Abuse of Discretion and the Sliding Scale of Deference: Restoring

MILLER_PP_FINAL (DO NOT DELETE) 4/24/2018 9:21 AM Abuse of Discretion and the Sliding Scale of Deference: Restoring the Balance of Power Between Circuit Courts and District Courts for Rule 23 Class Certification Decisions in Oil and Gas Royalty Litigation David C. Miller* ABSTRACT: Certifying a class is the first and most important step in bringing a claim as a class action. For certain plaintiffs, especially those suing on the basis of a contract like royalty owners of oil and gas leases, the class action is the only practical means of bringing a claim against the oil and gas production companies. In the past few years, the Supreme Court has raised the standard for Rule 23 class certification requirements. Over the same timeframe, circuits like the Fifth Circuit have reversed numerous orders certifying classes. Royalty owners are especially susceptible to unfavorable review because a reviewing court can point to minute differences within leases as the reason why the class fails to satisfy Rule 23. Rather than focus on the requirements of Rule 23, this Note examines the relationship between the circuit and district courts and the standard of review that should govern the circuit courts’ review of a certification order. There is a consensus that the abuse-of-discretion standard applies to review of certification orders, but the ambiguous definition of abuse of discretion has allowed circuit courts free reign when reviewing classes. To maintain the class action as a managerial tool for the district court, this Note proposes two solutions. First, the Note explains that codifying the abuse-of-discretion standard in Rule 23 will prevent circuit courts from circumventing the standard and push circuit courts to treat abuse of discretion as an independent standard. Second, the Note argues that each issue within the certification order falls somewhere * J.D. Candidate, The University of Iowa College of Law, 2018; B.A., Political Science and Religion, Baylor University, 2015. I would like to thank the Editorial Board of Iowa Law Review Volume 103 for their work on this piece. I would also like to thank my family, who has loved me from afar for the past three years, and, more specifically, my mother, who has challenged me to give my all in everything that I do and been my rock when I doubted that my all was enough. 1811 MILLER_PP_FINAL(DO NOT DELETE) 4/24/2018 9:21 AM 1812 IOWA LAW REVIEW [Vol. 103:1811 along the abuse-of-discretion spectrum, and the Note provides examples from royalty litigation to illustrate how the spectrum should operate. These steps remedy the current imbalance of power between circuit and district courts regarding the decision to certify a class. I. INTRODUCTION ........................................................................... 1812 II. RULE 23, STANDARDS OF REVIEW, AND OIL AND GAS LEASES: THE IDEAS BEHIND CERTIFICATION FOR ROYALTY OWNERS ....... 1814 A. CLASS ACTIONS AND THE REQUIREMENTS OF RULE 23 ............ 1815 1. The “Substantive” Requirements of Rule 23 ............. 1816 2. The “Procedural” Requirements of Rule 23 ............. 1819 B. FEDERAL APPELLATE STANDARDS OF REVIEW .......................... 1820 C. THE BASICS OF ROYALTY LITIGATION IN TEXAS OIL AND GAS LAW .............................................................................. 1822 III. THE CIRCUIT COURTS’ UNDEFINED POWER OVER CLASS CERTIFICATION ........................................................................... 1823 A. CHANCES OF CERTIFICATION: THE STATISTICS BEHIND THE REVIEW OF CERTIFICATION ORDERS ........................................ 1825 B. DOES “ABUSE OF DISCRETION” HAVE ANY MEANING? ............. 1827 C. THE ROYALTY OWNER CLASS: IMPOSSIBLE TO CERTIFY? ......... 1830 IV. RESTORING THE DISTRICT COURT’S ROLE IN CERTIFICATION BY RESTORING ABUSE OF DISCRETION ........................................ 1832 A. NOT NEGLECTING ABUSE OF DISCRETION: CODIFYING THE ABUSE-OF-DISCRETION STANDARD .......................................... 1833 B. GIVING ABUSE OF DISCRETION MEANING: HOW THE STANDARD MIGHT APPLY TO ROYALTY LITIGATION ............... 1838 V. CONCLUSION .............................................................................. 1841 I. INTRODUCTION “Drill, baby, drill.”1 In recent years, domestic oil drilling has evoked strong opinions on both sides of the issue, with the arguments stemming from environmental, economic, or other reasons.2 No matter the position taken on the issues 1. Former Md. Lieutenant Governor Michael S. Steele, Speech at the 2008 Republican National Convention (Sept. 3, 2008). 2. See, e.g., Jim Angle, Domestic Drilling Advocates Warn of Increased Global Demand for Oil, Dwindling Supply, FOX NEWS (Mar. 26, 2012), http://www.foxnews.com/politics/2012/03/26/domestic- drilling-advocates-warn-increased-global-demand-for-oil-dwindling.html (explaining the immediate MILLER_PP_FINAL (DO NOT DELETE) 4/24/2018 9:21 AM 2018] ABUSE OF DISCRETION 1813 underlying domestic drilling, domestic drilling is a significant portion of our economy.3 In fact, during the summer of 2014, the United States was the “world’s largest oil producer.”4 The more domestic production of oil and gas, the more relationships form between oil and gas production companies and the landowners where the drilling takes place.5 The oil and gas companies compensate these landowners through leases that pay royalties.6 While this contractual relationship might seem straightforward, “underpayments are widespread,” and “[t]housands of landowners . are receiving far less than they expected based on the sales value of gas or oil produced on their property.”7 Royalty owners have “few . protective mechanisms” to combat this practice by the production company.8 The class action is an essential litigation technique for royalty owners because it allows them “to pursue a number of small claims that could not economically be pursued on an individual basis.”9 To proceed as a class, royalty owners must satisfy Federal Rule of Civil Procedure 23, which lays out the requirements that district courts follow when deciding whether to certify a class or not.10 Convincing a district court to certify a class of royalty owners is far from a guarantee, but even if certified, a class typically must survive review by the circuit court on interlocutory appeal.11 The jurisdictions where most oil and gas production occurs, the Fifth Circuit, and more specifically need for domestic drilling); Jack Healy, North Dakota Oil Pipeline Battle: Who’s Fighting and Why, N.Y. TIMES (Dec. 2, 2016), https://www.nytimes.com/2016/11/02/us/north-dakota-oil-pipeline-battle- whos-fighting-and-why.html (explaining the dispute behind the proposed Dakota Access pipeline that would run from North Dakota to Illinois); Alec MacGillis, How Obama Let Big Oil Drill in the Pristine Alaska Wilderness, POLITICO (Dec. 21, 2015), http://www.politico.com/magazine/story/2015/12/ alaska-oil-drilling-lobbying-obama-213442 (explaining how ConocoPhillips obtained the right to drill more extensively in Alaska in the National Petroleum Reserve despite previous efforts to protect the environment). 3. See Chris Isidore, The Obama Oil Boom, CNN MONEY (Jan. 28, 2015, 4:32 PM), http://money. cnn.com/2015/01/28/news/economy/obama-oil-boom (describing how oil production steadily increased under President Obama’s administration). 4. Id. 5. See Abrahm Lustgarten, Unfair Share: How Oil and Gas Drillers Avoid Paying Royalties, PROPUBLICA (Aug. 13, 2013, 10:20 AM), https://www.propublica.org/article/unfair-share-how- oil-and-gas-drillers-avoid-paying-royalties (“Like every landowner who signs a lease agreement to allow a drilling company to take resources off his land, Feusner is owed a cut of what is produced, called a royalty.”). 6. Id. 7. Id. 8. Id. 9. Craig A. Haynes & Amanda Catlin, Special Royalty Litigation Issues: Class Actions, in PRIVATE OIL & GAS ROYALTIES 15-1, 15-1 (Rocky Mountain Mineral Law Found., Mineral Law Ser. No. 1, 2003). 10. See infra Part II.A. 11. See FED. R. CIV. P. 23(f) (allowing either party to petition the circuit court for review of an order granting or denying certification within 14 days of the order). MILLER_PP_FINAL(DO NOT DELETE) 4/24/2018 9:21 AM 1814 IOWA LAW REVIEW [Vol. 103:1811 Texas, are notably suspicious of class actions.12 In these jurisdictions, a royalty class must survive two layers of “rigorous analysis” on the certification question before proceeding to try its case on the merits.13 This “rigorous analysis” leaves royalty owners without an effective remedy against production companies because they cannot rely on the class action. In light of this problem, this Note addresses the current framework for the review of class certification by circuit courts and argues that the circuit courts lack a standard of review that consistently allows the district court the appropriate amount of discretion in certifying a proposed class.14 Although this problem pervades all types of class actions, this Note uses the oil and gas problem as a case study for the larger problem in class actions. First, this Note provides the relevant background for class action procedure, the standards of review used by appellate courts, and the basic workings of oil and gas leases. Second, this Note explains the problems in class certification procedure: (1) the difficulty a certified class faces in surviving review in certain circuits like the Fifth Circuit; (2) the lack of clarity between the circuits regarding the supposedly applicable standard of review (abuse of discretion) for certification

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