from the United States District Court for the Western
District of Oklahoma (D.C. No. 5:11-CV-00634-HE)
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.
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
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.
MORITZ, MURPHY, and EID, Circuit Judges.
MORITZ, CIRCUIT JUDGE.
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.
Oklahoma law, lessees like Chaparral are subject to an
implied duty of marketability (IDM). 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.
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. 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.
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; 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.
on this theory of liability, Naylor Farms moved to certify a
class comprising it and other similarly situated royalty
owners. 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).
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.
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. Chaparral now appeals the district
court's class-certification order.
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.
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
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
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.
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 (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
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) the type of wellhead sales
contracts that Chaparral allegedly utilized here. Thus, in
the absence of any guidance from the OSC on the specific
marketability questions before us in this appeal, our task is
"to predict how [the OSC] would rule" if it were to
answer those questions. Stickley, 505 F.3d at 1077
(quoting Johnson, 305 F.3d at 1118). In undertaking
that task, we find certain aspects of Mittelstaedt
relevant to, albeit not dispositive of, the issues before us.
Mittelstaedt, the OSC began by explaining that the
IDM imparts upon lessees like Chaparral a duty "to
provide a marketable product available to market." 954
P.2d at 1208. And as the OSC noted, "[i]t is common
knowledge that raw or unprocessed gas" must usually
undergo one or more GCDTP services to make that gas
marketable. Id. Thus, because the costs of
such GCDTP services are often "associated with"
making gas marketable, the OSC explained that the IDM
typically precludes a lessee from "deducting a
proportionate share" of those costs from royalty
payments. Id. at 1205. But the OSC then recognized
that a lessee may sometimes be able to demonstrate that gas
is "in a marketable form at the well[head]."
Id. at 1208. In that scenario, GCDTP services
aren't "necessary" to transform the
already-marketable gas into a marketable product.
Id. at 1208. Yet a lessee may nevertheless opt to
perform such services with an eye toward
"enhancing" the value of the
"already[-]marketable" gas. Id. at 1210.
And when it does so, the OSC explained, the cost of
performing such GCDTP services "may be allocated to the
royalty interests" if the lessee can make certain
additional showings. Id.
derive two controlling principles from Mittelstaedt.
First, Mittelstaedt resolved that when
unmarketable gas undergoes GCDTP services for the
purpose of transforming that unmarketable gas into a
marketable product, the lessee must bear the cost of the
GCDTP services. Second, Mittelstaedt resolved that
when marketable gas undergoes GCDTP services to
enhance the value of gas that is already marketable, the
lessee may, under certain circumstances, allocate the cost of
the GCDTP services to royalty holders.
Mittelstaedt left unresolved a whole host of other
questions. The most obvious are these: What does the term
"marketable" mean, and what factors determine when,
where, and if gas became marketable for purposes of applying
Mittelstaedt's marketable-product rule?
the OSC has declined at least two recent invitations to
address these questions. See Order Denying
Certiorari, Whisenant v. Strat Land Expl. Co., No.
115, 660 (Okla. Oct. 1, 2018); Order Denying Certiorari,
Pummill v. Hancock Expl. LLC, No. 114, 703 (Okla.
May 21, 2018). Further, the OSC declined one of these
invitations over the dissenting voices of two of its own
members. See Dissent from Order Denying Certiorari,
Pummill, No. 114, 703 (May 21, 2018) (Winchester,
J.) (noting that OSC "should grant certiorari to refine
what constitutes a 'marketable product' as that term
is used in [Mittelstaedt]").
the Oklahoma Court of Civil Appeals (OCOCA) has attempted to
fill the resulting legal vacuum, albeit with somewhat
inconsistent outcomes. See Whisenant v. Strat Land Expl.
Co., 429 P.3d 703, 707, 708-10 (Okla.Civ.App. 2018)
(recognizing that term "marketable product"
isn't susceptible to and has no uniform definition, but
then implicitly suggesting marketability always turns, at
least in part, on individual characteristics of gas at
issue); Pummill v. Hancock Expl. LLC, 419 P.3d 1268,
1278 (Oka. Civ. App. 2018) (indicating that in some cases, it
may be possible to answer marketability question based on
characteristics of relevant market, thus rendering
individualized gas-quality assessment unnecessary).
Whisenant, for instance, the OCOCA held that the
state trial court erred when, in proceeding under Okla. Stat.
Ann. tit. 12, § 2023(B)(3), it certified a class of
Oklahoma royalty owners who brought claims similar to those
Naylor Farms advances here. See 429 P.3d at 706-07.
Specifically, those royalty owners alleged that the
defendant, who operated several Oklahoma gas wells, breached
the IDM by calculating "royalties based on what it
received from" a midstream processing company,
"rather than based on what" that midstream
processing company "received for the gas at the
interstate (or intrastate) pipeline inlet." Id.
reversing the district court's certification order, the
Whisenant court initially expressed its view that
the OSC has, "for good reasons," declined to
"define the meaning of 'marketable product,
'" opting instead to leave the marketability
question "open to resolution on a case-by-case
basis." Whisenant 429 P.3d at 708 (quoting
Mittelstaedt, 954 P.2d at 1208). Nevertheless,
immediately after suggesting that the concept of
marketability isn't susceptible to any uniform definition
or test, the Whisenant court indicated that the
answer to the marketability question will always turn, at
least in part, on "the quality of [the] gas" at
issue. Id. at 710-12. Thus, the Whisenant
court reasoned, a "highly individualized and
fact-intensive review of each [class member's]
claim," as informed by the quality of the gas at each
individual well, "would be ...