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Class Certification Granted in Dispute over Royalties under Oil and Gas Leases

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On the recommendation of a United States Magistrate Judge for the Pittsburgh Division, the U.S. District Court for the Western District of Pennsylvania has granted class certification in a dispute between lessors and a lessee over royalty payments made under oil and gas leases. In Pollock v. Energy Corp. of Am., No. 10-1553, 2013 U.S. Dist. LEXIS 141139 (W.D. Pa. Sept. 16, 2013), the putative class representatives, all of whom had entered into oil and gas leases with the lessee defendant, essentially raised three allegations against the lessee defendant that were used to certify subclasses under Rule 23(c)(4).

First, they alleged that, in contravention of Pennsylvania law, the lessee defendant had improperly deducted post-production costs from their royalty payments after the lessee defendant sold the gas to a buyer. Second, they alleged that the defendant lessee had improperly deducted marketing fees from the royalties after the gas was sold, even though the gas was sold to a single buyer who also happened to be a marketing affiliate/subsidiary company of the lessee defendant. Third, they alleged that the lessee defendant had failed to pay royalties on gas used off the leased premises as plant fuel in violation of their leases. Based on these common issues affecting themselves and other lessors who had entered into oil and gas leases with the lessee defendant, the putative class representatives sought class certification to redress these alleged harms.

The lessee defendant opposed class certification. In addition to arguing that it had incurred the disputed post-production costs prior to selling the gas, the lessee defendant essentially objected to class certification on the basis that resolution of the aforementioned issues turned on individual leases, which were not all uniform.

As to the first two subclasses, the court agreed that class certification was proper. In the magistrate’s view, resolution of the first two issues, respectively, was dependent on the common issue of when the lessee defendant sold the gas and its relationship with the buyer, not the terms of the individual leases. With respect to the third subclass, however, the court reached a different conclusion. Because the ability of each class member to demonstrate that the lessee defendant had failed to pay royalties would depend on how and where the gas was used, and because of differences in the leases as to the lessee defendant’s ability to use the gas as plant fuel off the premises, the issue was not proper for class certification.

Finally, the court concluded its analysis by rejecting the application of the discovery rule to the class’s claims. Specifically, the court rejected the putative class’s argument that the damages period should date back to the first royalty payment made under each lease because such an individualized inquiry was inconsistent with class certification. Consequently, the court held that, in light of Pennsylvania’s four-year statute of limitations applicable to breach of contract claims, members of the first and second subclasses could not recover damages for royalty fees paid more than four years before the action was filed.

Pursuant to court order dated September 30, 2013, the district court has formally adopted the magistrate’s recommendations as outlined above.

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