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:
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:
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 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.
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.
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.
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.
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.