Seeligson et al v. Devon Energy Production Company LP

Filing 220

MEMORANDUM OPINION AND ORDER - Before the Court is Plaintiffs' Supplemental Motion for Class Certification (Doc. No. 208) ("The Motion"). After reviewing The Motion, response, reply, relevant portions of the record, evidence submit ted by the parties, and the applicable law, the Court GRANTS Plaintiffs' Motion. Because Plaintiffs have satisfied the elements necessary for class certification under Rule 23, the Court GRANTS the Supplemental Motion for Class Certification. (Ordered by Judge Ed Kinkeade on 2/11/2020) (chmb)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
HENRY SEELIGSON, JOHN M.
SEELIGSON, SUZANNE SEELIGSON
NASH, and SHERRI PILCHER,
individually and on behalf of all others
similarly situated,
Plaintiffs,
v.

DEVON ENERGY PRODUCTION
COMPANY, L.P.,
Defendant.

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Civil Action No.
3:16-CV-00082-K

MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiffs’ Supplemental Motion for Class Certification (Doc.
No. 208) (“The Motion”). After reviewing The Motion, response, reply, relevant
portions of the record, evidence submitted by the parties, and the applicable law, the
Court GRANTS Plaintiffs’ Motion. Because Defendant applied a uniform pricing
structure to every member of the class, the Court finds that damages and breach can
be shown on a classwide basis. Because Texas employs a “categorical” approach to the
discovery rule, the Court finds that statute of limitation and discovery rule issues do
not predominate over common questions.
I.

Factual Background
Henry Seeligson, John M. Seeligson, Suzanne Seeligson Nash, and Sherri
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Pilcher (collectively, the “Proposed Class Representatives,” or “Plaintiffs”) brought this
action on behalf of similarly situated royalty owners alleging that Defendant Devon
Energy Production Company, L.P. (“DEPCO”) improperly and intentionally underpaid
royalties owed to Plaintiffs and class members for gas that was processed through the
Bridgeport Gas Processing Plant (the “Bridgeport Plant”).
Plaintiffs and proposed class members own or owned royalty interests in wells
that produce gas that was processed through the Bridgeport Plant of DEPCO (the
“Class Wells”). DEPCO serves as either the lessee, operator, or the entity required to
remit revenue to royalty owners for the Class Wells. In some instances, DEPCO
assumes all three of these roles. DEPCO sold residue gas and natural gas liquids
(“NGLs”) from the Class Wells at or near the wellhead to Devon Gas Services, LP
(“DGS”). The relevant leases provide that on gas sold at the wellhead, “the royalty shall
be one-eighth of the net proceeds received from such sale,” whereas for gas sold or used
off the premises, the royalty shall be ”the market value at the well of one-eighth of the
gas so sold or used.” These sales are governed by one common contract—the Gas
Purchasing and Processing Agreement (“GPPA”). Under the GPPA, DGS purportedly
paid DEPCO prices equal to 82.5% of the value of the residue gas and NGLs and
deducted 17.5% as a processing fee.
Plaintiffs claim that DEPCO improperly passed the 17.5% fee on to them and
all class members by reducing their royalty payments by 17.5%. Plaintiffs allege that
this processing fee was artificially inflated and that it resulted in a price or value that
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was substantially lower than any price or value a prudent or diligent operator would
have obtained under the same or similar facts or circumstances. Plaintiffs further
contend that DEPCO could have reasonably obtained a higher price or value through
a lower processing fee from DGS but failed to do so in order to secretly create a lucrative
profit center for DEPCO, DGS, and their parent company, Devon Energy Corporation,
at the expense of Plaintiffs and the Class. Plaintiffs point to the contracts between DGS
and other producers such as Enervest and Cross-Tex, which processed gas at roughly
one-third the cost charged to DEPCO. Plaintiffs argue that the notably lower processing
fees are evidence that DGS did not act as a reasonably prudent operator in procuring
the 17.5% rate.
II.

Procedural Background
A. District Court Proceedings
Plaintiffs filed this case in the Eastern District of Texas, a district in which some

of their wells are located. On October 22, 2015, DEPCO filed an Emergency Motion
to Stay the proceedings in the Eastern District pending resolution of Defendant’s
Motion to Transfer Venue. Ultimately, this case was transferred to the Northern
District of Texas on January 12, 2016. On February 11, 2016, this Court denied
Plaintiffs’ Motion for Class Certification, Appointment of Class Representatives and
Appointment of Class Counsel. On February 25, 2016, Plaintiffs filed a motion asking
the Court to reconsider its order denying class certification and for leave to file a second
class certification motion. The Court held a hearing on these Motions on May 4, 2016
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where counsel for all parties presented argument and evidence on Plaintiffs’ Motions.
Following the hearing, the Court granted Plaintiffs’ Motion to Reconsider Order
Denying Class Certification and certified the following class:
All person or entities who, between January 1, 2008 and February 28, 2014, (i)
are or were royalty owners in Texas wells producing natural gas that was
processed through the Bridgeport Gas Processing Plant by Devon Gas Services,
LP (“DGS”); (ii) received royalties from Devon Production Company, L.P.
(“DEPCO”) on such gas; and (iii) had oil and gas leases that were on one of the
following forms: Producers 88-198(R) Texas Paid-Up (2/93); MEC 198 (Rev.
5/77); Producers 88 (Rev 10-70 PAS) 310; Producers 88 Revised 1-53—(With
Pooling Provision); Producers 88 (2-53) With 640 Acres Pooling Provision;
Producers 88 (3-54) With 640 Acres Pooling Provision; Producers 88 (4-76)
Revised Paid Up with 640 Acres Pooling Provision; Producers 88 (7-69) With
640 Acres Pooling Provision; and Producers 88 (Rev. 3-42) With 40 Acres
Pooling Provision (“The Class Lease Forms”).
The persons or entities excluded from the Class are: (a) overriding royalty
interest owners who derive their interest through the oil and gas lease; (b) all
governmental entities, including federal, state and local governments and their
respective agencies, departments, or instrumentalities; (c) the States and
territories of the United States or any foreign citizens, states, territories or
entities; (d) the United States of America; (e) publicly traded entities and their
respective parents, affiliates, and related entities; (f) owners of any interests
and/or leases located on or within any federally created units; (g) owners of any
non-operating working interest for which DEPCO or its agents or
representatives, as operator, disburses royalty; (h) DEPCO and any entity in
which DEPCO has a controlling interest, and their officers, directors, legal
representatives and assigns; and (i) members of the judiciary and their staff to
whom this action is assigned.
Defendant requested and was granted an interlocutory appeal under Rule 23(f).
B. Fifth Circuit
On appeal, a unanimous panel of the Fifth Circuit issued an unpublished opinion
on October 16, 2018, affirming much of this Court’s holding, but remanding on one
predominance issue. Defendant petitioned for a Panel Rehearing and Rehearing En
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Banc. The Fifth Circuit denied the petitions but substituted a new, unpublished
opinion on February 20, 2019. The Opinion affirmed a substantial majority of this
Court’s holding and remanded on two specific issues, one regarding commonality and
one regarding predominance. Defendant did not challenge the Court’s rulings regarding
numerosity, typicality, adequacy of representation, and superiority. Seeligson v. Devon
Energy Prod. Co., L.P., 761 F. App'x 329, 334 (5th Cir. 2019). The Fifth Circuit affirmed
the Court’s decision that the Class of royalty owners was ascertainable, holding that
“both DEPCO and the public records provide sufficient objective criteria from which
to identify class members.” Id. The Fifth Circuit also affirmed the Court’s finding that
all of the class leases imposed the same duty to market, rejecting Defendant’s argument
that the express marketing clause imposed a different standard than the duty implied
at law. Id. at 336. On the topic of breach, the Fifth Circuit determined that “it is
possible that Plaintiffs could demonstrate that DEPCO breached its implied duty to
market by basing its price on a higher processing fee than the fee that a ‘reasonably
prudent operator would have received at the wellhead.’” Id. at 337. The Panel held that
“[the district] court did not abuse its discretion in determining that whether DEPCO
breached its duty to Plaintiffs was a common question capable of classwide resolution.”
Id. at 337 n.42.
While acknowledging that the Court did not abuse its discretion in finding that
breach was capable of being determined on a classwide basis, the Fifth Circuit
remanded “for further consideration whether additional specific evidence supports the
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conclusion that the breach of the duty to market and damages from any breach can be
evaluated classwide or if a well-by-well analysis is required.” Id. at 337. The Fifth
Circuit also instructed the Court to determine whether statute of limitations and tolling
inquiries would predominate over common questions of law or fact. Id. at 339.
III.

Applicable Law

Once the party seeking certification establishes that a putative class is definable
and ascertainable, which Plaintiffs have achieved, that party must demonstrate that the
putative class meets all four requirements of Federal Rule of Civil Procedure 23(a) and
at least one of the three requirements of Federal Rule of Civil Procedure 23(b). WalMart Stores, Inc. v. Dukes, 564 U.S. 338, 345 (2011). Under Rule 23(a), the party
seeking certification must first demonstrate that:
(1) the class is so numerous that joinder of all members is impracticable,
(2) there are questions of law or fact common to the class,
(3) the claims or defenses of the representative parties are typical of the
claims or defenses of the class, and
(4) the representative parties will fairly and adequately protect the
interests of the class.
FED. R. CIV. P. 23(a).
Second, the proposed class must satisfy at least one of the three requirements
listed in Rule 23(b), which are:
(1) prosecuting separate actions by or against individual class members
would create risk of:
(A) inconsistent or varying adjudications with respect to individual
class members that would establish incompatible standards of
conduct for the party opposing the class; or
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(B) adjudications with respect to individual class members that, as
a practical matter, would be dispositive of the interests of the other
members not parties to the individual adjudications or would
substantially impair or impede their ability to protect their
interests;
(2) the party opposing the class has acted or refused to act on grounds
that apply generally to the class, so that final injunctive relief or
corresponding declaratory relief is appropriate respecting the class as a
whole; or
(3) the court finds that the questions of law or fact common to class
members predominate over any questions affecting only individual
members, and that a class action is superior to other available methods
for fairly or efficiently adjudicating controversy.
FED. R. CIV. P. 23(b).
Plaintiffs bear the burden of showing that class certification is appropriate.
Unger v. Amedisys, Inc., 401 F.3d 316, 320 (5th Cir. 2005). Class certification is at the
discretion of this Court, which has inherent power to manage and control pending
litigation. Fener v. Operating Eng’r Const. Indus. & Miscellaneous Pension Fund (Local 66),
579 F.3d 401, 406 (5th Cir. 2009). Although a court does not reach the merits of the
case in evaluating whether class treatment is appropriate, it may look past the pleadings
to understand the claims, defenses, relevant facts, and applicable substantive law to
make a meaningful decision on class certification. Unger, 401 F.3d at 321. “Rule 23
grants courts no license to engage in free-ranging merits inquiries at the certification
stage.” Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455, 466 (2013).
Defendant did not challenge this Court’s findings as to numerosity, superiority,
representativeness, and typicality while the Fifth Circuit affirmed the Court’s finding
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regarding ascertainability. Seeligson, 761 F. App'x at 334. The remaining issues engage
specific aspects of commonality under 23(a) and predominance under 23(b). To satisfy
Rule 23(a)’s commonality requirement, Plaintiffs have to demonstrate that there are
questions of law or fact common to the class. Id. A common question 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. Id. A Rule 23(b) predominance inquiry “entails identifying the
substantive issues that will control the outcome, assessing which issues will
predominate, and then determining whether the issues are common to the class, a
process that ultimately prevents the class from degenerating into a series of individual
trials.” Id. at 338.
IV.

Analysis

The issues before the Court include: 1) Whether specific evidence supports the
proposition that breach and damages can be established on a classwide basis and 2)
Whether statute of limitations and discovery rule inquiries predominate common
questions. Critical to the Court’s analysis of breach and damages is a finding that the
proposed alternative rate can be found on a classwide basis. Because the alternative
rate can be shown classwide, and Defendant applied the same pricing mechanism to
every member without regard to individual well characteristics, the Court finds that
breach is a common question capable of classwide resolution. Because Plaintiffs have
identified a formula that would adequately measure the alleged breach, the Court finds
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that damages are similarly susceptible to classwide resolution. Because Texas employs
a “categorical” approach to the discovery rule, asking whether the 17.5% rate was
discoverable as an objective matter, the individual issues of tolling will not predominate
over the common question of breach.
A. The Court finds that breach can be decided on a classwide basis
Because Plaintiffs can demonstrate what rate a reasonably prudent operator
would have received on a classwide basis, the Court finds that breach can subsequently
be shown classwide. Although the Fifth Circuit acknowledged that “[the district] court
did not abuse its discretion in determining that whether DEPCO breached its duty to
plaintiffs was a common question capable of classwide resolution,” it nonetheless
remanded for further consideration of specific evidence of whether breach can be
determined classwide. Seeligson, 761 F. App'x at 337 n.42. Though the Court did not
abuse its discretion in deciding that the breach question was capable of classwide
resolution, the Fifth Circuit wants it to go further in its analysis. Because the common
duty to market is established, the Court interprets the directive to determine whether
Plaintiffs would be able to show what rate a reasonably prudent operator would have
received (the Reasonably Prudent Operator Rate, or “RPO rate”) on a classwide basis.
This analysis is relevant to determining whether both breach and damages are common
questions capable of classwide resolution. Because gas is bought and sold under one
contract and the RPO rate inquiry does not require proof of other sales, the Court finds
that a proposed RPO rate would be “applicable to the class as a whole” and be “subject
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to generalized proof.” Nichols v. Mobile Bd. of Realtors, Inc., 675 F.2d 671, 676 (5th Cir.
1982).
i.

The Court finds that an alternative rate can be shown on a classwide basis

Because the duty to market is established classwide, the next question is whether
Plaintiffs can provide evidence of breach that is generalized and common to the class.
“The legal requirement that class members have all ‘suffered the same injury’ can be
satisfied by an instance of the defendant's injurious conduct, even when the resulting
injurious effects—the damages—are diverse.” In re Deepwater Horizon, 739 F.3d 790,
810–11 (5th Cir. 2014). It is established that Defendant owed a uniform duty to
market to every member of the class. See Seeligson, 761 F. App'x at 336 (“The district
court did not abuse its discretion in holding that DEPCO owed all class members the
same duty, under either the express marketing clause or the implied duty to market.”).
“The duty DEPCO owed to the royalty owners was an obligation to obtain the best
current price reasonably available [for the gas].” Id. (citing Union Pac. Res. Grp., Inc. v.
Hankins, 111 S.W.3d 69, 71 (Tex. 2003)). To determine whether DEPCO breached
that duty, the jury would still need to determine “the price a reasonably prudent
operator would have received at the wellhead.” Id. To satisfy the commonality
requirement under Rule 23(a)(2), the parties at this stage need only to provide evidence
to demonstrate that a contention is common, but not that it is correct—the Court
refrains from resolving questions of merit where possible at this stage so long as
Plaintiffs show the claim is common to the class. See Deepwater Horizon, 739 F.3d at
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811. The contention here is that the 17.5% rate in the GPPA, which applied to every
class member without regard to origin or specific characteristics, was a violation of the
duty to market because a reasonably prudent operator would have achieved a lower
rate. Because this contention is common to the class, related to the same injurious
conduct, and susceptible to generalized evidence, the Court finds that breach can be
determined on a classwide basis.
The Court finds that because all of the gas at issue was processed at one gas
processing plant and sold by DEPCO to DGS on an aggregate, classwide basis pursuant
to a common contract demonstrates that an alternative rate can also be shown on a
classwide basis. Because the alternative rate can be shown on a classwide basis, whether
the rate employed by Defendant constitutes a breach can also be shown. When
examining whether breach occurred, “[t]he Bowden court explained that variations in
well locations, quality of production, and field regulations, among other factors, will
require the jury to conduct a well-by-well analysis ... unless the class offers particular
evidence that the gas price at the wells can be evaluated classwide.” Seeligson, 761 F. App'x at
336 (citing Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 701–02 (Tex. 2008))
(internal quotations removed). This includes “if a class offered evidence that [the
defendant] was artificially lowering the prices it charged [its affiliate] for gas sales across
the board or that [it] was systematically miscalculating the royalty payments, such
claims might be more susceptible to certification.” Id. at 336–37 (citing Bowden, 247
S.W.3d at 702 n.5).
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Here, the 17.5% rate was “systematically” applied to every lease without regard
to its specific characteristics or origin. Both this Court and the Fifth Circuit found that
“Devon Energy used its multi-subsidiary, uniform pricing gimmick for each and every
well in the system, regardless of location, lease differences, etc.” Id. at 337. Because the
17.5% off-the-top applied to every class member, the class could provide generalized,
common proof that this rate was an “artificial” mechanism used to lower the price of
gas sales across the board. Defendant similarly will have the opportunity to provide
evidence that the 17.5% was a reasonably prudent rate to apply and not an artificial
reduction. Either way, whether the rate was artificial or not will be determined in a
“single stroke” for all members of the class.
ii.

Plaintiffs do not need evidence of other sales to demonstrate a breach of the
reasonably prudent operator standard

Plaintiffs do not need to show evidence of other sales to demonstrate that a
breach of the duty to market occurred. Defendant’s primary contention is that the lack
of evidence of other sales means the class cannot show a breach of the duty to market.
“The implied covenant to reasonably market. . .focuses on the behavior of the lessee
rather than on evidence of other sales and asks whether the lessee acted as a reasonably
prudent operator under the same or similar facts and circumstances.” Hankins, 111
S.W.3d at 71 (citing Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567–68
(Tex.1981)); see also Occidental Permian Ltd. v. Helen Jones Found., 333 S.W.3d 392, 401
(Tex. App.—Amarillo 2011, pet. denied) (citing Hankins, 111 S.W.3d at 71) (“[I]n an
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evaluation of the sufficiency of the evidence it breached its duty to reasonably market
the casinghead gas, our inquiry must focus on its behavior, not on evidence of other
sales.”). The Fifth Circuit explained that these implied covenants exist “[t]o balance
the significant powers vested in the lessee against the lessor's interest in seeing the lease
developed, and to discourage the lessee from considering only its own interests when a
conflict of interest develops.” Davis v. CIG Expl., Inc., 789 F.2d 328, 332 (5th Cir.
1986). Because of the “significant powers vested” and the isolating nature of lessorlessee relationships, “every claim of improper operation by a lessor against a lessee
should be tested against the general duty of the lessee to conduct operations as a
reasonably prudent operator in order to carry out the purposes of the oil and gas lease.”
Amoco Prod. Co., 622 S.W.2d at 568.
Because the reasonably prudent operator inquiry does not require evidence of
other sales, there is no reason to now even consider that the lack of other sales for this
combination of class leases precludes an alternative rate from being determined in the
aggregate. Defendant argues that the breach inquiry must be well-by-well in order to
determine what alternative rate each well could have received, and seems to raise this
argument under both the commonality and predominance inquiries. If the inquiry
required a well-by-well analysis of breach, then DEPCO would be correct that
individual questions would predominate and class certification would fail under
23(b)(3).

But the breach inquiry does not require well-by-well analysis because

DEPCO applied the 17.5% to the class leases in the aggregate. Defendant relies on the
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fact that Plaintiffs’ experts are not able to provide evidence that another company
would have processed all of the gas in the proposed class. Defendant’s argument
misunderstands the reasonably prudent operator analysis because it proceeds under the
premise that Plaintiffs must show evidence of other sales to prevail in the first place.
Nor does Defendant’s argument impact the Court’s 23(a) analysis because the lack of
other sales does not negate the common question of whether 17.5% was the rate a
reasonably prudent operator would have achieved.
In Hankins, the Texas Supreme Court held that a class challenging the propriety
of a marketing fee (a proxy for the “processing fee” in this case) would not be certified
because the class contained market value leases. A “market value” or “market price”
clause requires payment of royalties based on the prevailing market price for gas in the
vicinity at the time of sale, irrespective of the actual sale price. Bowden, 247 S.W.3d at
699. By contrast, “Proceeds” or “amount realized” clauses require measurement of the
royalty based on the amount the lessee in fact receives under its sales contract for the
gas. Id. The Texas Supreme Court in Hankins held that market value leases could not
be certified because they require individualized inquiry and already had protection
from abuse by setting royalties on objective measures. Hankins, 111 S.W.3d at 74. The
Texas Supreme Court then cited Amoco to “contrast” between the inquiry required of
market value leases and the inquiry applied to proceeds leases. See id. at 71 (citing
Amoco Prod. Co., 622 S.W.2d at 567–68). Because proceeds leases were not protected
by objective measures such as market value, the Texas Supreme Court held that a sham
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transaction (or improper fee) would create liability for an operator. Id. at 75 (“[A]
finding that Union Pacific engaged in a sham transaction might affect the outcome of
the proceeds owners' claims but would not determine its liability to the market-value
owners.”). This logic would necessarily extend to a class composed of entirely proceeds
leases if every lease was injured by the same improper fee.
The Court understands the reliance on Amoco, combined with the explicit
reference to proceeds leases, to mean that a proceeds class who had the same fee applied
across the board could present evidence that a reasonably prudent operator would have
applied a lower fee (or none at all). The entire class in this case is composed of proceeds
leases. The gas was sold under one contract, and the fee applied in the aggregate.
Transcript of Hearing on Motion to Reconsider Order Denying Class Certification and
Motion for Class for Class Certification at 47. Plaintiffs’ theory of breach is that a
reasonably prudent operator would have achieved a lower fee. At the class certification
stage, the Court asks whether the contention is common, not whether it is correct. See
Deepwater Horizon, 739 F.3d at 811. Lessors in this case have composed the class by
following the guidance provided by the Texas Supreme Court and limited their claim
to proceeds leases only. After fleshing out the analysis at the Fifth Circuit’s request, the
Court has the same opinion regarding the viability of the Class under Texas law.
Plaintiffs’ evidence of other prices charged for gas filtered through BPS, though
not required, are examples of “generalized, classwide proof” that will aid a jury in
determining whether DEPCO acted as a reasonably prudent operator when negotiating
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the 17.5% rate. Relevant evidence is that Devon Gas Services, when negotiating at
arms-length, allegedly applied a processing cost that is one-third of the total price
charged to DEPCO, its affiliate. See Transcript of Hearing on Motion to Reconsider
Order Denying Class Certification and Motion for Class for Class Certification at 24
(examining that the contract between Enervest and DGS charged 16.8 cents per one
million British Thermal Units (MMBTU) whereas the GPPA imputed a roughly 51
cent per MMBTU charge). Defendant argues that the contracts do not apply because
they do not reflect the “same or similar circumstances” of the GPPA. That is a merit
question not to be addressed at this stage. Because Plaintiffs do not need evidence of
other sales to demonstrate a breach of the reasonably prudent operator standard, the
Court does not need to weigh in on whether the third-party contracts stand for the
proposition that Plaintiffs advance.
iii.

The Court finds that whether the 17.5% is characterized as a sale or a processing
fee does not change the duty to market nor preclude class certification

Defendant claims that Plaintiffs shift theories throughout the pleadings and
briefs—the Court disagrees. Plaintiffs’ theory is that Defendant owed the class leases a
duty to market, and it breached that duty by failing to procure the best price available.
Seeligson, 761 Fed. Appx. at 331. Plaintiffs refer to the 17.5% off-the-top as a
“processing fee”—because it is not clear what else it might be. Defendant attempts to
recouch the 17.5% as a “discounted sale” to reflect the value of the gas at the wellhead.
That is just another way of saying the same thing—incorporating processing costs into
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the value at the wellhead. See, e.g., Tana Oil & Gas Corp. v. Cernosek, 188 S.W.3d 354,
360–61 (Tex. App.—Austin 2006, pet. denied) (“In exchange for its sale of 100% of
the total volume of raw gas at the well, Tana received a price equivalent to 84% of the
proceeds for the processed gas. . . this pricing formula represents the negotiated value
of the raw gas.”); see also Shoop v. Devon Energy Prod. Co., L.P., 2013 WL 12251353, at
*13 (N.D. Tex. Mar. 28, 2013) (Solis, J.) (finding the Tana transaction “similar” to the
transaction between DEPCO and DGS). Whether the 17.5% is characterized as a
discounted sale at the wellhead or the application of processing costs, DEPCO still owes
a duty to class members to achieve the best price reasonably available for the gas. Either
way, operators are bound to behave in a reasonably prudent manner by getting the
lowest processing fee (and highest price) reasonably available. Period. Whether or not
Defendant did achieve that price is a merits question “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.” Wal-Mart Stores, Inc., 564 U.S. at 350.
If the 17.5% discounted rate is neither the difference between the product at the
wellhead and the value of processed gas nor a 17.5% processing fee then Defendant
would not have a legitimate business purpose for the discounted rate. Though this lack
of legitimate business purpose seems to be endorsed by Defendant’s own pleadings. See
DEPCO’s Amended Answer to Plaintiffs’ First Amended Class Action Complaint, and
Counterclaim, Subject to Motion to Transfer Venue at 14 (explaining that DEPCO can
deduct actual costs on top of the 17.5% rate outlined in the GPPA). According to those
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pleadings, DEPCO has not applied the processing costs despite the application of the
17.5% discount. So if the 17.5% is not a processing fee, then the pleadings show
DEPCO charged Plaintiffs 17.5% for. . .what? A real charge for a phantom reason.
Because the Gas Purchasing and Processing Agreement is a long-term contract,
Defendant argues that recognizing Plaintiff’s theory of liability would impose a “duty
to renegotiate” and cites Occidental Permian Ltd. v. Helen Jones Found., 333 S.W.3d 392,
397–98 (Tex. App.—Amarillo 2011, pet. denied), as barring this outcome as a matter
of law. The dispute in Helen Jones arose in 2010 when royalty owners disagreed over
the treatment of casinghead gas royalties under leases signed in the 1930s and 1940s.
Helen Jones Found., 333 S.W.3d at 397–98. While the leases had been signed in armslength, good faith negotiations, the leases and processing plants had since been
acquired by the same company which resulted in an affiliate situation similar to the
one at bar. Id. at 397. The Plaintiffs in Helen Jones argued that the affiliate nature of
the leaseholder and processor allowed the opportunity to renegotiate to accommodate
the new market conditions (secondary and tertiary recovery from CO2 injections). Id.
at 403 (“Under the royalty owners' theory, [Defendant] breached its duty to reasonably
market by failing to modify the terms of the gas sales contracts precisely because it,
acting alone, has the ability to do so.”). The Appeals Court rejected this theory on the
grounds that a reasonably prudent operator would not have a duty to modify a gas
contract negotiated at arms-length. Id. The Appeals Court emphasized that the parties
did not set up the offending gas marketing arrangements but “simply acquir[ed] both
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sides of arrangements that were prudent when established.” Id. at 402. Here, DGS and
DEPCO set up this gas affiliate marketing arrangement, the prudence of which is now
being challenged. A trial on the merits regarding this affiliate transaction will be ferreted
out by the finder of facts.
The Court is not imposing a “duty to renegotiate” when it finds that Plaintiffs
could demonstrate that the arrangement violates the reasonably prudent operator
standard. Defendant argues that “as a matter of law [] a producer does not have a duty
to renegotiate gas purchase agreements with its affiliate.” Def. Resp. to Pl. Supp. M’tn
for Class Cert., Doc. No. 208, at 12. Defendant claims that, were the Court to recognize
that Plaintiffs have an actionable theory regarding the prudence of the GPPA, then the
Court would be imposing a duty to renegotiate. This is not so. The choices of DEPCO
if found to have breached their duty to market is the same as any breaching party to a
lawsuit.
iv.

The bifurcated royalty, by its plain text, does not trigger “market value” royalties

Defendant’s argument that the bifurcated royalty precludes certification fails
under Exxon Corp. v. Middleton, 613 S.W.2d 240, 242 (Tex. 1981), as applied to a plain
reading of the text. Defendant claims that if the Court recognized a processing theory
of liability then the gas would be sold “off the premises” as a matter of law. Because
gas sold off the premises triggers a market value royalty obligation, recognizing such
theory would therefore preclude class certification. Hankins, 111 S.W.3d at 74. In
Middleton, the lease distinguished between gas “sold or used off the premises” and gas
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“sold at the wells” and provided two standards for computing royalties, market value
and amount realized (proceeds). 613 S.W.2d at 242. The natural gas in question was
produced on the lease but processed at a gas plant in the same field but off the lease
grounds. Id. The question was whether a sale in the field, but not on the premises of
the lease, is a sale “off the premises” or a sale “at the wells.” Id. The Texas Supreme
Court conducted a plain language analysis and concluded that “sold at the wells” means
sold at the wells within the lease, and not merely sold within the fields. Id. at 243.
Defendant’s theory fails under the legal test articulated in Middleton because,
under the GPPA, gas is sold at the wellhead which, under the plain language of the
leases, triggers proceeds royalty obligations. In Middleton, when determining which
royalty provision applied, the Texas Supreme Court asked, “where did the sale occur?”
and then relied on the plain text of the lease to guide the rest of the inquiry. Id. at 242.
There, it was undisputed that the gas was sold after being processed. Id. The processing
plant was located in the same field which created the dispute as to whether a sale at
the plant created a sale “at the well.” Id. Because the analysis turns on where the gas is
sold, where DGS processes the gas is irrelevant because the parties have consistently
asserted that the gas is sold at the wellhead. See DEPCO’s Amended Answer to
Plaintiffs’ First Amended Class Action Complaint, and Counterclaim, Subject to
Motion to Transfer Venue at 14 (“DEPCO sells production from the wells on Plaintiffs’
1988 Leases to DGS at the well and the point of delivery from DEPCO to DGS is
likewise at the well.”); see also Transcript of Hearing on Motion to Reconsider Order
20

Denying Class Certification and Motion for Class for Class Certification at 72 (DEPCO
counsel states that “DEPCO, the producer. . .sells the gas to an affiliated buyer, DGS.
. .at the wellhead.”)[hereinafter DEPCO Pretrial Material].
Defendant’s position that applying a processing cost creates an off-the-premises
sale, and therefore market value royalty obligation, as a matter of law is directly
contradicted by the plain language of the lease used by Defendant. An oil and gas lease
is a contract, and its terms are interpreted as such. See Anadarko Petroleum Corp. v.
Thompson, 94 S.W.3d 550, 554 (Tex. 2002). We give the language its plain,
grammatical meaning unless doing so would clearly defeat the parties' intentions. Id.
The lease at issue in this case states that royalties to be paid by Lessee are:
(b) on gas. . .produced from said land and sold or used off the premises. . .the
market value at the well of one-eighth of the gas so sold or used. . .and provided
further on gas sold at the wells the royalty shall be one-eighth of the net proceeds
received from such sale, it being understood that Lessor’s interest shall bear one-eighth
of the cost of all compression, treating, dehydrating, and transporting costs incurred in
market the gas so sold at the wells.”
Oil, Gas and Mineral Lease, Doc. No. 219 (emphasis added).
From the plain language alone, the Court derives two glaring issues with
Defendant’s theory. The first is that “net proceeds” is clearly the measurement when
Defendant has asserted throughout the entire litigation that the gas is sold at the
wellhead. See DEPCO Pretrial Material, supra p. 20 (asserting that, under the GPPA, gas
is sold at the wellhead). The second is that a sale at the wellhead can still carry costs
without being converted into a “market value” measurement. The parties made it
painstakingly clear that gas “so sold at the well” will be measured by “net proceeds”
21

and bear proportionate costs to market. To recognize Defendant’s argument would be
to vitiate the intent of the parties as expressed through the plain language of the text.
v.

Plaintiffs’ theory of breach does not trigger an “off the premises” sale

Applying the processing fee does not create an “off the premises” sale as a matter
of law. The Texas Supreme Court explained this concept clearly in Heritage:
The purpose in specifying “at the well” is to distinguish between gas sold in the
form in which it emerges from the wellhead and gas which thereafter has had
value added by transportation or processing. The Fifth Circuit held that royalties
under a “market value at the well” clause should compensate only for the value
of the gas at the well, before the operator adds value. Accordingly, that court
concluded that royalty owners may be charged with all expenses subsequent to
production including processing, transportation, removal of sulfur, and other
marketing costs where the royalty provision measures value “at the well.” This
reasoning is persuasive.
Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 127 (Tex. 1996) (citing Piney Woods
Country Life Sch. v. Shell Oil Co., 726 F.2d 225 (5th Cir.1984) (internal citations
omitted). The Texas Supreme Court clearly states that applying processing and
marketing costs is compatible with a valuation “at the well.” Id. The use of “market
value” as opposed to “proceeds” in Piney Woods does not affect the analysis. See Judice
v. Mewbourne Oil Co., 939 S.W.2d 133, 137 (Tex. 1996) (citing Martin v. Glass, 571 F.
Supp. 1406, 1411–15 (N.D. Tex. 1983), aff'd, 736 F.2d 1524 (5th Cir. 1984)) (“Net
proceeds” expressly contemplates deductions, and. . .“at the well” means before value
is added by preparing the gas for market.); see also Byron C. Keeling, In the New Era of
Oil and Gas Royalty Accounting: Drafting A Royalty Clause That Actually Says What the
Parties Intend It to Mean, 69 Baylor L. Rev. 516, 524 (2017) (explaining the distinction
22

between the “yardstick” of how royalties will be determined and the “location of the
yardstick” which determines the point at which lessee will calculate the royalties). In
Judice, the Texas Supreme Court explicitly recognized that value can be measured “at
the well” while still including deductions so long as the proceeds are “net” and not
“gross.” 939 S.W.2d at 136–37. Heritage, Piney Woods, and Judice are all seminal cases
that directly negate Defendant’s assertion that incorporating a processing fee into the
valuation means the gas cannot be sold “at the well.” Many of Defendant’s theories
and arguments turn on this point. The Court is unpersuaded.
The District Court in the Shoop case, which included virtually identical
allegations against DEPCO and DGS by a separate plaintiff class, similarly concluded
that the gas was sold at the wellhead even when the processing fee was applied. There,
the Plaintiffs argued that the sale between DEPCO and DGS did not occur at the
wellhead in an attempt to base the proceeds on a higher downstream value. Shoop v.
Devon Energy Prod. Co., L.P., 2013 WL 12251353, at *13 (N.D. Tex. Mar. 28, 2013)
(Solis, J.). While Plaintiffs in the current case proceed under a different theory, the
analysis applies to Defendant’s contention that characterizing the 17.5% discount as a
“processing fee” triggers “market value” measurement as a matter of law. In rejecting
that notion, the District Court in Shoop aptly stated that “royalty calculations based on
downstream activities [do] not automatically uproot contractual language dictating
where the gas is sold when Texas law is outcome determinative.” Id.

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The Plaintiffs in Shoop argued that “since the sales price is not calculated until
after the gas is processed and transported to the Bridgeport plant, the sale cannot occur
at the well.” Id. The District Court similarly found cases like Tana to be “in diametric
opposition” to that argument (again, the same argument adopted by Defendant in the
present case). Id. The District Court characterized the Tana exchange as follows: “In
exchange for that sale, Defendant receives a price equivalent for a certain percentage
of the processed gas proceeds. Plaintiffs derive their royalty payments from this
percentage.” Id. Concluding that “Under similar facts, [DEPCO] sells the raw gas to
DGS at the well” and “even though the price is not established until after the gas is
transported and processed, the sale still occurs at the well.” Id. Because the gas is sold
at the wellhead, the measurement of royalties under the plain language of the lease is
“net proceeds.” Defendant’s arguments to the contrary conflate the relationship
between the measurement (proceeds versus market value) and the location (at the
wellhead versus off the premises).
Finally, advancing a “sham” sale theory does not preclude “at the well”
valuation. A sham sale is a phony sale, essentially a charge without purpose; imposed
with the intent to defraud. See Sham, MERRIAM-WEBSTER’S DICTIONARY (11th ed.
2003) (defining Sham as “a trick that deludes,” also known as a hoax). In spirit with
Defendant’s running theme that any and every potential theory of liability triggers
“market value” royalty, Defendant claims (without authority) that a sham sale triggers
“market value” royalty obligations. This is because the sham sale allegedly means the
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gas is being sold off the lease. The Court sees no reason, and Defendant offers no
authority, why sham sales cannot occur at the wellhead. The parties have maintained
that the gas is sold at the wellhead. Sham or not, the plain language of the lease
controls.
vi.

The Court finds that Plaintiffs can demonstrate breach on a classwide basis

The Court finds that the proceeds nature of the leases, the “uniform pricing
gimmick” employed by DGS, and the fact that every class lease was filtered through
the Bridgeport system allows the question of breach to be determined in “one single
stroke.” The principal requirement of Wal–Mart is merely a single common contention
that enables the class action “to generate common answers apt to drive the resolution
of the litigation.” Deepwater Horizon, 739 F.3d at 811. The answer being sought here is
whether Defendant breached the duty to market, owed to every member of the class,
by employing a 17.5% processing fee (or discount rate). Because the gas is aggregated
and fees applied to the aggregate, the answer will be yes or no for every underlying
member. In Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620, 626–27 (5th Cir.
1999), “the Fifth Circuit found that common issues did predominate when casino
employees became ill because of a malfunctioning ventilation system, because the
employees suffered the same injury, were exposed to the same alleged source of the
illness, were subject to the same federal law, and presented a common theory of
liability.” Frey v. First Nat. Bank Sw., 602 F. App'x 164, 172 (5th Cir. 2015) (citing
Mullen, 186 F.3d at 626–27). Here, all class members were subject to the same
25

(allegedly improper) rate, subject to the same duty to market, and presented a common
theory of liability. Whether the 17.5% is labeled as a discounted sale or processing fee
does not change the duty owed to each class member. Because each class member
experienced the same injury from the same pricing mechanism, the Court finds that
breach can be determined on classwide basis.
B. Damages can be determined on a classwide basis
The second issue on remand is “whether damages can be ascertained on a
classwide basis.” Seeligson, 761 F. App'x 329, 337. “The legal requirement that class
members have all “suffered the same injury” can be satisfied by an instance of the
defendant's injurious conduct, even when the resulting injurious effects—the
damages—are diverse.” Deepwater Horizon, 739 F.3d at 810–11. The theory of damages
“must be consistent with [the] liability case,” and the district court is required to
“conduct a rigorous analysis [at the class certification stage] to determine whether that
is so.” Ludlow v. BP, P.L.C., 800 F.3d 674, 686 (5th Cir. 2015) (citing Comcast Corp. v.
Behrend, 133 S. Ct. 1426, 1433). “[The] model purporting to serve as evidence of
damages in [a] class action must measure only those damages attributable to that
theory.” Ludlow, 800 F.3d 674, 686. Plaintiffs’ theory is that Defendant breached the
duty to market by not receiving the price a reasonably prudent operator would have
received. The damages would accordingly be the difference between the rate a
reasonably prudent operator would have received and the rate employed by DEPCO,
which is then multiplied by the fractional royalty interest. And that is the “straight
26

forward mathematical exercise” proposed by Plaintiffs. The only variable, if a jury were
to find Defendant liable, would be the rate a reasonably prudent operator would have
received. The remaining question is whether that rate can be determined classwide or
whether a well-by-well analysis is required.
Because the fee applied across-the-board and a Plaintiff is not required to
demonstrate evidence of other sales to show an operator has violated the duty to
market, the Court finds that the reasonably prudent operator rate can be determined
on a classwide basis through generalized, classwide proof. The Court’s analysis is like
the preceding discussion of breach. “The implied covenant to reasonably market. .
.focuses on the behavior of the lessee rather than on evidence of other sales, and asks
whether the lessee acted as a reasonably prudent operator under the same or similar
facts and circumstances.” Hankins, 111 S.W.3d 69, 71 (citing Amoco Prod. Co., 622
S.W.2d at 567–68). On an individual level, a Plaintiff would put on evidence of what
a reasonably prudent operator would have received for the gas. When the pricing
mechanism is applied across the board, as here, then the same damages calculation can
be performed for every member. Defendant argues that the alternative rate cannot
possibly be deduced because it would be inappropriate to treat the gas as an aggregated
entity. Because Plaintiffs are not required to provide evidence of other sales, the Court
finds no reason that prevents a jury from being presented alternative rates for the class
as a whole. Defendant did not make individual determinations when applying the
17.5% and cannot now claim such practice as a necessity.
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The proposed damages model covers only those damages arising from Plaintiffs’
theory of breach. “The first step in a damages study is the translation of the legal theory
of the harmful event into an analysis of the economic impact of that event.” Comcast Corp.,
133 S. Ct. at 1435. Once the Court has found that the alternative rate is susceptible
to class resolution, adjudicating breach and damages is relatively simple. If the theory
was applied to one plaintiff and one defendant, the damages would be the difference
between the price a reasonably prudent operator would have received and actual price
received, multiplied over the volume of sales and divided according to respective royalty
interests. Plaintiffs’ proposed formula merely inputs the payment data, readily
receivable from the TIPS accounting software and public data and calculates the
damage amount for each class member. The damages would be the sum of all the class
members damages combined. Because the Court finds that Plaintiffs are not precluded
as a matter of law from determining breach and damages on a classwide basis, it now
turns to whether the specific evidence provided by Plaintiffs supports a damages
determination classwide.
The Court finds that Plaintiffs have provided sufficient evidence to calculate
class damages. Plaintiffs, relying on their expert Jane Kidd, assert that “alternative
processing fees attainable by DEPCO can and will be evaluated on a classwide basis
through the use of a computer model that relies only on the TIPS and pay history data
in the possession of DEPCO.” The TIPS data is the internal accounting system that
tracks the essential data that would show the amount produced and how much it was
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sold for. Transcript of Hearing on Motion to Reconsider Order Denying Class
Certification and Motion for Class for Class Certification at 29. The royalty data would
show the percentage of damages to each leaseholder. The only remaining data point
would be the rate a reasonably prudent operator would have received, which is a merits
question. Plaintiffs assert, and the Court agrees, that this would be a “straightforward
mathematical exercise.”
Because the reasonably prudent operator rate is determinable classwide, and the
remaining data needed to calculate damages is readily attainable, the Court finds that
damages can be determined on a classwide basis.
C. Statute of limitations and discovery rule inquiry do not predominate the
common question
In order to satisfy Rule 23(b), the court must determine whether “the questions
of law or fact common to class members predominate over any questions affecting only
individual members.” Seeligson, 761 F. App'x at 338 (citing FED. R. CIV. P. 23(b)(3)).
This “entails identifying the substantive issues that will control the outcome, assessing
which issues will predominate, and then determining whether the issues are common
to the class, a process that ultimately prevents the class from degenerating into a series
of individual trials.” Id. The question before the Court is “whether the applicable
statute of limitations and potential tolling questions would raise individual issues” that
would predominate over common questions such as breach and damages. See id. The
proposed class contains leases held by DEPCO and processed through BPS between
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January 1, 2008 and February 28, 2014. In Texas, there is a four-year statute of
limitation for breach of implied covenants. See HECI Expl. Co. v. Neel, 982 S.W.2d 881,
885 (Tex. 1998) (“Absent application of the discovery rule, a four-year statute of
limitations would bar the claims for breach of implied contractual covenants.”). Breach
of contract (for the express covenants) are also subject to a four-year statute of
limitations. Tex. Civ. Prac. & Rem. Code 16.004, 1.051. Because suit was filed on
October 24, 2014, all claims as of October 24, 2010 are timely. The question remains
whether the January 1, 2008 to October 23, 2010 claims are barred from class
certification due to the statute of limitations and tolling inquiry. Because Texas
employs a “categorical” approach to the discovery rule, individual issues do not
predominate. Because individual issues do not predominate, the 2008-10 leases are
included in the class certification.
Texas employs a categorical approach to the discovery rule. The discovery rule
is a “limited exception” to the general rule that a cause of action accrues when a legal
injury is incurred. Archer v. Tregellas, 566 S.W.3d 281, 290 (Tex. 2018). The discovery
rule applies when the nature of the injury is inherently undiscoverable and the evidence
of injury is objectively verifiable. Id. An injury is inherently undiscoverable when it is
“unlikely to be discovered within the prescribed limitations period despite due
diligence.” Via Net v. TIG Ins. Co., 211 S.W.3d 310, 313–14 (Tex. 2006) (quoting
Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 734–35 (Tex. 2001)). The
determination of whether an injury is inherently undiscoverable is made on a
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categorical basis rather than on the facts of the individual case. HECI Expl. Co., 982
S.W.2d at 886. We look not to whether particular lessors could have discovered their
injury with diligence, but whether the injury incurred by the lessors was “the type of
injury that could be discovered through the exercise of reasonable diligence.” Cf. Archer,
566 S.W.3d at 290 (citing BP Am. Prod. Co., 342 S.W.3d at 66). The next question is
whether Plaintiffs would be capable of providing evidence to establish the application
of the discovery rule on a classwide basis.
Whether or not the 17.5% fee was “inherently undiscoverable” is a merits
question capable of classwide resolution. Whether the injury to the 2008–2010 leases
was inherently undiscoverable must be demonstrable by evidence “applicable to the
class as a whole” and be “subject to generalized proof.” Nichols, 675 F.2d at 676.
Common evidence will include the way Defendant shared royalty payment information
(pay stubs, standard contracts) and whether the terms of the GPPA were available to
the lessors. Even though only a specific portion of the class will need the discovery rule,
the evidence establishing whether the injury was inherently undiscoverable will be the
same across the board. Defendant cites Wagner & Brown, Ltd., 58 S.W.3d at 733, for
the proposition that, “In the case of claims for underpaid royalties from breach of oil
and gas leases, the Texas Supreme Court has declared categorically that the discovery
rule does not apply.” Defendant Response to Sup Mt’n at 16.
Defendant reads Wagner too broadly and, in either case, it is readily
distinguishable from the case at bar. The issue presented in Wagner was “whether the
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discovery rule applies to oil and gas royalty owners' claims that the lease operator
deducted improper gas gathering and compression charges from the gas purchase
price.” Wagner & Brown, Ltd., 58 S.W.3d at 733. The case followed HECI, where the
Supreme Court of Texas rejected the application of the Discovery rule to a reservoir
damage claim because the appearance of wells on neighboring properties should have
alerted Plaintiffs that damage to the reservoir was possible. HECI Expl. Co., 982 S.W.2d
at 886. The plaintiffs in HECI accordingly had a duty to exercise diligence by inquiring
with the lessee. Id. In Wagner, the charges that were being challenged were consistently
listed on the royalty statements. Wagner & Brown, Ltd., 58 S.W.3d at 733. The Court
reiterated that “a royalty owner should exercise due diligence to determine whether
charges made against royalty payments are proper and reasonable.” Id. at 736. Because
the lessors were aware that a compression charge was being applied, they had a duty to
inquire if they suspected unfair practices. Id. If the lessees concealed the information
then that would give rise to fraudulent concealment, a different proceeding entirely. Id.
In this case, the GPPA was a private agreement between DGS and DEPCO that was
not publicly available. More importantly, the 17.5% charge was not listed on the
royalty statements provided by DEPCO. Nor does DEPCO claim that its handling of
business records differed between its lessors. Because the lessors had similar dealings
and interactions with DEPCO, the Court finds that the discovery rule inquiry will be
categorical and susceptible to “generalized, classwide proof.”

32

The fact that one of the named Plaintiffs allegedly was told about the 17.5%
during a phone call does not negate the discovery inquiry. The discovery rule asks about
the injury from an objective, not subjective, point of view. See HECI Expl. Co., 982
S.W.2d at 886. DEPCO can put forth that evidence in favor of its argument regarding
discoverability, but that again is a merits question and not for this stage of the
proceedings. Because Texas employs a categorical approach to the discovery rule,
statute of limitation and discovery rule inquiries do not predominate over common
questions.
D. Plaintiffs have satisfied the necessary elements under Rule 23.
The Court finds that Plaintiffs have carried the burden in showing that Class
Certification is proper. Between the Court’s first opinion and the Fifth Circuit’s review,
the issues regarding numerosity, superiority, typicality, and representativeness were
satisfied. On remand, the Court finds that breach and damages are susceptible to
classwide proof. Because Defendant applied the same pricing mechanism to every
member without regard to individual well characteristics, the Court finds that breach
can be decided on a classwide basis. Because Plaintiffs have identified a formula that
would adequately measure the alleged breach, the Court finds that damages are
similarly susceptible to classwide resolution. Because Texas employs a categorical
approach to the discovery rule, the Court finds that statute of limitations and discovery
inquiries do not predominate over the common question. Because Plaintiffs have

33

satisfied the elements necessary for class certification under Rule 23, the Court
GRANTS the Supplemental Motion for Class Certification.
SO ORDERED.
Signed February 11th, 2020.

____________________________________
ED KINKEADE
UNITED STATES DISTRICT JUDGE

34