Last month in a 2-1 split, the Third Circuit held that state, not federal, law determined how much a landowner was entitled to as just compensation in condemnation proceedings brought by private entities under the Natural Gas Act of 1938. Tennessee Gas Pipeline Co., LLC v. Permanent Easement for 7.053 Acres, No. 17-3700 (3d Cir. July 23, 2019). The precedential decision will force natural gas companies to account for differences in state law in negotiations with landowners over what constitutes “just compensation” for a taking.  

The underlying dispute stemmed from Tennessee Gas Pipeline Company, LLC’s (“Tennessee Gas”) attempt to obtain easements from a landowner, King Arthur Estates, LP (“King Arthur”), for the construction of natural gas pipelines in Pennsylvania. King Arthur agreed that Tennessee Gas was entitled to the easements under the Natural Gas Act, but the parties disagreed regarding the appropriate compensation for the condemnation.

During the subsequent condemnation proceedings, a legal question arose regarding whether state or federal law governed the determination of just compensation in condemnation actions under the Natural Gas Act. The question was not merely academic because Pennsylvania law, the state law at issue, allows private property owners in condemnation cases to recover certain types of consequential damages and professional fees in addition to the land value. In this case, King Arthur stood to recover an additional $1 million if Pennsylvania law applied.

The district court held on summary judgment that federal law governed the determination, relying on the Supreme Court’s decision in United States v. Miller, 317 U.S. 369 (1943), in which the Court determined that federal law set the standard for the compensation due an owner of land condemned by the United States. King Arthur then filed an interlocutory appeal solely on the question of whether state or federal law supplies the standard of measuring just compensation in commendation proceedings by private entities under the Natural Gas Act.

The Third Circuit, in a 2-1 panel, reversed the district court’s decision and held that state law controls.

First, the court distinguished Miller on the ground that it applied solely to condemnation proceedings brought by the federal government. The court reasoned that the “powerful federal interest at play when the federal government is the condemnor is considerably weakened when a private entity is the condemnor,” and therefore, Miller was inapplicable.

Second, the court determined that there was a “gap” in the Natural Gas Act as to what standard to apply for the measure of compensation. As a result, the court turned to the analytical framework set forth in United States v. Kimbell Foods, Inc., 412 U.S. 580 (1973) to determine whether to apply state or federal common law in filling a “gap” in an ambiguous or incomplete federal statute. The Kimbell Foods analysis presumes that state law controls unless there is an expression of legislative intent to the contrary or a showing that state law significantly conflicts with the federal interest present. In applying the Kimbell Foods analysis, the court upheld the presumption in favor of state law on the basis that a national uniform standard for “just compensation” under the Natural Gas Act was in its view unnecessary, particularly because property rights are usually a matter of state concern.  

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