CHAPTER 8 CURRENT TRENDS IN CLASS ACTION ROYALTY SETTLEMENTS
| Jurisdiction | United States |
(Dec 2008)
CURRENT TRENDS IN CLASS ACTION ROYALTY SETTLEMENTS
Justin R. Marlles
Tifani M. Jones
Vinson & Elkins, L.L.P.
Houston, Texas
Mark C. Rodriguez is an attorney with Vinson & Elkins, L.L.P. is Houston, Texas. He has a general commercial litigation and arbitration practice that has included a broad range of commercial disputes, including energy litigation and arbitration matters, class action litigation, qui tam/False Claims Act litigation, environmental and toxic tort litigation, products liability, personal injury, and various administrative proceedings. The primary emphasis of Mark's practice is energy-related litigation and arbitration. Throughout his more than ten years at the firm, Mark has represented producers, operators, working interest owners, royalty interest owners, and others, as both plaintiffs and defendants, in various energy-related litigation and arbitration matters. This has included claims for underpayment of royalties, claims for breach of implied covenants, joint operating agreement disputes, title disputes, disputes involving purchase and sale agreements, farmout agreements, and term assignments, administrative audits and investigations, and related matters.
Justin Marlles is an associate litigator in Vinson & Elkins' Houston office. His practice focuses on international commercial litigation and international arbitration, as well as oil & gas litigation. Justin has both advised and spoken on the complex interplay between international law and energy matters, including his most recent presentation on questions of international and national maritime boundary delimitation as part of the Vinson & Elkins Energy Industry Series.
Tifani Jones is an associate litigator in Vinson & Elkins' Houston office. Her practice includes general commercial litigation, intellectual property work, and oil and gas litigation.
I. Introduction
Oil and gas royalty class actions often consist of thousands of interest owners covering hundreds, if not thousands, of wells and leases. Typical claims include highly technical claims such as failure to develop oil and gas reserves and improper deduction of post-production costs. Given the complexity all of this creates, parties to royalty class actions spend significant time and resources negotiating acceptable settlement terms that cover the thousands of owners in the class and that address the claims and issues in the case. The work, however, is not over once the settlement is inked. In many ways, the work is only beginning.
Settlement of a royalty class action presents a number of challenges. Beginning with the request for preliminary approval of the settlement and the settlement class, and continuing through the approval process and distribution of the settlement fund, the parties and their counsel must effectively manage the numerous procedural and practical challenges inherent in a royalty class action. Failure to effectively manage these challenges can substantially increase the time, expense, and risk associated with a class settlement and, in some cases, can jeopardize the settlement itself.
The purpose of this paper is to examine and discuss the mechanics of settling a royalty class action. In many respects, parties in a royalty class action face many of the same challenges that exist in any class action settlement, such as obtaining court approval, dealing with opt-outs, and responding to objections to the settlement. However, there are a number of issues that are unique to the settlement of a royalty class action, such as how to handle owners-in-suspense and claims for contribution from co-working interest owners. Although it is impossible to predict all of the issues that will arise out of any given class action royalty settlement, this paper attempts to identify the issues and challenges commonly faced by parties to class action royalty settlements in order to provide insight on the applicable legal standards and practical considerations that shape the settlement process.
II. Creation of the Settlement Class and the Applicable Legal Standards for Approval of the Class and the Settlement
A. Federal Law
1. Must Satisfy the Proof Requirements of Federal Rule of Civil Procedure 23(a), (b), and (e)
The formation of settlement classes under federal law is largely a function of Federal Rule 23(a), (b), and (e) and case authorities addressing the key factors federal courts consider in
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deciding whether to approve a class settlement.1 A party seeking to create a settlement-only class must satisfy the class certification requirements of Rule 23(a) and (b), with the exception of Rule 23(b)(3)(D) concerning the "likely difficulties" in management of the class action in determining whether common issues of law or fact predominate and whether the class action is superior to other available methods for adjudication. The party must also satisfy the requirements of Rule 23(e), the most notable of which is the "fair, reasonable and adequate" requirement of Rule 23(e)(2).2
Rule 23(a) sets out the widely recognized prerequisites for class certification (i.e., numerosity, commonality, typicality, and the requirement that the class representatives will "fairly and adequately" protect the interests of the class).3 Provided that Rule 23(a) is satisfied, Rule 23(b) states that a class will be certified:
(i) if failure to certify a common class and subsequent individual litigation would result in inconsistent adjudications;
(ii) if individual adjudications would be dispositive of the interests of other members not parties to the individual litigation; or
(iii) if the party opposing the class has acted or refused to act on grounds that apply generally to the class such that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.
Rule 23(b) further provides that as long as questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy, a court may certify the class. For purposes of approval of a settlement class, the matters pertinent to these latter findings include the class members' interests in individually controlling the prosecution or defense of separate actions, the extent and nature of any litigation concerning the controversy already begun by or against class members, and the desirability or undesirability of concentrating the litigation of the claims in the particular forum.4
Rule 23(e) applies specifically to the settlement of class actions and provides that a class
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action cannot be settled without the approval of the federal court.5 Rule 23(e)(1) mandates that before settlement, the court must provide notice to all class members who would be bound by the proposal. Rule 23(e)(2) states that the court must approve a settlement only if it is "fair, reasonable and adequate." Under Rule 23(e)(3), parties seeking approval of a settlement "must file a statement identifying any agreement made in connection with the proposal." Under Rule 23(e)(4), if the class action was previously certified on the basis that questions of common law or fact predominated, "the court may refuse to approve a settlement unless it affords a new opportunity to request exclusion to individual class members who had an earlier opportunity to request exclusion but did not do so." Finally, Rule 23(e)(5) provides that any class member may object to the settlement and that objections may be withdrawn only with the court's approval. As noted by one federal court, "there is a strong presumption in favor of finding the [s]ettlement [a]greement fair."6
2. The United States Supreme Court's Decision in Amchem
While the requirements for a settlement-only class are well settled under federal law, that has not always been the case. Prior to the United States Supreme Court's 1997 decision in Amchem Products v. Windsor,7 federal courts were uncertain whether parties seeking certification of a settlement-only class were required to pass only the hurdle set out by Rule 23(e), or the entire pantheon of requirements of Rule 23(a), (b), and (e). The Amchem case resolved the issue by examining "the legitimacy under Rule 23 of the Federal Rules of Civil Procedure of a class-action certification [meant] to achieve global settlement of current and future asbestos-related claims."8 The class action in Amchem was "not intended to be litigated," and the Court "granted review to decide the role settlement may play, under existing Rule 23, in determining the propriety of a class certification."9
In Amchem, the Court explained that parties attempting to gain the approval of a court for a settlement class must meet the requirements of Rule 23(a), (b), and (e), holding that Rule 23(e) "was designed to function as an additional requirement, not a superseding direction, for the `class action' to which Rule 23(e) refers is one qualified for certification under Rule 23(a) and (b)."10 The Court opined that "[t]he safeguards provided by the Rule 23(a) and (b) class-qualifying criteria...are not impractical impediments - checks shorn of utility - in the settlement-class action."11 As noted above, the only requirement of Rule 23 singled out by the Court as not applicable in the context of a settlement-only class is that of Rule 23(b)(3)(D), which considers the "likely difficulties" in the trial court's management of a class action in determining whether questions of law or fact predominate and whether a class action is superior to other available methods of adjudication.12
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3. "Heightened Scrutiny" Requires Federal Courts to Act as a "Quasi-Fiduciary"
Amchem is also significant for the Court's discussion of the level of scrutiny to...
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