Fourth Circuit Vacates Gas Royalties Class Certification on Ascertainability and Dukes Commonality Analysis

August 20, 2014

On August 19, 2014, the United States Court of Appeals for the Fourth Circuit ruled in favor of CNX Gas Company, LLC, EQT Production Company, and Buckhorn Coal Company, vacating and remanding the U.S. District Court for the Western District of Virginia’s certification of five classes related to coalbed methane (“CBM”) gas royalty litigation. While the opinion, which involves mineral and property rights and oil and gas jurisprudence, is important for the coal and gas industry, it is equally noteworthy for its class certification analysis of ascertainability and Wal-Mart v. Dukes commonality.

Highlighting recent Supreme Court jurisprudence on class certification and the stringent requirements of Rule 23 of the Federal Rules of Civil Procedure, the Fourth Circuit concluded that the district court’s analysis “lacked the requisite rigor to ensure the requirements of Rule 23 were satisfied by any of the certified classes.”

The Court began with an analysis of the district court’s decision to certify the “ownership classes,” in which plaintiffs sought a declaration that class members are the true owners of CBM. The Fourth Circuit concluded that the district court “abused its discretion in at least two ways.” First, the district court “failed to rigorously analyze whether the administrative burden of identifying class members in the ownership cases would render class proceedings too onerous,” and second, the district court “improperly lowered the burden of proof the plaintiffs must satisfy to demonstrate the prospective classes’ compliance with Rule 23(a)’s commonality requirement.” Because the class certifications failed to meet the ascertainability and commonality requirements of Rule 23, the Court declined to address the remaining Rule 23 prerequisites for the ownership classes, but noted that the district court will need to “rigorously analyze each class’s compliance with all of the Rule 23 requirements.”

Speaking to the ascertainability requirement (i.e., that class members be readily identifiable), the Court found that the lower court’s reliance on defendants’ submissions of ownership schedules to the Virginia Gas and Oil Board “glossed over” the reality that ownership of gas estates is dynamic and fluid, resulting from conveyances postdating those initial submissions. The Appellate Court further noted that such ownership changes are not necessarily easily addressed by reference to land records, which in and of itself may be a complicated process, and one further obfuscated by “numerous heirship, intestacy, and title-defect issues.” The Court concluded that such “complications pose a significant administrative barrier to ascertaining the ownership classes.”

With regard to commonality, the Fourth Circuit held that it was improper to leave open at the certification stage whether the central question of ownership is in fact a common question. Rather, district courts “must definitively determine that the requirements of Rule 23 have been satisfied, even if that determination requires the court to resolve an important merits issue.” Plaintiffs argued that the Virginia Supreme Court’s 2004 decision in Harrison-Wyatt, LLC v. Ratliff dictated a finding that plaintiffs are entitled to CBM royalties. The Fourth Circuit held that the district court abused its discretion by certifying the class without “decid[ing] the matter one way or the other.”

In addition, the Court did not believe that the question of CBM ownership could be answered on the basis of the Harrison-Wyatt decision or the Virginia Oil and Gas Act alone. Rather, the Fourth Circuit agreed with defendants that the “the court will need to resolve each ownership conflict with reference to specific deed language,” and that “[s]uch individualized review precludes a finding of commonality.”

The Fourth Circuit next examined the district court’s decision to certify the royalty underpayment classes, in which plaintiffs sought payment of royalties they believe defendants improperly escrowed or withheld. Focusing on commonality, as well as predominance and superiority, the Court concluded that the district court again abused its discretion by certifying the five classes under Rule 23(b)(3).

The Court specifically highlighted that the district court placed “an inordinate emphasis on the sheer number of uniform practices without considering whether those practices are relevant to assessing the defendants’ ultimate liability.” Additionally, the Court held that Plaintiffs’ varying leases “will make it difficult, if not impossible, for a court to assess the validity of the defendants’ royalty payment practices on a classwide basis.” Lastly, the Court directed the district court on remand to “give further thought to other factors that may bear on the superiority analysis,” including a) the effect of dominating state-law issues on the suitability of this litigation in a federal forum, b) what state-law mechanisms may be available to resolve the underpayment claims as an alternative to a class action, and c) an assessment of the defendants’ efforts to resolve and pay undisputed claims.

While it is unclear how the district court will rule on remand, the Fourth Circuit has signaled that class certification requires district courts to rigorously analyze each Rule 23 requirement and ensure that Plaintiffs have met their burden of demonstrating that each prerequisite to class certification has been satisfied.

The cases are: EQT Production Company v. Robert Adair, No. 13-414; EQT Production Company v. Eva Mae Adkins, No. 13-415;EQT Production Company v. Julia A. Kiser, No. 13-414; CNX Gas Company LLC v. Jeffrey Carlos Hale, No. 13-419, and CNX Gas Company LLC v. Doris Betty Addison, No. 13-421. Jonathan T. Blank of McGuireWoods LLP represents CNX Gas Company and argued on behalf of all defendants. Michael Willis Smith of Christian & Barton argued on behalf of Defendant EQT Production Company. In addition, the following lawyers and law firms represented Defendants and Intervenor-Defendants in the cases: Wade Massie, Penn, Stuart & Eskridge; James Creekmore, Creekmore Law Firm PC; Blair Gardner, Jackson Kelly PLLC; and Eric Whitesell, Gillespie, Hart, Altizer & Whitesell.