6th Circ. Backs Landowners’ Cert. In Chesapeake Royalty Row

November 12, 2019

Law360 (August 15, 2019, 10:19 PM EDT) -- The Sixth Circuit affirmed class certification Thursday for landowners claiming Total E&P USA Inc. and Chesapeake Exploration LLC withheld payments from hundreds of royalty owners, saying differences among the natural gas and oil wells did not overly complicate the common question of whether the company made improper payment deductions.

 A three-member panel ruled that the question of whether Total and Chesapeake improperly paid royalties after deducting costs associated with processing the gas so it could be sold on the market was common among the landowners. As such, a lower court properly determined that the language of each lease and when the gas could be deemed marketable was a common question at the heart of determining liability, the panel said.

 "The case will turn on whether the lease language is deemed to invoke the at-the-well rule, the marketable-product rule, or a different valuation system entirely. This question will have a common answer that turns on the court's interpretation of the lease language under Ohio law," U.S. Circuit Judge Ronald Lee Gilman wrote in the published opinion.  Chesapeake told the appeals court in January that its practice of calculating royalties known as the "netback" method, which allows gas companies to deduct fees they pay to lessors when a contract sets the value "at the well," does not violate the leases and that the lessors can't establish liability without individual inquiries into Chesapeake's use of the method. An Ohio federal judge recently determined that Ohio law follows the "netback" method.

 "Far from engaging in the 'rigorous analysis' required by the court's precedents, the district court relied on plaintiffs' allegations about the netback method as the beginning and end of its certification analysis," Chesapeake said in its brief. 

 But the panel said Thursday that any merits-based arguments are left for later stages of the case, rejecting Chesapeake's insistence to consider the U.S. Supreme Court's 2013 decision in Comcast Corp. v. Behrend , which allowed lower courts to consider the merits in determining whether common questions prevail at the class certification stage. 

 Chesapeake also argued that the landowners can't raise a new theory regarding the payment that they never raised until the class certification stage and that the panel should consider recent circuit court decisions vacating certification after the trial courts failed to ensure prerequisites for class certification.

 The panel swiftly knocked out each of those arguments, 'saying the landowners had in fact raised the payment theory in the original complaint and that the other suits, while similar, had significant differences.

 U.S. District Judge Benita Y. Pearson granted class certification in 2018 to two of the subclasses of landowners, saying the use of the "netback" method was the central question at issue. Judge Pearson said that even though individual questions about market prices of oil and gas at the wellhead remained, answering them was inappropriate for the certification stage. 

 Dennis E. Murray Jr. of Murray & Murray, who represented the class, told Law360 on Thursday that the panel properly saw their case as the "garden variety" of class action warranting certification. 

"There have been a number of appellate decisions in messy oil and gas class actions in which the courts said the classes shouldn't have been certified, but in those cases, the trial courts had taken too broad [a] look at Rule 23," Murray said. "The uniformity of the leases and the particular wrong that we alleged - that differentiated our case. You have to narrow it down to a uniform practice that has a clear path and mechanism to determine liability for the class."

Representatives for Total and Chesapeake did not immediately respond to requests for comment Thursday.

Zehentbauer Family Land is represented by Dennis E. Murray Jr. and William H. Bartle of Murray & Murray and Terry A. Moore, Gregory W. Watts and Scott M. Zurakowski of Krugliak Wilkins Griffiths & Dougherty.

Chesapeake Exploration is represented by Daniel T. Donovan of Kirkland & Ellis LLP and Timothy B. McGranor of Vorys Sater Seymour & Pease LLP.

The case is Zehentbauer Family Land LP et al. v. Chesapeake Exploration LLC et al., case number 18-4139, in the U.S. Court of Appeals for the Sixth Circuit.

 --Editing by Haylee Pearl.

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