EQT Production Company v. Robert Adair , 764 F.3d 347 ( 2014 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-414
EQT PRODUCTION COMPANY,
Petitioner,
v.
ROBERT ADAIR, on behalf of himself and all others similarly
situated,
Respondent.
No. 13-415
EQT PRODUCTION COMPANY,
Petitioner,
v.
EVA MAE ADKINS, on behalf of herself and all others
similarly situated,
Respondent.
No. 13-418
EQT PRODUCTION COMPANY,
Petitioner,
v.
JULIE A. KISER, Plaintiff and Class Representative,
Respondent.
No. 13-419
CNX GAS COMPANY, LLC,
Petitioner,
v.
JEFFREY CARLOS HALE, on behalf of himself and all others
similarly situated,
Respondent.
No. 13-421
CNX GAS COMPANY, LLC,
Petitioner,
v.
DORIS BETTY ADDISON, on behalf of herself and all others
similarly situated,
Respondent.
No. 13-422
BUCKHORN COAL COMPANY LLLP; COMMONWEALTH COAL CORPORATION;
HARRISON-WYATT LLC,
Petitioners,
v.
2
DORIS BETTY ADDISON; JEFFREY CARLOS HALE,
Respondents.
On Petitions for Permission to Appeal from the United States
District Court for the Western District of Virginia, at
Abingdon. James P. Jones, District Judge. (1:10-cv-00037-JPJ-
PMS; 1:10-cv-00041-JPJ-PMS; 1:11-cv-00031-JPJ-PMS; 1:10-cv-
00059-JPJ-PMS; 1:10-cv-00065-JPJ-PMS)
No. 13-2376
ROBERT ADAIR, on behalf of himself and all others similarly
situated,
Plaintiff – Appellee,
v.
EQT PRODUCTION COMPANY,
Defendant – Appellant.
No. 13-2378
EVA MAE ADKINS, on behalf of herself and all others
similarly situated,
Plaintiff – Appellee,
v.
EQT PRODUCTION COMPANY,
Defendant – Appellant.
3
No. 13-2381
JULIE A. KISER, Plaintiff and Class Representative,
Plaintiff – Appellee,
v.
EQT PRODUCTION COMPANY,
Defendant – Appellant.
No. 13-2382
JEFFREY CARLOS HALE, on behalf of himself and all others
similarly situated,
Plaintiff – Appellee,
v.
CNX GAS COMPANY, LLC,
Defendant – Appellant.
No. 13-2383
DORIS BETTY ADDISON, on behalf of herself and all others
similarly situated,
Plaintiff – Appellee,
v.
CNX GAS COMPANY, LLC,
Defendant – Appellant.
4
No. 13-2384
DORIS BETTY ADDISON; JEFFREY CARLOS HALE,
Plaintiffs – Appellees,
v.
BUCKHORN COAL COMPANY LLLP; COMMONWEALTH COAL CORPORATION;
HARRISON-WYATT LLC,
Defendants – Appellants.
Appeals from the United States District Court for the Western
District of Virginia, at Abingdon. James P. Jones, District
Judge. (1:10-cv-00037-JPJ-PMS; 1:10-cv-00041-JPJ-PMS; 1:11-cv-
00031-JPJ-PMS; 1:10-cv-00059-JPJ-PMS; 1:10-cv-00065-JPJ-PMS)
Argued: May 13, 2014 Decided: August 19, 2014
Before WILKINSON, KEENAN, and DIAZ, Circuit Judges.
Vacated and remanded by published opinion. Judge Diaz wrote the
opinion, in which Judge Wilkinson and Judge Keenan joined.
ARGUED: Jonathan Todd Blank, MCGUIREWOODS LLP, Charlottesville,
Virginia; Michael Willis Smith, CHRISTIAN & BARTON, Richmond,
Virginia, for Appellants. Elizabeth Joan Cabraser, LIEFF,
CABRASER, HEIMANN & BERNSTEIN, LLP, San Francisco, California,
for Appellees. ON BRIEF: Stephen M. Hodges, Wade W. Massie,
Mark E. Frye, PENN, STUART & ESKRIDGE, Abingdon, Virginia; R.
Braxton Hill, IV, CHRISTIAN & BARTON, Richmond, Virginia, for
Appellant EQT Production Company. Lisa M. Lorish, Tennille J.
Checkovich, John Tracy Walker, IV, MCGUIREWOODS LLP,
Charlottesville, Virginia; James R. Creekmore, Blair Nivia Wood,
CREEKMORE LAW FIRM PC, Blacksburg, Virginia, for Appellant CNX
Gas Company, LLC. Blair M. Gardner, Lee Adair Floyd, JACKSON
KELLY PLLC, Charleston, West Virginia; Eric D. Whitesell,
5
GILLESPIE, HART, ALTIZER & WHITESELL, Tazewell, Virginia, for
Appellants Buckhorn Coal Company LLLP, Commonwealth Coal
Corporation, and Harrison-Wyatt LLC. David S. Stellings, Daniel
E. Seltz, LIEFF CABRASER HEIMANN & BERNSTEIN, LLP, New York, New
York; Jackson S. White, Jr., THE WHITE LAW OFFICE, Abingdon,
Virginia, for Appellees.
6
DIAZ, Circuit Judge:
This appeal arises from the district court’s decision to
certify five related class action suits. The plaintiffs in each
of the five classes generally allege that EQT Production Co. and
CNX Gas Co. have unlawfully deprived the class members of
royalty payments from the production of coalbed methane gas
(“CBM”) in Virginia. Four of the five classes claim that EQT
and CNX have improperly remitted royalty payments to escrow or
suspense accounts instead of to the royalty owners. All five
classes allege that EQT and CNX have been underpaying royalties.
The defendants petitioned for permission to appeal the five
orders granting class certification pursuant to Federal Rule of
Civil Procedure 23(f). We deferred ruling on the petitions,
consolidated the cases, and ordered formal briefing.
We now grant the appeal and conclude that the district
court abused its discretion when it certified the five classes.
As we explain below, Rule 23 requires a more rigorous analysis
as to whether the requirements for class certification have been
satisfied. We therefore vacate and remand for reconsideration
of the plaintiffs’ motions for class certification.
7
I.
A brief explanation of the historical and statutory
background is necessary to assess the implications of class
certification in this case.
A.
CBM is a form of natural gas that resides in the pores of
coal. When the pressure on coal is reduced--for example, from
natural geologic shifts or mining--CBM is released from the
surface of coal.
Like any form of methane, CBM is highly explosive.
Historically, miners viewed CBM as a dangerous waste product and
ventilated it into the atmosphere as a safety measure. By the
1970s, however, it became apparent that CBM could be used as an
energy resource, and producers began to capture it for
commercial use. CBM has since been recognized in Virginia as a
“distinct mineral estate,” Harrison-Wyatt, LLC v. Ratliff, 593
S.E.2d 234, 238 (Va. 2004), which means that the rights to CBM
can be severed from the land.
Questions regarding ownership of the CBM estate have long
plagued its commercial development in Virginia. CBM drilling
often occurs on tracts of land where different persons own the
subsurface gas rights (the “gas estate”) and coal mining rights
(the “coal estate”). Until recently, severance deeds generally
did not mention CBM, much less assign ownership rights. At
8
times, both gas estate owners and coal estate owners have
claimed title to CBM. Further complicating matters, a CBM
drilling unit--the area of land underlying and surrounding a CBM
well--typically encompasses 60 to 80 acres. Multiple,
separately owned tracts of land often underlie a single unit,
and each tract has the potential for an ownership conflict if
the coal estate has been severed from the gas estate.
B.
In 1990, the Virginia legislature enacted the Virginia Gas
and Oil Act, Va. Code Ann. § 45.1-361.1 et seq., to enable
producers to capture CBM “[w]hen there are conflicting claims to
the ownership of coalbed methane gas.” Id. § 45.1-361.22. Upon
application from a CBM producer, the Act authorizes the Virginia
Gas and Oil Board to enter orders “pooling all interests or
estates in the [CBM] drilling unit for the development and
operation thereof.” Id. Once issued, a pooling order
consolidates all adjoining tracts of land with subsurface CBM
into a single pool or unit of interests, enabling the CBM
producer to extract the gas from a common reservoir. Under the
Act, a pooling order deprives potential CBM owners of the right
to prevent CBM extraction but does entitle CBM owners to a
royalty payment.
To apply for a pooling order, producers must send notice to
every “potential owner of an interest” in the CBM underlying a
9
planned drilling unit. Id. § 45.1-361.22.1. The notices
typically give each interest holder the option of reaching a
voluntary lease agreement with the CBM producer prior to the
entry of the final pooling order. A person who does not reach
such an agreement is typically “deemed . . . to have leased his
gas or oil interest to the [CBM] well operator.” Id. § 45.1-
361.22.6. Under the provisions of the Board’s pooling orders,
deemed lessors are entitled to a royalty of one-eighth of the
net proceeds received by the CBM producer for their share of the
CBM.
To identify the persons to whom they must send notice, CBM
producers have historically prepared ownership schedules listing
all of the potential interest holders--and conflicting
claimants--to the CBM involved in each drilling unit. Preparing
these schedules is often an arduous process, requiring extensive
research and the preparation of numerous lease reports and title
opinions. The Board’s pooling orders adopt the ownership
schedules submitted by the CBM producers and memorialize the
ownership conflicts identified therein. 1
1
There is usually a gap between the issuance of a proposed
pooling order and the entry of a final order. During that time,
potential interest holders are permitted to contact the CBM
producer to reach a voluntary lease arrangement. The CBM
producer must update the schedules accordingly. A person who is
deemed a lessor under the statute is likewise free to
demonstrate, through a “final legal determination of ownership,”
(Continued)
10
Whenever a CBM ownership conflict is identified, the Board
must establish an escrow account to receive the royalties
attributable to the disputed interest. See id. § 45.1-361.22.2.
The CBM producer must “deposit into the escrow account one-
eighth of all proceeds attributable to the conflicting interests
plus all proceeds in excess of ongoing operational expenses.”
Id. § 45.1-361.22.4. As of January 2010, the Board’s escrow
account contained over $25 million.
The Act provides three ways for persons with a disputed
ownership claim to CBM to gain release of the escrowed funds. A
claimant can obtain “(i) a final decision of a court of
competent jurisdiction adjudicating the ownership of [CBM] as
between [conflicting claimants]; (ii) a determination reached by
an arbitrator . . . ; or (iii) an agreement among all claimants
owning conflicting estates in the tract in question or any
undivided interest therein.” Id. § 45.1-361.22.5.
II.
In this consolidated appeal, we consider the claims of five
separate plaintiff classes, comprising actual or potential CBM
that they are the true owner of the CBM interest. See Va. Code
Ann. § 45.1-361.22.6. Any such changes that occurred in this
case are not material to our resolution of the appeal.
11
interest holders, against two CBM producers, EQT and CNX. The
Adair, Adkins, and Kiser cases involve claims against EQT, while
Hale and Addison involve claims against CNX.
A.
Defendants EQT and CNX operate numerous CBM wells in
Virginia, many of which are subject to Board pooling orders. 2 To
apply for Board pooling orders, both EQT and CNX prepared
schedules attempting to identify every potential CBM interest
holder and any ownership conflict involved in each drilling
unit.
In their submissions to the Board, EQT and CNX have
consistently taken the position that a CBM interest is
conflicted if, for a given tract of land that is part of a
drilling unit, different persons own the gas estate and the coal
estate. Because Board pooling orders incorporate the
defendants’ schedules, those orders memorialize the ownership
conflicts identified by EQT and CNX.
Buckhorn Coal Co. LLP, Commonwealth Coal Corp., and
Harrison-Wyatt, LLC (collectively, the “BCH-W defendants”)
intervened as defendants in the two cases against CNX--Hale and
2
As of 2011, EQT operated approximately 1,977 CBM wells in
Virginia, between 250 and 400 of which were subject to Board
pooling orders. As of 2009, CNX operated approximately 3,200
CBM wells in Virginia, approximately 500 of which were subject
to pooling orders.
12
Addison. All of the BCH-W defendants have lease arrangements
with CNX granting it the right to drill wells into coal seams
owned by the BCH-W defendants. Based on these agreements, the
BCH-W defendants claim an interest in the CBM at issue in this
case. 3
B.
The plaintiff classes can be categorized by their shared
circumstances and requested relief.
1.
Four of the five classes--Adair, Addison, Hale, and Kiser--
consist of persons who have never received CBM royalties for a
CBM interest they claim to own. 4 As defined by the district
court, the classes include (1) all persons or their successors,
(2) whom EQT or CNX have identified as being the owners of the
gas estate in a tract underlying a CBM drilling unit, (3) whose
interest in the CBM is “in conflict” because a different person
owns the coal estate in the same tract.
3
Four of the five class complaints initially named as
defendants the persons and entities that EQT and CNX identified
as conflicting coal estate owners in the defendants’ submissions
to the Board. The plaintiffs subsequently amended each of the
complaints to omit the coal owners as defendants on the theory
that the coal owners were not necessary for a court to determine
CBM ownership.
4
We refer to these cases as the “ownership” classes.
13
The ownership classes can be further broken down. In two
cases (the “force pooled” classes)--Adair and Hale--the
plaintiffs’ purported CBM interests have been force pooled by a
Board order.
In the other two ownership cases (the “voluntary lease”
classes)--Kiser and Addison--the defendants entered voluntary
lease arrangements with the putative class members.
Nonetheless, the class members’ CBM interests have been subject
to pooling, and their royalties have either been paid into Board
escrow accounts or internally withheld by EQT and CNX. 5
The primary object of the ownership classes is to obtain
the release of escrowed or suspended royalties. To that end,
they seek a declaratory judgment that: (1) the ownership
conflict EQT and CNX identified between gas estate owners and
coal estate owners is “illusory”; (2) as gas estate owners, the
class members are entitled to the CBM royalties withheld; and
(3) any royalties held in escrow or internally suspended by EQT
and CNX as a result of the “illusory” ownership conflict must be
paid to the class members.
5
When EQT and CNX obtained consent from all potential CBM
interest holders, they pooled the relevant interests themselves
without seeking a Board order. But if the defendants deemed the
gas estate owner’s interest to be conflicted, they internally
suspended payment of the royalties, effectively escrowing them.
14
2.
The fifth class--Adkins--is unique, as it consists of
persons whose CBM ownership interest is not disputed. Instead,
the putative class includes persons who have received a royalty
from EQT at some point since January 1, 1995. The Adkins
plaintiffs allege that EQT has systematically underpaid CBM
royalties. The four other classes make similar claims against
the defendants. Each of the classes seek a complete accounting
of the royalties EQT and CNX have remitted to class members,
paid into escrow, or internally suspended.
In addition to the declaratory judgment relief sought by
the ownership classes, each class alleges a variety of other
theories of recovery, including tort, property, and contract,
and they all seek punitive damages.
C.
The lead plaintiffs filed the various complaints between
June 2010 and April 2011. The district court coordinated
discovery and pretrial proceedings in the five cases, referring
many of the preliminary motions to a magistrate judge.
After discovery and numerous hearings, the magistrate judge
issued a report and recommendation (“R&R”) supporting class
certification of the proposed classes and claims with two
exceptions. First, the magistrate judge found the claims of the
15
class representative in Kiser--then Eva Mae Adkins 6--atypical of
the other class members, and thus recommended against certifying
that class until a suitable representative could be substituted.
See Adair v. EQT Prod. Co., Nos. 1:10–cv–00037, 1:10–cv–00041,
1:11–cv–00031, 1:10–cv–00059, 1:10–cv–00065, 2013 WL 5429882, at
*42, *44-*45 (W.D. Va. Sept. 5, 2013). Second, the magistrate
judge recommended against certifying the breach of contract
claims related to the underpayment of royalties in Kiser and
Adkins because the class members had different lease agreements
with EQT. See id. at *42. Such variation, the magistrate judge
concluded, defeated Rule 23’s requirement that class claims be
typical of one another.
The district court adopted the magistrate judge’s R&R but
certified additional classes and claims. See Adair v. EQT Prod.
Co., No. 1:10-CV-00037, 2013 WL 5442369 (W.D. Va. Sept. 30,
2013); Addison v. CNX Gas Co., No. 1:10-CV-00065, 2013 WL
5442373 (W.D. Va. Sept. 30, 2013); Adkins v. EQT Prod. Co., No.
1:11-CV-00031, 2013 WL 5442378 (W.D. Va. Sept. 30, 2013); Hale
v. CNX Gas Co., No. 1:10-CV-00059, 2013 WL 5429901 (W.D. Va.
6
Although Eva Mae Adkins was replaced as the class
representative in Kiser for certification purposes, the district
court certified her as the class representative in the case we
call Adkins. As a result of these changes, some of the case
names below differ from what we use on appeal. The case we call
Kiser was called Adkins below. The case we refer to as Adkins
was referred to as Legard below.
16
Sept. 30, 2013); Legard v. EQT Prod. Co., No. 1:10-CV-00041,
2013 WL 5429885 (W.D. Va. Sept. 30, 2013). Specifically, the
district court substituted Julie A. Kiser as the class
representative in Kiser and certified the class. See Adkins,
2013 WL 5442378, at *2. Additionally, and without explanation,
the court certified the breach of contract claims in Kiser and
Adkins. See id. at *1; Legard, 2013 WL 5429885, at *1.
Finally, the court revised the class definitions for each
of the classes. Relevant to this appeal, it added language in
Adkins--the pure royalty underpayment case--to limit the class
to include only those royalty owners whose leases are “silent as
to the deduction of costs, according to the business records
maintained by EQT.” See Legard, 2013 WL 5429885, at *1. In
Kiser, one of the voluntary lease cases, the court certified a
class of all lease holders, but also certified a subclass of
persons “whose lease is silent as to the deduction of costs.”
Adkins, 2013 WL 5442378, at *1. The district court did not
clarify what it meant by “silent as to the deduction of costs”
in either of the certification orders.
The defendants timely filed petitions pursuant to Rule
23(f) for permission to appeal the five orders granting the
plaintiffs’ motions for class certification. We deferred ruling
on the petitions, consolidated the actions, and ordered briefing
on the merits.
17
III.
As a threshold matter, we first consider the defendants’
petitions for permission to appeal under Federal Rule of Civil
Procedure 23(f). That rule authorizes courts of appeals to
review decisions granting or denying class certification on an
interlocutory basis. See Fed. R. Civ. P. 23(f).
We apply a five-factor test to assess the appropriateness
of granting a Rule 23(f) petition. See Lienhart v. Dryvit Sys.,
Inc., 255 F.3d 138, 145 (4th Cir. 2001). The relevant factors
are:
(1) whether the certification ruling is likely
dispositive of the litigation; (2) whether the
district court’s certification decision contains a
substantial weakness; (3) whether the appeal will
permit the resolution of an unsettled legal question
of general importance; (4) the nature and status of
the litigation before the district court (such as the
presence of outstanding dispositive motions and the
status of discovery); and (5) the likelihood that
future events will make appellate review more or less
appropriate.
Id. at 144. We consider these factors on a holistic basis, but
the court should grant the petition, notwithstanding the other
factors, “[w]here a district court’s certification decision is
manifestly erroneous and virtually certain to be reversed on
appeal.” Id. at 145.
As discussed in greater detail below, class certification
in this case was manifestly improper. We therefore grant the
18
petitions for review and assess the merits of the district
court’s certification orders.
IV.
We review a district court’s decision to certify a class
for abuse of discretion. Brown v. Nucor Corp., 576 F.3d 149,
152 (4th Cir. 2009). A district court abuses its discretion
when it materially misapplies the requirements of Rule 23. See
Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 424 (4th Cir.
2003).
Rule 23(a) requires that the prospective class comply with
four prerequisites: (1) numerosity; (2) commonality; (3)
typicality; and (4) adequacy of representation. See Fed. R.
Civ. P. 23(a). In addition, “the class action must fall within
one of the three categories enumerated in Rule 23(b).”
Gunnells, 348 F.3d at 423.
Here, the plaintiffs seek certification under Rules
23(b)(2) and 23(b)(3). Rule 23(b)(2) authorizes class treatment
when “the party opposing the class has acted or refused to act
on grounds that apply generally to the class, so that final
injunctive relief or corresponding declaratory relief is
appropriate respecting the class as a whole.” Fed. R. Civ. P.
23(b)(2). As the Supreme Court has instructed, “[t]he key to
the (b)(2) class is the indivisible nature of the . . . remedy
19
warranted.” Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541,
2557 (2011) (internal quotation marks omitted). Certification
under this provision is appropriate “only when a single
injunction or declaratory judgment would provide relief to each
member of the class.” Id.
By contrast, certification under Rule 23(b)(3) is
appropriate when all of the prerequisites of Rule 23(a) are
satisfied and two other requirements are met. See id. at 2558.
Specifically, (1) common questions of law or fact must
predominate over any questions affecting only individual class
members; and (2) proceeding as a class must be superior to other
available methods of litigation. See Fed. R. Civ. P. 23(b)(3).
A party seeking class certification must do more than plead
compliance with the aforementioned Rule 23 requirements. See
Wal-Mart, 131 S. Ct. at 2551 (“Rule 23 does not set forth a mere
pleading standard.”). Rather, the party must present evidence
that the putative class complies with Rule 23. See Comcast
Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013).
To determine whether the party seeking certification has
carried its burden, a district court may need to “probe behind
the pleadings before coming to rest on the certification
question.” Id. (internal quotation marks omitted). Although
Rule 23 does not give district courts a “license to engage in
free-ranging merits inquiries at the certification stage,” a
20
court should consider merits questions to the extent “that they
are relevant to determining whether the Rule 23 prerequisites
for class certification are satisfied.” Amgen Inc. v. Conn.
Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1194-95 (2013).
It is the plaintiffs’ burden to demonstrate compliance with
Rule 23, but the district court has an independent obligation to
perform a “rigorous analysis” to ensure that all of the
prerequisites have been satisfied. See Wal-Mart, 131 S. Ct. at
2551.
V.
In light of the foregoing principles, we first consider the
district court’s decision to certify the four classes asserting
CBM ownership claims. At bottom, the ownership classes seek a
declaration that the class members are the true owners of CBM,
as well as payment of the royalties they believe EQT and CNX
have improperly escrowed or withheld.
After reviewing the magistrate judge’s R&R and the district
court’s certification orders, we conclude that the district
court abused its discretion in at least two ways. First, it
failed to rigorously analyze whether the administrative burden
of identifying class members in the ownership cases would render
class proceedings too onerous. Second, the court improperly
lowered the burden of proof the plaintiffs must satisfy to
21
demonstrate the prospective classes’ compliance with Rule
23(a)’s commonality requirement. We address each issue in turn.
A.
We have repeatedly recognized that Rule 23 contains an
implicit threshold requirement that the members of a proposed
class be “readily identifiable.” Hammond v. Powell, 462 F.2d
1053, 1055 (4th Cir. 1972); see also In re A.H. Robins Co., 880
F.2d 709, 728 (4th Cir. 1989) (“Though not specified in [Rule
23], establishment of a class action implicitly requires . . .
that there be an identifiable class . . . .”), abrogated on
other grounds, Amchem Prods., Inc. v. Windsor, 521 U.S. 591
(1997). Our sister circuits have described this rule as an
“ascertainability” requirement. See, e.g., Marcus v. BMW of N.
Am., LLC, 687 F.3d 583, 592-94 (3d Cir. 2012); John v. Nat’l
Sec. Fire & Cas. Co., 501 F.3d 443, 445 (5th Cir. 2007); In re
Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 44-45 (2d Cir.
2006).
However phrased, the requirement is the same. A class
cannot be certified unless a court can readily identify the
class members in reference to objective criteria. See Marcus,
687 F.3d at 593; see also Crosby v. Soc. Sec. Admin., 796 F.2d
576, 579-80 (1st Cir. 1986) (finding that a class failed to
satisfy Rule 23 requirements because it would be impossible to
22
identify class members without “individualized fact-finding and
litigation”).
The plaintiffs need not be able to identify every class
member at the time of certification. But “[i]f class members
are impossible to identify without extensive and individualized
fact-finding or ‘mini-trials,’ then a class action is
inappropriate.” Marcus, 687 F.3d at 593; see also 7A Charles
Alan Wright et al., Federal Practice & Procedure § 1760 (3d ed.
2005) (“[T]he requirement that there be a class will not be
deemed satisfied unless . . . it is administratively feasible
for the court to determine whether a particular individual is a
member.”).
Here, the proposed classes raise serious ascertainability
issues because they are defined to include both former and
current gas estate owners.
The district court defined the classes to include all
persons, and their successors-in-interest, who EQT or CNX
identified in their filings with the Board as being the owners
of a gas estate, whose interest in CBM is conflicted because a
different person owns the coal estate in the same tract. 7 The
court correctly concluded that some class members will be easy
7
Because the district court accepted the magistrate judge’s
R&R with only a few exceptions, we refer to the magistrate
judge’s findings in the R&R as the district court’s findings.
23
to identify because the classes are all defined in reference to
the ownership schedules that EQT and CNX submitted to the Board.
When ownership has not changed hands, identifying class
membership may be as simple as cross-referencing the ownership
schedules the defendants themselves prepared. See Adair, 2013
WL 5429882, at *33.
Complications arise, however, because ownership of the gas
estate has not been static since EQT and CNX first prepared the
ownership schedules. Some of the schedules were prepared some
twenty years ago, and they have not been updated to account for
changes in ownership. The schedules therefore cannot aid a
court in ascertaining those class members who obtained their
interest in the gas estate after the schedules were first
prepared. 8
The district court largely glossed over this problem,
merely noting that any ownership changes could be determined by
reference to local land records. See id. But resolving
8
With the exception of Adkins, neither the magistrate judge
nor the district court specifically defined the class periods
for any of the classes. The class period in Adkins clearly
extends from January 1, 1995 to the present. See Legard, 2013
WL 5429885, at *1. For the other four classes, we assume that
the class period begins on the first date the defendants
submitted ownership schedules to the Board as part of their
applications for pooling orders and extends through the present.
Although the record is not entirely clear as to this date, the
earliest reference in the record to a pooling order involving
the defendants appears to be June 1992.
24
ownership based on land records can be a complicated and
individualized process. Cf. Johnson v. Kan. City S., 224 F.R.D.
382, 389 (S.D. Miss. 2004) (denying certification on
ascertainability grounds when determining class membership
“would require individualized review of thousands of title
documents containing differing and diverse conveyance language
that would have to be analyzed according to the specific
language used and applicable case law to ascertain the intention
of the parties to the conveyances and the legal effect of the
instruments”), aff'd sub nom. Johnson v. Kan. City S. Ry. Co.,
208 F. App'x 292, 297 (5th Cir. 2006). As the record in this
case highlights, numerous heirship, intestacy, and title-defect
issues plague many of the potential class members’ claims to the
gas estate. In our view, these complications pose a significant
administrative barrier to ascertaining the ownership classes.
On appeal, the plaintiffs minimize these challenges,
arguing that a court can identify current gas estate owners at
the back-end. According to them, ownership issues only affect
the plaintiffs’ entitlement to royalties, not the
ascertainability of class membership. See Appellees’ Br. at 58-
60.
We disagree. The fact that verifying ownership will be
necessary for the class members to receive royalties does not
mean it is not also a prerequisite to identifying the class.
25
Without even a rough estimate of the number of potential
successors-in-interest, we have little conception of the nature
of the proposed classes or who may be bound by a potential
merits ruling. Lacking even a rough outline of the classes’
size and composition, we cannot conclude that they are
sufficiently ascertainable.
On remand, the district court should reconsider the
ascertainability issues posed by the ownership classes. At a
minimum, the district court should endeavor to determine the
number of potential class members who have obtained their
interest in the gas estate after the defendants first prepared
the ownership schedules. The court should also give greater
consideration to the administrative challenges it will face when
using land records to determine current ownership, and assess
whether any trial management tools are available to ease this
process. The district court should also determine whether it is
possible to adjust the class definitions to avoid or mitigate
the administrative challenges we have identified. 9
9
Although the issue was briefed and argued below, the
district court did not address whether it is possible to define
the classes without creating a fail-safe class. See Messner v.
Northshore Univ. HealthSys., 669 F.3d 802, 825 (7th Cir. 2012)
(explaining that a fail-safe class “is defined so that whether a
person qualifies as a member depends on whether the person has a
valid claim”). On remand, the district court should consider
this issue as part of its class-definition analysis.
26
B.
In addition to questioning the ascertainability of the
ownership classes, the defendants challenge the district court’s
conclusion that the ownership classes comply with Rule 23(a)’s
commonality requirement. As discussed previously, Rule 23(a)(2)
requires a plaintiff to show that “there are questions of law or
fact common to the class.” Fed. R. Civ. P. 23(a)(2).
Although the rule speaks in terms of common questions,
“what matters to class certification . . . [is] the capacity of
a classwide proceeding to generate common answers apt to drive
the resolution of the litigation.” Wal-Mart, 131 S. Ct. at 2551
(internal quotation marks omitted). A single common question
will suffice, id. at 2556, but it must be of such a nature that
its determination “will resolve an issue that is central to the
validity of each one of the claims in one stroke,” id. at 2551.
As we explain below, the plaintiffs in the ownership
classes have yet to identify such a question.
1.
To a great extent, commonality for the ownership classes
turns on the proper meaning of the Supreme Court of Virginia’s
decision in Harrison-Wyatt. In that case, the court considered
a 19th century severance deed conveying “all the coal in, upon,
and underlying” certain tracts of land. Harrison-Wyatt, 593
S.E.2d at 235 (internal quotation marks omitted). The court
27
held that the conveyance of coal did not transfer title to the
CBM estate, and that the grantor--the surface owner--retained
ownership of the CBM. See id. at 238. The Virginia legislature
subsequently codified that holding as part of the Virginia Oil
and Gas Act, providing that “[a] conveyance, reservation, or
exception of coal shall not be deemed to include coalbed methane
gas.” Va. Code Ann. § 45.1-361.21:1.
The plaintiffs interpret Harrison-Wyatt and the Act to mean
that a severance deed conveying coal never transfers title to
CBM, and that the owner of the gas estate in a tract of land
owns the underlying CBM as a matter of law. Since the
plaintiffs have all been identified as gas estate owners by EQT
and CNX, they believe the question of CBM ownership can be
resolved on a classwide basis--and in their favor.
The defendants say that the relevant authorities only
establish that deed language conveying coal--and only coal--does
not transfer title to CBM. But, they contend, deed language
varies significantly, and broader conveyances may transfer CBM.
They maintain that CBM ownership can only be determined on a
deed-by-deed basis by examining the intent of the parties.
According to the defendants, the need for such individualized
review defeats commonality.
Although the district court did not rule on the meaning of
Harrison-Wyatt, it agreed with the plaintiffs that the case gave
28
rise to at least one common question capable of classwide
resolution. See Adair, 2013 WL 5429882, at *36. Specifically,
the court agreed that whether Harrison-Wyatt entitles the
plaintiffs to CBM royalties is a question “subject to a common
resolution.” Id. 10
We conclude that certification based on this question was
premature. Prior to certifying a class, a district court 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. See Gariety v. Grant
Thornton, LLP, 368 F.3d 356, 365-66 (4th Cir. 2004). The
district court failed to do so here by refusing to resolve--one
way or the other--the implications of Harrison-Wyatt for
commonality purposes.
10
The plaintiffs also claim that the ownership conflict EQT
and CNX identified between gas estate owners and coal estate
owners is “illusory,” meaning that the existence of a severance
deed does not automatically signal an ownership conflict. See
Appellees’ Br. at 23. The district court agreed that this issue
was also subject to classwide resolution and independently
supported certification. See Adair, 2013 WL 5429882, at *36.
As we read the complaints and the briefs, however, the
plaintiffs ultimately want a much broader declaration--that
they, as gas estate owners, are entitled to CBM royalties. See,
e.g., Appellees’ Br. at 27. Although this question is
ultimately a merits issue, we believe it should be the focus of
the commonality inquiry. The only other question discussed by
the district court and identified by the plaintiffs--whether the
ownership conflict is “illusory”--does not provide a suitable
basis for class certification because answering that question
would not advance the litigation. See Wal-Mart, 131 S. Ct. at
2551.
29
Here, the meaning of Harrison-Wyatt is inescapably part of
the Rule 23(a) analysis. To even demonstrate commonality, the
plaintiffs must prevail on their reading of the case. That is,
they must establish that the common question--who owns the CBM--
will be answered in their favor. If Harrison-Wyatt does not
support such a conclusion, the plaintiffs have no other argument
as to how CBM ownership can be resolved on a classwide basis,
and they will have failed to carry their burden of establishing
even a single common question. Cf. Phillips v. Asset
Acceptance, LLC, 736 F.3d 1076, 1081 (7th Cir. 2013) (concluding
that the district court erred when it declined to decide a
merits issue before certifying the class when resolving the
question would “determine whether the suit could be maintained
as a class action at all”).
The district court abused its discretion by failing to
resolve the meaning of Harrison-Wyatt prior to certification.
Although the court noted its probable agreement with the
plaintiffs’ reading of the case, it declined to decide the
matter one way or the other. By leaving the issue unresolved,
the court improperly left open, at the time of certification,
whether CBM ownership is an individual or common question.
Certifying a class in the face of such uncertainty runs afoul of
the rule that “actual, not presumed, conformance with Rule 23(a)
30
[is] . . . indispensable.” Gen. Tel. Co. of Sw. v. Falcon, 457
U.S. 147, 160 (1982).
2.
We also do not believe Harrison-Wyatt and the Virginia Oil
and Gas Act can provide classwide answers to the question of CBM
ownership, at least as the classes are currently defined.
Although we do not hold that the plaintiffs can never satisfy
Rule 23’s commonality requirement, we believe the district court
misread the implications of those authorities when it certified
the ownership classes.
We read Harrison-Wyatt and the Act to establish only that a
surface owner’s conveyance of coal--and only coal--does not
automatically transfer title to CBM. But many of the severance
deeds at issue in this case explicitly convey much more than
coal. For example, one deed in Hale confers “[a]ll the coal,
minerals, petroleum, metallic substances, fluids and gas of
every description, in, upon, or underlying that certain tract of
land.” J.A. 1780. A different Hale deed grants “all the coal
and mineral of every description, in, on and underlying that
certain tract.” J.A. 1784. Yet another deed from the same
class transfers “all the coal and other substances, properties,
rights and interests in and upon that certain tract of land
. . . .” J.A. 1793. Neither Harrison-Wyatt nor the Act fully
resolves who owns the CBM under these broader deeds.
31
We also note that lower Virginia courts have not adopted
the plaintiffs’ reading of Harrison-Wyatt. Instead, they
continue to resolve CBM ownership conflicts on a deed-by-deed
basis, looking at the language of the deeds in each case. 11 See,
e.g., Wade v. Hugh MacRae Land Trust, CL09000476-00, at 3 (Va.
Cir. Ct. Aug. 31, 2010) (suggesting that Harrison-Wyatt gives
rise to a presumption that a severance deed conveying only coal
does not transfer title to the CBM estate, but noting that such
a presumption is rebuttable). 12
The plaintiffs’ reading is also at odds with longstanding
principles of Virginia contract law, which require courts to
review deed language to ascertain the parties’ intent. See,
e.g., Vicars v. First Va. Bank-Mountain Empire, 458 S.E.2d 293,
294-95 (Va. 1995) (stating that ownership rights are determined
by the construction of deeds, which requires a court to
determine the grantor’s intent); Virginian Ry. Co. v. Avis, 98
S.E. 638, 639 (Va. 1919) (“The purpose of all written . . .
11
The defendants argue that a court cannot determine CBM
ownership in the absence of those persons whom EQT and CNX
identified as the coal estate owners in their submissions to the
Board. Although all such coal estate owners may not have a
valid claim to CBM, we believe they should be allowed to assert
their potential interests--a right that the current class
proceedings would not readily afford.
12
The order granting summary judgment to a land owner
seeking payment of CBM royalties in Hugh MacRae is reproduced at
J.A. 706-09.
32
conveyances is to say what the parties mean, and the only
legitimate or permissible object of interpreting them is to
determine the meaning of what the parties have said therein.”). 13
If ownership cannot be established on the basis of
Harrison-Wyatt and the Act alone, we see no way for the district
court to answer the ownership question on a common basis.
Rather, the court will need to resolve each ownership conflict
with reference to specific deed language. Such individualized
review precludes a finding of commonality. See, e.g., Isaacs v.
Sprint Corp., 261 F.3d 679, 682 (7th Cir. 2001) (finding class
certification “decidedly inappropriate” when the case involved
“different conveyances by and to different parties made at
different times over a period of more than a century”); Johnson,
208 F. App’x at 297 (concluding that a class failed to satisfy
Rule 23(a) when the case involved “a multitude of property
13
The Supreme Court of Virginia has granted review of
Belcher v. Swords Creek Land Partnership, CL11000283-00 (Va.
Cir. Ct. Sept. 17, 2013), to resolve a number of questions that
directly implicate this case. Among other things, the court
will consider whether: (1) a deed conveying “coal and other
things” conveys property rights to CBM; (2) a coal estate
owner’s ownership of coal and appurtenant rights includes the
right to extract and recover CBM; and (3) a surface owner’s
claim to all of the CBM royalties--to the exclusion of the coal
estate owner--is a form of unjust enrichment. Without limiting
the district court’s discretion, we encourage it to review the
implications of any ruling in that case when it considers anew
whether the ownership question can produce common answers.
33
owners, each with individual conveyances stating different
things”).
This is not to say that certification could never be proper
for any of the ownership classes or some subdivision thereof.
Harrison-Wyatt may provide a common answer to the ownership
question for a class of gas estate owners whose severance deeds
convey coal and only coal. Likewise, the plaintiffs may be able
to identify a finite number of variations in deed language, such
that the ownership question is answerable on a subclass basis.
Cf. Fisher v. Va. Elec. & Power Co., 217 F.R.D. 201, 216-17
(E.D. Va. 2003) (granting certification when the easements at
issue were “the product of a limited set of substantially
similar conveyances,” so that “determining the relevant property
interest [would] require analysis of only a limited array of
easement language and the vast majority of conveyances at issue
contain[ed] substantially similar language”). That the deeds
may be classifiable will not, by itself, mean that there is an
adequate common question. But it may aid the district court’s
analysis of Rule 23(a)’s requirements. 14
14
As the defendants suggest, the district court may also
need to consider whether different methods of CBM extraction
affect CBM ownership rights, a question that Harrison-Wyatt
explicitly left open. See 593 S.E.2d at 235, 238 n.3.
34
As it stands, however, neither the plaintiffs nor the
district court have conducted the necessary substantive analysis
of the severance deeds at issue in this case. Neither we nor
the district court knows the number of deed variations or the
materiality of the discrepant language. Without such evidence,
the plaintiffs have failed to carry their burden of
demonstrating commonality. By certifying the classes
notwithstanding this failure, the district court abused its
discretion by relaxing the plaintiffs’ burden of proof with
respect to Rule 23’s commonality requirement. 15
VI.
The district court also certified the class claims relating
to EQT’s and CNX’s alleged underpayment of royalties. We again
15
Because we conclude that the plaintiffs have not
demonstrated the ownership classes’ compliance with the
ascertainability and commonality requirements, we take no
position today on the adequacy of the district court’s findings
with respect to the other Rule 23(a) prerequisites. See
Gunnells, 348 F.3d at 434 n.11. Likewise, we need not discuss
whether the ownership classes can satisfy any of the
requirements of Rule 23(b). See Broussard v. Meineke Discount
Muffler Shops, Inc., 155 F.3d 331, 337 n.3 (4th Cir. 1998).
On remand, however, the district court should rigorously
analyze each class’s compliance with all of the Rule 23
requirements. This will almost certainly require the court to
reconsider additional obstacles to class treatment under the
other provisions of Rule 23.
35
conclude that the district court abused its discretion when it
certified these classes.
A.
Before turning to the merits of the district court’s
certification decision, we first clarify the scope of our
review. The defendants have asked us to exercise pendent
appellate jurisdiction over an earlier ruling of the district
court. Specifically, they ask that we consider the district
court’s determination that Virginia courts would apply a
doctrine called the “first marketable product” rule to determine
whether the defendants have underpaid royalties.
Broadly speaking, the first marketable product rule holds
that all oil and gas lessees have an implied duty of
marketability. That is, lessees have an implied duty to bear
the cost of putting the oil and gas in a marketable condition
after it is removed from the well, including common
postproduction expenses for gathering, compressing, and
dehydrating oil and gas. See generally Byron C. Keeling &
Karolyn King Gillespie, The First Marketable Product Doctrine:
Just What is the Product, 37 St. Mary’s L.J. 1, 5 (2005)
(summarizing the doctrine). A number of state courts have
adopted variations of the doctrine to guide their interpretation
of oil and gas leases. See, e.g., Rogers v. Westerman Farm Co.,
29 P.3d 887, 902-03 (Colo. 2001) (en banc); Gilmore v. Superior
36
Oil Co., 388 P.2d 602, 606-07 (Kan. 1964); Mittelstaedt v. Santa
Fe Minerals, Inc., 954 P.2d 1203, 1205 (Okla. 1998).
Many of the plaintiffs’ theories of royalty underpayment in
this case depend, either explicitly or implicitly, on the
existence of an implied duty of marketability. For example,
according to some of the classes, the first marketable product
rule renders illegitimate many of the deductions the defendants
have taken from the plaintiffs’ royalty payments.
In an earlier ruling denying the defendants’ motion to
dismiss, the district court held that Virginia courts would
apply the first marketable product rule, and that the doctrine
would guide its analysis of the royalty underpayment claims in
this case. 16 On appeal, the defendants ask us to review that
non-final judgment.
Under the doctrine of pendent appellate jurisdiction, “we
retain the discretion to review issues that are not otherwise
subject to immediate appeal when such issues are so
interconnected with immediately appealable issues that they
warrant concurrent review.” Rux v. Republic of Sudan, 461 F.3d
461, 475 (4th Cir. 2006). We exercise jurisdiction under this
16
EQT also moved to certify to the Supreme Court of
Virginia the question of whether Virginia courts would apply the
first marketable product rule. The district court denied the
request.
37
exception sparingly, and only when: (1) “an issue is
inextricably intertwined with a question that is the proper
subject of an immediate appeal” or (2) “review of a
jurisdictionally insufficient issue is necessary to ensure
meaningful review of an immediately appealable issue.” Id.
(internal quotation marks omitted).
We decline to exercise such discretion here. The district
court did not mention the implied duty of marketability in its
certification decision, which suggests that the issue was not
inextricably intertwined with its determination that the
plaintiffs satisfied Rule 23’s requirements.
Additionally, we need not revisit the district court’s
marketability ruling to decide the central issue on appeal:
whether the district court abused its discretion when it
certified the claims of the five classes alleging underpayment
of royalties. As we discuss in greater detail below, the
classes do not satisfy Rule 23’s requirements even if we assume
the first marketable product rule applies to their claims.
B.
We next turn to the substance of the district court’s
decision to certify the classes asserting claims of royalty
underpayment. The classes’ theories of underpayment vary, but
there are some common threads. For example, all five classes
allege that the defendants sold the CBM at too low a price, in
38
part, by selling the gas to affiliates in non-arms-length
transactions. Most of the classes also contend that EQT and CNX
have taken improper or excessive deductions, for example, for
common postproduction expenses. Based on these and other
diverse theories, 17 the plaintiffs assert a host of property,
tort, and breach of contract/unjust enrichment claims arising
from the defendants’ purported underpayments.
The district court certified these classes as Rule 23(b)(3)
class actions. See Adair, 2013 WL 5429882, at 38. 18 As noted
17
The other claims are class-specific. The Hale and Adair
classes claim that EQT and CNX began producing CBM before
receiving permission from the Board and without paying royalties
on that unauthorized production. In Hale and Addison, the
plaintiffs claim that CNX failed to calculate royalties based on
its actual proceeds by not including proceeds received from
hedging and swap transactions. In Hale and Kiser, the
plaintiffs allege that EQT and CNX improperly deducted certain
taxes from their royalty payments. In Kiser, Addison, and
Adkins, the classes claim that EQT and CNX should have based
royalty calculations on the amount of CBM produced at the
wellhead, rather than the amount actually sold, but that the
defendants improperly required the plaintiffs to bear the cost
of CBM lost during the production process. Finally, the Adkins
class alleges that EQT misled class members by failing to
disclose all of the deductions it was taking on the check stubs
it remitted to royalty owners as proof of sale.
18
The district court did not clarify whether it was
certifying the classes’ additional demand for an accounting
under Rule 23(b)(2) or Rule 23(b)(3). Failing to specify the
basis for certifying that claim was an abuse of discretion, as
the district court must ensure that every class falls into one
of the three Rule 23(b) categories. See Gunnells, 348 F.3d at
423. If the district court chooses to certify the accounting
claim on remand, it should explain whether it is doing so under
(Continued)
39
above, a class certified under that provision must satisfy all
of Rule 23(a)’s prerequisites and two additional requirements:
predominance and superiority. See Fed. R. Civ. P. 23(b)(3).
As with the ownership classes, the primary issue on appeal
for the underpayment claims is whether the plaintiffs have
demonstrated common questions of law or fact. Because the
district court certified these classes under Rule 23(b)(3),
however, we consider that issue in conjunction with the court’s
further conclusion that common questions also predominate. See
Lienhart, 255 F.3d at 146 n.4 (“In a class action brought under
Rule 23(b)(3), the ‘commonality’ requirement of Rule 23(a)(2) is
‘subsumed under, or superseded by, the more stringent Rule
23(b)(3) requirement that questions common to the class
predominate over’ other questions.” (quoting Amchem Prods., 521
U.S. at 609)); see also Comcast, 133 S. Ct. at 1432 (noting that
“[t]he same analytic principles” governing the Rule 23(a)
commonality analysis apply to Rule 23(b)(3), but the latter’s
predominance requirement is “more demanding”).
For a variety of reasons, we conclude that the district
court abused its discretion when it certified the five classes
under Rule 23(b)(3).
Rules 23(b)(2) or 23(b)(3) and why certification under that rule
is appropriate.
40
1.
We first review the aspects of the district court’s
analysis that apply to all five royalty underpayment classes.
At bottom, the district court believed that both the
commonality and predominance requirements of Rule 23 were
satisfied by the same basic fact: the defendants employed
numerous uniform practices related to the calculation and
payment of CBM royalties. These common practices are not
irrelevant to Rule 23(b)’s predominance requirement. But we
hold that the district court abused its discretion by failing to
consider the significance of this common conduct to the broader
litigation.
The district court identified numerous common royalty
payment practices. For example, it noted that EQT sells all of
the CBM it produces in Virginia to an affiliate, EQT Energy, and
that “all royalty owners within the same field have been paid
royalties based on the same sales price for the CBM.” Adair,
2013 WL 5429882, at *38. With respect to CNX, it noted that CNX
“has uniform policies and procedures which governed its
calculation of CBM revenues,” and that “it has deducted
severance and license taxes when calculating royalties since
January 1, 2004.” Id. at *39.
That the defendants engaged in numerous common practices
may be sufficient for commonality purposes. As noted above, the
41
plaintiffs need only demonstrate one common question of
sufficient importance to satisfy Rule 23(a)(2).
But the mere fact that the defendants engaged in uniform
conduct is not, by itself, sufficient to satisfy Rule 23(b)(3)’s
more demanding predominance requirement. 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. See Amchem Prods., 521 U.S. at 623
(noting that the predominance inquiry “trains on the legal or
factual questions that qualify each class member’s case as a
genuine controversy”). Even a plethora of identical practices
will not satisfy the predominance requirement if the defendants’
common conduct has little bearing on the central issue in the
litigation--in this case, whether the defendants underpaid
royalties. Absent such a relationship, there is no basis for
concluding that individual issues will not predominate.
We believe 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. Some of the common practices
that the district court identified--e.g., the fact that EQT sold
all of its CBM into one of two interstate pipelines--have little
relevance to the validity of the defendants’ royalty payment
practices.
42
The district court did identify common practices that may
be pertinent to the predominance inquiry--e.g., the fact that
“EQT calculated all royalties based on the same methodology.”
Adair, 2013 WL 5429882, at *38. But the district court’s
analysis fell short because it never analyzed why those common
practices were sufficient to ensure that the class members’
common issues would predominate over individual ones.
The defendants have highlighted a number of uncommon
practices that might cause individual issues to predominate.
For example, EQT notes that it calculates royalties in different
ways for different class members, depending on where the CBM is
produced. Its method of calculating royalties--and the
deductions it applies--have also changed over time. CNX
submitted evidence that it takes different deductions depending
on where it sells the CBM, and that its deduction calculations
sometimes vary between and even within wells during different
time periods.
We do not decide today whether the disparate practices
identified by the defendants are sufficient to defeat the
predominance requirement. On remand, the district court may
well conclude that the defendants’ common conduct is sufficient
to ensure the predominance of common issues over individual
ones. But it was an abuse of discretion for the district court
to focus only on the number of common practices without
43
considering the significance of the defendants’ disparate
conduct in the broader litigation. 19
2.
We also remand for the district court to give greater
consideration to Rule 23 factors that affect only certain
classes. In particular, the district court should consider how
variations in the defendants’ royalty obligations to the class
members implicate the commonality and predominance inquiries in
Kiser, Adkins, and Addison.
The defendants have relatively uniform royalty obligations
with respect to the class members in the two force pooled cases-
-Adair and Hale. All plaintiffs in those classes are deemed
19
The district court also failed to consider whether the
different elements of the diverse causes of action the
plaintiffs assert may affect the Rule 23(b)(3) analysis. As the
Supreme Court has noted, “[c]onsidering whether questions of law
or fact common to class members predominate begins . . . with
the elements of the underlying cause of action.” Erica P. John
Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011)
(internal quotation marks omitted).
Here, the plaintiffs assert a diverse array of claims, yet
the court failed to consider whether any of the unique elements
of those claims would affect the predominance analysis. This
error is clearest with respect to the district court’s decision
to certify the breach of contract claims in Kiser and Adkins,
which it did without explanation and notwithstanding the
magistrate’s recommendation to the contrary. And neither the
magistrate nor the district court addressed the breach of
contract claims in Addison.
On remand, the district court should rigorously analyze
each of the plaintiffs’ claims to determine whether any of the
distinct elements of those actions might affect the predominance
of common questions.
44
lessors, which means that Board pooling orders dictate the terms
of the defendants’ royalty obligations. Those terms are largely
uniform among the class members. 20
The issue is more complicated in Kiser, Adkins, and
Addison, because those class members all have voluntary lease
arrangements with the defendants. As the district court
recognized, “these leases vary as to the language as to the
payment of royalties and post-production deductions.” Adair,
2013 WL 5429882, at *42. For example, while some leases require
the defendants to calculate royalties based on the proceeds they
receive from the sale of CBM, others require the defendants to
use the market value of CBM. Some leases specify that the price
for CBM must be determined at the well, while others permit
calculation at the point of sale.
Although the district court recognized the problem of lease
language variation, it did not see it as a barrier to class
certification in any of these cases. In our view, however,
these variable terms will make it difficult, if not impossible,
20
This is not to say that the Adair and Hale classes should
be certified for these claims. The ascertainability issues
discussed above apply equally to these classes’ claims for
royalty underpayment. And the district court will need to
address the other potential barriers to predominance discussed
above.
45
for a court to assess the validity of the defendants’ royalty
payment practices on a classwide basis.
For example, the question of whether a gathering charge 21 is
legitimate will produce different answers for class members
whose leases specifically authorize that charge versus those
whose leases specifically forbid it. Such dissimilarity will
preclude the generation of a common answer to the plaintiffs’
common question. See, e.g., Wallace B. Roderick Revocable
Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 1218-1219 (10th
Cir. 2013) (concluding that the plaintiffs failed to demonstrate
commonality when there was significant evidence of lease
language variation); Chieftain Royalty Co. v. XTO Energy, Inc.,
528 F. App’x 938, 942-44 (10th Cir. 2013) (remanding to allow
the district court to examine whether lease language variations
in a similar royalty underpayment case defeat commonality).
The plaintiffs argue that the first marketable product rule
renders lease variation a moot point because that rule prohibits
producers from deducting any postproduction costs. But even the
plaintiffs concede that an express lease term--e.g., authorizing
a particular postproduction charge--supersedes any implied duty
under the rule. Based on the sampling of deeds in the record,
21
A gathering charge is a deduction for the cost of
aggregating gas from several wells at a common receipt point.
46
we know at least some of the class members’ leases expressly
negate part or all of the implied duty. See, e.g., J.A. 2556-57
(requiring the lessor to pay a proportionate share of common
postproduction charges, including the cost of gathering and
dehydrating gas).
It was the plaintiffs’ burden to demonstrate commonality on
the implied duty of marketability. See Thorn v. Jefferson-Pilot
Life Ins. Co., 445 F.3d 311, 321 (4th Cir. 2006). Yet they have
made no attempt to do so. Neither they nor the district court
engaged in any substantive analysis of the lease terms to
determine whether language variations destroy the possibility of
resolving the common question(s) on a classwide basis. Assuming
the first marketable product rule does apply, the plaintiffs
have yet to demonstrate even the lesser requirement of
commonality on the implied duty of marketability.
Contrary to the plaintiffs’ assertions, the district
court’s class definitions do not solve this problem. In Kiser
and Adkins, the court defined the classes to include only those
gas owners whose leases are “silent” with respect to the
deduction of costs. 22 According to the plaintiffs, this
22
As noted above, the district court actually certified
both a class of all voluntary leaseholders in Kiser and a
subclass of persons whose leases are “silent” as to the
deduction of costs. It did not explain how the plaintiffs could
(Continued)
47
limitation obviates the need for them to review the leases
individually because the class members’ “leases are the same
with respect to the one issue that is material to their claims:
they do not contain language allocating to the lessor the costs
of making gas . . . marketable.” Appellees’ Br. at 37.
But the “silence” requirement raises as many problems as it
solves. The court never explained what it meant by “silent as
to the deduction of costs” in either Kiser or Adkins. See
Adkins, 2013 WL 5442378, at *1; Legard, 2013 WL 5429885. Would
a lease requiring the lessor to pay “all excise, depletion,
privilege and production taxes” 23 but not postproduction charges
qualify? See J.A. 1069. What about a lease that permits a
lessee to use any gas produced from the premises “for fuel in
its operations . . . free of charge”? J.A. 1073. We agree with
the defendants that disputes will inevitably arise regarding the
meaning of “silence,” and the court will have to sort out these
differences based on the particular lease language.
The issues are slightly different in the other voluntary
lease case, Addison, because the class definition does not
contain a “silence” requirement. The district court nonetheless
demonstrate commonality for those class members whose leases are
not “silent.”
23
These are common taxes charged on oil and gas production.
48
concluded that Rule 23 was satisfied because it found that CNX--
the defendant in that case--employs a standard gas lease. Thus,
it assumed there would be no lease language variation that could
affect the uniformity of CNX’s royalty obligations. See Adair,
2013 WL 5429882, at *39.
But the fact that CNX now uses a form lease for CBM
royalties does not establish that all of the Addison class
members’ leases are uniform. CNX has inherited a large number
of leases from predecessor companies, many of which contain
different royalty provisions. Compare J.A. 2556-57 (providing a
gas royalty of “12.5% of the value of gas produced from the
leased premises and sold on or off the leased premises . . .
less a proportionate part of the costs incurred by Lessee in
heating, sweetening, gathering, transporting, dehydrating,
compressing, exacting, processing, manufacturing, or any other
post-production costs incurred by Lessee in making such gas or
other substance merchantable”), with J.A. 4914-15 (providing a
royalty of “the value of 1/8th of the gas so sold or used,”
where “value” means “the selling price stipulated in a bona fide
contract entered into by Lessee as a result of an arms-length
negotiation with a third party not a subsidiary, parent or
affiliate of Lessee,” or, if the transaction is with an
affiliate without the lessor’s permission, “on the basis of the
current market value of the production so disposed of”).
49
Perhaps the legality of CNX’s deduction practices can be
assessed as to only those class members who signed its standard
lease. But the class definition is not limited to those
persons, and the plaintiffs have made no effort to explain how
commonality might be established for the other Addison class
members.
In short, the plaintiffs have failed to demonstrate that
variations in lease language in Kiser, Adkins, and Addison do
not defeat even the lesser requirements of Rule 23(a). On
remand, after reviewing the leases in this case, the plaintiffs
may be able to show that there are a limited number of lease
forms, such that the validity of the defendants’ conduct can be
assessed on a subclass basis. See, e.g., Foster v. Merit Energy
Co., 282 F.R.D. 541, 556 & n.12 (W.D. Okla. 2012). The district
court may also be able to craft more definite class definitions,
thus eliminating or mitigating some of the problems described
above. At this point, however, the plaintiffs have not yet
carried their burden of demonstrating the classes’ compliance
with all of Rule 23’s requirements.
3.
The plaintiffs in Adkins face additional complications,
which arise from the defining characteristic of that class: all
of the class members have received a royalty payment from EQT at
some point in the past twenty years. This fact raises at least
50
two issues that are likely to implicate the district court’s
Rule 23 analysis.
First, at least with respect to the breach of contract
claims, the court will likely need to consider course of
performance evidence. See Video Zone, Inc. v. KF & F Props.,
L.C., 594 S.E.2d 921, 924 (Va. 2004) (“Generally, the parties’
interpretation and dealings with regard to contract terms are
entitled to great weight and will be followed unless doing so
would violate other legal principles.”). The record highlights
the individualized nature of such evidence. See, e.g., J.A.
3855-98 (documenting one Adkins plaintiff’s individual
communications with EQT regarding its royalty obligations under
her lease). At a minimum, the need for individualized proof
strongly affects the predominance analysis of Rule 23(b). Yet,
as the defendants note, the district court failed to discuss
course of performance evidence entirely. See Appellants’ Br. at
53-54.
Second, the district court should reevaluate the
implications of the defendants’ statute of limitations defense
for Rule 23’s predominance requirement. 24
24
The district court discussed EQT’s statute of limitations
defense only with respect to Adkins. Although we similarly
focus on that case, the court should on remand analyze the
implications of this defense with respect to the other classes
and claims.
51
Below, EQT moved to dismiss several of the plaintiffs’
claims on the grounds that they were time-barred by applicable
statutes of limitations. In response, the plaintiffs argued
that the limitations period should have been tolled because EQT
issued misleading reports about the kinds of deductions it was
taking from its royalty payments.
The district court “refused to grant EQT’s motion to
dismiss . . . based on its finding that the plaintiffs had
alleged sufficient facts to plead fraudulent concealment by
which EQT may be estopped from asserting th[e statute of
limitations] defense.” Adair, 2013 WL 5429882, at *39. The
court elaborated that “the doctrine of fraudulent concealment
does not focus on the actions or knowledge of the plaintiffs,
but on the actions of the defendant.” Id. Because the
defendants’ representations to the plaintiffs regarding their
royalty deductions were relatively uniform, the court concluded
that the defendants’ common conduct was again sufficient to
satisfy the commonality and predominance requirements. See id.
The district court misapplied the doctrine of fraudulent
concealment. Although a defendant’s conduct is not irrelevant,
attention must also be paid to the plaintiff’s knowledge and
actions. “A party seeking to invoke the doctrine of fraudulent
concealment must demonstrate that ‘(1) the party pleading the
statute of limitations fraudulently concealed facts that are the
52
basis of plaintiff’s claim, and (2) the plaintiff failed to
discover those facts within the statutory period, despite (3)
the exercise of due diligence.’” Detrick v. Panalpina, Inc.,
108 F.3d 529, 541 (4th Cir. 1997) (quoting Supermarket of
Marlinton, Inc. v. Meadow Gold Dairies, Inc., 71 F.3d 119, 122
(4th Cir. 1995)). In this context, a plaintiff’s knowledge
typically requires individual evidence, Thorn, 445 F.3d at 321,
which will frequently defeat Rule 23’s requirements.
Here, the district court abused its discretion by failing
to give any consideration to what proof the plaintiff-focused
elements of the doctrine of fraudulent concealment might
require, even if the court is ultimately correct that the
statute of limitations is no bar to class certification. 25
4.
We conclude by briefly discussing Rule 23(b)(3)’s
superiority requirement. Because all of the royalty
underpayment classes and claims were certified under Rule
23(b)(3), the plaintiffs must be able to demonstrate that
proceeding as a class “is superior to other available methods
25
As noted above, we need not address the district court’s
judgment with respect to every Rule 23 prerequisite, nor is our
focus on commonality and predominance intended to constrain the
district court’s discretion on remand. The court remains free
to reconsider its judgment that the other requirements of Rule
23 have been satisfied.
53
for fairly and efficiently adjudicating the controversy.” Fed.
R. Civ. P. 23(b)(3).
The district court concluded that the royalty underpayment
classes satisfied this requirement, focusing on the barriers to
individual litigation that many CBM royalty claimants face. See
Adair, 2013 WL 5429882, at *40. As the court noted, “many CBM
royalty claimants own only a fractional interest in a 12.5
percent royalty,” a fact that, “no doubt, has resulted in the
sparse number of individual cases filed to date over . . . the
calculation of royalties.” Id. Additionally, the court found
that concerns of judicial economy supported a finding of
superiority because a collective action would allow a court to
resolve all of the royalty owners’ claims in a single forum and
lessen the risk of inconsistent judgments against the
defendants. See id. We agree with the district court that the
factors it identified are relevant to the superiority analysis.
Indeed, for many of these claimants, collective action may offer
the only realistic opportunity to recover.
Nevertheless, the district court should give further
thought to other factors that may bear on the superiority
analysis. Without intending to limit the scope of the relevant
inquiry, the court should consider how the dominance of state-
law issues may affect the suitability of this litigation in a
federal forum, and what state-law mechanisms may be available to
54
resolve the underpayment claims as an alternative to a class
action.
We also think it proper for the district court to assess
the extent of the defendants’ efforts to resolve and pay
undisputed claims. A finding that the defendants have not acted
in good faith toward that end may weigh strongly in favor of a
finding of superiority of a class action.
Where the proper balance lies in the superiority analysis
we leave to the district court on remand as part of its broader
consideration of the other Rule 23(b)(3) factors.
VII.
We ultimately hold 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. On remand, the
district court may conclude that one or more subclasses should
be certified. It may also find that class certification should
be denied entirely. At this point, we only conclude that
certification was premature.
We recognize that there are numerous CBM owners in Virginia
who haven’t received a penny of CBM royalties and others who may
have gotten less than their due. We are not unsympathetic to
their plight.
55
But sympathy alone cannot justify certification under Rule
23. We therefore vacate the district court’s grant of the
plaintiffs’ motions for class certification, and remand the case
for further proceedings consistent with this opinion.
VACATED AND REMANDED
56