[co-author: Michael Streitmann]
The Fifth Circuit recently rendered a decision in Cheapside Mins., Ltd. v. Devon Energy Prod. Co., L.P. concerning a class action that arose from Devon Energy Production Company’s (“Devon”) alleged underpayment of royalties from a tract of land in DeWitt County, Texas. The issue was whether the case would be heard in Texas state court or federal court, based on a claimed exception to the Class Action Fairness Act (“CAFA”). The Fifth Circuit ultimately decided the exception did not apply and the case should be heard in federal district court.
More than two hundred plaintiffs sued Devon as a class in Texas state court alleging Devon underpaid them more than $100 million in oil and gas royalties. Approximately ninety percent of the plaintiffs resided in Texas, while the remaining ten percent lived elsewhere, including Alaska and the United Kingdom. Devon maintains its citizenship in Oklahoma. Under CAFA, Devon exercised its option to remove the case to federal court. Plaintiffs challenged the removal, citing the “local controversy” exception to CAFA which states, “principal injuries resulting from the alleged conduct, or any related conduct of each defendant were incurred in the State in which the action was originally filed.” The federal judge agreed with Plaintiffs and remanded the case to state court. Devon appealed to the Fifth Circuit.
The first issue addressed by the appellate court was where Plaintiff injuries occurred vis-à-vis the alleged underpayment of royalties. The plaintiffs argued their injuries occurred at the location that was specified for payment. Specifically, they relied on language in the lease stating:
All royalties, surface damages, and other payments due under this lease shall be payable in DeWitt County, Texas unless otherwise provided herein.
Thus, Plaintiffs argued, that their injuries occurred in DeWitt County, Texas. Conversely, Devon argued that any underpayment of oil and gas royalties constitutes an injury to personal property, citing Texas law holding the right to payment for minerals already severed from the ground is considered personal property. Therefore, according to Devon, Plaintiffs’ injuries occurred where they resided.
The Fifth Circuit agreed with Devon. The Court held a plaintiff: (1) suffers an economic injury where they reside for an injury to personal property; and (2) feels the direct effect of being underpaid in the place where they reside. Accordingly, the plaintiffs outside of Texas sustained their injuries outside of Texas for purposes of this lawsuit.
In addressing the lease language, the Fifth Circuit emphasized that royalties being “payable” in DeWitt County does not mean that Devon was required to pay the royalty owners there, relying on the Merriam-Webster’s dictionary definition of “payable” meaning “that may, can or must be paid.” Moreover, the Court opined, that the lease provision does not mean that Plaintiff were actually paid in De Witt County. Additionally, neither party disputed that Devon issued payments from its offices in Oklahoma to Plaintiffs who resided at addresses outside of Texas. Citing Texas law (which the Plaintiffs acknowledged) that a breach of contract occurs at the location specified for payment, the Court found that at least some Plaintiffs sustained their injuries outside of Texas. This is important because, under the CAFA local controversy exception, all Plaintiffs must have incurred their injury in the state where the lawsuit was brought. Accordingly, Plaintiffs failed to show they all incurred their injuries in Texas.
Next, the Court addressed “the more challenging, and novel, question” of whether all injuries must occur in Texas for the local controversy exception of CAFA to apply. The statute reads “principal injuries resulting from the alleged conduct. . .” Plaintiffs argued that they satisfied the “principal injuries” requirement because the vast majority of Plaintiffs were underpaid and, therefore, injured in Texas. According to Plaintiffs, “principal” means “most” of the injuries. The Fifth Circuit disagreed. Stating “principal injuries” evaluates the type of injury, not the quantity of plaintiffs injured.
Because CAFA does not define “principal,” the Court relied on precedent for guidance on what “principal” means. In Brown v Plata, 563 U.S. 493, 525, 131 (2011), the Supreme Court noted that “principal” is synonymous with “primary”, “chief”, and “first or highest in rank, quality, or importance.” The Court also referred to both ordinary and legal dictionaries for the definition of “principal” used at the time CAFA was enacted. The Fifth Circuit understood this to mean that all plaintiffs must suffer their primary, main, or chief injury in the forum state and nowhere else for the CAFA “local controversy” exception to apply. “There is no exception for cases in which most plaintiffs sustain the principal injury in the forum state, but some do not.”
Accordingly, the Fifth Circuit vacated the district court’s judgment and remanded this case back to the federal district court. The case remains pending in the Southern District of Texas – Victoria Division.
