Royalty Class Actions: The Rise of Class Certification and Defenses to Avoid It

The recent rise in royalty class action lawsuits brought by the plaintiffs’ bar, that generally coincides with the ebb in crude oil prices, is a growing risk for oil and gas companies. Class action certifications in royalty lawsuits were less common before the COVID-19 pandemic, but since 2019 there has been an uptick in royalty class actions, specifically those related to (1) when a valuation of the royalties should occur (“at the well” or further downstream) and (2) post-production charges, costs and deductions.

From 2019 to 2021, at least 30 royalty class actions were filed. These cases continue to percolate through the courts with more decisions on the horizon, and it is likely that the U.S. Court of Appeals for the Fourth Circuit will be the next to publish a royalty class action decision.

With this increase, recent certification decisions have largely favored plaintiffs, while previous royalty class actions were more favorable for defendants. Accordingly, lessees should focus on a plaintiff’s failure to sufficiently assess the various lease forms, or any inaccuracy in that analysis, to defeat such an effort.

If the plaintiffs have sufficiently and accurately completed a lease language analysis for the various lease forms at issue, an attack on the predominance and commonality elements is unlikely to succeed. Consequently, if a plaintiff has met its burden on assessing various lease forms, defendants should turn to other arguments to defeat certification via the commonality element: (1) location of wells, (2) distance to market, (3) quality of gas produced, (4) unclaimed deductions/costs, (5) marketing arrangements/changes, (6) markets and market prices, and (7) royalty payment practices.

One case that illustrates these points well is Zehentbauer Family Land, LP v. Chesapeake Expl., L.L.C., in which the Sixth Circuit dealt with a determination of a succeeding class claim and a failing class claim. 935 F.3d 496, 505 (6th Cir. 2019). First, the court, in dicta, found that certification of one subclass would not have been affirmed had plaintiffs not stipulated to proceeding solely on a post-production-costs theory at the appellate level. The court found that the plaintiffs’ claims relied on showing that the defendants’ royalty payments were based on sale prices that fell below what an unaffiliated company would have paid for the oil and gas at the wellhead. This would have failed the test of predominance “because the inquiry to determine these market prices is highly individualized because the market prices depend on the quality of the oil and gas sold at each well, the quantity of the oil and gas so sold, and the proximity of the well to processing facilities and downstream markets.”

But the court affirmed class certification on the plaintiffs’ other theory regarding post-production costs. The plaintiffs had succeeded in showing that the lease at issue did not have any material differences in its language and identifying two subclasses that had “materially identical oil and gas royalty provisions.” Because the defendants had not argued that differences existed in those leases, the commonality and predominance elements were met. Accordingly, the Sixth Circuit made clear that individualized issues may still be found, but certain avenues of argument in that vein will be foreclosed if the plaintiffs do enough diligence in reviewing the leases at issue.

Industry participants can protect themselves against this wave of royalty litigations by preempting this type of litigation with the utmost diligence and review of their leases and the royalty language included. Companies should willingly and openly discuss these issues with their land, accounting and marketing departments to ensure that their pricing structures work—particularly what deductions are taken under which leases—and draft consistent royalty clauses in leases and addendums. Moreover, industry actors should work with their in-house and outside counsel to identify the differences between the states in which they have leaseholds and ensure that their leases comply and will not be the subject of a class action.