As a matter of first impression, in Cheapside Mins., Ltd. v. Devon Energy Prod. Co., L.P., No. 23-40591, 2024 WL 886951 (5th Cir. Mar. 1, 2024), the Fifth Circuit held that an oil-and-gas royalties class action belongs in federal court based on its interpretation that the “principal injuries” prong of the CAFA local controversy exception requires all plaintiffs sustain their principal injuries in the forum state. While most Plaintiffs sustained their injuries in Texas, others did not. Accordingly, the Fifth Circuit concluded that the principal injuries prong was not satisfied. Because Plaintiffs failed to demonstrate that the local controversy exception applies the Fifth Circuit vacated the district court’s remand order.
There are two key takeaways from the Fifth Circuit’s opinion:
(1) Appellants may rely on § 1291 or § 1453(c) in appealing orders remanding a case under the local controversy exception.
(2) The “principal injuries” prong of the CAFA local controversy exception requires all plaintiffs sustain their principal injuries in the forum state and nowhere else.
I. Background
A group of 214 plaintiffs sued Devon Energy Production Company, L.P. (Devon) in Texas state court, alleging Devon had underpaid them in excess of $100 million in oil-and-gas royalties. Devon, a citizen of Oklahoma, markets and sells hydrocarbon produced from wells on lands in Dewitt County, Texas, and pays royalties to the Plaintiffs pursuant to certain mineral leases. Devon makes those payments to locations specified by Plaintiffs from its offices in Oklahoma City, Oklahoma. Most Plaintiffs reside in Texas. But approximately ten percent of Plaintiffs either reside outside of Texas, requested that they be paid at addresses outside of Texas, or both.
Devon removed this case to federal court pursuant to the Class Action Fairness Act, 28 U.S.C. §§ 1332(d), 1453, 1711–15 (CAFA). Plaintiffs sought remand based on CAFA’s “local controversy” exception. The district court agreed that the local controversy exception applied and remanded the dispute to Texas state court. This appeal ensued.
II. Appellate Jurisdiction
Devon appealed the remand order under 28 U.S.C. § 1291 and also filed a request for permission to appeal the remand order under 28 U.S.C. § 1453(c). The Court granted Devon permission to appeal under § 1453(c) and consolidated the separate filings. Before reaching the merits, the Fifth Circuit evaluated its appellate jurisdiction under § 1291 as an alternate vehicle for appealing a remand order based on the local controversy exception.
Aligning with both the Eighth and Eleventh Circuits, the Fifth Circuit held that appellants may rely on § 1291, in addition to § 1453(c), in appealing orders remanding a case under CAFA’s local controversy exception. The Court examined § 1447(d)’s limitations to appellate jurisdiction of remand orders and concluded that “§ 1447(d) does not trump § 1291 to deny appeal of a remand order based on the local controversy exception, because § 1447(d) does not prohibit review of remands based on ‘abstention principles.’” The Fifth Circuit has previously held that orders remanding cases under CAFA’s local controversy exception are based on abstention principles. Thus, the Court held that “appellants may rely on § 1291 or § 1453(c) in appealing orders remanding a case under the local controversy exception. But only in appeals predicated on § 1453(c) is this court bound to rule within sixty days of our granting permission to appeal.”
III. Local Controversy Exception
The central issue on appeal is the interpretation of CAFA’s local controversy exception, which provides:
A district court shall decline to exercise jurisdiction under paragraph (2)—
(A)(i) over a class action in which—
(I) greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed;
(II) at least 1 defendant is a defendant—
(aa) from whom significant relief is sought by members of the plaintiff class;
(bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and
(cc) who is a citizen of the State in which the action was originally filed; and
(III) principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed; and
(ii) during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons[.]
28 U.S.C. 1332(d)(4) (emphasis added).
The parties dispute whether, as prong III requires, the “principal injuries” resulting from Devon’s alleged underpayment of royalties were sustained in Texas. The Fifth Circuit ultimately agreed with Devon that Plaintiffs failed to show the “principal injuries” from royalty underpayments were “incurred” in Texas based on the following analysis.
a. Where the Plaintiffs’ injuries “incurred”
Devon asserts that Plaintiffs suffered their injuries where they reside because underpayment of an oil or gas royalty is an injury to personal property, and a plaintiff’s residence is determinative of where the plaintiff suffers that injury. Plaintiffs disagree, arguing that they suffered their injuries at the location specified for payment. That location, according to Plaintiffs is DeWitt County, Texas because the leases make royalty payments “payable” there.
Applying Texas law, the Court held that because Plaintiffs allege that Devon underpaid their royalties on sales of hydrocarbons that were already severed from the subject real property, underpayments of royalties owed comprises injuries to Plaintiffs’ personal property1. Based on the general rule that a plaintiff sustains an economic injury where he resides, the Court concluded that Plaintiffs who reside or were paid at addresses outside of Texas (approximately 10% of Plaintiffs) could not have sustained their economic injures in Texas because the underpayment of their royalties did not occur in Texas nor were its effect felt there. Thus, ruled the Court, “the Plaintiffs who reside outside of Texas sustained their injuries outside of Texas.”
b. All Plaintiffs must have sustained the principal injures in the forum state for the local controversy exception to apply.
The parties disagreed as to whether “principal injuries” means that all Plaintiffs, or some quantity of Plaintiffs, must have suffered their injuries in Texas. As a novel matter of statutory interpretation, the Fifth Circuit concluded that the “principal injuries” prong requires that all principal injuries occur in the forum state for the local controversy exception to apply. Thus, when as here, “some plaintiffs sustain their primary injuries in the forum state but others do not § 1332(d)(4)(A)(i)(III) is not satisfied.” The Court based its reasoning on, inter alia, the plain and unambiguous language of the statute, structure of CAFA, and comparison to other parts of CAFA in which Congress enumerated fewer than all plaintiffs must meet certain requirements. The Court concluded that its interpretation of the local controversy exception complies with the requirement that courts construe the exception narrowly and with all doubts resoled in favor of exercising jurisdiction over the case.
Here, the “principal injury” each Plaintiff sustained is obvious because there was only one type of injury: a financial harm resulting from Devon’s alleged underpayment of their royalties. While most Plaintiffs sustained that injury in Texas, others did not. Therefore, the principal injuries prong is not satisfied in this case, and Plaintiffs have failed to demonstrate that the local controversy exception applies.
The Fifth Circuit vacated the district court’s remand order, directing the case be reinstated on the federal court’s docket. This case may signify the Fifth Circuit’s shift in narrowing the local controversy exception and more broadly applying federal jurisdiction under CAFA.
The full Fifth Circuit Opinion can be found here.
For further questions regarding this topic, contact Liskow attorneys Sheri Corales, Carey Menasco, and James Brown.
1 The district court erred in its determination that Plaintiffs’ lost royalties were real property interests.
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