Regmund v. Talisman Energy USA, Inc., No. 4:16-CV-02960, 2019 U.S. Dist. LEXIS 110363 (S.D. Tex. 2019)
The Plaintiffs, a putative class of lessors under oil and gas leases, brought claims against Talisman Energy USA, Inc. (“Talisman”) relating to Talisman’s “volumetric” method of calculating royalties. Some of the gas produced is “wet gas,” which requires stabilization prior to sale, which results in a reduction or “shrinkage” of the volume sold. Talisman commingled the production from numerous leases for processing at the stabilization facility, and then allocated the sales volumes back to individual leases on the basis of wellhead metered volumes (a “volumetric” allocation), and applied an estimate of overall shrinkage.
The Plaintiffs filed this class action suit, taking issue with Talisman’s commingling of gross production, practice of volumetrically allocating net sales volumes, and the usage of estimated (rather than actual) shrinkage volumes. Instead, the Plaintiffs argued that their leases require royalties to be calculated based on the actual amount of production from their leases ultimately available for sale.
The Plaintiffs sought to certify a class pursuant to Federal Rule of Civil Procedure 23(b)(3). Talisman challenged the adequacy requirement for class certification, arguing that “an impermissibly high risk of conflicts of interests exists among the putative class members.” The court agreed and explained that putative class members’ interest could conflict because, when estimates were used to pay royalties, some royalty owners could have been overpaid while others could have been underpaid. Thus, if ultimately successful, the underpaid class members would receive additional payouts, whereas the overpaid class members may be subject to Talisman’s counterclaim for recoupment. The court also explained that this conflict could not be solved by allowing overpaid class members to opt out because Talisman provided evidence that all money attributable to the royalties were already paid out, meaning overpaid class members could be opened up to liability under Talisman’s counterclaim. Finding that the two methods of calculation each benefited or burdened different class members, the court found the adequacy requirement could not be met.
The court also held that the Plaintiffs failed to meet the predominance requirement for class certification because the Plaintiffs did not provide adequate evidence that the royalty provisions in the leases at issue were substantially similar. The court made a similar finding for damages resulting from allegations of breach of contract. Thus, due to issues relating to adequacy and predominance, the court denied class certification.