In Bowden v. Phillips Petroleum Co., No. 03-0824 (Feb. 15, 2008), the Texas Supreme Court again addressed the propriety of class actions for gas royalty claims. The class affirmed the denial of two subclasses, but reversed the denial of a third subclass of royalty claimaints. The Court followed its prior holding in Yzaguirre in concluding that an “implied duty to market claim” is not susceptible to class treatment in a class containing both “market-value” and “proceeds” type leases. The Court also addressed the nature of the implied duties in oil and gas leases, whether the ambiguity of the underlying agreement precludes class treatment, and the extent to which class representatives may abandon individualized claims in order to preserve class treatment for common claims.
The Bowden case involved claims against Phillips Petroleum company in connection with its natural gas marketing through affiliate companies.
The first subclass involved gas sold from the Fort Bend and Brazoria county areas through an affiliate of Phillips at prices. Claimants argued that Phillips sold gas to its affiliate at below market prices, breaching its implied duty to market. The class was limited to leases containing a “proceeds” clause — in recognition of the Yzaguirre holding that the implied duty exists only in proceeds-type leases. The Court upheld the denial of class treatment. Among its reasons was its conclusion that the implied duty to market does not exist in all “proceeds” leases; specifically, it does not exist in those leases in which their is an explicit obligation of marketing. Second, the Court found that the proof of market value would require individualized determinations for different wells, in different locations, etc.
The second subclass involved royalty owners in the Panhandle region whose royalty was paid under identically worded Gas Royalty Agreements (“GRA”). The lower court had found that class treatment was inappropriate because the GRA was unambiguous, thus requiring individualized jury trials of intent between the parties. The Supreme court reversed, finding that the GRA was not ambiguous, thus susceptible of class-wide interpretation. This issue is significant because the Court strongly suggests that ambiguous contracts are not susceptible of class treatment.
The final subclass involved royalty owners, under a multitude of different form leases, whose gas was sold by Phillips to an affiliate under Percentage of Proceeds (“POP”) contracts, with the claimants asserting that Phillips failed in its implied “duty to manage and administer” the leases. The Court, however, concluded that the generalized implied duty to prudently manage is equivalent to the implied duty to market, which cannot be imposed upon a “market-value” lease. Thus, under its Yzaguirre holding, class treatment was inappropriate.
The Texas Supreme Court, through a series of rulings over the last several years, has made class certification of royalty claims difficult, and has typically found that individualized questions of intent and market value predominate over claims based on generalized duties implied in oil and gas leases. The Bowden case continues that trend, although it does explore the issues more closely and does indicate that, in the right circumstances, class treatment may be appropriate.