plaintiff’s motion for class certification...

i

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

Duncan Frank, on behalf of himself ) and all others similarly situated, ) ) Plaintiffs, ) ) v. ) Case No. CIV-14-01193-R ) Crawley Petroleum Corp., )

) Defendant. )

PLAINTIFF’S MOTION FOR CLASS CERTIFICATION AND OPENING BRIEF IN SUPPORT THEREOF

Case 5:14-cv-01193-R Document 58 Filed 09/06/16 of 51

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TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................... ii-iii

TABLE OF AUTHORITIES .......................................................................................... iv-ix

I. INTRODUCTION .................................................................................................... 1

II. STATEMENT OF FACTS ....................................................................................... 2 III. SUMMARY: THIS CLASS SHOULD BE CERTIFIED TO DETERMINE IF CRAWLEY’S UNIFORM NET CONTRACT ROYALTY ACCOUNTING PRACTICE VIOLATES OKLAHOMA LAW ............................ 7 IV. ARGUMENT ......................................................................................................... 11 A. Legal Standards for Class Certification ...................................................... 11 B. Tyson Foods Changes the Class Certification Landscape Back ................. 12 1. Royalty Owner Underpayment Class Actions Present No Individualized Issues ........................................................................ 13 2. The Brief Frolic Caused By Justice Scalia’s Dicta ................................ 14 3. Tyson Foods: The Return to Practicality on Class Certification ............ 16 C. The Rule 23 Factors Show This Case Should Be Certified As a Class Action ........................................................................................ 20 1. Ascertainability of the Class .................................................................. 20 2. Numerosity ............................................................................................. 21 3. Commonality .......................................................................................... 21 a. The Royalty Leases ....................................................................... 23 b. Marketable Condition .................................................................... 24 c. Royalty Payment Method and Damages ....................................... 25 d. Constitutionality of 52 Okla. Stat. § 570.10 .................................. 25


iii

4. Typicality ............................................................................................. 26 5. Adequacy of Representation ............................................................... 27 6. Predominance ...................................................................................... 28 a. Lease Language ............................................................................. 32 b. Marketable Condition .................................................................... 33 c. Damages ........................................................................................ 36 7. Superiority ........................................................................................... 38 V. CONCLUSION ...................................................................................................... 41 CERTIFICATE OF SERVICE .......................................................................................... 42


iv

TABLE OF AUTHORITIES

Page(s)

Federal Cases

Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184 (2013) ............................................................................... 17, 28, 29, 31

Berger v. Compaq Computer Corp., 257 F.3d 475 (5th Cir. 2001) ....................................................................................... 28

Butler v. Sears, Roebuck and Co., 727 F.3d 796 (7th Cir. 2013) ....................................................................................... 37

CGC Holding Co., LLC v. Broad & Cassel, 773 F.3d 1076 (10th Cir. 2014) ............................................................................ passim

Chieftain Royalty Co. v. QEP Energy Co., 281 F.R.D. 499 (W.D. Okla. 2012) ....................................................................... passim

Chieftain Royalty Co. v. XTO Energy, Inc., 528 Fed. Appx. 938 (10th Cir. 2013) ............................................................... 12, 15, 17

Chieftain Royalty Co. v. XTO Energy, Inc., No. CIV-11-29-FHS, 2012 WL 1231837 (E.D. Okla. 2012) ................................ 15, 16

Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) ..................................................................................... 14, 17, 18

In re Deepwater Horizon, 739 F.3d 790 (5th Cir. 2014) ....................................................................................... 37

Fankhouser v. XTO Energy, Inc., No. CIV-07-798-L, 2010 WL 5256807 (W.D. Okla. Dec. 16, 2010) ......................... 16

Fankhouser v. XTO Energy, Inc., No. CIV-07-798-L, 2012 WL 601415 (W.D. Okla. Feb. 23, 2012) ...................... 26, 32

Foster v. Apache, 285 F.R.D. 632 (W.D. Okla. 2012) .............................................................................. 15

Foster v. Merit Energy, 282 F.R.D. 541 (W.D. Okla. 2012) .............................................................................. 15


v

Franson v. Conoco, Inc., 64 F.3d 1481 (10th Cir. 1995) ....................................................................................... 9

Freebird, Inc. v. Merit Energy Co., No. 10-1154-KHV, 2012 WL 6085135 (D. Kan. Dec. 6, 2012) ................................. 16

Gagnon v. Merit Energy Co., LLC, No. 14-CV-832-WJM-KLM, 2015 WL 9489609 (D. Colo. Dec. 30, 2015) ............................................................................................................................ 15

Hill v. Kaiser Francis Oil Co., No. CIV-09-07-R, 2012 WL 4327665 (W.D. Okla. 2012) ...................................... 4, 12

Hill v. Kaiser-Francis Oil Co., No. CIV-09-07-R, 2010 WL 2474051 (W.D. Okla. June 9, 2010) ...................... passim

Hill v. Marathon Oil Co., No. CIV-08-37-R, 2010 WL 2365447 (W.D. Okla. June 9, 2010) ................. 13, 22, 32

In re IKO Roofing Shingle Products Liability Litigation, 757 F.3d 599 (7th Cir. 2014) ....................................................................................... 37

Jacob v. Duane Reade, Inc., 293 F.R.D. 578 (S.D.N.Y. 2013), aff’d, 602 Fed. Appx. 3 (2d Cir. 2015) ............ 30, 36

Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir.2004) .................................................................................... 37

Kleen Products LLC v. International Paper Co., Nos. 15-2385, 15-2386, --- F.3d -----, 2016 WL 4137371 (7th Cir. Aug. 4, 2016) ........................................................................................................................ 18

Lerner v. Haimsohn, 126 F.R.D. 64 (D. Colo. 1989) .................................................................................... 27

Leyva v. Medline Indus. Inc., 716 F.3d 510 (9th Cir. 2013) ....................................................................................... 37

McKnight v. Linn Operating, Inc., No. CIV-10-30-R, 2016 WL 756541 (W.D. Okla. Feb. 25, 2016) ....................... passim

Messner v. Northshore Univ. HealthSystem, 669 F.3d 802 (7th Cir. 2012) ....................................................................................... 37

Morrison v. Anadarko, 280 F.R.D. 621 (W.D. Okla. 2012) .............................................................................. 15


vi

Naylor Farms, Inc., v. Anadarko OGC Co., No. CIV-08-668-R, 2009 WL 8572026 (W.D. Okla. Aug. 26, 2009) ............. 13, 22, 32

Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7053787 (W.D. Okla. July 14, 2011) .................... 24, 26

Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7267847 (W.D. Okla. May 10, 2011) ........................... 4

In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. Jan. 21, 2015) ............................................................................... 37

Payson v. Capital One Home Loans, L.L.C., No. 07-2282-JTM, 2008 WL 4642639 (D. Kan. Oct. 16, 2008) ................................. 31

Piney Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225 (5th Cir. 1984) ....................................................................................... 35

Roach v. T.L. Cannon Corp., 778 F.3d 401 (2d Cir. Feb. 10, 2015) ........................................................................... 37

Roberts Ranch Co., v. Exxon Corp., 43 F. Supp. 2d 1252 (W.D. Okla. 1997) ........................................................................ 9

Roderick v. XTO Energy, Inc., 281 F.R.D. 477 (D. Kan. 2012) .............................................................................. 15, 18

Schell v. OXY USA Inc., No. 07-1258-JTM, 2013 WL 4857686 (D. Kan. Sept. 11, 2013) ................................ 15

Sykes v. Mel S. Harris & Associates LLC, 780 F.3d 70 (2d Cir. 2015) ............................................................................... 36, 37, 38

Tabor v. Hilti, Inc., 703 F.3d 1206 (10th Cir. 2013) ................................................................................... 18

Trevizo v. Adams, 455 F.3d 1155 (10th Cir. 2006) ................................................................................... 21

Tucker v. BP Am. Prod. Co., 278 F.R.D. 646 (W.D. Okla. 2011) .............................................................................. 15

Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016) .......................................................................................... passim


vii

United States v. Brooks, 751 F.3d 1204 (10th Cir. 2014) ............................................................................. 12, 13

In re Urethane Antitrust Litig., 768 F.3d 1245 (10th Cir. 2014) ............................................................................ passim

Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) ................................................................................... 12, 14, 17, 21

Wallace B. Roderick Rev. Living Trust v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. 2013) ............................................................................ passim

In re Whirlpool Corp. Front-loading Washer, 722 F.3d 838 (6th Cir. 2013) ....................................................................................... 37

State Cases

Bridenstine v. Kaiser Francis, No. CJ-2001-1 (Okla. Dist. Ct., Texas County)........................................................... 11

Digital Design Group, Inc. v. Information Builders, Inc., 2001 OK 21, 24 P.3d 834 ............................................................................................. 29

Drummond v. Range Resources, No. CJ-2010-510, 2013 WL 3884116 (Okla. Dist. Ct.) ............................................... 23

In re Farmers Med-Pay Litig., 2010 OK CIV APP 12, 229 P.3d 551 .......................................................................... 29

Fitzgerald Farms, LLC. v. Chesapeake Operating, Inc., No. 111,566, 2014 WL 813861 (Okla. Ct. App. Feb. 14, 2014) ................................. 15

Greghol Ltd. Partnership v. Oryx Energy Co., 1998 OK CIV APP 111, 959 P.2d. 596 ....................................................................... 22

Hall Jones Oil Corp. v. Claro, 1969 OK 113, 459 P.2d 858 ......................................................................................... 21

Leck v. Continental Oil Co., 1989 OK 173, 800 P.2d 224 ........................................................................................... 9

Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d 1203 ................................................................................. 9, 24, 32

Panola Indep. School Dist. No. 4 v. Unit Petroleum Co., 2012 OK CIV APP 94, 287 P.3d 1033 ........................................................................ 23


viii

Pummill, et al. v. Hancock Exploration, LLC, et al., No. CIV-2011-82 (Okla. Dist. Ct. Feb. 9, 2016) ........................................................... 8

Shores v. First City Bank Corp., 1984 OK 67, 689 P.2d 299 ........................................................................................... 21

Shutts v. Phillips Petroleum Co., 679 P.2d 1159 (Kan. 1984) aff’d in part, rev’d in part and remanded, 472 U.S. 797 (1985) ..................................................................................................... 21

The Tipton Home, et al. v. Burlington Resources Oil & Gas Co., No. 111,735 (Okla. Civ. App. Nov. 24, 2015) (unpub) ............................................... 15

TXO Production Corp. v. State, ex rel. Com’rs of Land Office, 1994 OK 131, 903 P.2d 259 ......................................................................................... 32

Wood v. TXO Production Corp., 1992 OK 100, 854 P.2d 880 ....................................................................... 10, 12, 24, 32

XAE v. SMR Property Management Co., 1998 OK 51, 968 P.2d 1201 ........................................................................................... 9

State Statutes

52 O.S. § 87.1(e) (effective May 8, 2012) ......................................................................... 24

Section 10, Production Revenue Standards Act, 52 Okla. Stat. § 570.10 ............. 10, 22, 25

Rules

Fed. R. Civ. P. 23........................................................................................................ passim

Rule 23(b)(3) ............................................................................................................... 36, 37

Constitutional Provisions

Constitution of the State of Oklahoma Article 5 §§ 46 and 59 ......................................... 22

Other Authorities

Hoffman, Pooling and Unitization: Current Status and Developments, 33 Inst. on Oil & Gas L. & Tax’n 245, 265 (1982) .......................................................... 35

Holliman, Exxon Corporation v. Middleton: Some Answers But Additional Confusion in the Volatile Area of Market Value Gas Royalty Litigation, 13 St. Mary’s L.J. 1, 47–49 & 48 nn. 185–86.............................................................. 34


ix

http://www.law360.com/articles/764257/dow-opts-for-835m-price-fix-deal-after-high-court-shakeup .............................................................................................. 16

33 Inst. on Oil & Gas L. & Tax’n ...................................................................................... 34

Newberg on Class Actions (5th ed.), § 3.18 ...................................................................... 21

2 W. Rubenstein, Newberg on Class Actions § 4:50 ......................................................... 19


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I. INTRODUCTION

Plaintiff Duncan Frank, on his own behalf and on behalf of all others similarly

situated, moves to certify this action as a class action for the underpayment of royalties on

gas produced from wells in Oklahoma by Defendant Crawley Petroleum Corporation.

Plaintiff seeks to certify the following Class:

All royalty owners of Crawley Petroleum Corp. from Oklahoma wells in Blaine, Caddo, Canadian, Custer, Dewey, Ellis, Garfield, Garvin, Kay, Kingfisher, Logan, Major, Noble, Roger Mills, Woods, and Woodward Counties that Crawley Petroleum Corp. operates or has operated and that have produced gas and/or gas constituents (such as residue gas, natural gas liquids, helium or condensate) from January 1, 1993 to the time Class Notice is given. Excluded from the Class are: (1) Office of Natural Resources Revenue f/k/a the Mineral Management Service (Indian tribes and the United States); (2) Defendant, its affiliates, and their employees, officers, and directors; (3) overriding royalty interests; (4) Any NYSE or NASDAQ listed company (and its subsidiaries) engaged in oil and gas exploration, gathering, processing, or marketing; (5) Blanchardized royalty payments1 ; and, (5) royalty owners to the extent that the lease creating the royalty interest expressly and unambiguously authorized all of the deductions taken by Defendant.2

1 Blanchardized royalty payments are royalty payments that Crawley makes as the well operator but for which Crawley is not legally responsible. See Def. Third Supp. Resp. to Pl. First Set of Interrogatories, Exhibit 2-J. 2 This excludes all royalty owners with express deduction (“ED”) leases. See Exhibit 2-J, Def. Second Supp. to Resp. to Pl. Disc., Ex. J (identifying ED Leases by Bates number and showing all of them affect only one well, Manke #1-24). Critically, Kevin McGehee, Crawley’s controller, testified that Crawley pays royalty on the Manke #1-24 well (under an ED lease) in the same way as all of its other wells. See Deposition of Kevin McGehee at 56-57, attached as Exhibit 2-E (Q: “Is there anything special about how the Manke well’s royalties owners are paid compared to other royalty owners? A. No.”). Hence, Crawley treats all of its royalty owners the same, as if they all have ED leases, when the Class does not.


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In line with the dozens of royalty underpayment cases that Oklahoma federal and state

courts have routinely certified as class actions, this case should be certified as a class action.

Crawley has engaged in a common course of conduct to pay royalty on the net value

of the gas marketing contract, rather on the gross value of the gas produced. These gas

contract deductions are wrongly subtracted from the royalty due under Plaintiff’s and the

putative class members’ oil and gas leases, which do not expressly authorize such

deductions. Crawley’s company policy is to treat all royalty owners the same by deducting

(or contracting with third parties to deduct) all of the midstream service costs for GCDTP3

(whether by monetary fee or in-kind fee).

Regardless of the terms of the various oil and gas leases, the quality of the gas from

Class Wells, or the type of the gas contract, Crawley takes deductions for midstream

service costs from its royalty owners and treats them as if they are working interest

owners—which they are not. And because this course of conduct occurs class-wide, the

requirements of Fed. R. Civ. P. 23 are met.

II. STATEMENT OF FACTS

1. Named Plaintiff, Duncan Frank (“Frank”), owns royalty interest in the

Young # 1 well in Kingfisher County, Oklahoma, which is operated and paid by Defendant.

Doc. 16, Compl. ¶ 5; Doc. 29, Am. Answer ¶ 5.

3 Midstream service costs are for gathering, compression, dehydration, treatment, and processing (“GCDTP”).


3

2. The gas royalty clause of the lease for the Young # 1 well provides: “The

lessee shall pay lessor, as royalty, one-eighth of the proceeds from the sale of the gas, as

such, for gas from wells where gas only is found...” Exhibit 1-A, Lease.

3. Mr. Frank understands his role as class representative in this putative class

action. Exhibit 1, Declaration of Duncan Frank at ¶¶6-7.

4. Crawley operates more than 300 wells in Oklahoma under more than 1,000

oil and gas leases. Affidavit of Jason A. Garner at 4, ¶12 (“Garner Aff.,” Doc. 1-6); Exhibit

2-K, Class Well List (showing 632 wells); Exhibit 8-A, Lease Summary at 15 (showing

2056 leases within the proposed class definition).4

5. Crawley’s documents and data produced to date show Crawley pays royalty

to more than 4,000 royalty owners, including Plaintiff Frank. Doc. 1-6, Garner Aff. at 2,

¶8; Exhibit 6, Expert Report of Donald Phend (“Phend Report”) at ¶ 4 (stating information

received and reviewed shows “approximately 4,196 royalty owners in Oklahoma that

would be potential Class Members”).

6. The Class Definition excludes royalty owners of Express Deduction Leases

(“ED Leases”), i.e., leases that contain clear and express language authorizing the

deduction from royalty. Of the 2056 Class Leases:

4 Plaintiff has moved the Court for leave to file the actual leases backing up the Lease Summary conventionally on disk as Exhibit 2-H.


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a. 244 (12%) are ED Leases, and are therefore excluded from the proposed

class definition.5

b. The remainder, 1,812 (88%) of the Class Leases, contain the implied

Marketable Product Rule as a matter of law. Ex. 8-A, Lease Summary.

7. Though excluded from the Class, the ED Leases demonstrate:

a. Lessees know how to obtain consent to take GCDTP deductions from

royalty owners, but did not do so in the Class Leases; and,

b. Lessees know that GCDTP Services are necessary to make the gas

merchantable or marketable.

c. The royalty clause in an ED Lease contains the following or similar

language:

To pay lessor for gas including casinghead gas and all other substances covered hereby a royalty of X% of the net proceeds realized by lessee from the sale thereof less a proportionate part of the production severance and other excise taxes and the cost

5 The ED Leases are highlighted in the Lease Summary, Ex. 8-A, at pages 10-12. Those royalty owners are excluded from this Class, and may have royalty owner claims for underpayment based on unreasonable excessive deductions or based on the royalty pot law but this case does not pursue those claims. See McKnight v. Linn Operating, Inc., No. CIV-10-30-R, 2016 WL 756541, at *1 (W.D. Okla. Feb. 25, 2016). Plaintiff has included as ED Leases certain lease language that this Court has previously concluded negates the implied duty to market or might be problematic for class certification. For example, Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7267847 (W.D. Okla. May 10, 2011) (leases with royalty clauses requiring payment on “raw gas at the mouth of the well”); Hill v. Kaiser-Francis Oil Co., No. CIV-09-07-R, 2012 WL 4327665, at *3 (same); id. (leases with royalty clauses requiring payment on gas “if sold in its natural state on the leased premises…”). In removing the case to federal court, Crawley’s Vice President Jason Garner conducted a sample of 110 leases and concluded that 4.55% of them were ED Leases. Doc. 1-6, Garner Aff. at 3, ¶8. It appears the percentage is actually higher.


5

incurred by lessee in delivering processing compressing or otherwise making such gas or other substances merchantable said payments to be made monthly.

Ex.8-A, Lease Summary at 12, ¶ 5.12 (emphasis added) (174 of the 244 ED Leases (71%)

have this exact language).

8. The Leases are irrelevant to Crawley’s marketing of the gas from Class

Wells. See Exhibit 2-B, Deposition of Doug Callaway, manager of gas marketing at

Crawley, (“Callaway Dep.”) at 59:22-60:1 (“Q. So nothing in particular about a lease, the

language in a lease has ever been brought to your attention to influence how you would

market gas? A. That is correct.”); id. at 60:21-24 (“Q. Crawley wouldn’t market the gas

better, worse, or any different depending on what the lease said, would it? A. No.”).

9. Whenever Crawley—or its predecessor-in-interest—was unable to obtain

leases for the mineral rights, Crawley or its predecessor applied for and received a pooling

order from the Oklahoma Corporation Commission. These forced pooling orders permitted

Crawley to produce gas from the pooled wells and required Crawley to pay royalty to the

mineral owners. The orders were silent about deductions for the costs of preparing the gas

for market. Crawley produced a list of royalty owners to whom it pays royalty under such

an order. See Exhibit 2-D, Callaway Depo. Ex. 5 (listing 71 such owners).

10. To make “gas or other substances merchantable,” a/k/a “marketable,”

Crawley enters into contracts for midstream services needed to transform raw gas into

marketable condition. All of the gas produced from all but two of the Class Wells requires

these services and is sold under gas contracts. Exhibit 5, Expert Report of Daniel T.

Reineke (“Reineke Report”) at II, n.2 (noting those two wells receive the dehydration and


6

compression services on-lease with no charge); Exhibit 5-B, Gas Contracts.6 The Gas

Contracts show:

a. All of the gas is Gathered (G). Ex. 5, Reineke Report at II.C.2.

b. All of the gas is Compressed (C). Ex.5, Reineke Report at II.C.1.a.

c. All of the gas is Dehydrated (D). Ex. 5, Reineke Report at II.C.1b

d. Most of the gas is Treated (T). Ex.5, Reineke Report at II.C.1.c. & II.C.1.d.7

e. All of the gas (except two wells for part of the Class Period) is Processed (P). Ex. 5, Reineke Report at II.C.

11. To become marketable, the Class gas requires GCDTP midstream services.

See Ex. 5, Reineke Report at II.D; Exhibit 7, Expert Report of Dr. William G. Foster

(“Foster Report”) at IV.A (“In order for gas to be in marketable condition, it must be in a

physical condition to be exchanged as a fungible product in the commercial

marketplace…This [raw] gas needs dehydration, compression and other midstream

services in order to meet interstate pipeline specifications.”); id. at VI.

12. After the midstream services are provided as set forth in the applicable gas

contract, all of the Class Gas is priced and sold at interstate pipeline quality at the Index

pool for residue gas or at the OPIS market for fractionated natural gas liquids (NGLs). Ex.

6 Plaintiff has moved the Court for an order permitting the filing of the confidential Gas Contracts under seal and conventionally on disk. Doc. 57. The motion is unopposed and pending. 7 Some of the gas is not treated. When that is the case, however, the midstream processor does not charge Crawley (or the royalty owner) for treatment. In other words, when the gas needs treatment, it receives treatment and that cost is deducted from the royalty. But if the gas does not need treatment, it is not treated and thus nothing is deducted.


7

5, Reineke Report at III.C (“commercial starting price for residue gas and NGLs”); Ex. 5-

B, Gas Contracts, and Ex. 7; Foster Report at IV.B & VI.8

13. Crawley calculates and pays royalty based upon the net contract price, i.e.,

the gross product price (Index or OPIS) minus deductions spelled out in the gas contracts.

Ex. 5, Reineke Report at III.A; Exhibit 6, Expert Report of Donald A. Phend (“Phend

Report”) at ¶¶4, 7-9, 12-17, and 26.

14. Plaintiff can prove liability class-wide and damages class-wide without

testimony from each individual Class Member. Ex. 5, Reineke Report at III.E (not relying

on testimony or evidence from any individual Class Member); Ex. 7, Foster Report at

Exhibit II, thereto (same); Ex. 6, Phend Report at ¶¶28-29; see also, Doc. 1-6, Garner Aff.

at 4-6, ¶¶ 12-16 (describing the data that Crawley has for the entire Class Period, how

Crawley used that data to calculate the amount in controversy in this case, removing

amounts attributable to persons excluded from the class by definition, and arriving at a

conservative estimate of damages of more than $6 million dollars.)

III. SUMMARY: THIS CLASS SHOULD BE CERTIFIED TO DETERMINE IF CRAWLEY’S UNIFORM NET CONTRACT ROYALTY ACCOUNTING PRACTICE VIOLATES OKLAHOMA LAW

Generalized proof—almost entirely from Crawley’s own business records—can be

used to prove class-wide liability and damages. There will be few, if any, individualized

8 Sometimes the volumetric deduction is all or part of a particular gas product such as Drip Condensate or NGLs, as well as FL&U or Plant Fuel, which are provided to the midstream service providers as partial payment for the midstream services. Ex. 5-B, Gas Contracts.


8

issues where individual Class Members must (or even could) provide testimony or any

relevant evidence. The Leases will be construed as a matter of law and will show a common

(indeed, identical) legal duty, i.e., the implied marketable product rule. The OCC drilling

and spacing orders, by virtue of the order itself, will establish the same fiduciary duty owed

to all Class Members. The gas volume statements, gas quality analysis, gas contracts,

monthly plant statements, and pay decks will be used to prove both liability and damages,

class-wide. Other publicly available documents and some subpoenaed documents from

midstream companies will fill in the gaps. All of the evidence will be reviewed and

analyzed by experts. No merits evidence will come from royalty owner Class Members if

tried individually, as was done in Pummill v. Cimarex and Chevron recently,9 or class-

wide, as was done without incident in multiple cases in state and federal court recently.10

This case is tailor-made for a class action because all of the salient facts are

common: the Leases are legally homogeneous (because they do not expressly authorize the

deductions); the gas quality is factually common (because it all requires and receives

midstream services under gas contracts); and the gas contracts are factually common

(because all start with the gross gas product value of Index or OPIS and then subtract the

9 Corrected Order, Pummill, et al. v. Hancock Exploration, LLC, et al., No. CV-2011-82 (Okla. Dist. Ct. Feb. 9, 2016), attached as Exhibit 4-O. 10 On the merits, Crawley pays royalty on net—not gross—value. This net contract value royalty payment methodology is not authorized by: (a) any leases in this case (ED Leases could do so, but they are excluded from the Class); (b) varying quality of the gas from a Class Well (Oklahoma law does not treat poor and good quality wells differently); or, (c) gas contracts (because royalty owners are not parties to the gas contracts and do not even know about them).


9

midstream service costs agreed to by Crawley). The legal theories at issue are the same:

breach of lease based on the implied Marketable Condition Rule11 and breach of fiduciary

duties owed by operators to royalty owners under Oklahoma law.12

In defending the case, Crawley will try to justify its deductions by pointing to its

unilateral conduct such as including a title transfer clause in confidential gas contracts (to

which the royalty owners are strangers) and insisting this paper title transfer is a “wellhead

sale” before performance of midstream services and deduction of the costs of those services

from the only money generated by the actual sale of the marketable products into their

respective recognized commercial markets. This Court is familiar with these arguments.

See McKnight v. Linn Operating, Inc., 2016 WL 756541, at *2 (W.D. Okla. Feb. 25,

2016).13 Crawley will fail to justify the deductions, however, in the only way approved by

the Oklahoma Supreme Court—by “spell[ing] out” the deductions in the lease to prove the

11 “We decided the royalty owner cases based on the implied covenant of marketability under the oil and gas lease.” XAE v. SMR Property Management Co., 1998 OK 51, 968 P.2d 1201, ¶ 10. 12 Leck v. Continental Oil Co., 1989 OK 173, 800 P.2d 224; Franson v. Conoco, Inc., 64 F.3d 1481, 1484 (10th Cir. 1995) (involving a drilling and spacing unit, the court held that “[t]he unit operator’s duty is fiduciary in nature.”); Roberts Ranch Co., v. Exxon Corp., 43 F. Supp. 2d 1252, 1265 (W.D. Okla. 1997) (“[i]t is clear that the prevailing, if not unanimous, view in Oklahoma is that an operator occupies a fiduciary relationship or position of trust with respect to the lessors to whom royalties are paid.”). 13 This Court has already held that “gas is not marketable until it is in a condition and location acceptable to an interstate pipeline.” McKnight, 2016 WL 756541, at *5. See also Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203, 1210, ¶ 21 (Okla. 1998) (“It is common knowledge that raw or unprocessed gas usually undergoes certain field processes necessary to create a marketable product. These field activities may include, but are not limited to, separation, dehydration, compression, and treatment to remove impurities.”).


10

lessors’ and lessee’s mutual consent. Wood v. TXO Production Corp., 854 P.2d 880, 883

(Okla. 1992). That merits question need not be answered now. The question before the

Court in this motion is whether Plaintiff can make a prima facie showing of liability on

generalized proof. Mr. Frank can.

The Plaintiff Class will present its prima facie case on liability with common

evidence. Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016). No individualized

evidence from each Class member will be needed. The same is true of class-wide damages,

which revenue accounting experts will present. See Ex. 5, Reineke Report; Ex. 6, Phend

Report; and Ex. 7, Foster Report. Though not required, even Crawley’s expected

defenses—that the gas is saleable (in the sense that paper title can be transferred before the

commercial market at which the gas is priced) and that Section 10 of the Production

Revenue Standards Act, 52 Okla. Stat. § 570.10, is unconstitutional—will not require

individual Class members to testify. Doc. 29, Am. Answer at 8, (e) & Doc. 31, Order.

Whether liability is determined class-wide as a matter of law or as a matter of common

facts, this case is ideally decided as a class action. It makes sense to try these claims in one

class action in one court rather than splintered into hundreds of separate actions in many

courts before many juries throughout Oklahoma. This case should be certified as a class

action like the many other royalty owner deduction class actions that have preceded it. 14

14 Few royalty underpayment cases have been denied class certification, especially in published opinions. See Exhibit 4-B, Table of Cases (showing 26 state and federal courts in Oklahoma have certified royalty owner classes and only 10 have denied them). Those that have been denied are rarely cited again (except by hopeful defense counsel) or followed by other Oklahoma courts. Moreover, the courts have successfully held trials of royalty owner class actions without management problems. Journal Entry of Judgment,


11

IV. ARGUMENT

A. Legal Standards for Class Certification This Court recently set out the standards for class certification, noting that a plaintiff

must satisfy Federal Rule 23(a)’s numerosity, commonality, typicality, and adequacy and

Rule 23(b)’s predominance and superiority. McKnight v. Linn Operating, Inc., 2016 WL

756541 (W.D. Okla. Feb. 25, 2016). A “rigorous analysis” of these factors is required, but

the Court possesses “significant latitude in deciding whether or not to certify a class.” Id.

at *3 (internal citations omitted); see also CGC Holding Co., LLC v. Broad & Cassel, 773

F.3d 1076, 1085 (10th Cir. 2014) (explaining that so long as a district court applies Rule

23, a class certification order can be reversed “only for abuse of discretion”).

In denying class certification in McKnight, the Court found that (1) Linn had an

unusually complex method of calculating and paying royalties; and (2) the class definition

was “not objectively ascertainable” and would require “evidentiary hearings to determine

which potential class members qualified for inclusion and exclusion from the class.”

McKnight, 2016 WL 756541, at *8. Here, in contrast, (1) Crawley applies a uniform

method to calculate and pay royalties; and (2) the exclusions from the class definition can

be determined from documents and do not require any evidentiary hearing. As a result, the

Bridenstine v. Kaiser Francis, No. CJ-2001-1 (Okla. Dist. Ct., Texas County), attached hereto as Exhibit 4-I, originally filed in Beaver County in 1995, shows that these cases can be managed as class actions. They can be tried to a jury to recover unpaid royalties for third-party gathering, compression, dehydration, fuel and similar fees. The jury awarded the class more than $74 million; the Oklahoma Supreme Court affirmed judgment on the verdict. See also other royalty owner class actions tried in the Third Declaration of Rex A. Sharp, Exhibit 4 hereto, specifically Exhibits 4-H to 4-P.


12

facts and evidence in this case differ greatly from the record in McKnight.15 And the class

certification case law differs, too, now that Amgen and Tyson Foods have erased the anti-

class action dicta that Justice Scalia in Wal-Mart and Comcast failed to make permanent.

B. Tyson Foods Changes the Class Certification Landscape Back

This Court—relying in part on the Supreme Court decision in Wal-Mart and the

Tenth Circuit’s decisions in Roderick and Chieftain—denied class certification in McKnight

in February 2016. McKnight, 2016 WL 756541, at *3-5.16 With the passing of Justice Scalia

on February 13, 2016, and the issuance of the 6-2 decision in Tyson Foods, Inc. v.

Bouaphakeo, 136 S. Ct. 1036 (2016), the Court signaled its return to the long-standing

practical approach to class certification that has guided courts for decades and resulted in

the certification as a class action of the great majority of royalty owner deduction cases.17

15 This Court has previously ruled on many marketable condition and lease construction issues. McKnight, 2016 WL 756541, at *5 (“This Court has already held that unless specifically negated as set forth in Wood v. TXO Production Corp., 854 P.2d 880, 883 (Okla. 1992), all leases contain the implied duty to market and that generally, gas is not marketable until it is in a condition and location acceptable to an interstate pipeline.”); id. at *6 (“This Court has already determined that lease language provided for payment of royalties of the ‘market value at the well’ does not negate the implied duty to market.”) (citing Hill v. Kaiser Francis Oil Co., 2012 WL 4327665, at * 2 (W.D. Okla. 2012)). 16 Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011); Wallace B. Roderick Rev. Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 1219 (10th Cir. 2013) [hereinafter Roderick v. XTO Energy, Inc.]; Chieftain Royalty Co. v. XTO Energy, Inc., 528 Fed. Appx. 938 (10th Cir. July 9, 2013). 17 In light of the intervening change of law in Tyson Foods, this Court is not bound by the Tenth Circuit’s 2013 decisions in Roderick and Chieftain. A Tenth Circuit decision is no longer binding “when the Supreme Court issues an intervening decision that is ‘contrary’ to or ‘invalidates [the Tenth Circuit’s] previous analysis.’” United States v. Brooks, 751 F.3d 1204, 1209–10 (10th Cir. 2014). In Brooks, the Tenth Circuit held that intervening Supreme Court precedent did require it to depart from otherwise binding Tenth Circuit law, even though it “acknowledge[d] up front” that the intervening Supreme Court


13

The practical approach in Tyson Foods examines the common issues in the case and

the evidence needed to prove the class’s claims. An individualized issue requires individual

class members to take the stand to prove liability so the efficiency goal of a class action is

unmet. But this case has no individualized issues of law or fact and can be presented with

common evidence via expert testimony. Class members will not have to take the stand to

prove liability, class membership, or damages. As a result, this case should be certified.

1. Royalty Owner Underpayment Class Actions Present No Individualized Issues

For decades, with respect to class certification, nothing changed in royalty

underpayment class actions. The three arguments that the leases, gas, and gas contracts

differ have been defendants’ mantra since the 1980s. Many courts have heard and rejected

these arguments, certifying royalty owner class actions. See Exhibit 4-B, Table of Cases

(citing numerous class certification cases).18

case was “not directly on point” with either the existing Tenth Circuit case “or with [the] Defendant.” Id. In fact, the intervening Supreme Court case had many dissimilarities: it involved a different area of the law (immigration), “a different line of Supreme Court precedent,” and a different question than was before the court. Id. Even so, the Tenth Circuit ignored its earlier panel decision because “[t]he question . . . is not whether an intervening Supreme Court case is on all fours with our precedent, but rather whether the subsequent Supreme Court decision contradicts or invalidates our prior analysis.” Id. 18 Before Walmart, this Court certified royalty underpayment class actions in Naylor Farms, Inc., v. Anadarko OGC Co., No. CIV-08-668-R, 2009 WL 8572026 (W.D. Okla. Aug. 26, 2009); Hill v. Kaiser-Francis Oil Co., No. CIV-09-07-R, 2010 WL 2474051 (W.D. Okla. June 9, 2010); Hill v. Marathon Oil Co., No. CIV-08-37-R, 2010 WL 2365447 (W.D. Okla. June 9, 2010). After Walmart, this Court certified one, Chieftain Royalty Co. v. QEP Energy Co., 281 F.R.D. 499 (W.D. Okla. Mar. 16, 2012), and denied one. McKnight v. Linn Operating, Inc., No. CIV-10-30-R, 2016 WL 756541 (W.D. Okla. Feb. 25, 2016) (finding, unlike here, “Linn does not calculate and pay royalty to class members using a uniform methodology”, id. at *5). But, here, Crawley has


14

2. The Brief Frolic Caused By Justice Scalia’s Dicta

So what happened? Why did routine class certification decisions turn more difficult?

The facts did not change. The leases were just as varied then as they are now. Most leases

were in place long before the 1990s, when improper deduction class actions were certified

and tried. The gas was as different as ever, as its composition does not change significantly

over time. And the three types of gas contracts have existed for decades. So one would think

the law must have changed.

But Rule 23 did not change significantly. What changed was the case law, or, more

accurately, the anti-class action gloss applied by Justice Scalia’s dicta, which obscured Rule

23. Justice Scalia’s influential opinions were Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338

(2011), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). Both of these 5-4 opinions

presented narrow holdings with broad dicta that Justice Scalia used in the hope of crippling

class actions nationwide. Some courts erroneously followed his dicta, and some followed

only the actual, narrow holdings in Wal-Mart and Comcast, which rarely apply. The

difference played out in royalty underpayment class actions where Chief Judge Marten, a

law clerk to a former U.S. Supreme Court justice, followed the narrow holding:

XTO suggests that Wal–Mart v. Dukes worked some sea change in class action jurisprudence. This is not so. The decision simply reflects the application of the long-standing rule that class members suffer a common injury, 131 S.Ct. at 2551, citing Falcon, 457 U.S. at 157, to facts which clearly established that defendant had not adopted any uniform policy, but in fact had done precisely the opposite: granting thousands of individual managers discretion to make employment decisions. That is not the case here.

a common methodology as set forth in its discovery responses. Exhibit 2-J, Def. Third Supp. Resp. to Pl. First Set of Interrogatories; see also n.1, supra (excluding Blanchardized royalty).


15

Roderick v. XTO Energy, Inc., 281 F.R.D. 477, 482 (D. Kan. 2012) (certifying royalty

underpayment class over the usual three arguments); see also Chieftain Royalty Co. v. XTO

Energy, Inc., No. CIV-11-29-FHS, 2012 WL 1231837 (E.D. Okla. 2012) (same); Schell v.

OXY USA Inc., No. 07-1258-JTM, 2013 WL 4857686, at *5 (D. Kan. Sept. 11, 2013)

(denying motion to decertify because “the Tenth Circuit's ruling in Roderick v. XTO

Energy, Inc. that Dukes did not change the standard necessitates this court's conclusion that

class certification is appropriate”). But the same three judge panel in the Tenth Circuit

followed the broad dicta and vacated both. Roderick v. XTO Energy, Inc., 725 F.3d 1213

(10th Cir. 2013); Chieftain v. XTO Energy, Inc., 528 Fed. Appx. 938 (10th Cir. 2013)

(same). Suddenly, relying on the anti-class action dicta rather than applying the narrow

holdings, some state and federal courts refused to certify royalty owner cases that were

virtually identical to cases that were previously certified (and even tried) as class actions.19

Other state and federal courts followed the narrow holdings and continued certifying royalty

19 Courts erroneously following the broad dicta instead of the narrow holdings were Tucker v. BP Am. Prod. Co., 278 F.R.D. 646 (W.D. Okla. 2011) (Miles-LaGrange, J.); Morrison v. Anadarko, 280 F.R.D. 621 (W.D. Okla. 2012) (Miles-LaGrange, J.); Foster v. Merit Energy, 282 F.R.D. 541 (W.D. Okla. 2012); Foster v. Apache, 285 F.R.D. 632 (W.D. Okla. 2012); Roderick, 725 F.3d 1213; Chieftain, 528 Fed. Appx 938 (10th Cir. 2013); Fitzgerald Farms, LLC. v. Chesapeake Operating, Inc., 2014 WL 813861 (Okla. Ct. App. Feb. 14, 2014), de-published 2014 WL 8400016 (Okla. June 2, 2014); The Tipton Home, et al. v. Burlington Resources Oil & Gas Co., No. 111,735 (Okla. Civ. App. Nov. 24, 2015) (unpub); Gagnon v. Merit Energy Co., LLC, No. 14-CV-832-WJM-KLM, 2015 WL 9489609 (D. Colo. Dec. 30, 2015). Had these courts had the subsequent benefit of Tyson Foods, the outcome likely would have been different.


16

owner class actions.20 A real dilemma developed among district courts in the same district,

among panels of appellate courts in the same federal circuit, and among state court judges.

With Justice Scalia’s passing in February 2016, the United States Supreme Court, in its

March 2016 decision in Tyson Foods, returned to the practical approach of certifying class

actions where the procedure serves judicial and litigant economy. Such is the case here and

before for the certification of almost all royalty underpayment class actions. But for the brief

frolic into anti-class action land, virtually all royalty owner class actions should be and have

been certified.

3. Tyson Foods: The Return to Practicality on Class Certification

The six-Justice majority in Tyson Foods made clear that Wal-Mart and Comcast were

limited to their facts and narrow holdings. See Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct.

1036, 1048 (2016) (finding commonality met and affirming class certification, and ignoring

20 Courts properly following the narrow holdings of Justice Scalia’s opinions were: Roderick, 725 F.3d 1213 (distinguishing Tucker and Morrison above on this basis); Chieftain Royalty Co. v. XTO Energy, Inc., No. CIV-11-29-FHS, 2012 WL 1231837 (E.D. Okla. April 12, 2012); Fankhouser v. XTO Energy, Inc., No. CIV-07-798-L, 2010 WL 5256807 (W.D. Okla. Dec. 16, 2010); Chieftain Royalty Co. v. QEP Energy Co., 281 F.R.D. 499 (W.D. Okla. 2012), and a few settlement classes, Freebird, Inc. v. Merit Energy Co., No. 10-1154-KHV, 2012 WL 6085135, at *4 (D. Kan. Dec. 6, 2012) (finding commonality met where, as here, defendant producer calculated royalty payments in the same way). And a different panel of the Tenth Circuit followed the class certification law rather than the dicta of Scalia. See In re Urethane Antitrust Litig., 768 F.3d 1245 (10th Cir. 2014) (affirming class certification because common liability questions predominated over individualized questions). With a U.S. Supreme Court petition for certiorari pending, the Urethane case—which was successfully tried as a class action— settled shortly after Justice Scalia’s death. http://www.law360.com/articles/764257/dow-opts-for-835m-price-fix-deal-after-high-court-shakeup. Defendant Dow settled the case for nearly $1 billion because, with Justice Scalia off the Court, the anti-class action frolic was over—and Dow knew it.


http://www.law360.com/articles/764257/dow-opts-for-835m-price-fix-deal-after-high-court-shakeup

http://www.law360.com/articles/764257/dow-opts-for-835m-price-fix-deal-after-high-court-shakeup

17

the two-Justice dissent relying on Comcast); Comcast, 133 S. Ct. 1426, 1435 (2013)

(Ginsberg, J., dissenting) (finding the Court’s reformulation of the Rule 23 question “shifted

the focus of the dispute from… Rule 23(b)(3) analysis to its attention (or lack thereof) to

the admissibility of expert testimony”); Roderick v. XTO Energy, Inc., 725 F.3d 1213, 1219-

20 (10th Cir. 2013); Chieftain Royalty Co. v. XTO Energy, Inc., 528 Fed. Appx. 938, 942-

43 (10th Cir. 2013).

Likewise, Tyson Foods rejected the expansive reading of Wal-Mart, unlike the Tenth

Circuit in Roderick and Chieftain, by:

• holding that a common payment policy can satisfy commonality and predominance, despite some differences in jobs or time spent putting on protective gear (unlike Roderick and Chieftain which found a common payment policy alone insufficient), Tyson Foods, 136 S. Ct. at 1048; Roderick, 725 F.3d at 1220;

• focusing the class certification question on liability, not damages;

• allowing representative sampling (not requiring a court to analyze every single lease, as held by the Tenth Circuit in Roderick) to prove liability; Tyson Foods, 136 S. Ct. at 1048 (“Wal-Mart does not stand for the broad proposition that a representative sample is an impermissible means of establishing classwide liability.”); and,

• finding that expert testimony aggregating (and averaging) the individual claims could establish predominance, id. (unnecessary in this case because Plaintiff’s expert can itemize each deduction for each well by each month and by Class member).

As a result of Tyson Foods and Amgen Inc. v. Connecticut Ret. Plans & Trust Funds,

133 S. Ct. 1184, 1196 (2013), all that remains of Wal-Mart and Comcast are their narrow

holdings. Walmart—an exclusively 23(b)(2) class action that did not even address

predominance under Rule 23(b)(3)—only addresses commonality and requires simply that

there be a uniform company policy influencing the liability issue. Wal-Mart, 564 U.S. 338.

In Wal-Mart, there wasn’t one, and the class size and class definition were recklessly


18

overbroad, which made decertification inevitable (and properly so) under even the most

liberal reading of Rule 23. See Roderick v. XTO Energy, Inc., 281 F.R.D. 477, 482 (D. Kan.

2012) (explaining this result); Tabor v. Hilti, Inc., 703 F.3d 1206, 1229 (10th Cir. 2013)

(explaining that Wal-Mart was driven by “the extraordinary size and scope of the proposed

class, which included 1.5 million female employees at 3,400 Wal–Mart stores”). And

Comcast holds that if a plaintiff promises a class-wide damage calculation, that calculation

must match the liability theory being pursued. 133 S. Ct. 1426 (2013); see also Kleen

Products LLC v. International Paper Co., 2016 WL 4137371 at *4 (7th Cir. Aug. 4, 2016)

(discussing same). Here, too, the Tenth Circuit has recognized the shallow reach of

Comcast. See In re Urethane Antitrust Litig., 768 F.3d 1245, 1258 (10th Cir. 2014)

(“Comcast does not control because: (1) the decision turned on a concession that is absent

here, and (2) we know from the actual trial that individualized issues did not

predominate.”). Thus, the holdings in Wal-Mart and Comcast are remarkable for how

limited they actually are, especially now that the gloss of Justice Scalia’s dicta has been

removed and the actual language of Rule 23 has been restored.

In addition to cabining Justice Scalia’s dicta, Tyson Foods returned class action law

to the practical approach for class certification by defining individualized issues to require

evidence from—not just about—individual class members. An individualized issue has two

prongs: (1) “members of a proposed class will need to present evidence” on the issue; and,

(2) the evidence presented must “var[y] from member to member.” Tyson Foods, 136 S. Ct.

at 1045. No doubt, as shown by the documentary and expert evidence relied on Plaintiff’s

experts in this case, class members will not need to testify to certify the class. Or, as Tyson


19

Foods put it, “a common question is one where ‘the same evidence will suffice for each

member to make a prima facie showing [or] the issue is susceptible to generalized, class-

wide proof.” Id. ([or] in original). Where, as here, determination of the liability issues is

susceptible to generalized, class-wide proof—e.g., gas analysis, gas contracts, markets, and

experts—class certification is proper because there are no individualized issues.

In royalty underpayment class actions, no first-hand evidence from royalty owners

is required. The leases speak for themselves: either they contain the implied Marketable

Condition Rule (MCR) or they expressly authorize the deductions. Royalty owners know

nothing about the “confidential” gas analysis, gas contracts, or revenue accounting

processes of Defendant. Royalty owners could not even prove their own damages, which

instead require Defendant’s business records and expert testimony. This is true whether tried

as an individual case or a class case. It follows that nothing is gained from trying hundreds

of cases individually; the same evidence from the Defendant will be duplicated hundreds of

times in hundreds of different Oklahoma courts before hundreds of different juries.

Under Tyson Foods, commonality and even predominance can be met by “one or

more of the central issues in the action …even though other important matters will have to

be tried separately, such as damages or some affirmative defenses peculiar to some

individual class members.” Tyson Foods, 136 S. Ct. at 1045 (emphasis added).21 Applied

21 As observed by the Newberg class action treatise section that was cited approvingly by the Supreme Court in Tyson Foods, “[c]ommon issues will predominate if ‘individual factual determinations can be accomplished using computer records, clerical assistance, and objective criteria — thus rendering unnecessary an evidentiary hearing on each claim.” 2 W. Rubenstein, Newberg on Class Actions § 4:50 (citation omitted).


20

here, Tyson Foods makes class certification an easy decision. First, the legal effect of the

Class Lease language is a central issue and common—Plaintiff presents a prima facie

showing by quoting the royalty clause in every lease and demonstrating that 100% of the

Class Leases contain the same implied MCR (the ED leases are excluded from the Class).

Second, the marketable condition or form of the gas is a central issue and common—

Plaintiff presents a prima facie showing via his experts using generalized proof that the gas

from Class Wells is not in marketable condition until after the midstream GCDTP services

are performed to make the gas acceptable to the interstate pipeline. Exs. 5 (Reineke) & 7

(Foster). Third, though not required because class-wide damages do not impact liability,

Plaintiff presents a prima facie case for class-wide damages through expert Phend, Ex. 6.

C. The Rule 23 Factors Show This Case Should Be Certified as a Class Action

1. Ascertainability of the Class

Crawley’s business records contain the names and addresses of all royalty owners

in the wells on the Class Well List. Reviewing the names and addresses will identify royalty

owners excluded under (1)-(4) as has been done in many other royalty owner class actions.

As for exclusion (5), Crawley knows what other working interest owners in Crawley

operated wells paid Crawley to remit to the royalty owners under Blanchard. That amount

can either be subtracted from the class-wide damages or the working interest marketed by

others can be subtracted from the particular well. Either way, it involves basic arithmetic.

Exclusion (6) already has identified the royalty owners with ED Leases, so that they can

be excluded from any damage calculation. For now, the simple way is the way Crawley


21

did it when removing the case to federal court: reducing class-wide damages by the

percentage of ED Leases.

2. Numerosity

Rule 23(a) requires the plaintiff show that “the class is so numerous that

joinder of all members is impracticable.” Fed. R. Civ. P. 23(a)(1); see also Trevizo

v. Adams, 455 F.3d 1155, 1161 (10th Cir. 2006). This case involves more than 300

wells and more than 4,000 royalty owners dispersed throughout the country. Ex. 6, Phend

Report at ¶¶4, 25.22 As a result, numerosity is easily met.

3. Commonality

“There need only be one issue of law or fact common to all class members to satisfy

the element of commonality.” Hill v. Kaiser-Francis Oil Co., No. CIV-09-07-R, 2010 WL

2474051, at *3 (W.D. Okla. June 9, 2010). Even a single common question of law or fact

is enough.23 Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 359 (2011) (“a single [common]

question will do”); Newberg on Class Actions (5th ed.), § 3.18 (“the commonality

requirement is not usually a contentious one: the requirement is generally satisfied by the

existence of a single issue of law or fact … and is thus easily met in most cases.”).

22 See also Hall Jones Oil Corp. v. Claro, 1969 OK 113, 459 P.2d 858 (class certified with only 11 members); and Shores v. First City Bank Corp., 1984 OK 67, 689 P.2d 299, 302 (class certified with 115 members). 23 Shutts v. Phillips Petroleum Co., 679 P.2d 1159, 1175 (Kan. 1984) (“The [commonality] requirement … is couched in the disjunctive: common question of fact or law. It does not, therefore, require the presence of both a common question of fact and a common question of law.”) (citations omitted) aff’d in part, rev’d in part and remanded, 472 U.S. 797 (1985).


22

In royalty owner class actions such as this, individual factual differences

regarding oil and gas lease language, BTU content of gas, well location, or

producing formations do not preclude a finding of commonality. See, e.g., Hill v.

Kaiser-Francis, 2010 WL 2474051, at **1-3; Hill v. Marathon Oil Co., No. CIV-08-

37-R, 2010 WL 2365447, at *3-4 (W.D. Okla. June 9, 2010); Naylor Farms, Inc. v.

Anadarko OGC Co., No. CIV-08-668-R, 2009 WL 8572026, at *5 (W.D. Okla. Aug.

26, 2009) (concluding that “differing language of the leases is not an impediment to

certification of the class on the basis of commonality.”); Chieftain Royalty Co. v.

QEP Energy Co., 281 F.R.D. 499, 503 (W.D. Okla. 2012). 24 This case is no exception.

The questions of fact or law common to Plaintiff and the Class include, without limitation,

one or more of the following:

(a) Do the Class Leases contain the implied duty to market and the OCC Drilling and Spacing Orders create a fiduciary duty?

(b) Is the raw gas in marketable condition at the gathering line inlet before any midstream service costs are incurred or deducted from royalties (as Crawley contends) or after the midstream services are performed (as Plaintiff contends)?

(c) Can class-wide damages be calculated? Even Defendant’s Answer raises a common question of law seeking resolution class-wide:

(d) Is Section 10 of the Production Revenue Standards Act, 52 Okla. Stat. § 570.10, a “special law” that violates sections 46 and 59 of Article 5 of the Constitution of the State of Oklahoma?

Doc. 29, Amd. Answer at 8, ¶(e). 24 Oklahoma courts have also found that “individual issues created by the specific language of the conveyance instruments do not preclude the common issue, i.e. whether the deductions for post-production costs are proper . . . .” Greghol Ltd. Partnership v. Oryx Energy Co., 959 P.2d. 596, 599 (Okla. Civ. App. 1998).


23

Here, these common questions: (1) can be answered on a class-wide basis; and (2)

are apt to drive the resolution of the case. See McKnight v. Linn Operating, Inc., 2016 WL

756541, at *5-6 (W.D. Okla. Feb. 25, 2016).

a. The Royalty Leases

“Under Oklahoma law, the implied duty to market is imputed into each and every

oil lease, unless otherwise provided by the express terms of the lease.” McKnight, 2016

WL 756541, at *1 (citing Naylor Farms, 2011 WL 753782, at *3). This Court and others

have previously analyzed the language in many common forms of leases and found it does

not negate the implied duty to market in each lease. See Exhibit 2-I, Table of Oklahoma

Lease Language. The Royalty Clause Summary in this case captures the royalty clause in

each of the leases and totals the number of leases with that royalty clause so the Court can

easily review and determine which leases contain express terms negating the implied duty

to market. Ex. 8-A, Lease Summary (highlighting ED Leases, all other leases are non-ED

Leases).25 All of the remaining leases contain the implied duty to market class-wide.26 This

25 Though clearly not required after Tyson Foods, in compliance with Roderick v. XTO Energy, Inc., 725 F.3d 1213, 1219 (10th Cir. 2013), Plaintiff reviewed every lease Defendant produced and quoted its royalty clause in a chart. In addition, Plaintiff filed every lease on disk to back up the summary in the record. 26 Oklahoma law also imposes the implied duty to market on lessees who pay royalty to owners under a forced pooling order issued by the OCC. Defendant will likely cite the thoroughly discredited and non-precedential opinion of Panola Indep. School Dist. No. 4 v. Unit Petroleum Co., 287 P.3d 1033 (Okla. Ct. Civ. App. July 13, 2012) for the contrary position. No subsequent court has ever cited Panola favorably, and Drummond v. Range Resources, 2013 WL 3884116, at *9-12 (Okla. Dist. Ct. Judge Van Dyke) scathingly rejected Panola. In Drummond, the court found 6.8% of class members were pooled, such that the percentage was too small to preclude class certification regardless of the implied duty to market. Id. at *11. Here, there are approximately 1.5%. Besides, Panola was


24

determination drives the case toward the next common question: when is gas in marketable

condition and the lessee’s implied duty to market satisfied?

b. Marketable Condition

In McKnight, at *2, this Court concluded that, under the implied duty to market,

“producers are responsible for marketing a well’s natural gas production[,] Mittelstaedt v.

Santa Fe Minerals, Inc., 954 P.2d 1203, 1206 (Okla. 1998),” and the lessee is “to bear the

full cost of any operations or processes necessary to transform the unprocessed gas into a

marketable product. Mittelstaedt, 954 P.2d at 1205; Wood v. TXO Production Corp., 854

P.2d 880, 881-82 (Okla. 1992).” This Court has held: “[T]he lessee may not deduct the

costs incurred for such third party’s services from amounts paid the lessor(s) or royalty

owner(s) but must compute the royalty interest(s) based upon the amount paid by the

interstate pipeline for the residue gas and NGLs unreduced by any amount or percentage

of proceeds paid to the third party.” Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-

08-668-R, 2011 WL 7053787 (W.D. Okla. July 14, 2011), recons. on other grounds, 2011

WL 7053791 (W.D. Okla. Sept. 14, 2011). Oklahoma law on the implied duty to market

controls each Class Member’s claim—whether brought separately or in a class action.

obsolete and statutorily wrong before it was even issued as the Oklahoma Legislature codified the implied duty to market for the benefit of forced pooled royalty owners two months earlier. 52 O.S. § 87.1(e) (effective May 8, 2012) (stating that forced-pool mineral interest owners “shall be considered a lessor, subject to the judicially recognized implied covenant to market.”) This either confirmed what the law always was, or at the very least, after the effective date, provides that the pooled royalty owners are owed the same duty as those that are leased. Before the statutory change, it only makes sense that a royalty owner who was “forced”, rather than consented, to the lessee’s drilling would have the same or better rights than those who consensually signed a lease.


25

Oklahoma law also controls the breach of lease and breach of fiduciary duty claims. That

law is common; in fact, it is identical.

c. Royalty Payment Method and Damages

Factually, each Class Member has a royalty interest in an Oklahoma well operated

by Crawley. Each Class Member has midstream GCDTP services costs deducted from his

or her royalty payments. The amount deducted from (and, thus, the damages to) each Class

Member is different, but the liability (or lack thereof) for taking midstream services cost

deductions is common to all. As has been done in many other royalty underpayment class

actions, experts can utilize Crawley’s well-by-well, month-by-month data in a spreadsheet

to calculate the amount of underpayment due each class member. Ex. 5, Renieke Report at

III.F; Ex. 6, Phend Report at ¶19. Differences in the amounts class members might recover

does not affect certification of the case as a class action.

d. Constitutionality of 52 Okla. Stat. § 570.10

Crawley’s Amended Answer also raises a common question of law that supports

certification of this action as a class action. Its fifth affirmative defense contends:

Section 10 of the Production Revenue Standards Act, 52 Okla. Stat. § 570.10, is a ‘special law’ that violates sections 46 and 59 of Article 5 of the Constitution of the State of Oklahoma.

Amd. Answer, Doc. 29 at 8, ¶(e). The resolution of this common question would apply

class-wide.

In sum, at least one common question of fact or law exists. Commonality is satisfied

here, just as it has been in several other royalty underpayment cases certified as class

actions by this Court:


26

The common question here, as in prior cases certified by the Court is whether Defendant either took inappropriate deductions or sold gas at a lesser price to a midstream company in exchange for the processing thereof and paid royalty on the net value of the gas rather than its gross value. Although ultimately the Court may determine sub-classes are necessary or desirable to assist in management of the class, the mere fact of differences in the gas and the actual marketing arrangements for any particular well or wells does not preclude class certification on the basis of commonality. The common question will yield common answers; whether Defendant took deductions or otherwise passed processing costs on to royalty owners, and did Defendant do so inappropriately. Accordingly, the Court finds Plaintiff's breach of contract claim is subject to certification.

Chieftain Royalty Co. v. QEP Energy Co., 281 F.R.D. 499, 503 (W.D. Okla. 2012). 4. Typicality

This Court analyzed typicality in McKnight under the following statements of law:

“The commonality and typicality requirements of Rule 23(a) tend to merge.” The typicality requirement limits the class claims to those “fairly encompassed” by the claims of the named plaintiffs. Claims may be typical without being identical such that “typicality may be satisfied even though varying fact patterns support the claims or defenses of individual class members or there is disparity in the damages claimed by the representative parties and the other members of the class.”

McKnight v. Linn Operating, Inc., 2016 WL 756541, at *5 (W.D. Okla. Feb. 25 2016)

(internal citations omitted).

Here, the Plaintiff’s lease—like all of the leases and forced-pooling orders in this

case—contains the implied duty to market. It provides for royalties to be paid on the

“proceeds from the sale of the gas, as such .…” This Court has already determined that

lease language like this does not negate the implied duty to market. Fankhouser v. XTO

Energy, Inc., No. CIV-07-798-L, 2012 WL 601415, at *2 (W.D. Okla. Feb. 23, 2012);

Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7053787 (W.D.


27

Okla. July 14, 2011), recons. on other grounds, 2011 WL 7053791 (W.D. Okla. Sept. 14,

2011). In McKnight, the Court found typicality lacking because of the lessee’s “differing

methods of paying the royalty owners and in particular the payment methodology used on

production from the [McKnight’s] well…” McKnight, 2016 WL 756541, at *6. In contrast,

here, Crawley used a uniform method of calculating and paying royalties, so typicality is

satisfied. Ex. 5, Reineke Report; Ex. 6, Phend Report. And Plaintiff’s legal claims for

underpayment of royalty are typical of the Class’s legal claims for underpayment of

royalty.

Thus, typicality is satisfied.

5. Adequacy of Representation

Rule 23(a) requires that the named plaintiffs and their counsel will adequately represent the class. Legal adequacy is determined by the resolution of two questions: (1) do the named plaintiffs and their counsel have any conflicts of interest with other class members; and (2) will the named plaintiffs and their counsel prosecute the action vigorously on behalf of the class.

McKnight, 2016 WL 756541, at *6 (internal citations omitted).

Here, the Declaration of Rex Sharp details the qualifications and experience of the

attorneys at Rex A. Sharp, P.A. to represent the Class. See Exhibit 2, First Sharp Decl. at

2-A, Firm Resume.

“Generally, as long as the Plaintiff, as class representative, knows something about

the case, even though they are not knowledgeable of the complaint’s specific allegations,

the class should be certified.” Lerner v. Haimsohn, 126 F.R.D. 64, 67 (D. Colo. 1989). The

class representatives should be able to “take an active role in and control the litigation and


28

to protect the interests of absentees.” Berger v. Compaq Computer Corp., 257 F.3d 475,

482 (5th Cir. 2001). Here, Plaintiff understands the responsibility that is owed to the absent

Class Members and has been and is willing to complete the task. Ex. 1, Frank Decl. ¶¶6 &

7. Thus, adequacy is met.

6. Predominance

Under Rule 23(b)(3) (i.e., an opt-out class), class certification is proper when the

Court finds that common questions of law or fact predominate over questions affecting

only individual members and that a class action is superior to other methods of

adjudication.

“The Rule 23(b)(3) predominance inquiry tests whether proposed classes are

sufficiently cohesive to warrant adjudication by representation.” CGC Holding Co., LLC

v. Broad & Cassel, 773 F.3d 1076, 1087 (10th Cir. 2014) (quoting Amchem Prods., Inc. v.

Windsor, 521 U.S. 591, 622–23 (1997)). In making this assessment, courts are to consider

the elements of the underlying cause of action. In re Urethane Antitrust Litig., 768 F.3d

1245, 1255 (10th Cir. 2014).

Under Amgen, Rule 23(b)(3) “does not require a plaintiff seeking class certification

to prove that each ‘elemen[t] of [her] claim [is] susceptible to classwide proof.’ What the

rule does require is that common questions ‘predominate over any questions affecting only

individual [class] members.’” Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S.

Ct. 1184, 1196 (2013) (emphasis in original) (quoting Rule 23(b)(3)); see also Urethane,

768 F.3d at 1255 (“Class-wide proof is not required for all issues. Instead, Rule 23(b)(3)

simply requires a showing that the questions common to the class predominate over


29

individualized questions.”). On top of that, “Rule 23(b)(3) requires a showing

that questions common to the class predominate, not that those questions will be answered,

on the merits, in favor of the class.” Amgen, 133 S. Ct. at 1191 (emphasis in original). That

means “[i]t is not necessary that all of the elements of the claim entail questions of fact and

law that are common to the class, nor that the answers to those common questions be

dispositive.” CGC Holding Co., 773 F.3d at 1087. Thus, in CGC Holding Co., the Tenth

Circuit affirmed the class certification of a complex RICO fraud case despite the reality

that fraud claims ordinarily require individualized findings of reliance. In line with the

Supreme Court’s recent guidance in Amgen, because it was “clear that the class’s claims

[would] ‘prevail or fail in unison,” there was “enough to satisfy the predominance prong

of Rule 23.” Id. at 1093 (quoting Amgen, 133 S. Ct. at 1191).

Here, the underlying causes of action are breach of lease and breach of fiduciary

duty. Doc. 16, Amd. Compl. at 13-15, ¶¶ 41-53. In Oklahoma, “to prove a breach

of contract, a plaintiff must prove three elements: 1) the formation of a contract; 2) a breach

thereof; and 3) actual damages suffered from that breach. Digital Design Group, Inc. v.

Information Builders, Inc., 2001 OK 21, ¶ 33, 24 P.3d 834, 843.” In re Farmers Med-Pay

Litig., 2010 OK CIV APP 12, 229 P.3d 551, 559 n.9 (affirming class certification). The

elements of breach of fiduciary duty in Oklahoma are existence of the duty, breach, and

damages directly caused thereby. Vernon's Okla. Forms 2d, OUJI-CIV 26.1 (2d ed.). Here

all of the royalty owners have a non-ED Lease with Crawley or are under a forced pooling

order such that Crawley owes them the implied duty to market. By virtue of the OCC

orders, whether forced pooled or drilling and spacing, Crawley owes all of the royalty


30

owners a fiduciary duty. And, in paying royalties on the net (after GCDTP deductions),

rather than gross, contract value for less than all of the marketable products, Crawley

underpaid the Class Members, i.e. all of the Class Members sustained damages as a result

of Crawley’s uniform royalty payment method. All of these elements are subject to

generalized proof and predominate resolution of Plaintiff’s and the Class’s claims. Tyson

Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1945 (2016) (describing a common question

as a “prima facie showing” using “generalized, class-wide proof”).

“Predominance is ordinarily satisfied when plaintiffs have alleged a common course

of conduct by the defendant.” Hill v. Kaiser-Francis Oil Co., No. CIV-09-07-R, 2010 WL

2474051, at *6 (W.D. Okla. June 9, 2010). Here, without the certification of this action as

a class action, Crawley will continue its uniform practice of deducting midstream service

costs from royalties due the putative Class Members under leases that contain no language

expressly authorizing those deductions, paying royalties on less than the full volume

produced, and paying royalties on fewer than all marketable products produced.27

27 In McKnight, this Court found “Linn’s complex method of calculating and paying individual royalties” necessitated “owner by owner and month by month calculations” which defeated predominance. McKnight v. Linn Operating, Inc., 2016 WL 756541, at *8 (W.D. Okla. Feb. 25, 2016) (“Linn does not pay all royalty owners across the board in the same manner.”) But, where, as here, Crawley has a uniform royalty payment method in that it treats all leases as ED leases even where the lease is silent as to deductions, see n.2, supra, predominance is satisfied. But were that not the case, it seems problematic that a defendant can defeat predominance and, hence, class certification simply by creating a complex accounting method. See Jacob v. Duane Reade, Inc., 293 F.R.D. 578, 592 (S.D.N.Y. 2013), aff’d, 602 Fed. Appx. 3 (2d Cir. 2015) (acknowledging common questions of liability may predominate and support class certification even where “individualized determinations or proof of damages might be required at the [later] damages phase” and providing an example of an employer that failed to maintain accessible


31

This class action is the only viable method for adjudicating and protecting the rights

of more than 4,000 of royalty owners, especially when the “cost to litigate” makes

individual actions uneconomic. Most of the putative Class member’s claims are too small

to justify the enormous expense of litigation. “At the very core of the class action

mechanism” is overcoming the problem that a small recovery does not provide an incentive

for an individual to bring a solo action to prosecute his rights. Amgen, 133 S. Ct. at 1202;

accord Hill v. Kaiser-Francis Oil Co., 2010 WL 2474051, at *7 (same).

Like commonality, predominance requires common questions of law or fact, and,

like Rule 23(a)(3), it is styled in the disjunctive. Satisfaction of either common questions

of law or common questions of fact is sufficient. And, here, both are satisfied.

“[I]ndividualized issues” are issues that require individual testimony to prove them so that

a representative class case does not present any efficiencies. Tyson Foods, Inc. v.

Bouaphakeo, 136 S. Ct. 1036, 1045 (2016) (an individualized issue has two prongs: (1)

“members of a proposed class will need to present evidence” on the issue; and, (2) the

evidence presented must “var[y] from member to member.”); accord Payson v. Capital

One Home Loans, L.L.C., 2008 WL 4642639, at *5 (D. Kan. Oct. 16, 2008) (quoting

Urethane, 2008 WL 4210780, at *5); see also In Urethane, 768 F.3d 1245 (10th Cir. 2014)

(same). There is not a single issue that requires the individual testimony of any royalty

owner. Duty is a legal issue, and liability for Crawley’s uniform royalty payment method

and damages for breach of lease and fiduciary duty both satisfy predominance.

records of overtime as insufficient to prevent certification of common questions on liability).


32

a. Lease Language

With guidance from Oklahoma law and as this Court has done before, the Court

need only determine whether the material lease language clearly and expressly negates the

implied duty to market; if not, all Class leases and, by operation of law, the forced pooling

orders contain that implied duty to market.

As this Court has found, Oklahoma law is clear that the implied covenant to market

exists in both market value and proceeds leases. See Wood v. TXO Production Corp., 854

P.2d 880 (Okla. 1992) (market value “at the well” lease form); TXO Production Corp. v.

State, ex rel. Com'rs of Land Office, 903 P.2d 259 (Okla. 1994) (generally gross proceeds

lease form); Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998) (same);

and Fankhouser v. XTO Energy, Inc., No. CIV-07-798-L, 2012 WL 601415, at *2 (W.D.

Okla. Feb. 23, 2012) (“The court therefore holds the implied duty to market is not negated

by the lease language cited by defendant [“at the well”; “gas as such”; “raw gas”; “net

proceeds”; or “proceeds less handling costs”]”); see also, Hill v. Kaiser-Francis Oil Co.,

2010 WL 2474051, at *1, *3; Hill v. Marathon Oil Co., No. CIV-08-37-R, 2010 WL

2365447, at *3-4 (W.D. Okla. June 9, 2010); Naylor Farms, Inc. v. Anadarko OGC

Co., No. CIV-08-668-R, 2009 WL 8572026, at *5; Chieftain Royalty Co. v. QEP

Energy Co., 281 F.R.D. 499, 503 (W.D. Okla. 2012).28

28 Even if the lease language varies, any variation is immaterial to the implied duty to market that Oklahoma law reads into every contract unless that duty is expressly disclaimed. Plaintiff carefully crafted his class definition to exclude all ED Leases. As a result, all of the Leases in the class fail to disclaim the implied duty. In turn, all of the leases and OCC orders have the same legal effect; by virtue of their silence, they all are read to contain the implied covenant to market.


33

Indeed, insofar as relevant, all of the Class Leases contain the implied duty to market

and present a predominant common question of law as to whether Defendant’s uniform

royalty payment method breaches that duty.

b. Marketable Condition

Predominance on marketable condition under Oklahoma law is a common fact issue

resulting in many class certifications, some which went on to manageable trial without

incident. See Ex. 4, Third Sharp Decl. This is because experts will present common

evidence—drawn from Crawley’s business records and likely to be undisputed—about gas

analysis, pressure, water vapor saturation, gas contracts, gas conditioning, and market

analysis to answer the predominant fact question—whether raw gas is in marketable

condition at the well, at the gathering line inlet, or at the interstate pipeline. See, e.g., Exs.

5-7, Expert Reports. The answer for the Class Wells will be common, either at or before

the gathering line inlet (if Crawley prevails) or, since all of the gas from Class Wells is

commingled after the gathering line inlet (with gas from not just Crawley wells but many

others), at the interstate pipeline market pool. This is exactly what has happened in every

royalty owner underpayment trial on the marketability question—100% of the class wins

or loses on this fact issue.

While the raw gas coming out of each well may differ in its composition, this fact

simply shows the raw gas cannot be in fungible marketable condition until after

aggregation of the raw gas into the gathering lines and performance of the midstream

services. Ex. 5, Reineke Report at II.C & II.D. All of the gas produced is subject to gas

contracts providing for the necessary midstream services to transform the raw gas into


34

marketable condition, i.e., interstate pipeline quality.29 As this Court succinctly

summarized in another royalty underpayment case:

Typically these contracts allow the midstream companies to acquire title or possession of the unprocessed and therefore unmarketable gas at the wellhead or somewhere upstream of the midstream company’s processing facilities and producers then declare that a “wellhead sale” has occurred and contend that the raw gas is “marketable” at the wellhead. This is an attempt to seemingly comply with the implied duty to market.30 However, the

29 The GCDT services were all necessary from a change of “condition” standpoint, Reineke Report at II.C, from an economic standpoint, Dr. Foster Report at VI; and, from a common sense standpoint as there is nothing to be gained from providing “extra” midstream services for gas already in marketable condition. “Crawley did not contract for or incur expense for unnecessary or excessive services.” Id. at III.C. 30 Long ago, the Fifth Circuit rejected the producers’ and midstream companies’ declarations of “wellhead sale” based upon title transfer before the sale of marketable products. The Fifth Circuit advised that the mere structuring of a gas “sale” based on the transfer of title alone was erroneous and failed to consider that the lessor/royalty owner was not a party to the “sale” contract:

To interpret the leases otherwise would place the lessors at the mercy of the lessee. The lessors had no say in Shell’s choice of where to put the passage of title. Their interests were either irrelevant or adverse to Shell's. Shell and its buyers wanted to avoid state pipeline regulations; but their decision to do so had the effect of placing the “point of sale” on the lease, thereby avoiding Shell's obligation to pay royalties based on market value. The opportunity for manipulation is apparent. Harmon, for example, counsels producers to “attempt to obtain appropriate contract amendments which would move the sales point onto the premises of each lease from which gas delivered under the contract is produced” to avoid payment of market value royalty. 33 Inst. on Oil & Gas L. & Tax'n at 95. We note as well the strange results that may occur if the determination of whether gas is “sold at the well” turns solely on the place where title passes. For example, if gas from several leases is delivered at a single point in the fields some lessors may be entitled to market value royalty while others receive proceeds royalty; similarly, gas produced from one lease through a directional well drilled on another lease would be sold “off the lease” even if delivered at the wellhead itself. See Holliman, Exxon Corporation v. Middleton: Some Answers But Additional Confusion in the Volatile Area of Market Value Gas Royalty Litigation, 13 St. Mary's L.J. 1, 47–49 & 48 nn. 185–86. If the place of delivery is controlling, it makes “[t]he


https://1.next.westlaw.com/Link/Document/FullText?findType=Y&serNum=0102800919&pubNum=1237&originatingDoc=Ic69cab61944911d9bdd1cfdd544ca3a4&refType=LR&fi=co_pp_sp_1237_47&originationContext=document&transitionType=DocumentItem&contextData=(sc.History*oc.Search)#co_pp_sp_1237_47




35

midstream companies provide the services of gathering, compressing, dehydrating, treatment and processing (“GCDTP”) the gas and then remitting to the producer either a percentage of what the midstream company receives from the purchaser (POP) or the amount received from the pipeline minus a fee in kind or in cash charged for performing the GCDTP services. Producers then calculate and pay royalties based on the net amounts received from the midstream companies rather than the gross amount the midstream companies receive from the pipeline sales. By calculating the royalty payments on such net amounts, the royalty owners bear the costs of transforming the raw gas into a marketable product.

McKnight v. Linn Operating, Inc., 2016 WL 756541, at *2.

Because anything of value can be sold, regardless of condition, even Defendant’s

title transfer theory is common. Either theory provides a common class-wide answer

depending upon which theory prevails—the “quality” theory or “salable” theory. There

will be no liability class-wide if a mere paper title transfer is all that is required to meet the

Oklahoma implied duty to market (as Crawley is likely to contend) and class-wide liability

if that is wrong.

Plaintiff has demonstrated using common class-wide evidence that the question of

when the gas is in marketable condition is a predominant common question that will have

happenstance of the point of delivery ... very significant”. Hoffman, Pooling and Unitization: Current Status and Developments, 33 Inst. on Oil & Gas L. & Tax'n 245, 265 (1982). We are convinced that Mississippi law does not allow the lessors' rights under an oil and gas lease to turn on such “happenstance”, especially when the point of delivery is in the lessee's control.

Piney Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225, 232 (5th Cir. 1984) (emphasis added); see also id. at 232-33 & n.7 (describing similar state law case involving a “sham” sale and explaining that “parties to a sale contract may not conclusively extinguish the rights of persons not party to the sale simply by selecting a place for passage of title”); see also Reineke Report at III.A.


36

the same answer for every plaintiff and drive the resolution of Plaintiff’s and the Class’s

claims. As such, the determination of this issue—whether favorable to the putative class or

dispositive in favor of Crawley—will apply to all. See CGC Holding Co., LLC v. Broad &

Cassel, 773 F.3d 1076, 1093 n.11 (10th Cir. 2014) (“On both sides, this dispute is

resolvable by common evidence. And the answer to this predominant question may, in

many ways, definitively end the litigation. The existence of such a predominating question

places a thumb on the scale in favor of class certification.”).

c. Damages

The Tenth Circuit has also mentioned that damages should be considered: “[T]he

district court should consider the extent to which material differences in damages

determinations will require individualized inquiries.” Roderick v. XTO Energy, Inc., 725

F.3d 1213, 1220 (10th Cir. 2013).31

With that said, the Supreme Court in Wal-Mart already deemed it “clear that

individualized monetary claims belong in Rule 23(b)(3).” 131 S.Ct. at 2558; see also Sykes

v. Mel S. Harris & Associates LLC, 780 F.3d 70, 82 (2d Cir. 2015) (“The Supreme Court

has explicitly determined that it is ‘clear that individualized monetary claims belong in

Rule 23(b)(3).’”). In Urethane Antitrust Litig., a later case after Roderick, the Tenth Circuit

31 The Tenth Circuit Panel in Roderick, perhaps noting the limited value of Comcast, volunteered potential solutions if damages were deemed a challenge under predominance. Roderick v. XTO Energy, Inc., 725 F.3d at 1220. For instance, the Tenth Circuit proposed dividing the class into subclasses for purposes of adjudicating damages or simply certifying the class for liability purposes only and leaving individual damages calculations to subsequent proceedings. Id. (citing dissent in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013)); see also, Jacob, 293 F.R.D. 578, note 27, supra.


37

squarely considered whether individualized damages defeated class certification.

Affirming the decision to certify the class and the successful class action trial that followed,

the Tenth Circuit explained: “The presence of individualized damages issues would not

change this result. Class-wide proof is not required for all issues. Instead, Rule 23(b)(3)

simply requires a showing that the questions common to the class predominate over

individualized questions.” 768 F.3d 1245, 1255 (10th Cir. 2014). Most other Circuits have

joined the Tenth Circuit in reading Comcast narrowly on damages; the focus remains on

liability—not damages—when deciding Rule 23(b)(3) predominance.32

Legally, damage calculations do not preclude class certification even if they have to

be calculated individually, instead of class-wide. Roach v. T.L. Cannon Corp., 778 F.3d

401, 407-08 (2d Cir. Feb. 10, 2015) (citing numerous reasons and subsequent case law,

including subsequent Tenth Circuit opinions). Factually, the class-wide damages can be

calculated based on the Plaintiff’s liability theory. Ex. 5, Reineke Report at III.F; Ex. 6,

32 Simply put, individualized damages issues among class members do not defeat class certification. See Butler v. Sears, Roebuck and Co., 727 F.3d 796 (7th Cir. 2013); In re Whirlpool Corp. Front-loading Washer, 722 F.3d 838 (6th Cir. 2013). And in both of these cases, the Supreme Court refused certiorari regarding the respective Circuits’ application of Comcast. Id. See also In re Nexium Antitrust Litig., 777 F.3d 9, 22-23 (1st Cir. Jan. 21, 2015) (same); Sykes v. Mel S. Harris & Associates LLC, 780 F.3d 70, 88 (2d Cir. 2015) (same); In re Deepwater Horizon, 739 F.3d 790, 817 (5th Cir. 2014) (same); Leyva v. Medline Indus. Inc., 716 F.3d 510, 514 (9th Cir. 2013) (same); Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 815 (7th Cir. 2012) (same and collecting cases); In re IKO Roofing Shingle Products Liability Litigation, 757 F.3d 599, 601-03 (7th Cir. 2014) (vacating class certification denial because Comcast does not require class-wide damages be capable of calculation); Klay v. Humana, Inc., 382 F.3d 1241, 1260 (11th Cir.2004) (only in rare, extreme cases would individual issues of damages be so complex as to defeat class certification under Rule 23(b)(3)). Here, class-wide damages are capable of calculation. See Ex.6, Phend Report.


38

Phend Report at ¶¶ 9, 21 & 26. The numbers to which royalty calculation formulas are

applied come from Crawley’s gas contracts and plant statements that Crawley receives

from its midstream service providers (who keep the information digitally which is easier

to calculate damages from). Moreover, Crawley in removing this case itself demonstrated

that class-wide damages can be calculated from its own records. Doc. 1-6, Garner Aff. at

¶¶ 7-9.33 Thus, the damages calculation is formulaic and can be done. Id. at ¶¶ 12-15; Ex.

6, Phend Report at ¶9, 21, & 26; Ex. 5, Reineke Report at III.F. This method is common

and has been used in many other royalty owner class actions.

For all of the above reasons, predominance is satisfied. See, e.g., Sykes v. Mel S.

Harris & Associates LLC, 780 F.3d 70, 88 (2d Cir. 2015) (affirming class certification and

explaining that “plaintiffs point out that the amount of any money extracted from plaintiffs

is stored by defendants themselves. Because the evidence necessary to make out such

damages claims, while individual, is easily accessible, such individual damage

considerations do not threaten to overwhelm the litigation.”); see also id. (dismantling the

assertion that Comcast changed the landscape and affirming class certification even though

individual damages issues existed).

7. Superiority

In addition to predominance of common questions, Rule 23(b)(3) requires a finding

that “a class action is superior to other available methods for the fair and efficient

33 The Affidavit of Jason A. Garner, Vice President of Crawley, Doc. 1-6, differentiates between wells Crawley operates and wells Crawley does not operate. Plaintiff’s proposed class definition encompasses only wells that Crawley operates. See p. 1, supra. The class definition does not include wells which Crawley does not operate. Id.


39

adjudication of the controversy.” Id. In making this assessment, Rule 23(b)(3) directs the

trial court to consider:

(A) the interest of members of the class in individually controlling the prosecution . . . of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action.

Rule 23(b)(3).

This case meets the standards for superiority. First, every Class Member has an

interest in proving Defendant’s common course of wrongful conduct. It would be

enormously inefficient for both the judicial system and the parties to engage in multiple

trials in individual actions on the same issues. See Hill v. Kaiser-Francis Oil Co., No. CIV-

09-07-R, 2010 WL 2474051, at *7 (W.D. Okla. June 9, 2010) (“A class action ‘would

achieve [greater] economies of time, effort and expense, and promote [enhanced]

uniformity of decisions as to persons similarly situated’ than would individual actions. The

superiority prong of Rule 23(b)(3) is clearly established in this case.”).

Second, the number of Class Members is too large and, the “[p]utative class

members, each of whose royalty interests may be quite small, would have little incentive

to prosecute their claims individually because their costs would likely exceed the value of

their individual claims. Thus, class treatment is a superior option here because ‘the

alternatives are either no recourse for thousands ... to whom the courthouse would be out

of bounds, or a multiplicity and scattering of suits with the inefficient administration of


40

litigation which follows in its wake.’” Hill v. Kaiser-Francis Oil Co., 2010 WL 2474051,

at *7 (citations omitted).

Third, Plaintiff does not anticipate any management difficulties that would preclude

this action from being maintained as a class action. It is apparent, however, that there would

be myriad difficulties if certification were denied, not the least of which is flooding the

state court system with thousands of small cases, or alternatively, allowing Defendant to

escape its duties owed to most of its royalty owners.

Fourth, a class action is superior to any other available method for a fair and efficient

adjudication of this controversy. Individual joinder of all members of the class is

impracticable and individual lawsuits would be inefficient and impracticable. The average

claim of each royalty owner is small relative to the amount of time, effort and expense that

will be needed to prove liability and damages. Much of the evidence in this case will be

presented through experts who will have spent hundreds of hours studying the matter. See

Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016).

Ultimately, there is no feasible way for an individual royalty owner to pursue this

type of case without class certification. Even if individuals could afford to bring this type

of action, the costs and burdens to the Court system also would be catastrophic. And the

system, the Plaintiff, and justice would suffer. “It is enough that class treatment is superior

because it will ‘achieve economies of time, effort, and expense, and promote uniformity of

decision as to persons similarly situated, without sacrificing procedural fairness or bringing

about other undesirable results.’” CGC Holding Co., LLC v. Broad & Cassel, 773 F.3d

1076, 1096 (10th Cir. 2014).


41

V. CONCLUSION

The factual and legal issues involved in determining whether Crawley’s uniform

royalty payment method that imposes deduction of midstream service costs on royalty

owners are common and are best answered in one fell swoop. By this motion, Plaintiff asks

the Court to enter an Order certifying this case as a class action, appointing Plaintiff as the

Class Representative, appointing Plaintiff’s counsel as Class Counsel, and awarding such

other relief, at law or in equity, special or general, to which Plaintiff is justly entitled. Respectfully Submitted,

/s/ Rex A. Sharp Rex A. Sharp OBA#011990 Rex A. Sharp, P.A. 5301 W. 75th Street Prairie Village, KS 66208 (913) 901-0505 (913) 901-0419 fax [email protected] Michael E. Grant, OBA #11848

Grant Law Firm, PLLC 512 NW 12th Street Oklahoma City, OK 73103 (405) 232-6357 (405) 232-6358 fax [email protected]

Attorneys for Plaintiff


mailto:[email protected]

mailto:[email protected]

42

CERTIFICATE OF SERVICE

This certifies that on this 6th day of September, 2016, I electronically transmitted

the above document to the Clerk of the Court using the CM/ECF system for filing.

Accordingly, a Notice of Electronic Filing will be automatically transmitted to all counsel

of record who have registered for the CM/ECF system.

s/ Rex A. Sharp


plaintiff’s motion for class certification...

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