State mining and drilling law doesn't trump the authority of local governments to control land use, the four-judge appellate division panel ruled unanimously.
Norse Energy Corp.'s challenge to a drilling ban in the upstate town of Dryden has been closely watched by an industry hoping to drill in New York's piece of the Marcellus Shale formation and opponents of the technology they want to use, also known as fracking. Environmentalists fear the drilling, which frees gas from deep rock deposits by injecting wells with chemical-laced water at high pressure, could threaten water supplies and public health.
More than 50 New York municipalities have banned gas drilling in the past few years, and more than 100 have enacted moratoriums on drilling activities.
The court decision involved interpretation of state law that says regulation of the oil and gas industry rests solely with the state Department of Environmental Conservation.
Norse lawyer Thomas West had argued that the law is intended to prevent waste of oil and gas and protect the mineral rights of multiple landowners.
"When a municipality says you can't drill here, you have the ultimate waste of the resource and destruction of the correlative rights of the landowners," he said during oral arguments in March.
But the court ruled the law doesn't pre-empt a municipality's power to enact zoning laws that would ban gas drilling.
The court said it disagreed with Norse's assertion that New York's policy was to maximize recovery of oil and gas at the expense of local decisions over land use.
West said Thursday that he will ask the state's top court, the Court of Appeals for permission to appeal the decision. He said the appellate panel took too narrow a view of the law and relied on previous decisions in cases involving mining sand and gravel rather than drilling for gas and oil.
The town of Dryden said it was pleased with the ruling.
"The people who live here and know the town best should be the ones deciding how our land is used, not some executive in a corporate office park thousands of miles away," Dryden Supervisor Mary Ann Sumner said in a statement.