Naylor Farms, Inc. v. Chaparral Energy, LLC

923 F.3d 779

NAYLOR FARMS, INC. ; Harrel's LLC, Plaintiffs-Appellees,

v.CHAPARRAL ENERGY, LLC, Defendant-Appellant,Black Stone Minerals Company, L.P., Amicus Curiae.

No. 17-6146

United States Court of Appeals, Tenth Circuit.

FILED May 3, 2019

Anthony J. Shaheen, Holland & Hart LLP, Denver, Colorado (Christopher A. Chrisman and Jessica M. Schmidt, Holland & Hart LLP, Denver, Colorado; Linda J. Byford, Chaparral Energy, LLC, Oklahoma City, Oklahoma; John J. Griffin, Jr., Harvey D. Ellis, Jr., and Charles V. Knutter, Crowe & Dunlevy, Oklahoma City, Oklahoma, with him on the briefs), for Defendant-Appellant Chaparral Energy, LLC.

Conner L. Helms (Gary R. Underwood and Erin M. Moore, with him on the brief), Helms Underwood & Cook, Oklahoma City, Oklahoma, for Plaintiffs-Appellees Naylor Farms, Inc. and Harrel's LLC.

Daniel H. Charest and Warren T. Burns, Burns Charest LLP, Dallas, Texas, filed an amicus curiae brief for Black Stone Minerals Company, L.P. in support of Plaintiffs-Appellees Naylor Farms, Inc. and Harrel's L.L.C.

Before MORITZ, MURPHY, and EID, Circuit Judges.

MORITZ, Circuit Judge.

Defendant Chaparral Energy, L.L.C. (Chaparral) operates approximately 2,500 oil and gas wells in Oklahoma. Plaintiffs Naylor Farms, Inc. and Harrel's, L.L.C. (collectively, Naylor Farms) have royalty interests in some of those wells. As a result, Naylor Farms receives a portion of the proceeds those wells generate. But according to Naylor Farms, Chaparral systematically underpaid Naylor Farms and other similarly situated royalty owners by improperly deducting from their royalty payments certain gas-treatment costs—costs that Naylor Farms says Chaparral was required to shoulder under Oklahoma law. Thus, Naylor Farms brought a putative class-action lawsuit against Chaparral and moved to certify the class under Rule 23 of the Federal Rules of Civil Procedure. The district court granted Naylor Farms' motion to certify, and Chaparral now appeals the district court's certification order. For the reasons discussed below, we affirm.

Background

Under Oklahoma law, lessees like Chaparral are subject to an implied duty of marketability (IDM).¹ The IDM imposes upon lessees "a duty to provide a marketable product available to market." Mittelstaedt v. Santa Fe Minerals, Inc. , 954 P.2d 1203, 1206 (Okla. 1998). Consistent with this duty, lessees are generally precluded from passing along to royalty owners any costs the lessees incur in making a product marketable. See id. at 1208. And because "raw or unprocessed gas" must typically "undergo[ ] certain field processes"—such as gathering, compressing, dehydrating, transporting, and producing (GCDTP services)—to make the gas marketable, lessees generally bear the costs associated with performing such services. Id. at 1205, 1208.

Citing the IDM, Naylor Farms brought a putative class-action lawsuit against Chaparral, asserting claims for breach of contract, breach of fiduciary duty, fraud, unjust enrichment, and failure to produce in paying quantities. As relevant here, Naylor Farms' complaint alleges that Chaparral breached the IDM by improperly deducting GCDTP-service costs from the royalty payments Chaparral made to Naylor Farms and to other similarly-situated royalty owners. More specifically, Naylor Farms contends that in an attempt to circumvent the IDM, Chaparral enters into wellhead sales contracts with midstream processing companies. Under the terms of those contracts, the midstream companies acquire title or possession of unprocessed gas at or near the wellhead.² Yet according to Naylor Farms, the midstream companies don't actually pay Chaparral for the gas at this time. Instead, the midstream companies first perform certain GCDTP services and then sell the treated gas to downstream purchasers.

At that point, Naylor Farms asserts, the midstream companies (1) take the gross proceeds they receive from the downstream sales; (2) deduct from those gross proceeds the costs and fees associated with performing the GCDTP services;³ and (3) pay Chaparral for the gas they previously acquired at the wellhead by giving Chaparral the resulting net proceeds. Chaparral then calculates royalty payments based on the net proceeds it receives from the midstream companies, rather than calculating royalty payments based on the gross proceeds the midstream companies receive from the downstream sales. And in doing so, Naylor Farms alleges, Chaparral impermissibly "requires royalty owners to bear the costs of transforming unprocessed gas into a marketable product," thus violating the IDM. Id. at 13.

Based on this theory of liability, Naylor Farms moved to certify a class comprising it and other similarly situated royalty owners.⁴ In relevant part, Naylor Farms argued that certification was appropriate under Rule 23 because (1) whether Chaparral breached the IDM is a common question, see Fed. R. Civ. P. 23(a)(2) ; and (2) this and other common questions predominate over any individual ones, see Fed. R. Civ. P. 23(b)(3).

In response, Chaparral asserted that whether it breached the IDM isn't a common question because a jury won't be able to answer it without first assessing "individualized issues, including the obligation created by each" individual lease "and the gas produced from each" individual well. App. vol. 2, 410. Further, Chaparral asserted, these individual questions about lease language and gas quality, as well as individual questions about damages, predominate over any common questions Naylor Farms might identify. Thus, Chaparral argued, Naylor Farms cannot satisfy Rule 23's certification requirements.

The district court disagreed and concluded that certification was appropriate. As an initial matter, the court ruled that Naylor Farms identified at least one common question: whether Chaparral breached the IDM. The district court then rejected Chaparral's arguments that answering this common question will require an individualized assessment of either the language that appears in each lease or the quality of the gas that comes from each well. Next, the district court ruled that common questions, including whether Chaparral breached the IDM, predominate over any individual ones. Ultimately, after addressing Rule 23's remaining requirements, the district court granted Naylor Farms' motion to certify.⁵ Chaparral now appeals the district court's class-certification order.

Analysis

According to Chaparral, the district court erred in certifying the class under Rule 23. In support, Chaparral advances three discrete arguments. It first asserts the district court erred in failing to recognize that marketability constitutes an individual question—one that necessarily predominates over any common ones in this litigation. It next contends the district court erred in rejecting Chaparral's argument that distinctions in lease language also give rise to individual questions, and that those individual questions likewise predominate. Finally, it insists the district court erred in failing to recognize that in the absence of evidence indicating Chaparral employs a uniform payment methodology, certification is inappropriate. We address each of these arguments in turn.

I. Marketability

As discussed above, the cornerstone of Naylor Farms' class-action lawsuit is its allegation that Chaparral breached the IDM by improperly saddling Naylor Farms and other similarly situated royalty owners with certain gas-treatment costs.

The parties agree that the success of this allegation turns in large part on when the gas at issue became marketable. But they disagree about whether, in assessing marketability, a jury will need to individually analyze the quality of gas that each well produced. And by extension, they also disagree about whether the attendant need to conduct such an individualized assessment renders class certification inappropriate.

To resolve the parties' disagreement on this point, we begin with an overview of Oklahoma state law. We then discuss Rule 23's certification requirements. Next, we explain how the district court applied Rule 23 in the context of Naylor Farms' state-law claims. Finally, we set forth the applicable standard of review and discuss whether, considering that deferential standard, Chaparral's marketability arguments require us to reverse the district court's class-certification order.

A. Oklahoma Law

As discussed in more detail below, the ultimate issue before us in this appeal is whether the district court abused its discretion in concluding that Naylor Farms satisfied Rule 23's certification requirements. See Vallario v. Vandehey , 554 F.3d 1259, 1264 (10th Cir. 2009). And this ultimate issue presents a question of federal law. But that doesn't doom Oklahoma law to irrelevancy. On the contrary, at the heart of the parties' Rule 23 dispute lies an intermediate state-law question: When is gas marketable under Oklahoma law? Thus, we begin our discussion with an overview of that law. Cf. Wal–Mart Stores, Inc. v. Dukes , 564 U.S. 338, 351, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011) (noting that Rule 23 analysis will often "overlap with the merits of the plaintiff's underlying claim"); CGC Holding Co., LLC v. Broad & Cassel , 773 F.3d 1076, 1087 (10th Cir. 2014) (explaining that Rule 23 inquiry requires "consideration of how the class intends to answer factual and legal questions to prove its claim" and thus "will frequently entail some discussion of the claim itself").

To the extent we "are called upon to interpret state law" in resolving this appeal, we begin by "look[ing] to the rulings of [Oklahoma's] highest state court." Stickley v. State Farm Mut. Auto. Ins. Co. , 505 F.3d 1070, 1077 (10th Cir. 2007) (quoting Johnson v. Riddle , 305 F.3d 1107, 1118 (10th Cir. 2002) ). It has been more than two decades since the Oklahoma Supreme Court (OSC) has said anything meaningful about marketability. See Mittelstaedt , 954 P.2d 1203. And neither party suggests Mittelstaedt involved (or even contemplated, for that matter)...