Class Action Lawsuits Over O&G Royalties: 6 Issues to Consider
- November 9, 2015 | By Alan D. Wenger | Oil & Gas
Many royalty recipients are convinced they are being underpaid by a lessee because of improper cost deductions and sale prices tilted through schemes involving companies related to the lessee.
Lessors face many roadblocks if they seek redress: royalty claims are complicated and difficult to prove, and can involve huge costs for accountants, experts and attorneys. How could a normal lessor reasonably combat a multi-billion-dollar colossus oil company?
Even if a lessor should win (which may not be certain) the costs of winning may exceed any benefit. Awareness of this dynamic arguably has given some lessees leverage to play “fast and loose” with royalty payments to lessors.
Some lessors have joined with others with similar leases, or perhaps with other lessors in the same drilling unit, to share the cost burden of bringing the lessee to task. Other lessors (several now in Ohio) have filed lawsuits that ask that a court certify a “class” of lessors with similar royalty issues.
“Class Actions” allow claims of a large group, too many to join as individual plaintiffs in a lawsuit, to in effect be treated as a single party if certified as a “class” by the court or qualified arbitration agency.
Royalty class actions have been filed and settlements reached in states other than Ohio. Though several royalty cases asking for class certification have been filed in Ohio, none has apparently thus far been certified.
Assuming that a class of lessors with similar facts and issues is eventually certified, should a disgruntled lessor join in if given the opportunity? Here are some general considerations:
- 1. Determine who will be in charge. In class actions, lead plaintiffs' lawyers risk a huge investment in developing the case, and in return for the risk, will seek to earn major fees. You need to ascertain whether the attorneys have experience with class actions relevant to the arcane world of oil and gas royalty issues. Do they have the financial wherewithal to “front” the substantial costs that will be incurred as part of litigation? What will be a class member's obligations? How will class members handle expenses and lawyer's fees, communications with each other and their roles in decisions regarding the litigation?
- 2. You might not qualify for a class action. Depending on the class certified, are you qualified to join? One major distinction could be whether your lease contains a mandatory arbitration clause, requiring consideration of disputes in arbitration rather than in the courts.
- 3. Any outcome could be years away. The parties will spend months, and perhaps years in efforts to dismiss and change the scope of the litigation and address certification of a class. With several pending potential class actions, there could be efforts to consolidate the cases. It could take lots of time.
- 4. Individual class members may have limited roles. Being part of a class will be far different than being a plaintiff in conventional litigation. Class members will not likely have much input as to strategies, decisions and developments in the case, which will rather be controlled by the court and attorneys.
- 5. A settlement is likely to determine the outcome. There could be potential for a lessor in the lawsuit with large holdings to settle separately, affecting the leverage of the remaining lessors in the class. A large portion of a settlement will be applied to fees and costs.
- 6. Alternatives may be limited. One alternative, in addition to seeking redress individually, or as part of a smaller litigation group, might be to hope for a “coat tails” effect from precedent set in successful efforts of others to establish a favorable interpretation of “no deduction” clauses in leases. Do not depend on this; settlements often are protected by confidentiality, and qualified with stipulations as to “no admissions” and “no precedent.”
Disgruntled lessors face difficult decisions as to what they might do in order to receive proper royalties. They need to educate themselves as to options and strategies in order to make a decision should the opportunity come to “join the class.”