29 September 2014
Practice Groups:
Oil & Gas
Energy
Energy, Infrastructure
and Resources
Lessons Learned from the Fourth Circuit’s Decision
to Vacate Class Certification in Coalbed Methane
Royalty Underpayment Cases
By Nicholas Ranjan, Bryan D. Rohm and Travis L. Brannon
As oil and gas production continues to increase domestically, the possibility for class action
exposure is an increasing concern. The United States Court of Appeals for the Fourth Circuit
recently issued its decision in EQT v. Adair, No. 13-414, 2014 WL 4070457 (4th Cir. Aug. 19,
2014), which may assist oil and gas companies in dealing with class certification in oil and
gas royalty class actions, particularly those brought in federal court. As discussed below,
Adair may provide useful guidance to oil and gas companies seeking to defeat class
certification, by analyzing:
• burdens on ascertainability due to the changing nature of ownership;
• problems with commonality due to variable lease language and royalty payment
practices;
• common royalty calculation and sales practices as affecting predominance for the
prospective class; and
• the individualized nature of a statute of limitations analysis.
Adair
In Adair, royalty owners filed suit, alleging underpayment of royalties from the production of
coalbed methane (“CBM”) in Virginia. The royalty owners sought to certify a number of
different classes, and the district court certified five classes. The producers appealed the
certification decision to the Fourth Circuit.
The Fourth Circuit, in an expansive opinion, held that class certification was improper and
remanded the case to the district court. The Fourth Circuit’s opinion addressed a number of
important issues that may figure prominently in other royalty class actions filed in federal
court. Below, we outline several of the issues that the court addressed.
Lessons Learned Regarding Class Actions
Underlying oil and gas issues were central in this case and, according to the Fourth Circuit’s
reasoning, presented challenges that were not properly considered by the district court prior
to class certification. Some key lessons were as follows:
Ascertainability
In certifying a class, a plaintiff must identify an ascertainable class. In other words, a class
cannot be certified unless a court can readily identify or ascertain the members using
objective criteria—a task that should not require individualized determinations. In Adair, the
Lessons Learned from the Fourth Circuit’s Decision to
Vacate Class Certification in Coalbed Methane Royalty
Underpayment Cases
district court defined the classes to include both former and current gas estate owners based
upon the defendants’ administrative filings with the Virginia Oil and Gas Board. The Fourth
Circuit, however, noted that the “administrative barrier” of identifying these class members
was glossed over by the district court. For example, the presence of chain-of-title issues
made ascertaining the class a fact-intensive and individualized inquiry, thereby potentially
precluding class certification.
Accordingly, in cases where ownership records are difficult to locate, or where extensive title
analyses must be done in order to ascertain who is a legitimate member of the class,
producers may be able to point to such individualized tasks as a potential obstacle to class
certification.
Commonality
In certifying a class, a plaintiff must establish the existence of common questions of fact and
law. In oil and gas lease litigation, this oftentimes entails an interpretation of a lease
provision, which may or may not be standard to all royalty owners in a class, particularly
where differing forms and formulations may be in use. In Virginia, a deed conveying only
coal does not transfer title to CBM. Interpreting this authority in Adair, the royalty owners
argued CBM is never transferred in coal conveyances, while the defendants argued
individualized review of the conveyance language in each lease is required to determine
CBM ownership. The Fourth Circuit found it erroneous for the district court to not decide the
issue “one way or the other.” Certification depended on the resolution of this argument
because individualized review of multiple lease forms would likely prevent a finding of
commonality. The court also stated variable lease language makes assessing “the validity of
the defendants’ royalty payment practices on a classwide basis” difficult for certification
purposes.
Accordingly, in oil and gas cases implicating differing lease forms, particularly those with
differing language regarding the scope of the conveyance or payment of royalties,
commonality may be more difficult to establish.
Predominance
Common issues alone are not enough for class certification; under federal law, the classwide
issues must predominate over individual issues. Predominance requires that common
issues of law or fact rise above any questions affecting only individual class members. The
requirement ensures that proposed classes are sufficiently cohesive to warrant adjudication
by representation.
In Adair, the district court emphasized the defendants’ uniform pipeline and marketing
practices without analyzing whether the practices were relevant to the ultimate liability
question, which was underpayment of royalties. The Fourth Circuit held such an analysis
was insufficient to ensure common questions predominate over individual ones. That is, the
court found that the “predominance inquiry focuses not only on the existence of common
questions, but also on how those questions relate to the controversy at the heart of the
litigation.” For example, the fact that a defendant sells all of its CBM into one of two
interstate pipelines had little relevance to royalty calculation practices by itself. The
defendants argued that their method of calculating royalties varied widely depending on each
royalty owner and, importantly, the Fourth Circuit noted these practices might cause
individual issues to predominate.
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Lessons Learned from the Fourth Circuit’s Decision to
Vacate Class Certification in Coalbed Methane Royalty
Underpayment Cases
Thus, even where there are common legal and factual issues, class certification may be
inappropriate unless those common features of the case specifically relate to the critical
theories of the case.
Statute of Limitations
The statute of limitations is also a frequently litigated issue in oil and gas class actions, as
plaintiffs typically seek classwide tolling of the statute of limitations while defendants point to
individualized determinations as precluding classwide tolling.
In Adair, the plaintiffs sought classwide tolling of the statute of limitations on the basis of
fraudulent concealment. The district court agreed to this classwide tolling, finding that the
defendants’ representations to the class members were uniform. The Fourth Circuit,
however, found that the district court erred, and that the district court should have also
considered the plaintiffs’ knowledge and actions, which are typically individualized inquiries
that defeat certification.
The Fourth Circuit’s emphasis on the individualized nature of tolling doctrines, such as
fraudulent concealment, suggests that attempts to extend a class beyond the statute of
limitations may fail.
Conclusion
While Adair has been remanded for further proceedings in the district court, the Fourth
Circuit’s decision on class certification provides useful lessons on certain frequently litigated
class certification issues. Reaffirming what other courts have concluded, the Fourth Circuit
made clear that oil and gas class actions implicating individualized issues, such as
ownership questions, older records, variable lease language, and the tolling of the statute of
limitations may make class certification difficult.
Authors:
Nicholas Ranjan
nicholas.ranjan@klgates.com
+1.412.355.8618
Bryan D. Rohm
bryan.rohm@klgates.com
+1.412.355.8682
Travis L. Brannon
travis.brannon@klgates.com
+1.412.355.7443
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Lessons Learned from the Fourth Circuit’s Decision to
Vacate Class Certification in Coalbed Methane Royalty
Underpayment Cases
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