The U.S. Court of Appeals for the Fifth Circuit recently handed down its opinion in Seeligson v. Devon Energy Production Co., Cause No. 17-10320. The case is an appeal from a decision in the District Court for the Northern District of Texas certifying a class of royalty owners to sue Devon for breach of the duty to market gas produced under the royalty owners’ leases. The Fifth Circuit affirmed all but one of the trial court’s findings on the appropriateness of allowing the class action to proceed.
The question of whether class actions are appropriate in federal courts are governed by federal rules and cases, but the class certification rules are very similar to those applied by Texas state courts. Although class actions are common in other contexts, such as suits by shareholders against their companies, they have not generally been successful in suits by royalty owners. The barriers created by the requirements to certify a class have usually been too great.
In Seeligson v. Devon, the plaintiffs claim that Devon breached its implied duty to market their gas. Devon’s wells in the Barnett Shale field are connected to a gathering system called the Bridgeport System, owned by an affiliate of Devon called Devon Gas Services. The gas is gathered and transported to the Bridgeport Gas Processing Plant, owned and operated by Devon Gas Services. Under a contract between Devon Energy and Devon Gas Services, Devon Gas Services takes delivery of the gas at the well and runs it through the plant, which separates the dry gas from the natural gas liquids and sells the dry gas and NGLs separately. Under the contract, Devon Gas Services pays Devon Energy 82.5% of a published industry index price for the dry gas and NGLs. Devon Gas Services thus retains 17.5% of the value of the dry gas and NGLs to compensate it for the gathering and processing of the gas. Plaintiffs claim that this arrangement breaches Devon Energy’s duty to market because the 17.5% is in effect a processing fee that is far greater than the market rate for processing.
Plaintiffs asked the trial court to certify a class of royalty owners who are paid royalties by Devon for gas processed through the Bridgeport System. Plaintiffs limited the class of plaintiffs to those who signed lease forms that provided for payment based on proceeds of sale and under which Devon had an implied duty to market the gas. After a hearing, the trial court certified the class, which included some 4,143 oil and gas leases.
Class actions are intended to allow claims to be pursued where individual plaintiffs would not be likely to pursue the claims because of the cost and complexity relative to the size of any one plaintiff’s claim. But to proceeds as a class action, the plaintiffs must first prove several things: First, that the class is “adequately defined and clearly ascertainable;” second, “numerosity” – that there are too many members of the class for them to all sue separately; third, “commonality” – that there are questions of law common to the class members’ claims; fourth, “typicality” – that the named plaintiffs’ claims are typical of all class members; fifth, “adequacy of representation” – that the named plaintiffs can adequately represent all class members. In addition, in this case the plaintiffs had to show “predominance” – that the questions of law or fact common to all members of the class “predominate over 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.” Lots of hurdles.
The Fifth Circuit concluded that the plaintiffs had adequately proven all requirements for certification of the class but one – predominance. Devon argued that each member of the class had a different issue on when the statute of limitations would bar all or part of their claim. The plaintiffs argued that the statute of limitations should be tolled for all members of the class because Devon had fraudulently concealed its marketing scheme and plaintiffs could not have discovered the scheme with reasonable diligence within the applicable limitations period. Devon argued that these issues would be different for each member of the class. The court decided that the trial court had not adequately addressed the issue of predominance, and it remanded the case to the trial court to address that issue.