Tenth Circuit Affirms Return of Royalty Class Action to Oklahoma State Court

Earlier this week, the Tenth Circuit affirmed an Oklahoma federal district court’s decision to remand a putative royalty class action to state court under the so-called “discretionary” exception to federal jurisdiction under the Class Action Fairness Act (CAFA). The case is Speed v. JMA Energy Co., LLC, 2017 WL 4342615 (10th Cir. 2017) and is a must-read for anyone who works with royalty class actions, because of its relatively deep dive into the so-called “discretionary” exception to CAFA jurisdiction.

The plaintiff royalty owner, represented by the well-known plaintiffs’ side Lanier Law Firm from Houston, filed the case against JMA Energy in Hughes County, Oklahoma alleging, among other things, that JMA committed fraud by concealing its obligation to pay interest on late royalty payments in accordance with an Oklahoma law. JMA removed the case to federal court, but then Speed moved to remand under the jurisdictional exceptions in CAFA.

It’s easy to forget about the exceptions in CAFA, so take note: not every $5 million, non-gerrymandered class action stays in federal court. Two exceptions are mandatory, but both require (in addition to other things) that 2/3 of the class members be citizens of the state from which the case was removed. The third exception is discretionary but only requires at least 1/3 of the class members to be citizens of the removal state and that the “primary defendants” are also from the removal state. In other words, cases that seem very-Oklahoma must stay in Oklahoma state court and cases that are at least somewhat-Oklahoma might stay in state court.

In this case, the parties stipulated that the number of Oklahoma class members was between 1/3 and 2/3 of the total, so we are mercifully spared from having to delve into the other requirements for mandatory remand under CAFA – only the discretionary exception matters.

Under CAFA, if the two prerequisites for the discretionary exception are met, a district court analyzes six factors (listed in CAFA) to decide a motion to remand. Notably, a trial court’s grant/denial of a motion to remand based on these factors is reviewed for abuse of discretion and the burden is on the party seeking remand.

In its opposition to Speed’s motion to remand, JMA Energy made two clever (but unsuccessful) arguments. First, JMA argued that the number of class members from the removal state should be looked at on “sliding scale.” The more class members from the removal state (up to 2/3), the more likely remand should be; the less from the removal state (down to 1/3), the less likely remand should be. Unfortunately for JMA, the percentage in this case was roughly halfway between 2/3 and 1/3 (48%), so this argument took them nowhere. JMA also argued that “neutral” factors should count against remand because the burden is on the other side; the Court disagreed, holding that the factors are evaluated “in the aggregate.”

Here’s how the factors played out:

(A) whether the claims asserted involve matters of national or interstate interest;

  • All the wells are in Oklahoma, and this was built into the class definition;
  • Even though some royalty owners live elsewhere, they “purposely availed” themselves of Oklahoma jurisdiction by owning minerals there;
  • The influence of Oklahoma law on other jurisdictions weighs in favor of letting Oklahoma courts, which are more familiar with Oklahoma law, to decide the issue

Weighs in favor of remand.

(B) whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States;

  • The “backbone” claim is about an Oklahoma royalty statute;
  • The trial court should have given more weight to potential choice-of-law issues on Speed’s fraud claim, but this was a “piggyback” claim on the statutory claim, and it looks like the choice-of-law question would result in Oklahoma law applying, anyway;
  • “Almost everything about this case is suffused with the distinct aroma of Oklahoma.” (???)

Weighs in favor of remand.

(C) whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction;

  • Exclusion of public companies from the class definition was not a gerrymander to avoid CAFA. According to Speed, these companies are violating the same royalty statute; (we’re going to see more of these class actions?)
  • It’s somewhat common practice to do this.

Weighs in favor of remand.

(D) whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants;

  • Seems obvious that Oklahoma has a nexus with wells in Oklahoma and violations of an Oklahoma statute;
  • The use of “forum” rather than “state” in this factor does not mean that the court should look to intra-state jurisdictional divisions, such as counties with little connection to the case, absent “clear abuse”;
  • No evidence of such abuse here;
  • Look to state jurisdictional rules once you’re back in state court.

Weighs in favor of remand.

(E) whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States;

  • Even though a majority of class members are from out of state and 20% are from Texas, the purpose of this factor is to “ensure that no other state has a significant interest in the controversy as does Oklahoma.”

Weighs in favor of remand.

(F) whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed.

  • No overlapping class actions on file. (yet?)

Weighs in favor of remand.

Altogether, every factor weighs in favor of remand, despite clever lawyering by JMA’s counsel. Accordingly, the trial court did not abuse its discretion in sending the case back to Hughes County.

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