A federal judge in Erie has granted final approval of a class-action settlement estimated to be worth more than $22 million, in a suit brought by landowners above the Marcellus Shale who claimed that their natural gas leases with Range Resources imposed unfair royalty calculations.

The settlement is one of the largest in Pennsylvania in the last year.

The suit, Frederick v. Range Resources, was filed on behalf of more than 25,000 landowners and initially challenged the validity of the leases under the Pennsylvania Guaranteed Minimum Royalty Act.

But while the suit was pending, the Pennsylvania Supreme Court handed down its decision in Kilmer v. Elexco, which held that deducting post-production costs from the gross sale proceeds before calculating the royalty did not violate the act.

In the wake of Kilmer, the Frederick plaintiffs withdrew their challenge to the legality of the post-production cost deductions and filed an amended complaint challenging the propriety of the amounts deducted by Range Resources.

Specifically, the plaintiffs claimed that Range Resources had improperly reduced the amounts of their royalty payments by wrongly using the point-of-sale volume of gas, rather than the volume of gas collected at the wellhead, to calculate the gross royalty.

The suit also challenged deductions for marketing costs and management fees, as well as the lack of royalties for liquid hydrocarbons, a product extracted from the gas and sold separately by Range Resources.

In its formal answer, Range Resources denied the allegations and contended that none of the deductions were improper under Kilmer.

But soon after it answered the suit, Range Resources entered into settlement negotiations that led to a deal that includes an immediate payment of more than $1.7 million and changes to the leases that are estimated to be worth more than $20 million.

Now, U.S. District Judge Sean J. McLaughlin has approved the settlement, including a provision that could provide more than $4.6 million in attorney fees to lead plaintiffs attorney Joseph E. Altomare of Titusville.

In a settlement hearing, Mr. Altomare told Judge McLaughlin that the settlement called for a cap on the amount of costs that can be deducted by Range Resources prior to calculation of royalties in the future.

Expert witnesses testified that the cap on deductions would provide about $20.3 million in projected royalty savings to the class over the next five years.

The settlement also calls for Mr. Altomare's fees to be paid over five years, with an initial payment of more than $430,000, representing 25 percent of the initial cash payment, followed by fees equal to one-half cent for every 1,000 cubic feet of natural gas produced under the leases.

Expert witnesses testified that Mr. Altomare was likely to garner about $4.2 million in additional fees under the plan.

Judge McLaughlin concluded that the fees would probably be about 20.5 percent of the total settlement and are therefore reasonable.

In his 31-page opinion approving the settlement, Judge McLaughlin lauded "the innovative nature" of both the settlement and the attorney fee provision, saying it "ensures a monetary benefit to the class going forward in the nature of a cap on post-production costs."

Range Resources' lead lawyer, David W. Hardymon of Vorys Sater Seymour & Pease in Columbus, Ohio, declined to be interviewed.

The case was officially closed on Thursday, when the judge signed an order approving the settlement and amending the leases.

First Published: March 23, 2011, 4:00 a.m.