jersey was required to pay the price reflected by the IPP pool Index. In the fall of 2014, South Jersey complained to Platts that non-IPP pool transactions should be included in the Index. Platts informed South Jersey that while the Index covered all Appalachian gas, only IPP-pool transactions were reported and included in the Index's pricing methodology. As reported in an internal South Jersey email, Platts took the position that the "[non-IPP] trades are outliers and should not be included." App. 1683. Because "[Platts] didn't include them [in the past] . . . they didn't want to start now." Id.

         Based in part on these inquiries from South Jersey, in November 2014, Platts issued what it called a "clarification" of how Index prices were determined. Platts announced to the industry that non-IPP pool transactions were not included in the Index, stating that "gas restricted from using the IPP pool services will no longer be included in the assessment process." App. 1721.[6] The clarification stated:

Please note that Platts clarifies its description for Columbia Gas, Appalachia, to "Deliveries in Columbia Gas Transmission's Interruptible Paper Pool (IPP pool) from any source on Columbia Gas. Deliveries in the IPP pool which is also known as the 'TCO Pool' can originate from any source delivered into Columbia Gas' system."

App. 1724.[7] Platts also later announced a new index would be created specifically for non-IPP pool transactions because those trades reflected a different market than the IPP pool market. As a result, the Index reflected higher IPP pool transactions and the new Columbia Gas, Appalachia (Non-IPP) Index generally reflected lower prices.

         C. The Renegotiation Term

         Having failed to convince Platts to modify the Index, South Jersey turned to Antero, arguing the Index had materially changed its methodology to South Jersey's detriment. The contract envisioned several situations where the parties could renegotiate the price provisions. Specifically, Section 14 of the contract provided five different "market disruption events" that could trigger the need to renegotiate a replacement price-two of which are at issue in this case, 14(c) and 14 (e):

If a Market Disruption Event has occurred then the parties shall negotiate in good faith to agree on a replacement price for the Floating Price . . . . "Market Disruption Event" means, with respect to an index specified for a transaction, any of the following events:
***
(c) the temporary or permanent discontinuance or unavailability of the index;
***
(e) both parties agree that a material change in the formula for or the method of determining the Floating Price has occurred.[8]

App. 1658. The first market disruption event, "discontinuance or unavailability," might occur, for example, if Platts did not publish a price point because it lacked enough data or discontinued the relied-on Index. The other market disruption event, "material change in the formula," allowed the parties to renegotiate the pricing methodology if they agreed a material change in the Index had occurred. If either event happened, the contract instructed the parties to renegotiate the pricing term in good faith. See infra Section II.A.2.

         South Jersey approached Antero about the difficulties South Jersey faced in light of the market changes. Both parties knew Platts was discussing the possibility of creating the new non-IPP pool index. South Jersey wanted to preempt this decision by renegotiating with Antero immediately, whereas Antero wanted to wait and see what Platts decided to do with the Index. Antero ultimately determined the existing circumstances did not constitute a market disruption event, but it offered to explore other long-term options with South Jersey. Communications broke down and, pursuant to a remedies provision of the contract, [9] South Jersey began paying what it deemed to be the correct amount.

         South Jersey sued in New Jersey state court because it believed Antero breached the contract by failing to renegotiate the pricing term. Antero then filed a lawsuit in federal court in Colorado, claiming that neither a market disruption event nor a material change in the Index had occurred and that South Jersey was required to pay the Index price. South Jersey counterclaimed.

         The district court denied summary judgment for both parties and allowed the claims and counterclaims to proceed to a jury trial. The jury found in favor of Antero. South Jersey filed a motion for judgment as a matter of law, which the district court denied. South Jersey appeals the district court's ruling and also alleges the jury instructions were erroneous, warranting a new trial.

         II. Analysis

         South Jersey contends the district court erred in denying its motion for judgment as a matter of law. South Jersey argues the court erred in failing to find as a matter of law that Antero breached the contract because a market disruption event had occurred, requiring the renegotiation of the contract's price terms. But the district court concluded that whether a market disruption event had occurred was indeed a question of fact and denied South Jersey's ...


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