Colorado Gas Royalty Law
at the Intersection of Implied Covenants and Class
Treatment: A Look Back and a Look Forward
Barry C. Bartel, April 11, 2014
Marketable Product Rule
 Garman v. Conoco, Inc., 886 P.2d 652 (Colo.
1994)
 Rogers v. Westerman Farm Co., 29 P.3d 887, 906
(Colo. 2001)
Once gas is deemed marketable based on a factual determination,
the allocation of all costs can properly be determined. Absent
express lease provisions addressing allocation of costs, the
lessee's duty to market requires that the lessee bear the expenses
incurred in obtaining a marketable product. Thus, the expense of
getting the product to a marketable condition and location are
borne by the lessee. Once a product is marketable, however,
additional costs incurred to either improve the product, or transport
the product, are to be shared proportionately by the lessor and
lessee. All costs must be reasonable.
Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)
Once gas is deemed marketable based on a factual determination,
the allocation of all costs can properly be determined. Absent
express lease provisions addressing allocation of costs, the
lessee's duty to market requires that the lessee bear the expenses
incurred in obtaining a marketable product. Thus, the expense of
getting the product to a marketable condition and location are
borne by the lessee. Once a product is marketable, however,
additional costs incurred to either improve the product, or transport
the product, are to be shared proportionately by the lessor and
lessee. All costs must be reasonable.
Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)
Colorado royalty law
 Look back: implied covenants
 Intersection with class action law
 Five trends that result
 A look back.
“Our nation’s deference to private ownership of
minerals is inherited from England, where the
common law applied the Latin maxim, cujus est
solum, ejus est usque ad coelum et ad inferos: to
whomsoever the soil belongs, he owns also to the
sky and to the depths.” James C. Smith, Theories of
Subsurface Ownership: An Overview, 14 E. MIN. L.
FOUND. § 4.01 (1993).
“Our nation’s deference to private ownership of
minerals is inherited from England, where the
common law applied the Latin maxim, cujus est
solum, ejus est usque ad coelum et ad inferos: to
whomsoever the soil belongs, he owns also to the
sky and to the depths.” James C. Smith, Theories of
Subsurface Ownership: An Overview, 14 E. MIN. L.
FOUND. § 4.01 (1993).
 1859: Venango County, Pennsylvania
 “The Pennsylvania Start-up That Changed the
World,” Daniel Yergin, The Pennsylvania Start-up
That Changed the World, FORBES, Sept. 3, 2009.
 Who gets what when natural gas is produced?
 Written oil and gas lease
 “[F]rom the very beginning of the industry the
stormcenter of litigation in the jurisprudence has
been the degree of diligence which an oil and gas
lessee should exercise in the development of the
lands covered by his lease.” James A. Veasey,
The Law of Oil and Gas, 18 MICH. L. REV. 446,
454 (Apr. 1920)
 MAURICE H. MERRILL, THE LAW RELATING TO
IMPLIED COVENANTS IN OIL AND GAS
LEASES 20 (1926), 23 (1940).
 Four implied obligations
–
–
–
–
to begin drilling
to keep drilling
to operate diligently
to protect the resource.
Davis v. Cramer, 808 P.2d 358, 361 (Colo. 1991)
“Most commentators divide the implied covenants into four categories:
exploration, development, production (including marketing), and protection
against drainage. Merrill, The Law Relating to Covenants Implied in Oil
and Gas Leases, § 4 (2d ed. 1940); Kulp, Oil and Gas Rights, § 10.66
(1955); Sullivan, Handbook of Oil and Gas Law, §§ 87–93 (1955); see 5
Kuntz, supra, at § 55.1. Another commentator divides production into the
duty to produce and to market. Brown, The Law of Oil and Gas Leases, §
16.02 (1958). Regardless, the necessity of the duty to market ‘is obvious
in order that the lessor may receive the consideration for the lease, that is,
the royalties which are to be paid.’ 2 Summers, supra, at § 400; see also
Hemingway, Law of Oil and Gas, § 6.4 (1983).”
Davis v. Cramer, 808 P.2d 358, 361 (Colo. 1991)
“Most commentators divide the implied covenants into four categories:
exploration, development, production (including marketing), and protection
against drainage. Merrill, The Law Relating to Covenants Implied in Oil
and Gas Leases, § 4 (2d ed. 1940); Kulp, Oil and Gas Rights, § 10.66
(1955); Sullivan, Handbook of Oil and Gas Law, §§ 87–93 (1955); see 5
Kuntz, supra, at § 55.1. Another commentator divides production into the
duty to produce and to market. Brown, The Law of Oil and Gas Leases, §
16.02 (1958). Regardless, the necessity of the duty to market ‘is obvious
in order that the lessor may receive the consideration for the lease, that is,
the royalties which are to be paid.’ 2 Summers, supra, at § 400; see also
Hemingway, Law of Oil and Gas, § 6.4 (1983).”
 Analyzing implied covenants related to drilling the
initial well, how many further wells are necessary,
and what is necessary to protect against drainage,
require fact-specific inquiries.
 A breach of one of those obligations could lead to
cancellation of the lease. See, e.g., Brewster v.
Lanyon Zinc Co., 140 F. 801, 814 (8th Cir. 1905)
(a leading case discussing cancellation for breach
of implied covenants).
 Production (including marketing)
Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)
“Once gas is deemed marketable based on a factual determination,
the allocation of all costs can properly be determined. Absent
express lease provisions addressing allocation of costs, the
lessee's duty to market requires that the lessee bear the expenses
incurred in obtaining a marketable product. Thus, the expense of
getting the product to a marketable condition and location are
borne by the lessee. Once a product is marketable, however,
additional costs incurred to either improve the product, or transport
the product, are to be shared proportionately by the lessor and
lessee. All costs must be reasonable.”
Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)
“Once gas is deemed marketable based on a factual determination,
the allocation of all costs can properly be determined. Absent
express lease provisions addressing allocation of costs, the
lessee's duty to market requires that the lessee bear the expenses
incurred in obtaining a marketable product. Thus, the expense of
getting the product to a marketable condition and location are
borne by the lessee. Once a product is marketable, however,
additional costs incurred to either improve the product, or transport
the product, are to be shared proportionately by the lessor and
lessee. All costs must be reasonable.”
 Gas produced at the well (producer pays)
 Things done to gas
–
–
–
–
–
gather
dehydrate
compress
treat
process
 What value is royalty paid on?
– Depending on where sold, what can be deducted?
– Does the gas have to be in a certain condition?
Rogers v. Westerman Farm Co., 29 P.3d 887, 896-97 (Colo. 2001)
“In order to resolve the dispute among the parties here, we must look to
the actual language of the leases at issue and determine if they address
the allocation of costs, and thus, the calculation of royalty payments. We
first note that there are four variations of lease language at issue in this
case. However, notwithstanding the distinct language of each of the four
lease types, there is some language common to all four lease types.
Specifically, all of the leases contemplate that the royalties are to be
computed ‘at the well’ or ‘at the mouth of the well.’ We have not previously
interpreted the type of lease language presented by the leases at issue in
this case. Despite the differing language in each of the four types of
leases, and despite the arguments raised that the ‘at the well’ and ‘at the
mouth of the well’ language provides for the allocation of costs, we
conclude that all of the leases are, in fact, silent with respect to the
allocation of costs.”
Rogers v. Westerman Farm Co., 29 P.3d 887, 896-97 (Colo. 2001)
“In order to resolve the dispute among the parties here, we must look to
the actual language of the leases at issue and determine if they address
the allocation of costs, and thus, the calculation of royalty payments. We
first note that there are four variations of lease language at issue in this
case. However, notwithstanding the distinct language of each of the four
lease types, there is some language common to all four lease types.
Specifically, all of the leases contemplate that the royalties are to be
computed ‘at the well’ or ‘at the mouth of the well.’ We have not previously
interpreted the type of lease language presented by the leases at issue in
this case. Despite the differing language in each of the four types of
leases, and despite the arguments raised that the ‘at the well’ and ‘at the
mouth of the well’ language provides for the allocation of costs, we
conclude that all of the leases are, in fact, silent with respect to the
allocation of costs.”
Rogers v. Westerman Farm Co., 29 P.3d 887, 898 (Colo. 2001)
Lease language with respect to deductions:
 Type I: two separate clauses:
– royalties based on the gross proceeds from the sale of gas at the
wellhead.
– for sales not occurring at the well, the royalties are to be paid based
on the market value at the well, but in no event shall those royalties
total more than 1/8th of the amount actually received for the sale.
 Type II: the proceeds from the sale of gas ... at the mouth of the well
 Type III: market price at the well for the gas sold
 Type IV: proceeds received for gas sold from each well ... or the
market value at the well of such gas used off the premises
Rogers v. Westerman Farm Co., 29 P.3d 887, 898 (Colo. 2001)
Lease language with respect to deductions:
 Type I: two separate clauses:
– royalties based on the gross proceeds from the sale of gas at the
wellhead.
– for sales not occurring at the well, the royalties are to be paid based
on the market value at the well, but in no event shall those royalties
total more than 1/8th of the amount actually received for the sale.
 Type II: the proceeds from the sale of gas ... at the mouth of the well
 Type III: market price at the well for the gas sold
 Type IV: proceeds received for gas sold from each well ... or the
market value at the well of such gas used off the premises
Rogers v. Westerman Farm Co., 29 P.3d 887, 897
(Colo. 2001)
“Despite the differing language in each of the four
types of leases, and despite the arguments raised
that the ‘at the well’ and ‘at the mouth of the well’
language provides for the allocation of costs, we
conclude that all of the leases are, in fact, silent with
respect to the allocation of costs.”
Piney Woods Country Life Sch. v. Shell Oil Co., 726
F.2d 225, 231 (5th Cir. 1984)
“‘At the well’ therefore describes not only location but
quality as well. Market value at the well means
market value before processing and transportation,
and gas is sold at the well if the price paid is
consideration for the gas as produced but not for
processing and transportation.”
Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)
“Once gas is deemed marketable based on a factual determination,
the allocation of all costs can properly be determined. Absent
express lease provisions addressing allocation of costs, the
lessee's duty to market requires that the lessee bear the expenses
incurred in obtaining a marketable product. Thus, the expense of
getting the product to a marketable condition and location are
borne by the lessee. Once a product is marketable, however,
additional costs incurred to either improve the product, or transport
the product, are to be shared proportionately by the lessor and
lessee. All costs must be reasonable.”
Oklahoma
Oklahoma: certified question:
 In light of the facts as detailed below, is an oil and
gas lessee who is obligated to pay “3/16 of the
gross proceeds received for the gas sold” entitled
to deduct a proportional share of transportation,
compression, dehydration, and blending costs
from the royalty interest paid to the lessor?
Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7,
954 P.2d 1203, 1204-05
Oklahoma
Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d
1203, 1210
“In sum, a royalty interest may bear post-production costs of
transporting, blending, compression, and dehydration, when
the costs are reasonable, when actual royalty revenues
increase in proportion to the costs assessed against the
royalty interest, when the costs are associated with
transforming an already marketable product into an enhanced
product, and when the lessee meets its burden of showing
these facts.”
Naylor Farms, Inc. v. Anadarko OGC Co., CIV-08-668-R, 2011 WL
7053789 (W.D. Okla. July 14, 2011) on reconsideration in part, CIV-08668-R, 2011 WL 7053794 (W.D. Okla. Oct. 14, 2011) (clarifying that court
did not intend to imply that extraction of NGLs is necessary to put gas in
marketable form)
“The Court concludes that the Oklahoma Supreme Court in
the cases cited above deems ‘marketable’ to be
distinguishable from saleable. It would be hard to imagine any
gas not being saleable at least for some price the moment it
comes out of the ground. Yet the Supreme Court says the
operator must make the gas marketable which by inference
means of interstate or intrastate pipeline quality.”
Naylor Farms, Inc. v. Anadarko OGC Co., CIV-08-668-R, 2011 WL
7053789 (W.D. Okla. July 14, 2011) on reconsideration in part, CIV-08668-R, 2011 WL 7053794 (W.D. Okla. Oct. 14, 2011) (clarifying that court
did not intend to imply that extraction of NGLs is necessary to put gas in
marketable form)
“The Court concludes that the Oklahoma Supreme Court in
the cases cited above deems ‘marketable’ to be
distinguishable from saleable. It would be hard to imagine any
gas not being saleable at least for some price the moment it
comes out of the ground. Yet the Supreme Court says the
operator must make the gas marketable which by inference
means of interstate or intrastate pipeline quality.”
Kansas
Sternberger v. Marathon Oil Co., 257 Kan. 315, 331, 894 P.2d 788, 800
(1995)
“Once a marketable product is obtained, reasonable costs incurred to
transport or enhance the value of the marketable gas may be charged
against nonworking interest owners. The lessee has the burden of proving
the reasonableness of the costs. Absent a contract providing to the
contrary, a nonworking interest owner is not obligated to bear any share of
production expense, such as compressing, transporting, and processing,
undertaken to transform gas into a marketable product. In the case before
us, the gas is marketable at the well. The problem is there is no market at
the well, and in that instance we hold the lessor must bear a proportionate
share of the reasonable cost of transporting the marketable gas to its point
of sale.”
“Marketable Product Rule”





Colorado (with location element)
Oklahoma
Kansas
Litigating in New Mexico
Not universal
North Dakota
“[¶ 21] We conclude the term market value at the well is not
ambiguous. We join the majority of states adopting the “at the
well” rule and rejecting the first marketable product doctrine.
Thus, we conclude the district court properly determined
Petro–Hunt can deduct post-production costs from the plant
tailgate proceeds prior to calculating royalty. We affirm the
district court's order granting Petro–Hunt summary judgment
regarding the use of the work-back method to calculate
royalties.”
Bice v. Petro-Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496,
502
Texas
“Although it is not subject to the costs of production, royalty is
usually subject to post-production costs, including taxes,
treatment costs to render it marketable, and transportation
costs. Martin v. Glass, 571 F.Supp. 1406, 1410
(N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th Cir.1984); Williams
& Meyers, supra, p. 857. However, the parties may modify
this general rule by agreement. Martin, 571 F.Supp. at 1410.”
Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 122
(Tex. 1996)
Marketable product rule:
 Conditions for royalty law
– to intersect with
 Class treatment
(a) Prerequisites. One or more members of a class may sue or be sued as
representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or
defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the
class.
(b) Types of Class Actions. A class action may be maintained if Rule 23(a) is
satisfied and if:
*****
(3) the court finds that the questions of law or fact common to class members
predominate over any questions affecting only individual members, and that a
class action is superior to other available methods for fairly and efficiently
adjudicating the controversy.
Fed. R. Civ. P. 23
Class Certification
(a) Prerequisites. One or more members of a class may sue or be sued as
representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or
defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the
class.
(b) Types of Class Actions. A class action may be maintained if Rule 23(a) is
satisfied and if:
*****
(3) the court finds that the questions of law or fact common to class members
predominate over any questions affecting only individual members, and that a
class action is superior to other available methods for fairly and efficiently
adjudicating the controversy.
Fed. R. Civ. P. 23
 Marketable Product Rule
– common questions predominate if:
 lease language does not override the implied covenant
 the implied covenant is defined in a way that applies broadly
– “Marketable Product”
 Cases articulating the rule:
– Rogers (Colorado) not a class action
– Mittelstaedt (Oklahoma) not a class action
– Sternberger (Kansas) was a class action
 Supreme Courts have not addressed the
marketable product rule in class context
 Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541,
2550, 180 L. Ed. 2d 374 (2011)
 Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432,
185 L. Ed. 2d 515 (2013)
 Wallace B. Roderick Revocable Living Trust v.
XTO Energy, Inc., 725 F.3d 1213 (10th Cir. Kan.
2013)
 Chieftain Royalty Co. v. XTO Energy, Inc., 528 F.
App'x 938 (10th Cir. Okla. 2013) (not selected for
publication)
Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725
F.3d 1213 (10th Cir. Kan. 2013)
“Holdings: The Court of Appeals, Paul J. Kelly, Jr., Circuit Judge, held
that:
“1 district court abused discretion in relaxing and shifting burden of proof
as to whether royalty owners of natural gas wells satisfied commonality
requirement;
“2 predominance of common issues was not established simply by virtue
of lessee's uniform methodology of payments to royalty owners; and
“3 lessee's previous settlement of natural gas royalty litigation did not
collaterally or judicially estop lessee from litigating class certification
issues.
“Vacated and remanded.”
Wallace B. Roderick Revocable Living Trust v. XTO Energy,
Inc., 725 F.3d 1213 (10th Cir. Kan. 2013)
“1 district court abused discretion in relaxing and shifting
burden of proof as to whether royalty owners of natural gas
wells satisfied commonality requirement;”
– lease language
– marketable product
– vacated certification
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
Lindauer v. Williams Prod. RMT Co., No. 10CA0798
(Colo. App. Apr. 21, 2011) (unpublished)
– Class action
– Settlement: all but two issues
 gross proceeds leases
 enhanced value of gas
Lindauer v. Williams Prod. RMT Co., No. 10CA0798
(Colo. App. Apr. 21, 2011) (unpublished)
 “A provision in natural gas leases states that the
lessee will pay the lessors a percentage of the
‘gross proceeds’ from gas ‘used off the premises.’”
– Plaintiff: gross proceeds where sold
– Defendant: silent under Rogers
Lindauer v. Williams Prod. RMT Co., No. 10CA0798
(Colo. App. Apr. 21, 2011) (unpublished)
“In sum, we conclude that the term ‘gross proceeds’
as used in the leases here does not preclude
Williams from deducting reasonable costs to
transport gas on mainline transmission pipelines.”
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
In Mleynek et al. v. K.P. Kaufman Co., Inc., Case
No. 07-CV-3268 (D. Ct. Denver County, Colo. 2009),
the jury returned a verdict for defendant where the
class claimed that defendant breached the leases by
paying royalties on gas before it was in marketable
condition.
Lindauer v. Williams Prod. RMT Co., No. 06CV317,
Order Regarding Enhancement (D. Ct. Garfield
County, Colo., Jan. 21, 2014)
“The Court previously held that Williams could
deduct from the royalty payments the transportation
expenses it incurred to move gas downstream if
doing so enhanced the value of the gas.”
 Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding
Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014)
 Parties stipulated:
– Time period involved
– Average index price
– Gross price that Williams received
– Net price after deducting transportation
– Starting point for evaluating whether value enhanced
 The only issue remaining for the Court to determine is what
price should be used to make the comparison.
 Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order
Regarding Enhancement (D. Ct. Garfield County, Colo.,
Jan. 21, 2014)
 “The only issue remaining for the Court to
determine is what price should be used to make
the comparison.”
– Williams wants the Court to hold that Index minus 25
should be used.
– Plaintiffs want the Court to hold that the average index
price for each of the three pipelines as determined by
Platts should be used.
Lindauer v. Williams Prod. RMT Co., No. 06CV317,
Order Regarding Enhancement (D. Ct. Garfield
County, Colo., Jan. 21, 2014)
“The Court notes at the outset that there is no case
law in Colorado or elsewhere to assist the Court in
its determination. Counsel for both parties are
specialists in oil and gas law and if there was
anything out there, the Court is certain that they
would have brought it to the attention of the Court.”
Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding
Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014)
“The Court concludes that the evidence does not support using the
average index price as the comparison point to determine whether the gas
was enhanced. The index price includes markets outside of the Basin.
The average index price is not a fair reflection of the price Williams could
obtain for gas sold in the Basin. The evidence is that Williams could not
obtain the average index price in the Basin which is why the gas was sold
outside of the Basin. The Court finds that the average index price should
be adjusted to reflect what gas could sell for in the Basin. The Court
concludes that this price should be the index price minus 20 cents which
is what Mr. Killion testified the gas sold for in the Basin during the relevant
time period.”
 Dines v. Berry Petroleum Co., D. Ct. Denver
County, Complaint filed December 28, 2012
 Paragraph 11 Common Question:
 “2. Determining that royalties should be paid to Plaintiffs
and the Class on future Natural Gas production by Berry
Petroleum based on the proceeds received for the sale of
the Natural Gas at the commercial market, after such
Natural Gas has been gathered and processed at a
processing plant, and sold to third party purchasers and/or
delivered into a long distance transportation pipeline.”
 Gagon v. Merit Energy Co., D. Colo, Complaint filed March
21, 2014 (Colorado and Oklahoma wells)
 “35. Defendant underpays Plaintiffs and the Class in one or
more of the following ways, without limitation:
 “(b) Natural Gas Liquids (NGLs). Defendant: (i) fails to pay
royalty for all of the NGLs produced (some is lost and
unaccounted for and some is used in fuel during gathering
and/or processing); (ii) deducts processing fees and
expenses; (iii) and reduces payment by T&F all before
obtaining commercially marketable fractionated NGLs.
NGLs should be paid on a fully fractionated basis and only
on arm’s length sales.”
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
 The certification decision is a defining moment that
can “sound the ‘death knell’ of the litigation on the
part of plaintiffs, or create unwarranted pressure to
settle non-meritorious claims on the part of
defendants,” Kalow & Springut, LLP v. Commence
Corp., 272 F.R.D. 397, 401 (D.N.J. 2011)
 More cases may proceed to trial, particularly if
classes are of more limited scope.
Colorado appellate cases applying Rogers in class
certification setting.
 Colorado Supreme Court: None
– Washington Cnty. Bd. of Equalization v. Petron Dev.
Co., 109 P.3d 146, 154 (Colo. 2005) (“analogy between
this [taxation] case and Rogers misplaced”)
– Aloi v. Union Pac. R.R. Corp., 129 P.3d 999, 1004
(Colo. 2006) (cited for unrelated point)
 Colorado Court of Appeals: None published
Colorado Court of Appeals: 2 royalty cases on Westlaw; neither was a class action
Clough v. Williams Prod. RMT Co., 179 P.3d 32 (Colo. Ct. App. 2007)
Holdings: The Court of Appeals, Bernard, J., held that:
1 evidence of marketability of natural gas at wellhead prior to deregulation of industry was not relevant to
determining whether gas was marketable after deregulation;
2 separate jury instructions on bad faith and marketability did not mislead the jury;
3 trial court did not err in refusing to instruct the jury that natural gas leases at issue were silent on the
allocation of costs; and
4 evidence was sufficient to support jury's damages award of $4,091,561.30 for underpayment of royalties.
Savage v. Williams Prod. RMT Co., 140 P.3d 67 (Colo. Ct. App. 2005)
Holdings: The Court of Appeals, Hawthorne, J., held that:
1 marketability analysis was appropriate to determine allocations between parties;
2 determination when gas was marketable required consideration of specified factors;
3 sufficient evidence support finding that [gas] at wellhead was not marketable; and
4 lessee's failure to make counterclaim for taxes precluded deducting taxes.
BP Am. Prod. Co. v. Patterson, 263 P.3d 103 (Colo. 2011)
(does not cite Rogers; does not discuss lease language,
implied covenants)
Holdings: Upon grant of certiorari, the Supreme Court,
Martinez, J., held that:
1 common issues of fraudulent concealment regarding
production company's use of the netback methodology for
calculating royalty payments predominated over individual
issues of natural gas royalty owners, and
2 trial court did not abuse its discretion in certifying a class
extending from January 1, 1986 through December 1, 1997.
Patterson v. BP America Prod. Co., Case No: 03CY-9926, Denver D. Ct trial August 19 - September
4, 2013
– Claims for underpayment of royalty, fraudulent
concealment
– BP argued gas in marketable condition at the well
– Alleged damage approximately $23m for underpayment
– Jury verdict nearly $8m
– Plus over $32 million prejudgment interest (back to Jan.
1, 1986)
Jury Verdict reporter of Colorado (Dec. 2, 2013)
Fitzgerald v. Chesapeake Operating, Inc., Case No. 111,566
(Okla. App. Feb. 14, 2014)
 reversed certification of state-wide class
 cited Tenth Circuit’s XTO decisions, Wal-Mart
 “Our review of the record shows a class action is not the superior
method of adjudicating these claims due to two material questions
which will have to be proved individually: whether a particular lease
allows some or all GCDTP costs to be born by the royalty owners and
at what point the gas in a particular field or gathering system is
marketable (and therefore what GCDTP services and costs are
necessary and whether they may be passed on to the royalty owner).”
 Petition for Cert pending
Colorado:
 Dines v. Berry Petroleum Co., Denver D. Ct.,
Complaint filed Dec. 28, 2012
– Motion to Certify class filed March 3, 2014
 Gagon v. Merit Energy Co., D. Colo, Complaint
filed March 21, 2014 (Colorado and Oklahoma
wells)
With the intersection of implied covenants and class
treatment
 A Look Forward:
1. Litigation over the meaning of lease language
2. Litigation over the existence and scope of the implied
covenant (where is gas a marketable product)
3. New leases taking into account rulings
4. Litigation over class certification standards
5. Settlement
 future methodology?
 Settlement after certification:
– Mountain West Expl, Inc. v. Evergreen Resources, Las
Animas County (2002)
– Holman v. Patina Oil and Gas Corp., Weld County
(2007)
– Boulter v. Kerr-McGee Rocky Mtn. Corp., Denver
County (2005)
– Burkett, et al., v. Huber, et. al., LaPlata County (2005)
– Miller v. EnCana Oil and Gas (USA), Inc., Denver
County (2008) (with future methodology)
 Settlement after certification:
– Mountain West Expl, Inc. v. Evergreen Resources, Las
Animas County (2002)
– Holman v. Patina Oil and Gas Corp., Weld County
(2007)
– Boulter v. Kerr-McGee Rocky Mtn. Corp., Denver
County (2005)
– Burkett, et al., v. Huber, et. al., LaPlata County (2005)
– Miller v. EnCana Oil and Gas (USA), Inc., Denver
County (2008) (with future methodology)
Objection to future methodology in settlement:
“Part of the beauty of the existing covenants to
market contained in the leases is that they are
timeless and adapt to changing technologies and
changed ways of transporting and processing gas in
the future. In contrast, the Stipulation is rigid in its
application [and] expressly carves out exceptions on
what kind of deductions will be prohibited (e.g.
anything downstream of entry into a mainline).”
 Questions?