Texas Supreme Court Makes Key Rulings in Royalty Class Action Litigation
Submitted by Michael Powell, Lock Lord Bissell & Liddell LLP

In Bowden v. Phillips Petroleum Company, decided February 15, 2008, the Texas Supreme Court made several significant rulings affecting royalty owner class action litigation.

The Court reaffirmed its prior holdings that class actions are subject to normal rules of res judicata. For suits based on oil and gas leases, the Court wrote: “If the class representatives do not assert at the trial court all claims for damages arising from the leases which could have been litigated before the trial court, the unasserted claims may be precluded by res judicata in subsequent litigation.”

In Bowden, the proposed class representatives limited the claims they asserted on behalf of the class to those based on the implied covenant to market. The representatives argued that the implied covenant is identical for each lease within which it arises. Thus, they contended, there were no individual questions arising from differing lease language that could create predominance or typicality issues. Phillips countered that the representatives’ willingness to subject other claims class members might have under their oil and gas leases to a res judicata bar rendered the representatives inadequate.

The Court held the proposed representatives’ decision to limit class claims did not render them per se inadequate. Nevertheless, the Court held that “[t]he choice of claims to pursue or abandon is one relevant factor in evaluating the requirements for class certification such as typicality, superiority, and adequacy of representation.”

The Court then addressed three subclasses of Phillips royalty owners the trial court had certified. Two of the subclasses were based on affiliate transaction claims. In one subclass, Phillips sold gas in the field to a marketing affiliate, which transported and sold gas to distant buyers. The class representatives limited their claims to “proceeds” leases and claimed Phillips breached the implied duty to market. The Court held that under the implied duty to market, the “task for the jury would be to determine the price a reasonably prudent operator would have received at the wellhead.” The Court reversed certification of this subclass, holding that variations in well locations, quality of production, and field regulations, among other factors, would require a well-by-well determination of such a price, thus defeating predominance.

In the second affiliate sales subclass, the trial court certified a class of royalty owners in wells from which Phillips sold gas to an affiliated processor under “percentage of proceeds” (“POP”) contracts. The class contended that the percentage split under the POP contracts was too favorable to the affiliated processor and resulted in decreased royalties. The Supreme Court reversed certification, holding that “[a] factual analysis of the circumstances surrounding each POP contract would be necessary to ascertain if the [POP percentage split] was reasonable,” and thus individual issues would predominate.

Finally, the Court affirmed certification of a subclass of Phillips royalty owners whose leases are subject to standard gas royalty clause amendments, called “Gas Royalty Amendments (“GRAs”), that Phillips used in the 1940’s and 1950’s. The trial court had concluded that the GRAs are ambiguous, yet still had certified the subclass. An intermediate Texas court of appeals had held the trial court abused its discretion by certifying the subclass based on the trial court’s conclusion that the GRAs are ambiguous. On this interlocutory appeal from class certification, the Texas Supreme Court proceeded to decide the substantive issue of whether the GRAs are ambiguous, and held they are not. The Supreme Court then interpreted the GRAs and announced how royalty must be calculated under Phillips’ GRAs.