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January 30, 2013 Articles

Oil and Gas Class Actions in Texas

Forum selection and other tactics for defeating class certification.

By Thomas G. Ciarlone Jr. – January 30, 2013

It is axiomatic that the denial of class certification virtually always spells the swift end to a class action. On this score, after recognizing “the pivotal status of class certification in large-scale litigation,” one federal appeals court has emphasized that “denying . . . class certification is often the defining moment in class actions . . . for it may sound the death knell of the litigation on the part of plaintiffs. . . .” In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 310 (3d Cir. 2008) (citation and internal quotes omitted). By the same token, a successful bid for class certification can open up defendants to exposure on such a grand scale that they will settle even dubious claims rather than assume the burden of a costly defense, the unpredictability of a runaway jury, and the attendant risk of a crippling damages award. The official advisory committee notes to the 1998 amendments to the Federal Rules of Civil Procedure explicitly recognize this dynamic, bluntly conceding that class certification “may force a defendant to settle rather than incur the costs of defending a class action and run the risk of potentially ruinous liability.” 1998 Advisory Committee Notes to Fed. R. Civ. P. 23(f) (quoted in CE Design Ltd. v. King Architectural Metals, Inc., 637 F.3d 721, 723 (7th Cir. 2011)).

The Fifth Circuit has acknowledged this as well, in similarly stark terms:

[C]lass certification creates insurmountable pressure on defendants to settle, whereas individual trials would not. The risk of facing an all-or-nothing verdict presents too high a risk, even when the probability of an adverse judgment is low. These settlements have been referred to as judicial blackmail.

Castano v. American Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996).

Naturally, then, when named in a putative class action, energy firms must take a sober approach to class certification. It represents an early stage in the proceedings when litigation can be stopped in its tracks—and possibly defused permanently. But this is easier said than done. Class certification is a minefield, one rife with traps for those unschooled in the intricacies of Rule 23 and its state-law equivalents.

Venue: Federal or State? 
A threshold decision facing many defendants in class cases is whether to seek a change in venue, either via removal to federal court or remand to state court. Defendants will often reflexively opt for the former, on the theory that a federal tribunal will insulate them from the vagaries of small-town juries and afford them access to a pool of judges with fewer parochial allegiances. In Texas, however, the choice is not necessarily as cut and dried. While the Fifth Circuit has by all means openly demonstrated its hostility to the class mechanism, state courts in Texas have likewise proven inhospitable to class actions. As one consumer advocacy group has lamented:

Justifiably, Texas is now considered by most class action lawyers (on both sides of the aisle) to be the state most hostile to class actions. One judge commented to the author, “I don’t know why anyone would bring a class action in state court in Texas because as far as I can tell, the Texas Supreme Court has abolished class actions—it just hasn’t said so.”

Steve Gardner, “Texas Supreme Court: Putting the Squeeze on Class Actions?” Consumer Law & Policy Blog (Mar. 5, 2007).

One Houston practitioner, writing in the Texas Bar Journal about the future of class actions in Texas, has gone so far as to forecast the total demise of the class mechanism in the state: “The Texas class action is, for the most part, feeble and on its last legs.”  “A moment of silence,” the author quipped, perhaps only half-jokingly, “may be in order.”  Alistair B. Dawson and Geoff A. Gannaway, “The Future of Civil Litigation: In Memoriam: Texas Class Actions,” 72 Tex. B.J. 366, 373 (May 2009).

Since neither the Fifth Circuit nor the Texas state courts are enamored of class actions, when an exploration and production (E&P) company or other energy firm is named in a class case filed in Texas, an important question arises: To the extent it has a choice, is the defendant better served by proceeding in state or federal court? This is not merely an academic decision; often it is one that has practical—perhaps even outcome-determinative—consequences.

Procedural Differences
Procedural rules in both the federal and the Texas state courts make provision for interlocutory review of class-certification orders. So, in theory at least, defendants who lose at the certification stage can take an immediate appeal whether they are in federal or state court. But theory and practice rarely share much in common.

To begin with, Rule 23(f) is discretionary in nature. In other words, a federal court of appeals can decline to hear an appeal of an order granting class certification, and, historically, the federal courts of appeals have been reluctant to second-guess—on an interlocutory basis—a trial court’s decision to certify a class. See, e.g., In re Delta Air Lines, 310 F.3d 953, 959 (6th Cir. 2002) (“Like the other courts before it, the Lorazepam court indicated that Rule 23(f) petitions should be rarely granted.”) (citing In re Lorazepam & Clorazepate Antitrust Litigation, 351 U.S. App. D.C. 223, 289 F.3d 98 (D.C. Cir. 2002)); Asher v. Baxter Int’l, Inc., 505 F.3d 736, 741 (7th Cir. 2007) (“Rule 23(f) is an exception that . . .  must be used sparingly lest interlocutory review increase the time and expense required for litigation.”);Turnage v. Norfolk S. Corp., No. 05-0509, 2006 U.S. App. LEXIS 11674, at *2 (6th Cir. Apr. 28, 2006) (A “deferential standard of review supports the notion that Rule 23(f) appeals will be the exception, not the norm.”) (citation and internal quotes omitted). By contrast, pursuant to section 51.014(a)(3) of the Texas Civil Practice & Remedies Code—the closest analog to Rule 23(f) under Texas procedural law—disappointed litigants can take an interlocutory appeal as of right.

This presumptive ability to take a second bite at the apple on appeal—before absorbing the huge expense accompanying protracted litigation—is a decisive advantage for defendants whose exposure has been magnified by a certified class. It also bears special emphasis that delay is among the worst enemies of class-action firms working on a contingency. Because they work on a contingency and typically advance all expenses, plaintiffs’ lawyers always strive to generate forward momentum to bring matters to a head—so that they can either get paid or cut their losses. An interlocutory appeal will sometimes even operate to stay proceedings in the trial court, and, regardless, it will be an expensive distraction. This can spread thin the resources of class counsel who are personally funding the litigation out of their own war chests, applying pressure to reach a favorable settlement.

Substantive Differences
Further sweetening the deal for defendants, the Texas Supreme Court has—at least implicitly in a series of decisions decertifying classes—signaled a general aversion to the class device. See, e.g., Stonebridge Life Ins. Co. v. Pitts, 236 S.W.3d 201 (Tex. 2007) (decertifying class on basis of predominance); Best Buy Co. v. Barrera, 248 S.W.3d 160 (Tex. 2007) (predominance); Citizens Ins. Co. v. Daccach, 217 S.W.3d 430 (Tex. 2007) (adequacy); DaimlerChrysler Corp. v. Inman, 252 S.W.3d 299 (Tex. 2008) (standing);Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) (predominance and commonality); Exxon Mobil Corp. v. Gill, 299 S.W.3d 124 (Tex. 2009) (legal merit);Southwestern Bell Tel. Co. v. Marketing on Hold Inc., 308 S.W.3d 909 (Tex. 2010) (adequacy and predominance). This trend began in 2000, when the supreme court issued its seminal opinion in Southwestern Refining Company v. Bernal. There, with only Justice Enoch dissenting, the court rejected the long-standing “approach of certify now and worry later.”Bernal, 22 S.W.3d at 425 (Tex. 2000). A new sheriff was in town, and, from then on, applications for class certification would be subject to strict scrutiny—very strict scrutiny, indeed. Applications would be granted only in the limited instances where a “rigorous analysis” demonstrated that Texas Rule of Civil Procedure 42’s requirements for certification had been satisfied. Bernal, 22 S.W.3d at 435. Even when one of the rule’s elements is not put into issue by the parties, the trial court is still obligated to engage in the same “rigorous analysis” with respect to the undisputed element. See, e.g., State Farm Mutual Auto. Ins. Co. v. Lopez, 156 S.W.3d 550, 555 (Tex. 2004).

Do not underestimate the privileged status of the oil and gas industry in Texas. Judges are elected officials in the Lone Star State, and the majority of voters are proponents of the energy sector. Many residents owe their livelihood to it, and some of the most strident advocates for the industry have very deep pockets. The atmosphere is further saturated by the state’s public policy encouraging exploration and production activities. In this regard, the Texas Constitution explicitly provides that it is a public right and duty to “protect and encourage the development of . . . natural resources.” Exxon Corp. v. Emerald Oil & Gas Co., L.C., 331 S.W.3d 419, 425 (Tex. 2010) (citing Tex. Const. art. XVI, § 59). Under the proper circumstances, practical realities such as these can tip the scales in favor of a state forum for an energy firm targeted in a class action, especially when coupled with the Texas Supreme Court’s demonstrated animosity toward the class device.

Other Considerations
Other practical considerations can militate in favor of a state venue. Effective for actions filed on or after September 1, 2003, a new subsection—governing fee awards in class actions—was appended to the tail end of Rule 42 of the Texas Rules of Civil Procedure. It provides that, “[i]n awarding attorney fees, the court must first determine a lodestar figure by multiplying the number of hours reasonably worked times a reasonable hourly rate,” and, in the aggregate, “[t]he attorney fees award must be in the range of 25% to 400% of the lodestar figure.” Tex. R. Civ. P. 42(i)(1). While this range is generous enough, it is not unprecedented for fee awards in class cases to exceed a multiple of four times the overall lodestar. Rule 42’s fixed upper limit can therefore operate as at least a mild disincentive. Very recently, for example, plaintiffs’ lawyers in Delaware were awarded a whopping $304 million in fees—which, on an hourly basis, worked out to over $35,000 (no, that’s not a typo and no, that could not happen in Texas). See Wall Street Journal, “The AM Roundup: $35,000 Per Hour,” Sept. 25, 2012.

Additionally, “[i]f any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney fees awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.” Tex. R. Civ. P. 42(i)(2). While squarely aimed at plaintiffs’ counsel’s wallet, this provision may represent one of the few detriments to class-action defendants proceeding in Texas state courts. Coupon settlements have historically facilitated an almost symbiotic relationship between plaintiffs’ lawyers and corporate defendants: The latter could fund settlements on the cheap with coupons for their own products or services, while the former could justify their cash fees based on the economic value of the coupons.

Defeating Class Certification in State Court
There are several tactics that can be used in Texas state courts to maximize the odds of defeating class certification. All class actions must, of course, satisfy four statutory prerequisites: (1) numerosity—the class is so numerous that joinder of all members is impracticable; (2) commonality—there are questions of law or fact common to the class; (3) typicality—the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) adequacy of representation—the representative parties and their attorneys will fairly and adequately protect the interests of the class. See Tex. R. Civ. P. 42(a).

This alone is not enough, however. A class action must also satisfy at least one of the additional requirements announced in Rule 42(b). By far the most common route for plaintiffs is subsection (b)(3), which requires: (i) that “questions of law or fact common to the members of the class predominate over any questions affecting only individual members”; and (ii) that class treatment be “superior to other available methods for the fair and efficient adjudication of the controversy.” These two requirements—predominance and superiority—can often be used by E&Ps and other industry players to cut a putative class action off at its legs.

This is particularly true in the context of disputes over the calculation and payment of royalties—a common arena for class litigation in the oil-and-gas sector—which often implicate multiple leases, conveyances, and other instruments; the typically unique circumstances surrounding their negotiation and execution; and fact-intensive inquiries into inherently individualized areas such as reliance. When confronted with a tangled web of agreements—signed in different places over various periods of time, by individuals sometimes scattered throughout the country—vexing choice- and conflict-of-law questions can sharpen the predominance requirement into a powerful weapon for the class-action defendant. The Texas Supreme Court’s decision in Compaq Computer Corp. v. Lapray is illustrative.

As the court explained in Lapray, “[t]he threshold question [on appeal] . . . is whether the trial court conducted a proper choice of law analysis and correctly decided that Texas law controlled.” To do this, the appellate court “must first decide whether Texas law conflicts with the laws of other interested states, as there can be no harm in applying Texas law if there is no conflict.” Unsurprisingly, it is the class representative who bears “the burden of establishing the prerequisites for class treatment,” and this burden can be met only through “an extensive analysis of state law evaluating any differences.” Lapray, 135 S.W.3d 657, 672 (Tex. 2004).

Luckily for defendants, a court “may not accept on faith a party’s assertion that no variations in state laws exist; plaintiffs, as class action proponents, must show that it is accurate.” Id. at 672–73 (citation and internal quotes omitted). The required showing represents, to put it mildly, a massive hurdle. Anything less than “a state-by-state analysis of the questions of law presented,” including a granular “analy[sis] [of] the relevant law of each state and the variations among states,” will not suffice, and class certification will therefore fail the litmus test for predominance. Class-action defendants squander a golden opportunity when they fail to hold the plaintiff’s feet to the fire by insisting on strict compliance with the mandates announced in Lapray. While in theory the trial court is ultimately responsible for putting the plaintiffs through these paces, defense counsel would be wise to jump-start the process and keep the pressure on.

The Trial Plan
While at first glance this may strike the casual observer as a mundane housekeeping matter, the trial plan can in fact be a potent antidote to class certification. On this front, consider the decision in Southwestern Refining Co. v. Bernal. There, the Texas Supreme Court was emphatic that a trial plan is a key component of the rigorous analysis “courts must perform . . . before ruling on class certification.” Bernal, 22 S.W.3d at 435. Make no mistake: This was not just some passing academic observation. The Supreme Court will not hesitate to call out lower appellate courts when they ignore the strictures articulated in Bernal. For example, when the Tyler Court of Appeals dared to certify a class before the plaintiffs had prepared a trial plan, the Supreme Court of Texas dropped the hammer, first stressing that this “directly conflicts with Bernal,” and then teaching that it is irresponsible to “certify a class without knowing how the claims can and will likely be tried.” North American, 153 S.W.3d at 44. The bottom line is this: “A trial plan is required in every certification order to allow reviewing courts to assure that all requirements for certification under Rule 42 have been satisfied.”State Farm Mutual Auto. Ins. Co. v. Lopez, 156 S.W.3d 550, 556 (Tex. 2004). Pulling no punches, the Supreme Court held in State Farm Mutual Auto. Ins. Co. v. Lopez that, in the absence of a trial plan, a certification order is necessarily “infirm.” 156 S.W.3d 550 (Tex. 2004).

The class-action defendant should seize on this opportunity. It is one thing to debate Rule 42’s predominance requirement in a vacuum, by reference to abstract legal principles cobbled together by appellate tribunals far removed from the trench warfare of trial. This amorphous terrain allows one to gloss over the practical realities of trial and trivialize the day-to-day logistics that can often make the class-wide adjudication of claims a formidable—and perhaps even counterproductive—exercise. It is incumbent on the defendant to fast forward to the day of trial and paint a vivid picture for the court, one that trains an unflattering spotlight on the major hiccups that would be avoided if class proceedings were replaced with a series of smaller individual trials.

And remember: It is the plaintiff’s obligation to put pen to paper and present the court with a concrete road map for trial. If the plaintiff cannot formulate a pragmatic blueprint for trying hundreds, maybe even thousands, of claims in a single trial—using common proofs and identical theories of liability—then the plaintiff’s case is not entitled to class status. Too often defendants fail to subject the plaintiff’s trial plan to sufficient scrutiny. Don’t make the same mistake.

Plan Ahead
The worst moment to think about litigation for the first time is after your company is visited by the process server. The forward-thinking practitioner is contemplating litigation in the best of times—when everyone is playing nice and the courthouse is the furthest thing from anyone’s thoughts.

E&Ps devote a tremendous amount of time and resources to acquiring leases. Despite this, the nuances of the lease contract itself are often given surprisingly little thought. More often than not, the lease is a form document—one that no one has reviewed or substantially revised in years—hastily filled out by a contract landman on the landowner’s front porch or in his or her living room. Although in some respects this is just the nature of the beast, there is no excuse for using anything less than a bulletproof lease form. While more sophisticated landowners and those represented by capable counsel may resist it, an arbitration clause with a class-action waiver is essential. Yet the vast majority of mineral leases don’t include one; usually this can be chalked up to the drafter’s ignorance or oversight.

In 2011, the U.S. Supreme Court handed down its seminal decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which upheld an arbitration clause containing a class-action waiver against an unconscionability challenge premised on state law. In other words, according to the deeply divided Court, states must enforce arbitration agreements even when the agreement provides that consumer complaints be arbitrated one by one, on a piecemeal—rather than a class-action—basis. Class-action waivers are sometimes enough to persuade opportunistic plaintiffs’ lawyers to look elsewhere for lower-hanging fruit. That begs the question: If you aren’t already, why aren’t you taking advantage of this class-action prophylactic?

In the wake of Concepcion, the circuit courts have held that class-action waivers in arbitration clauses will be enforced when the underlying claim sounds in state law, even if enforcement all but eliminates any genuine prospect of recovery for individual plaintiffs. See generally, e.g.Homa v. American Express Co., No. 11-3600, 2012 U.S. App. LEXIS 17763 (3rd Cir. Aug. 22, 2012) (“Even if [the plaintiff] cannot effectively prosecute his claim in an individual arbitration, that procedure is his only remedy, illusory or not.”);Pendergast v. Sprint Nextel Corp., No. 09-10612, 2012 U.S. App. LEXIS 17512 (11th Cir. Aug. 20, 2012) (same). However, a circuit split has emerged about whether Concepcion compels the same result when one or more of the putative class claims are based on federal law.  Compare generally, e.g.In re American Express Merchant’s Litigation, 554 F.3d 300 (2d Cir. 2009), 634 F.3d 187 (2d Cir. 2011), 667 F.3d 204 (2d Cir. 2012) (Concepcion does not compel enforcement of class-action waivers “if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”), with Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012) (“Concepcion is broadly written,” thus mandating enforcement of class-arbitration waivers even if this effectively precludes individual plaintiffs from pursuing their claims.) (wherein the plaintiffs had asserted claims under both state and federal law). Fortunately for E&Ps, because most of the claims they routinely confront find their genesis in state common law, this latter line of authority should not meaningfully alter the analysis. Particularly now that the circuit courts have had an opportunity to wrestle with Concepcion and flesh out its finer points, there is no apparent downside to including a class-action waiver in mineral leases and other form documents.

Class actions are serious business. They are enormously expensive to defend; they will distract key members of your management team from their core business functions; and they can take a heavy toll on your company’s public image. In a high-stakes game such as this, victory can be elusive, and the winner is often the party who relentlessly pursues every possible litigation advantage. While no prescribed set of prefabricated tactics will defeat class certification, there are still some usual suspects—including the threshold matter of selecting the optimal forum—that can reliably work to the defendant’s advantage.

Keywords: energy litigation, class certification, oil, gas, Fifth Circuit

Thomas G. Ciarlone Jr. is a senior counsel at Burleson LLP in the firm's San Antonio, Texas, office.

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