Zehentbauer Family Land, LP; Hanover Farms, LP; Evelyn Frances Young, Successor Trustee of Robert Milton Young Trust, Plaintiffs-Appellees,
Chesapeake Exploration, L.L.C.; Chesapeake Operating, Inc.; CHK Utica, L.L.C.; Total E&P USA, Inc., Defendants-Appellants.
Argued: June 19, 2019
from the United States District Court for the Northern
District of Ohio at Youngstown. No. 4:15-cv-02449-Benita Y.
Pearson, District Judge.
Gregory G. Garre, LATHAM & WATKINS LLP, Washington, D.C.,
E. Murray, Jr., MURRAY & MURRAY, CO., L.P.A., Sandusky,
Ohio, for Appellees.
Gregory G. Garre, Elana Nightingale Dawson, Samir Deger-Sen,
Charles S. Dameron, LATHAM & WATKINS LLP, Washington,
D.C., Daniel T. Donovan, KIRKLAND & ELLIS LLP,
Washington, D.C., Timothy B. McGranor, VORYS, SATER, SEYMOUR
AND PEASE LLP, Columbus, Ohio, for Appellants.
E. Murray, Jr., William H. Bartle, MURRAY & MURRAY, CO.,
L.P.A., Sandusky, Ohio, Scott M. Zurakowski, Terry A. Moore,
Gregory W. Watts, KRUGLIAK, WILKINS, GRIFFITHS &
DOUGHERTY CO., L.P.A., Canton, Ohio, for Appellees. L.
Bradfield Hughes, PORTER WRIGHT MORRIS & ARTHUR LLP,
Columbus, Ohio, Andrew J. Pincus, MAYER BROWN LLP,
Washington, D.C., for Amici Curiae.
Before: GILMAN, STRANCH, and NALBANDIAN, Circuit Judges.
LEE GILMAN, CIRCUIT JUDGE.
appeal concerns oil and gas leases in Ohio's Utica Shale
Formation. The defendants are exploration and production
companies that have contracted with landowners to drill for
oil and gas on the leased properties, and the plaintiffs are
a putative class of such landowners. Between 2010 and 2012,
the plaintiffs and the defendants entered into hundreds of
oil and gas lease agreements that provide for royalty
payments to the plaintiffs based on the gross proceeds
received by the defendants from the sale of each well's
oil and gas production.
defendants sell the oil and gas extracted from the leased
properties to so-called midstream companies affiliated with
the defendants. To calculate the price that an
unaffiliated entity would have presumptively paid
for the oil and gas, the defendants use the "netback
method." According to the plaintiffs, the defendants
underpaid the royalties due to the plaintiffs during the
years in question because the netback method (1) does not
accurately approximate an arm's-length-transaction price,
and (2) improperly deducts post-production costs from the
district court granted class certification. In this
interlocutory appeal, the defendants argue that class
certification under Rule 23(b)(3) of the Federal Rules of
Civil Procedure is improper because issues common to the
class members do not predominate over individual issues. For
the reasons set forth below, we AFFIRM the
judgment of the district court.
Exploration, LLC, and a predecessor company, Ohio Buckeye
Energy, LLC, entered into hundreds of oil and gas leases with
landowners in Ohio, including the three named plaintiffs in
the present case. These leases establish that Chesapeake
Exploration and its assigns are entitled to produce oil and
gas from beneath the surface of the landowners'
properties in exchange for royalty payments based on the
gross proceeds received from the oil and gas sold.
plaintiffs have split the leases into three subclasses. Group
A's royalty provisions contain language governing the
sale price and royalty percentage, but the gas royalty
provisions contain a definitional clause and a
comparable-sales requirement that the oil royalty provisions
do not. The definitional clause outlines the substances
governed by the provision and the comparable-sales
requirement governs gas sales to companies affiliated with
the defendants. Zehentbauer Family Land, LP, and Hanover
Farms, LP-two of the three named plaintiffs-are in the Group
B's royalty provisions contain a definitional clause and
comparable-sales requirement for both oil and gas sales.
Evelyn Frances Young, Successor Trustee of the Robert Milton
Young Trust-the third named plaintiff-is in the Group B
all of Group C's oil and gas royalty provisions have a
definitional clause, but do not have a comparable-sales
requirement. None of the named plaintiffs, however, are in
the Group C subclass.
lease agreements provide that Zehentbauer and Hanover are
entitled to a 17.5% royalty and that Young is entitled to a
20% royalty "based upon the gross proceeds paid to
Lessee" from the sale of oil or gas sold from the leased
premises. The leases define the term "gross
proceeds" as "the total consideration paid for oil,
gas, associated hydrocarbons, and marketable by-products
produced from the leased premises."
sales, the leases specify that the royalties are based on the
gross proceeds paid to the defendants "computed at the
wellhead." Royalties are based on the defendants'
sales price when they sell gas "in an arms-length
transaction to an unaffiliated bona fide
purchaser." The comparable-sales requirement of the
leases accounts for the possibility that the defendants might
sell gas to their own affiliates. In such cases, the
Zehentbauer and Hanover leases provide that
the price upon which royalties are based shall be comparable
to that which could be obtained in an arms length transaction
(given the quantity and quality of the gas available for sale
from the leased premises and for a similar contract term) and
without any deductions or expenses except for Lessee to
deduct from Lessor's royalty payments ...