Keith Hall
Professor, LSU Law
After two earthquakes were recorded near saltwater injection wells operated by AWMS Water Solutions, L.L.C. (“AWMS”), the Ohio Department of Natural Resources (“ODNR”) issued an order that required temporary suspension of injections at those wells. AWMS filed suit, seeking a judgment that the order constituted a taking of property. In State ex rel. AWMS Water Solutions, L.L.C. v. Mertz, 2026 WL 1161052 (Ohio 2026), the Ohio Supreme Court issued a judgment reversing the lower court’s ruling and holding that ODNR’s order did not constitute a taking.
Background
In December 2011, AWMS leased 5.2 acres in Trumbull County to construct and operate a commercial injection disposal well facility. Shortly thereafter, AWMS applied for permits to drill and operate two saltwater injection wells. The day after AWMS filed its permit applications, a 2.7 magnitude earthquake was recorded within one mile of an existing injection well that was located about seven miles from the land leased by AWMS. About a week later, a larger earthquake was recorded near the same well. In addition, there had been four other earthquakes of magnitude 2.2 or larger had been recorded. The Governor then imposed a moratorium on certain injection well activities. This delayed the issuance of injection permits to AWMS, but AWMS obtained permits to drill two injection wells in July 2013.
At the time AWMS applied for its permits, it had only invested $100,000 in development of its leased site. Eventually, however, AWMS spent about $5.6 million drilling and equipping two injection disposal wells. The company raised much of the money from investors, to whom AWMS issued a confidential offering memorandum that included discussion of various risks. One of the identified risks was the possibility that injection disposal operations would induce seismic activity and that regulators might then order a suspension or cessation of injections.
AWMS drilled two injection wells—Well #1 and Well #2—and began commercial operations in May and June 2014. In late July 2014, a 1.7-magnitude earthquake was recorded near the wells. Later, a 2.1-magnitude earthquake was recorded in the area. After the second earthquake, the ODNR Division of Oil and Gas Resources (the “Division”) ordered AWMS to suspend operations, after concluding that AWMS’s operations caused the earthquakes. The Division eventually concluded that the operation of Well #1 had not contributed to the seismic activity, so the Division allowed AWMS to resume injections using that well in September 2014. The Division did not allow Well #2 to go back into operation until September 2021.
AWMS I
AWMS appealed the suspension of operations at Well #2 to the Ohio Oil and Gas Commission. In August 2015, the Commission denied AWMS’s appeal.
AWMS then filed suit, asserting that ODNR’s order suspending operations at Well #2 was a taking. The court of appeals granted summary judgment in the State’s favor, concluding that the order was not a taking. In AWMS I, the Ohio Supreme Court reversed, holding that AWMS’s leasehold interest was a property right and that there was a genuine issue of material fact regarding whether the suspension had the effect of depriving AWMS of all economically viable use of its leasehold. If the order had denied AWMS of all economically viable use, that would be a factor weighing in favor of finding a taking (though it would not be a conclusive factor).
Termination of the Suspension
In May 2021—after the Ohio Supreme Court’s decision in AWMS I, but before a lower court re-heard the case on remand—the Division issued an order that allowed AWMS to begin injection operations at Well #2 again, though with additional conditions and restrictions. Because AWMS objected to some of the additional restrictions contained in the Division’s order, AWMS appealed the order to the Ohio Oil and Gas Commission, but the Commission upheld the order as issued. AWMS then appealed the Commission’s decision, but the court upheld that decision, and hence the order, on grounds that AWMS’s appeal of the Commission’s decision was not timely.
AWMS II
On remand from AWMS I, the appellate court dismissed AWMS’s claim, holding that AWMS’s leasehold rights were not a property interest. The Ohio Supreme Court reversed, holding that the leasehold qualified as a property interest. The Ohio Supreme Court reversed again, instructing the appellate court to analyze whether the order suspending injections had constituted a total or partial taking.
AWMS III
On remand from AWMS II, the appellate court concluded in a 2-to-1 decision that the order suspending injections did not constitute a total taking, but that it did constitute a partial taking. Both sides appealed to the Ohio Supreme Court, with AWMS asserting that the appellate court erred by not finding a total taking and the ODNR asserting that the appellate court erred by finding that there had been any taking.
The Ohio Supreme Court quickly concluded that there had not been a total taking. The court then considered whether the suspension of operations had constituted a partial taking. The Ohio Supreme Court analyzed this under the U.S. Supreme Court’s Penn Central three-factor balancing test that considers: (1) the economic impact of the regulation, (2) the extent to which the regulation interfered with distinct investment-backed expectations, and (3) the character of the government action.
Quoting other cases, the court stated, that the “investment-backed expectations” factor “is designed to account for property owners’ expectation that the regulatory regime in existence at the time of their acquisition will remain in place, and that new, more restrictive legislation or regulations will not be adopted.” The court elaborated, stating that this “factor has three subfactors that guide the inquiry: “(1) whether the plaintiff operated in a ‘highly regulated industry;’ (2) whether the plaintiff was aware of the problem that spawned the regulation at the time it purchased the allegedly taken property; and (3) whether the plaintiff could have ‘reasonably anticipated’ the possibility of such regulation in light of the ‘regulatory environment’ at the time of purchase.”
The court concluded that the first subfactor weighed against AWMS because injection disposal operations are highly regulated. The second subfactor also weighed against AWMS because AWMS was aware of induced seismicity risk before it made its investment. Indeed, AWMS had stipulated that, before it acquired its lease, it “was aware that saltwater injection wells may have triggered induced seismicity in Ohio and elsewhere.” Finally, the court concluded that the third subfactor also weighed against AWMS because the company was aware of the possibility of the type of regulation that it was complaining about. The court noted that, while raising money, AWMS had warned investors about the possibility of regulatory action. AWMS acquired the lease before issuing the warning, but the warning could be circumstantial evidence that AWMS know of the possibility of such regulations before it acquired the lease. Further, AWMS issued the warning at a time when the company had not yet invested very much in the leasehold. Thus, each of the three subfactors, and hence the first factor itself, weighed against AWMS.
The second factor, the extent to which the order interfered with “distinct investment-backed expectations,” also weighed against AWMS. The appellate court concluded that this factor weighed against AWMS based on testimony of ODNR”s expert, who asserted that AWMS could still obtain value from Well #2 by drilling it deeper or plugging it back to a shallower formation that the one into which AWMS had been injecting. AWMS pointed to contrary testimony from its expert witness, but the Ohio Supreme Court accepted the appellate court’s evaluation of the credibility of the witnesses.
Finally, the Ohio Supreme Court considered the third factor, the character of the governmental action. The court stated that it was undisputed that the intent of the order was to protect public safety. The earthquakes that had prompted the order had not caused damage, but important infrastructure was located in the vicinity of AWMS’s injection wells, and ODNR was not unreasonable in suspending injections before the occurrence of an earthquake of sufficient magnitude to cause damage.
Therefore, all three Penn Central factors weighed against finding a partial taking. The Ohio Supreme Court therefore reversed the appellate court and dismissed AWMS’s action.