CHAPTER 2 CURRENTS TRENDS IN CLASS ACTION PROCEDURE IN ROYALTY LITIGATION

• Jurisdiction: United States

Private Oil & Gas Royalties: The Latest Trends in Litigation
(Dec 2008)
CHAPTER 2
CURRENTS TRENDS IN CLASS ACTION PROCEDURE IN ROYALTY LITIGATION
John F. Shepherd
Holland & Hart, LLP
Denver, Colorado

John F. Shepherd is a partner in the Denver office of Holland & Hart LLP. He specializes in oil and gas, natural resources, public land and environmental law. He has successfully handled a broad array of cases related to federal, state and private royalties, including class actions and qui tam claims, and regularly advises clients on royalty compliance. He is listed by Colorado Super Lawyers in the areas of Energy and Oil and Gas. He is also listed in The Best Lawyers in America for the areas of Natural Resources Law, Energy Law and Administrative Law. In 1998, he was the Natural Resources Distinguished Practitioner-in-Residence at the University of Denver College of Law. He served as a Trustee for the Rocky Mountain Mineral Law Foundation during 1993-1995. He has addressed a variety of natural resources and public land issues in presentations at the Annual Institute and Special Institutes of the Mineral Law Foundation. His prior presentations on royalty issues include: Special Royalty Litigation Issues: Fraud, Fiduciary Relationships and Punitive Damages, Rocky Mtn. Min. L. Fdn. Spec. Inst. on Private Oil and Gas Royalties (2003), and Recent Developments in Oil and Gas Class Action Litigation, 53rd Annual Institute on Oil and Gas Law (2002). He is a graduate of the University of Denver College of Law (J.D., Order of St. Ives, 1979), and Dartmouth College (A.B., magna cum laude, 1976).

I. INTRODUCTION ¹

Since the Rocky Mountain Mineral Law Foundation's original Special Institute on Private Oil & Gas Royalties in 2003, the filing of class action lawsuits by royalty owners has exploded. Some courts, particularly in Texas, have adopted a cautious approach to class certification, often denying certification. Other courts, particularly in Colorado, have been liberal in approving class actions. Since 2003, in fact, no Colorado trial court (state or federal) has denied certification of a royalty class action. And it is fair to say that, at least in the states like Colorado following the "marketable condition" rule, the trend has been in favor of class certification.

Focusing on royalty litigation in Colorado, this paper will review class certification decisions in recent years and identify the key issues in dispute. It will also address important class certification decisions in New Mexico and Oklahoma that are pending on appeal and could provide guidance on the outer bounds of royalty class actions. As will be seen, certification of a class action royalty case depends at least in part on applicable state royalty law. There are substantial differences in royalty law among the oil and gas producing states (for example, between Texas and Colorado). Not coincidentally, the states in which courts have been most likely to grant class certification are also the states where royalty law is more favorable to royalty owners.

II. CLASS ACTION REQUIREMENTS

A. Rule 23

Colorado Rule of Civil Procedure 23, like most state rules governing class actions, is nearly identical to the portions of Federal Rule 23 that establish the requirements for certification of a class.² Rule 23(a) lists four prerequisites: (1) the class must be so numerous that joinder of all members is impractical (the "numerosity" requirement); (2) there must be questions of law or

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fact common to the class (the "commonality" requirement); (3) the claims or defenses of the representative parties must be typical of the claims or defenses of the class (the "typicality" requirement); and (4) the representative parties must fairly and adequately protect the interests of the class (the "adequacy of representation" requirement).

Rule 23(b) provides that an action may be maintained as a class action if the prerequisites of section (a) are satisfied and, in addition, one of three subsections of (b) is satisfied. The most common subsection used to certify a class of royalty owners is subsection (b)(3). Under Rule 23(b)(3), a class may be certified if the court finds that the questions of law or fact common to the members of the class "predominate" over any questions affecting only individual members, and that a class action is "superior" to other available methods for the fair and efficient adjudication of the controversy. Another subsection sometimes used to seek certification of a royalty class is (b)(2), which applies where "the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole."

While royalty underpayment class actions are not always the same, and the facts of a particular proposed class can raise difficult issues under Rule 23(a), the prerequisites of Rule 23(a) have generally not been the battleground for determining whether a royalty class should be certified. The battle over class certification has more often been under Rule 23(b)(3): whether common questions predominate and whether a class action is the superior method to fairly and efficiently decide the dispute.³

B. Basic Certification Principles Under Rule 23(b)(3)

Plaintiffs bear the burden of establishing that a class should be certified.⁴ The court must conduct a "rigorous analysis" of the Rule 23 prerequisites before certifying a class because "actual, not presumed" compliance with Rule 23's requirements is "indispensable."⁵ While the court does not decide the merits of the claims or defenses at the class certification stage, "it is often necessary for the court to consider the substantive claims and defenses of the parties and the essential elements of those claims and defenses."⁶

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Rule 23's commonality and predominance requirements are closely linked. Rule 23(a)(2) requires that the class share common questions of law or fact. The commonality requirement is satisfied only if the resolution of a common issue would advance the litigation.⁷ Commonality requires plaintiffs to establish that a common issue applies to the class as a whole and is subject to generalized proof.⁸ Commonality is lacking where resolution of a purported common issue depends on individualized determinations for each class member.⁹

Under Rule 23(b)(3), not only must common questions of law or fact exist, they must predominate over questions affecting only individual class members. Although the two requirements are related, "the predominance criterion is far more demanding" than the commonality requirement.¹⁰ The predominance requirement "is intended to prevent class action litigation when the sheer complexity and diversity of the individual issues would overwhelm or confuse a jury or severely compromise a party's ability to present viable claims or defenses."¹¹ Predominance is not established, and certification is not appropriate, where the proof at trial will be "primarily individualized" or there is the "potential for different analyses" among class members.¹²

In recent years, some courts have endorsed a "cautious approach to class certification" and have rejected the "when in doubt, certify" approach supported by some older cases.¹³ Other courts, however, appear to continue to resolve doubts about class certification in favor of

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certifying the class, perhaps based on the notion that, despite its flaws, a class action may nonetheless be the most practical and efficient way to resolve royalty claims for hundreds or thousands of royalty owners. The Colorado Supreme Court has not decided the appropriate approach in Colorado, but as discussed below, Colorado state district courts arguably fall into the latter category, certifying cases that appear to present many individualized issues.

III. THE PARTIES' POSITIONS

A. Royalty Owners

Attorneys for royalty owners generally prefer to bring their lawsuit as a class action, if they can. One obvious advantage to royalty owners and their attorneys from class certification is that the alleged damages sought can increase exponentially over an individual suit. The added potential exposure can impose pressure on the company to settle, and most class royalty cases do settle. With a larger pot of money at stake, royalty owner attorneys can also reap large fee awards if they obtain a successful result. Of course, in seeking to certify a class, a royalty owner's attorney may relinquish some freedom to litigate the case, because the case must satisfy the requirements of Rule 23 to ensure that the class representatives adequately represent the absent class members. Any settlement or dismissal must, for example, obtain court approval.¹⁴

The overall strategy of royalty owners seeking to certify a class action is to emphasize the common issues and downplay individualized issues. The typical argument of royalty owners to certify a class (at least in a state following the marketable condition rule) goes something like this:

Lease terms do not matter, at least where leases expressly allowing deductions are excluded from the class definition. (Such leases are often excluded.) For the "silent" leases in the class, an implied covenant to market applies and imposes a uniform royalty payment standard for all class members; therefore, a common issue of law applies. Furthermore, evidence of the intent of the parties under ambiguous leases (such as division orders, course of dealing, etc.) that might contradict the implied covenant to market is inadmissible, thus avoiding individualized issues. In any event, the producer paid the royalty owners using a common payment methodology, so the court should disregard the producer's arguments about "different lease terms" or the need to consider extrinsic evidence.

With respect to the implied covenant to market, the gas is...