The opinion of the court was delivered by: David N. Hurd United States District Judge
MEMORANDUM-DECISION and ORDER
Plaintiffs Arlene and Michael Alexander and other landowners*fn1 (collectively "plaintiffs") brought this declaratory judgment action against Chesapeake Appalachia, LLC ("Chesapeake") and Statoilhydro USA Onshore Properties, Inc. ("Statoil") (collectively "defendants"), seeking a declaration that plaintiffs' leases with defendants expired based on the primary lease term; that the covenants clause in the leases does not extend the primary lease term; that no force majeure event*fn2 exists which extends the leases; that the leases are void for a failure of consideration; that defendants failed to make prescribed payments as required by the leases; and that defendants failed to invoke force majeure during the lease term. See Second Am. Compl.. Finally, plaintiffs charge defendants with violating New York General Business Law section 349 and assert a claim for conversion of their oil and gas rights. Id.
Defendants moved to compel arbitration and stay the claims of three plaintiffs not subject to arbitration. Plaintiffs opposed and defendants replied. The motion was taken on its submissions without oral argument.
The following facts are undisputed. Plaintiffs are a group of landowners who reside in New York State throughout Broome, Tioga, Cortland, and Chemung counties. They collectively own approximately 10,000 acres of land. Between 1999 and 2005, the plaintiffs each*fn3 entered into separate oil and gas leases with either Central Appalachian Petroleum ("CAP") or Columbia Natural Resources, LLC ("CNR") (collectively the "leases"). Plaintiffs each leased to either CAP or CNR all oil, gas, and constituents underlying their property, and the rights necessary to develop, produce, measure, and market them. The CAP leases were executed in 1999 and 2000 for a ten year primary term. See Second Am. Compl., Ex 2. The CNR leases were executed in 2004 and 2005 for a five year primary term. See id. Generally, the terms provided for the lessees to pay the lessors an annual Delay Rental payment until the commencement of Royalty payments (upon production of oil or gas). The CAP leases provided for a Delay Rental payment of $3.00 per acre per year and the CNR leases provided for a Delay Rental payment of $5.00 per acre per year. Each lease was duly recorded in the proper county clerk's office. In total, there are approximately 150 leases that are the subject of this litigation.
Since that time, the leases have been acquired by Chesapeake which, in turn, assigned 32.5% of its interest in the leases to Statoil. By the primary lease terms of five and ten years, the leases at issue expired in 2009 and 2010. As of those dates, no wells had been drilled on the properties and no royalties had been paid to plaintiffs. To date, there has still been no drilling and no royalty payments.
With the exception of two leases (the "Hidock leases"*fn4 ), each lease that is the subject of plaintiffs' complaint contains the following arbitration clause:
ARBITRATION: In the event of a disagreement between Lessor and Lessee concerning this lease, performance thereunder, or damages caused by Lessee's operation, settlement shall be determined by a panel of three disinterested arbitrators. Lessor and Lessee shall appoint and pay the fee of one each, and the two so appointed shall appoint the third, whose fee shall be borne equally by Lessor and Lessee. The award shall be by unanimous decision of the arbitrators and shall be final.
See e.g., Second Am. Compl., Ex. 2 ("Lease A").
III. LEGAL STANDARD--CHOICE OF LAW
The parties first disagree over which law is to be applied to this motion. Defendants contend the Federal Arbitration Act ("FAA") governs because the oil and gas leases concern interstate commerce. Plaintiffs dispute the application of the FAA and argue New York law applies because all of the leases concern real property in New York and no gas has been drilled yet alone transported in interstate commerce. They urge that public policy in New York precludes arbitration under these circumstances because the dispute centers on matters of important governmental policy and state interest.
Diversity jurisdiction exists over this matter pursuant to Title 28 of the United States Code, section 1332. Because diversity actions are generally governed by state substantive law, a district court sitting in diversity must determine whether an arbitration dispute is governed by the FAA or state law. The FAA applies only to written arbitration agreements connected to a transaction involving interstate commerce.See ACEquip Ltd. v. Am. Eng'g Corp., 315 F.3d 151, 154 (2d Cir. 2003); 9 U.S.C. §§ 1, 2; see also David L. Threlkeld & Co., Inc. v. Metallgesellschaft Ltd., 923 F.2d 245, 249 (2d Cir. 1991) ("[FAA] applies in federal court to diversity suits which relate to contracts involving interstate or international commerce.").
The FAA's application here turns on whether the leases involve commerce. The Supreme Court has held that the term "involving commerce" signifies the "broadest permissible exercise of Congress' Commerce Clause power." Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 2040 (2003) ("[T]he FAA encompasses a wider range of transactions than those actually 'in commerce'-that is, 'within the flow of interstate commerce.'"). The Supreme Court explained that "Congress' Commerce Clause power 'may be exercised in individual cases without showing any specific effect upon interstate commerce' if in the aggregate the economic activity in question would represent 'a general practice . . . subject to federal control.'" Id. at 56--57, 123 S. Ct. at 2040 (quoting Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 236, 68 S. Ct. 996, 1006 (1948)).
Thus, "[o]nly that general practice need bear on interstate commerce in a substantial way." Id. at 57, 123 S. Ct. at 2040.
Applying those guidelines, the leases here fall within the extent of Congress' Commerce Clause power. Although the oil and gas leases at issue involve real property only in New York, the plaintiff landowners in New York negotiated the subject leases with CAP, an Ohio company and CNR, a Delaware limited liability company. Those leases have since been acquired by Chesapeake, an Oklahoma limited liability company and Statoil, a Delaware corporation. Further, while no drilling has yet been commenced on the properties and thus no gas has been found nor shipped in interstate commerce, the contracts clearly evidence transactions involving interstate commerce. As defendants point out, the leases' primary purpose is the development of gas resources which will ultimately be placed in an interstate pipeline subject to federal regulation. The ...