5th Circuit Pumps Brakes on Royalty Owner Class Certification

The federal Fifth Circuit recently signaled its continued skepticism of permitting class certification for royalty owners.  In Seeligson v. Devon Energy Production Company, L.P., No. 17-10320, 2018 WL 5045671 (5th Cir. Oct. 16, 2018), a group of royalty owners in the Barnett Shale in Texas alleged that Devon Energy Production Company, L.P. breached its royalty obligations “by selling the raw, unprocessed gas to its corporate affiliate at the wellheads at a price artificially reduced by an unreasonably high processing fee, and then passing this processing fee on to the royalty owners.”

The plaintiffs convinced the trial court to certify a class comprised of royalty owners who claimed that their royalty payments under their individual leases with Devon were reduced by Devon’s pricing scheme.  But the Fifth Circuit was not convinced.

On appeal, the Fifth Circuit first considered the district court’s findings regarding ascertainability (the ability to know the members of the class) and commonality (whether common issues of law and fact apply to individual members).  The Fifth Circuit held that the district court did not abuse its discretion on ascertainability because public records could provide sufficient objective criteria to identity individual class members.  The Fifth Circuit also rejected Devon’s argument as to commonality (namely, that each individual lease must be reviewed before determining whether Devon violated any duty to the class members).  The Fifth Circuit held that the district court did not abuse its discretion “in ruling that Plaintiffs could demonstrate that Devon breached its implied duty to market by basing its price on a higher processing fee than the fee that a ‘reasonably prudent operator would have received at the wellhead.’”

However, the royalty owners’ request for class certification hit a snag when the Fifth Circuit turned to predominance.  Under Federal Rule of Civil Procedure 23, it is not enough that there are common issues of law and fact; those common issues must also “predominate over any questions affecting only individual members.”  Devon argued that predominance did not exist because each lease raised individual issues about tolling and the applicable statute of limitations.  Plaintiffs tried to counter by arguing that limitations periods were tolled by the discovery rule (the clock does not begin to run until one discovers his injury) and fraudulent concealment, but Devon persuasively contended that issues of tolling and fraudulent concealment raise individualized fact questions that would themselves require thousands of mini-trials to resolve.  The Fifth Circuit stopped short of fully resolving the issue and instead noted that the trial court had failed to analyze the role, if any, that tolling or limitations issues would play in the class action.  Without such an analysis, the Fifth Circuit stated that it was “impossible to know” if predominance existed here.  Accordingly, it found that by failing to consider such issues the trial court abused its discretion, and the Fifth Circuit ultimately reversed and sent the case back to the trial court for further proceedings.

Over the last few years, various federal court decisions have made class certification increasingly difficult.  The decision here is consistent with the trend of limiting the instances when class resolution will be allowed.  Although the Fifth Circuit’s decision does not necessarily eliminate Plaintiffs’ attempts to certify a class, it certainly makes their position more precarious.  We shall see if on remand Plaintiffs are able to salvage their class action in the district court and withstand further Fifth Circuit scrutiny.  Stay tuned.

footer image footer image footer image