In a pair of decisions, the Tenth Circuit this week decertified two class actions involving gas-well owners in Kansas and Oklahoma who claimed they were underpaid royalties owed by XTO, a company that buys and produces gas from wells.  The pair of decisions illustrates that commonality is getting more scrutiny after Dukes.

The dispute centered on IDM, the implied duty of marketability.  In many states – including Kansas and Oklahoma – there is an implied duty of marketability in gas leases.  That duty requires the lessee to bear the full cost of making the gas marketable (i.e. gathering, compressing, and processing the gas into a marketable product).  So, once a gas-well lessor and a lessee agree on a royalty to be paid per unit of gas, then the lessee must bear the full costs of making the gas marketable and may not deduct those costs from the agreed-upon royalty.

In these two cases, the Plaintiffs (gas-well owners) claimed that XTO (the lessee) improperly deducted from the royalties the costs to make gas marketable.

The decertification was based primarily on the lack of commonality.  Quoting Wal-Mart v. Dukes, XTO argued, and the Tenth Circuit agreed, that the Kansas and Oklahoma district courts erred in basing their commonality finding on the fact that XTO used a uniform method to pay royalties to the Plaintiffs:

[T]he mere raising of a common question does not automatically satisfy Rule 23(a)’s commonality requirement.  Rather, the common contention “must be of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.”

According to the Tenth Circuit, the district courts erred in several ways: they did not require Plaintiff to show that every class member’s lease contained an implied duty of marketability; they ignored the possibility that some leases contained language that expressly negated the implied duty of marketability; and the Kansas district court may have “altered the burden of proof” by assuming that the IDM was present in each lease merely because XTO failed to point to any lease provision that unambiguously negated that duty.

One other interesting point: in the Oklahoma action, the Tenth Circuit noted that the district court erred by acknowledging the significance of the variations in the lease language but failing to consider the effect on certification and instead stating that those variations could be dealt with at the summary-judgment stage.  Citing Comcast, the Tenth Circuit noted that “the district court must address the lease language issue as it related to Rule 23 before certifying the class.”

The cases are Chieftain Royalty Co. v. XTO Energy, Inc., 2013 WL 3388629 (10th Cir. July 9, 2013) and Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 2013 WL 3389469 (10th Cir. July 9, 2013).