ITEM 3.
Legal Proceedings
We are subject to ordinary routine litigation incidental to our business. In addition, the following matters were recently terminated or are pending: Securities Litigation. On March 3, 2000, the U.S. District Court for the Western District of Oklahoma dismissed a consolidated class action complaint styled In re Chesapeake Energy Corporation Securities Litigation. On March 21, 2001, the court denied the plaintiffs' motion to amend and supplement their
complaint, which had been filed 31 days after the judgment was issued. The complaint, which consolidated 12
purported class action suits filed in August and September 1997, alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 by Chesapeake and certain of our officers and directors. The action was brought on behalf of purchasers of our common stock and common stock options between January 25, 1996 and June 27, 1997. The complaint alleged that the defendants made material misrepresentations and failed to disclose material facts about our exploration and drilling activities in Louisiana. Bayard Drilling Technologies, Inc. On July 30, 1998, the plaintiffs in Yuan, et al. v. Bayard, et al. filed an amended class action complaint in the U.S. District Court for the Western District of Oklahoma alleging violations of Section 11 and Section 12 of the Securities Act of 1933 and Section 408 of the Oklahoma
Securities Act by Chesapeake and others. The action, originally filed in February 1998, was brought purportedly on behalf of investors who purchased Bayard common stock in connection with Bayard's November 1997 initial public offering. The defendants included officers and directors of Bayard who signed the registration statement, selling shareholders (including Chesapeake) and underwriters of the offering. Total proceeds of the offering were $254 million, of which we received net proceeds of $90 million.
The plaintiffs alleged that Chesapeake, a major customer of Bayard's drilling services and the owner of 30.1% of Bayard's outstanding common stock prior to the offering, was a controlling person of Bayard. The plaintiffs asserted that the Bayard prospectus contained material omissions and misstatements that resulted in a decline in Bayard's share price following the public offering. The plaintiffs sought a determination that the suit is a proper class action and damages in an unspecified amount or rescission, together with interest and costs of litigation, including attorneys' fees.
On August 24, 1999, the District Court dismissed the plaintiffs' claims that Chesapeake was a "controlling person" of Bayard under Section 15 of the Securities Act of 1933. As of March 29, 2001, the parties have agreed to settle the action, subject to drafting of documents and court approval after a fairness hearing. Bayard, which was acquired by Nabors Industries, Inc. in April 1999, has reimbursed us for all our costs of defense as incurred. We will have no liability under the terms of the settlement agreement. The case has been administratively closed pending the closing of the settlement. Patent Litigation. In Union Pacfic Resources Company v. Chesapeake, et al., filed in October 1996 in the U.S. District Court for the Northern District of Texas, Fort Worth Division, Union Pacific Resources Company asserted that we had infringed UPRC's patent covering a "geosteering" method utilized in drilling horizontal wells. Following a trial in June 1999, the court ruled on September 21, 1999 that the patent was invalid. Because the patent was declared invalid, the court held that we could not have infringed the patent, dismissed all of UPRC's claims with prejudice and assessed court costs against UPRC. The court concluded that the UPRC patent was invalid for failure to describe definitively the patented method in the patent and for failure to provide sufficient disclosure in the patent to enable one of ordinary skill in the art to practice the patented method. Appeals of the judgment by both Chesapeake and UPRC were denied on January 5, 2001 by the Federal Circuit Court of Appeals. The mandate issued on January 26, 2001. In February 2001, Chesapeake received $89,000 from the plaintiff for reimbursement of court costs.
West Panhandle Field Cessation Cases. One of our subsidiaries, Chesapeake Panhandle Limited Partnership ("CP") (f/k/a MC Panhandle, Inc.), and two subsidiaries of Kinder Morgan, Inc. have been defendants in 13 lawsuits filed between June 1997 and January 1999 by royalty .owners seeking the cancellation of oil and gas leases in the West Panhandle Field in Texas. MC Panhandle, Inc., which we acquired in April 1998, has owned the leases since January 1, 1997. The co-defendants are prior lessees. -22-