(D.C. No. 6:11-CV-00029-FHS) (E.D. Okla.)
Before KELLY, McKAY, and MATHESON, Circuit Judges.
ORDER AND JUDGMENT [*]
Paul J. Kelly, Jr. Circuit Judge
Defendant-Appellant XTO Energy, Inc. (XTO) appeals from the district court's order certifying a class of Oklahoma royalty owners, represented by Chieftain Royalty Company (Chieftain). The class includes over 16, 000 royalty owners, approximately 14, 300 leases, and roughly 2, 300 wells. Chieftain's underlying claim is that XTO has underpaid royalties in violation of Oklahoma law by improperly deducting costs incurred to place gas in marketable condition. The district court certified the class under Federal Rule of Civil Procedure 23(b)(3). Exercising our jurisdiction under 28 U.S.C. § 1292(e) and Fed.R.Civ.P. 23(f), we vacate the district court's certification order and remand for further proceedings consistent with this opinion, as well as our opinion in the companion case, Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., ---F.3d----, No. 12-3176 (10th Cir. July 2013).
Chieftain represents a class comprising "[a]ll non-excluded persons or entities who are or were royalty owners in Oklahoma wells since July 1, 2002, where XTO . . . is or was the operator (or, as a non-operator, XTO separately marketed gas)." Chieftain Royalty Co. v. XTO Energy, Inc., No. CIV-11-29-FHS, 2012 WL 1231837, at *2 (E.D. Okla. Apr. 12, 2012). The class claims "relate only to payment for gas and its constituents (helium, residue gas, natural gas liquids, nitrogen and condensate) produced from the wells." Id.
At present, the class includes more than 16, 000 royalty owners who have approximately 14, 300 leases covering some 2, 296 wells. Id.; see also I App. 619. The district court found that "Chieftain is a royalty owner in numerous XTO wells located in Oklahoma, " and "has a direct lessor-lessee relationship with XTO in at least two of the XTO wells." Chieftain, 2012 WL 1231837, at *2.
On behalf of the class, Chieftain asserts several theories of recovery against XTO: (1) breach of contract, (2) tortious breach of contract, (3) breach of fiduciary duty, (4) fraud, (5) conversion, (6) conspiracy, (7) accounting, and (8) injunctive relief. I App. 14–18. According to the district court, "Chieftain's underlying claim as to all theories of recovery is that XTO has underpaid royalties . . . by improperly deducting costs . . . incurred to transform the wellhead gas into a marketable condition." Chieftain, 2012 WL 1231837, at *2.
Under Oklahoma law, lessees have an implied duty of marketability (IDM). Wood v. TXO Prod. Corp., 854 P.2d 880, 882–83 (Okla. 1992). Absent lease language negating the IDM or permitting certain deductions, the lessee must bear the full cost of services undertaken to place gas in marketable condition, such as gathering, compression, dehydration, treatment, and processing ("GCDTP" services). Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203, 1208 (Okla. 1998).
Chieftain argues that none of the gas from XTO's wells is in marketable condition at the well. I App. 816. According to Chieftain, gas is not placed in marketable condition until raw gas and its constituent parts are made into: (1) residue gas of pipeline quality; and (2) natural gas liquids (NGLs) of commercial quality. Id. at 816. Chieftain claims XTO does not itself place gas into marketable condition, but instead hires various "mid-stream" companies who perform the necessary GCDTP services to make gas marketable. I App. 817. According to Chieftain, "the net result, just like a cash payment, is an effective deduction to the royalty owners for [GCDTP services]." Aplee. Br. 9 (quotation omitted). Essentially, Chieftain contends that royalty owners "should be paid the gross product value, not the net value after subtraction of the service fees." I App. 818.
The district court found that "XTO employs a uniform royalty payment methodology which does not take into account individual lease language, " but noted that "[a] possible exception to this uniform treatment exists." Chieftain, 2012 WL 1231837, at *4 & n.3. Specifically, the court acknowledged "data suggest[ing] that a different payment methodology was used" for at least one of the sample wells. Id. at *4 n.3. Ultimately, however, the court decided "the uncertainty of the royalty payment methodology . . . d[id] not prevent certification in light of the substantial evidence of a uniform policy on the remaining wells." Id.
As in Roderick, XTO raises two key objections to certification. First, XTO claims each lease must be examined individually to determine whether the IDM has been negated. Here, XTO sampled 732 leases, categorizing those leases by royalty type. I App. 618–72. Based on its sample, XTO identified "86 different royalty clauses, " many of which "expressly allow XTO to deduct the costs it incurs." Aplt. Br. 12. Thus, XTO argues, a lease-by-lease inquiry is necessary.
Second, XTO claims that the point of "marketability" varies from well to well because "[t]he composition of gas extracted from wells depends on the type, depth, and location of the underground deposit and the geology of the area." Aplt. Br. 15 (quotation omitted). According to XTO, this variation is particularly significant because some gas may be in marketable condition at the well. See I App. 592 (citing Mittelstaedt, 954 P.2d at 1207). However, the district court appears to have concluded that no gas is in marketable condition at the well: "The raw gas at the wellhead . . . . requires conditioning to eliminate or reduce the contaminants to acceptable limits to make th[e] gas marketable." Chieftain, 2012 Wl 1231837, at *1 (citing expert affidavit of Daniel T. Reineke).
After holding a hearing and considering the parties' respective briefs, the district court certified the proposed class of Oklahoma royalty owners under Rule 23(b)(3). See Chieftain, 2012 WL 1231837, at *1. XTO timely filed a petition for permission to appeal, which we granted. XTO Energy, Inc. v. Chieftain Royalty Co., No. 12-708 (10th Cir. June 26, 2012). XTO argues on appeal, as in Roderick, that the district court abused its discretion by finding the proposed class ...