Stirman v. Exxon Corp.

• Decision Date: 01 February 2002
• Docket Number: No. 01-50632.,01-50632.
• Citation: 280 F.3d 554
• Parties: Jack D. STIRMAN; Beth Blakemore Hunter, Plaintiffs-Appellees, v. EXXON CORPORATION, et al., Defendants, Exxon Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

280 F.3d 554

Jack D. STIRMAN; Beth Blakemore Hunter, Plaintiffs-Appellees, v. EXXON CORPORATION, et al., Defendants, Exxon Corporation, Defendant-Appellant.

No. 01-50632.

United States Court of Appeals, Fifth Circuit.

February 1, 2002.

COPYRIGHT MATERIAL OMITTED

Robert R. Herring, Jr., Sylvia Gerald Davidow, Fleming & Associates, T. Gerald Treece (argued), Houston, TX, James Lawton Reed, Jr., James Joseph Ormiston, Looper, Reed & McCraw, Houston, TX, James L. Branton, Harry L. Munsinger, Branton & Hall, San Antonio, TX, for Plaintiffs-Appellees.

Shannon H. Ratliff (argued), Lisa A. Paulson, Akin, Gump, Strauss, Hauer & Feld, Richard A. Kelley, Clayton James Barton, McGinnis, Lochridge & Kilgore, Austin, TX, S. Jack Balagia, Jr., Exxon Mobile Corp., Houston, TX, for Defendant-Appellant.

Appeal from the United States District Court for the Western District of Texas.

Before E. GRADY JOLLY, SMITH and BENAVIDES, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

The plaintiffs in this class action case, John Stirman and Beth Blakemore Hunter, allege that defendant Exxon Corporation breached its lease obligations to them and to a class of similarly situated individuals by violating an implied covenant to market the natural gas and natural gas liquids (collectively, "natural gas") that were the subject of the leases. Exxon allegedly did so by transferring the natural gas within its own divisions at a lower price than the price realized in third party sales, causing the royalty owners to receive lower royalty payments. The plaintiffs moved for class certification and the district court twice denied their motions, but in its second order called for an evidentiary hearing on the matter. After the hearing, the district court certified a class consisting of:

(1) All private persons and private entities who own or owned royalty interests under leases located in the continental United States,

(2) where Exxon Corporation is the lessee,

(3) the leases provide for payment of royalties on natural gas production on an amount realized/net proceeds basis or a market value/market price basis, and

(4) from which Exxon Corporation has produced natural gas (including natural gas liquids) that was directly or indirectly sold or transferred to Exxon Corporation or within Exxon Corporation,

(5) during the time period July 14, 1995 through the present (the "Class").

Exxon filed a Petition for Permission to Appeal, which we granted. We hold that the district court failed adequately to examine whether the plaintiffs met all the requirements for class certification under Federal Rule of Civil Procedure 23 ("Rule 23"). We REVERSE the certification order and REMAND for further proceedings not inconsistent with this opinion.

I

Plaintiffs Stirman and Hunter are residents of Colorado. Stirman is apparently not a member of the class, although his name is still on the caption of this case.¹ Hunter is a royalty interest owner under a natural gas leasehold owned and/or operated by Exxon. This suit was filed on July 14, 1999. The suit was brought under diversity jurisdiction, and alleged breach of contract and unjust enrichment, and sought an accounting. The plaintiffs allege that Exxon breached an implied covenant to market diligently the natural gas that is the subject of their leaseholds and to obtain the highest price reasonably possible. Exxon allegedly did so by transferring the gas purchased from the plaintiffs within Exxon at lower prices than those it received in third party sales. The plaintiffs also allege that Exxon lists unreasonable and excessive charges and costs in its books, leading to undervaluation of the gas and unreasonably low royalties. The plaintiffs sought to certify a class of all current and former owners of royalty interests on Exxon natural gas leases where any subsidiary, affiliate, or division of Exxon markets or purchases the natural gas. The putative class included royalty interest owners in Alabama, Arkansas, California, Colorado, Florida, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.

Hunter's royalty interests arise from three separate 1934 leases, a 1938 Royalty Contract, and a Division Order. Her 1934 Port City Tract Mineral Lease provides for royalty payments based on market value for gas sold or used off the premises, but for royalty payments based on the amount realized from the sale of gas sold at the wells. Another of her 1934 leases provides for payments of gas royalties based on "the reasonable market value at the wells of all gas produced or manufactured from said premises and sold or used off said premises...." However, the 1938 Royalty Contract contains a clause which the defendant's expert, Professor Bruce Kramer, testified could be held to modify any implied covenant to market.²

In its initial order on February 24, 2000, the district court found the plaintiffs met the requirements of Rule 23(a) for class certification. These requirements are:

(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). The parties do not dispute the first requirement, numerosity. According to the affidavit of John Rockwell, the Litigation Coordinator for Exxon Mobil's North American Controller's Ownership Group, Upstream Business Services, Exxon has over 13,000 natural gas leases and 67,904 unique interest owners who receive royalty and/or working interest owner payments.³ As to commonality, the district court stated:

Plaintiffs claim that Exxon Mobil engaged in a class-wide course of conduct by failing to market gas in such a way as to maximize the Plaintiffs' returns. Whether or not this conduct satisfied the "reasonably prudent operator" standard is, as Plaintiffs argue, a common issue of fact and law. The Court finds that commonality has been satisfied.

Stirman v. Exxon Corp., No. SA-99-CA-0763 (W.D.Tx.), Feb. 24, 2000 Order at 2 ("February 24, 2000 Order"). Although the putative class members had different types of leases, the district court found that this did not destroy typicality, as all the asserted claims would consist of the same basic legal elements (subject to a finding that state law variations did not make class certification infeasible). Id. at 2-3. The court determined that counsel was qualified to represent the class, but did not address whether Hunter and Stirman were themselves adequate class representatives. Id. at 3. The court's discussion of each of these factors was brief.

Additionally, in order to maintain an action as a class action, the plaintiffs must qualify under one of the three prongs of Federal Rule of Civil Procedure 23(b). The plaintiffs sought to certify the class under 23(b)(3), which requires that "questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." The court found that variations in individual leases and in applicable statutes of limitation did not destroy commonality. However, the court found that differences in the applicable law of the fifteen different states where leases were held, as well as difficulties in identifying individual class members and determining whether a breach occurred in each case, could present problems. Accordingly, the court did not yet find that common issues predominated, but instead ordered more discovery on these issues. Id. at 5. The district court did not address superiority.

After additional discovery, the plaintiffs again moved for class certification. In its February 22, 2001 order, the district court did not certify the class, but called for an evidentiary hearing on whether class certification was appropriate given the different state laws that could apply. In its order, the district court stated that:

there is little serious question that an implied covenant to market exists throughout the jurisdictions at issue, unless the lease in issue expressly precludes that conclusion. In addition, there seems to be a consensus in the law that the standard to be applied in determining whether such a covenant has been breached is the reasonably prudent operator standard.

Stirman v. Exxon, No. SA-99-CA-0763 (W.D.Tx.), Feb. 22, 2001 Order at 2 ("February 22, 2001 Order"). However, the court noted that it had not reached a final determination on these issues. Further, the court listed nine considerations raised by the defendant that it found to be of concern and to require an evidentiary hearing before resolution.⁴

At the evidentiary hearing, the plaintiffs offered the expert testimony of John Tysseling, an economist familiar with the natural gas industry. He testified that royalties are often calculated on the basis of a field price index, which is an index of the value of the gas measured at a point in the field near the wellhead, and that this was how the price of the plaintiffs' gas was calculated. He added that this most likely does not represent the best price reasonably available. Further, he did not believe that there would be a need to analyze market value in each individual transaction, because Exxon's own computerized records would demonstrate the price it paid for gas in third-party transactions, which would represent a fair market value for the gas. He did admit that particularized facts and circumstances, including different geographic locations, might lead to different market valuations. He also admitted that if state laws differed on whether Exxon could deduct the costs of making gas marketable from royalty payments, this would affect the price upon which royalties...