Royalty Owners Seeking Class Certification Sent Back to the Trial Court

Originally published by Charles Sartain.

Co-author Niloufar “Nikki” Hafizi

The latest Fifth Circuit opinion in Seeligson v. Devon Energy Production, L.P. is the latest round in a class action that has been developing since 2014. The plaintiffs are royalty owners who leased to defendant DEPCO. They were certified by the trial court as a class based on an alleged breach of DEPCO’s implied duty to market gas.

The issue on this appeal: Did the trial court abuse its discretion in certifying the lessors in 4,143 Barnett Shale leases as a class under Federal Rule 23?

The Fifth Circuit reversed and remanded to determine “commonality” and to analyze “predominance”, both of which are required for class certification.

This opinion supercedes an earlier opinion from the same panel. This reversal was for a different reason than the first.

The Devon arrangement

Gas produced from DEPCO’s leases is transported and processed through the Bridgeport Rich Gathering System by Devon Gas Services. Both are wholly-owned subsidiaries of the same parent. Royalty payments were based on the proceeds from sales at the wellhead.

The royalty owners claimed that DEPCO would “sell” the gas at a low price at the wellhead to DGS without actually transferring funds, and DGS could engage in the pretense of charging an above-market 17.5% processing fee. The result was artificially low royalty payments. This practice violated DEPCO’s implied duty to market gas by dealing in good faith to obtain “the best price reasonably attainable.”

DEPCO claimed that it no longer owned the gas when it was transported through the Bridgeport System, did not charge “processing fee”, and it was not the seller of the residue gas.

Common question of fact or law?

The court reviewed the two questions the district court had found to be common to determine whether it had abused its discretion.

Did DEPCO owe the class members a uniform duty to market? The named plaintiffs each signed one of nine lease forms, all of which calculate royalty in the same way and involve the same implied duty. DEPCO argued that three of the leases were modified to exclude the implied duty to market, and thus even the nine named plaintiffs did not have uniform leases and should not be able to form a class. Despite the differences, the substance of the duty owed to each plaintiff was the same.

The sticking point was damages, which involved the price DEPCO should have received for the gas at the wellhead and paid royalties on had it fulfilled its duty to market. To maintain certification, the plaintiffs would need evidence that the gas prices could be evaluated classwide. The court concluded that, while the plaintiffs had provided “some evidence” that classwide damages could be evaluated, and that well-by-well analysis was unnecessary, more evidence was required to settle that question.

The second question was whether DEPCO’s duty to market included a duty to recoup downstream profits. The district court failed to explain why Devon’s duty to market included a duty to recoup downstream profits.

The court ruled that the district court abused its discretion in finding commonality and remanded to the trial court for consideration of additional evidence.

Predominance

Questions common to class members must predominate over individual issues in order to prevent the class action from “degenerating into a series of individual trials”. The Fifth Circuit again ruled that the district court abused its discretion in not addressing whether limitations and tolling questions would prevent plaintiffs under different leases from meeting the predominance requirement. Which claims were time barred and which would have been time barred but for tolling raised individual questions that possibly could predominate. Not considering these issues was an abuse of discretion.

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