Chapter 4D Oil and Gas Class Action Lawsuits in Colorado

• Jurisdiction: United States

Chapter 4D Oil and Gas Class Action Lawsuits in Colorado
John F. Shepherd Chelsea M. Baltes Holland & Hart LLP Denver, CO

JOHN F. SHEPHERD is a partner in the Denver office of Holland & Hart LLP. He specializes in natural resources, public land, oil and gas, and environmental law. He has successfully handled a broad array of energy-related cases. Those cases include some of the leading cases on class actions, royalties, operating agreements, purchase agreements, gas balancing, federal and Indian leases, and NEPA. His class action cases have been in Colorado, Oklahoma, North Dakota, Wyoming, and New York. He has been a frequent speaker over the years at Annual and Special Institutes of the Foundation. Since 1995, John has been listed in The Best Lawyers in America in the areas of natural resources law, energy law, environmental litigation, and administrative/ regulatory law, and was selected as the Lawyer of the Year in Denver in his specialties for 2015, 2018, and 2020. He is a graduate of Dartmouth College (A.B., magna cum laude, 1976) and the University of Denver College of Law (J.D., Order of St. Ives, 1979).

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I. Introduction

This paper will address the evolving class action landscape in the state of Colorado and how this has shaped the modern class action lawsuit. It will begin by summarizing the class action rules generally, and then turn to key federal and state decisions in the royalty dispute context. It will end with an overview of cases in Colorado challenging the fairness of settlements in royalty class actions.

II. Class Certification Under Federal and Colorado State Rule 23

Federal Rule of Civil Procedure (FRCP) 23 dictates the requirements in a federal class action lawsuit.¹ Colorado Rule of Civil Procedure (CRCP) 23 is the mirror state rule governing class actions.² Both have the same four prerequisites: (1) the class action be so numerous that joinder of all members is impracticable (numerosity); (2) questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties as typical of the claims or defenses of the class (typicality), and; (4) the representative parties will fairly and adequately protect the interests of the class.³

The class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.⁴ In order to justify a departure from that rule, a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.⁵ FRCP 23(a) ensures that the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate.⁶ The Rule's four requirements - numerosity, commonality, typicality, and adequate representation - effectively limit the class claims to those fairly encompassed by the named plaintiff's claims.⁷

In addition to the four requirements listed above, both FRCP 23 and CRCP 23 require that a second analysis be conducted by way of meeting one of the following three subfactors in order to maintain a class action: (1) prosecution of separate actions by or against individual members of the class would create a risk of (a) inconsistent or varying adjudications, or (b) adjudications with respect to individual members of the class which would as a practical matter

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be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interest; or (2) the party opposing the class has acted or refused to act on grounds generally applicable to the class; or (3) the court finds 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.⁸

A party seeking to certify a class must not only be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, typicality of claims or defenses, and adequacy of representation, as required by Rule 23(a).⁹ The party must also satisfy through evidentiary proof at least one of the provisions of Rule 23(b).¹⁰ Rule 23(b)(3) requires a court to find that the questions of law or fact common to class members predominate over any questions affecting only individual members.¹¹

A. The Shift to a More Rigorous Analysis Under Wal-Mart and Its Progeny

The Supreme Court's 2011 decision in Wal-Mart (sometimes also referred to as Dukes) is widely regarded as a turning point in the application of Rule 23 to class action lawsuits. Before Wal-Mart, district courts exercised wide discretion in granting or denying class certification. Because class certification decisions are seen as necessarily case-specific,¹² district courts possessed significant latitude in deciding whether or not to certify class.¹³ As long as the district court applied the proper Rule 23 standard, appellate courts would defer to its class certification ruling provided the decision fell within the bounds of rationally available choices given the facts involved.¹⁴

Wal-Mart changed not only how courts analyze class action cases, but also how plaintiffs and defendants must strategically approach them. In prior cases, such as Vallario, a district court generally accepted the substantive, non-conclusory allegations of the complaint as true.¹⁵ In Wal-Mart, the court made clear that a district court must engage in a rigorous analysis before certifying a class action and, in doing so, must consider the merits of plaintiffs' claims as they

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overlap with issues related to certification.¹⁶ Under the Wal-Mart approach, it is appropriate - indeed, necessary - for the court to probe behind the pleadings before coming to rest on the certification question.¹⁷

In addition to authorizing some probing behind the pleadings and consideration of the merits, Wal-Mart also is a key case on the class requirement of commonality. The court established the "common answers" test: "What matters to class certification is not the raising of common 'questions' - even in droves - but, rather the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within a proposed class are what have the potential to impede the generation of common answers."¹⁸ Therefore, commonality turns not only on the existence of a common question within the class, but also a common answer. A plaintiff must identify common questions that depend on the same contention, and the resolution of that contention must "resolve an issue that is central to the validity of each one of the claims in one stroke."¹⁹

Wal-Mart dramatically changed how courts evaluate class certification. Recently, the Supreme Court reaffirmed its approach in Wal-Mart in a securities fraud action.²⁰ There the Court endorsed the need to probe into the merits of a claim before deciding class certification: "In assessing price impact at class certification in a securities fraud action, courts should be open to all probative evidence on that question - qualitative as well as quantitative - aided by a good dose of common sense. That is so regardless whether the evidence is also relevant to a merits question like materiality. A court has an obligation before certifying a class to determine that Fed. R. Civ. P. 23 is satisfied, even when that requires inquiry into the merits. And, a court cannot conclude that Rule 23's requirements are satisfied without considering all evidence relevant to price impact."²¹

B. Background to Royalty Principles in Colorado

A brief background to oil and gas royalty principles in Colorado is helpful in understanding the class certification issues presented. Colorado recognizes four implied duties in oil and gas leases: "to drill; to develop after discovery of oil and gas in paying quantities; to

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operate diligently and prudently; and to protect leased premises against drainage."²² Included in the "duty to operate diligently and prudently is the implied covenant to market."²³

Under Colorado law, oil and gas instruments are interpreted using general rules of contract interpretation.²⁴ Implied terms in an express contract are designed to fill in gaps and "impos[e] a rule that may be deemed adopted by the parties' silence."²⁵ Implied duties cannot, however, be used to vary or contradict the parties' written agreements.²⁶ In keeping with this rule, the Colorado Supreme Court has recognized that the implied duty to market (IDM) applies only where a lease is silent.²⁷ Accordingly, the IDM does not apply where the parties have agreed how royalties will be paid. One effect of this rule is that a proposed class raising claims under the IDM including both silent and express leases should not be certified.²⁸

C. Key Class Action Cases Involving Royalty Disputes

The discussion below summarizes key class action cases in the federal and state courts in Colorado. Although some of the Tenth Circuit cases involve the substantive laws of different states (such as Oklahoma and Kansas), they nonetheless reflect an approach to class certification likely to be followed by courts applying Colorado law. Colorado, Oklahoma, and Kansas courts

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all follow some version of the IDM, though there are some differences that could be important depending on the claim and the scope of the proposed class.

1. Federal Cases

• Wallace B. Roderick Rev. Living Trust v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. 2013)

In Roderick, plaintiffs argued that XTO Energy "systematically underpaid royalties by deducting costs associated with placing gas (and its constituent products) in marketable condition," in violation of Kansas's marketable-product rule.²⁹ Under Kansas law, oil and gas lessees have an IDM absent a contract providing to the contrary.³⁰ Pursuant to this duty, lessees are obligated to bear the full cost of production expenses, such as gathering, compression, dehydration...