This morning the Ohio Supreme Court issued a decision in Lutz, which arose when the federal Northern District Court of Ohio, Eastern Division, certified the following question of law to the Ohio Supreme Court: Does Ohio follow the “at the well” rule (which permits the deduction of postproduction costs) or does it follow some version of the “marketable product” rule (which limits the deduction of post-production costs under certain circumstances)?

The Supreme Court initially accepted the certified question and the issue was fully briefed and argued earlier this year. However, this morning the Court declined to make a blanket ruling regarding allocation of post-production costs. The Court concluded, “Under Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the certified question.” This essentially leaves the issue to the trial courts to decide, on a case by case basis, how the parties to a lease intended to allocate post-production costs.

Justice O’Neill dissented, explaining that he believes the court should have adopted the “at the well” rule, thereby allowing a lessee to deduct post-production costs from a lessor’s royalty. Justice Pfeifer also dissented, commenting that he would have liked the Court to answer the certified question by adopting the “marketable product rule,” thereby forcing lessees to bear the burden of all post-production costs.