Jacklin Romeo, Susan S. Rine, and Debra Snyder Miller v. Antero Resources Corporation ( 2024 )

No. 23-589, Jacklin Romeo, Susan S. Rine, and Debra Snyder Miller v. Antero Resources
Corporation FILED
Walker, Justice, dissenting: November 14, 2024
released at 3:00 p.m.
C. CASEY FORBES, CLERK
SUPREME COURT OF APPEALS
OF WEST VIRGINIA
This certified question proceeding presents a new wrinkle to a perennial
problem: how to calculate the landowners’ royalty under the terms of a mineral lease. In
the underlying case before the district court, the plaintiffs allege that Antero Resources
Corporation breached their contracts by deducting post-production costs from their royalty
payments; this is one of the most contentious legal issues in the oil and gas industry. “On
one side of the spectrum is the established and majority ‘at the well’ approach, while on
the other is the minority ‘first marketable product’ approach.”1 Today, the majority of this
Court selects neither of those options and expands Wellman2/Tawney’s3 “point of sale”
requirement to (1) oil and gas processed and shipped to downstream locations as far away
1
William T. Silvia, Slouching Toward Babel: Oklahoma’s First Marketable
Product Problem, 49 Tulsa L. Rev. 583 (Winter 2013).
2
See Syl. Pt. 4, Wellman v. Energy Res., Inc., 210 W. Va. 200, 557 S.E.2d 254(2001) (“If an oil and gas lease provides for a royalty based on proceeds received by the
lessee, unless the lease provides otherwise, the lessee must bear all costs incurred in
exploring for, producing, marketing, and transporting the product to the point of sale.”).
3
See Syl. Pt. 10, Estate of Tawney v. Columbia Natural Res., 219 W. Va. 266, 633
S.E.2d 22 (2006) (“Language in an oil and gas lease that is intended to allocate between
the lessor and lessee the costs of marketing the product and transporting it to the point of
sale must expressly provide that the lessor shall bear some part of the costs incurred
between the wellhead and the point of sale, identify with particularity the specific
deductions the lessee intends to take from the lessor’s royalty (usually 1/8), and indicate
the method of calculating the amount to be deducted from the royalty for such post-
production costs.”).
1
as the Gulf Coast of Louisiana, and (2) enhanced byproducts such as natural gas liquids.
Because the majority’s holding expands the breadth of an already unsound rule, I
respectfully dissent. Oil and gas leases are contracts.4 And under West Virginia law,
contracts are to be interpreted to carry out the intent of the parties, as that intent is evidenced
by the contract’s language. I would have taken this opportunity to rewrite the certified
questions and overrule our holdings in Wellman/Tawney.
Tawney was a mistaken decision, an outlier on the day it was decided and
one that’s become lonelier with time. Its predecessor Wellman, also wrongly decided, set
the stage for what has become two decades of massive judicial revision of oil and gas leases
across our State. In Wellman, this Court addressed an action brought by the lessors seeking
damages for failure to pay proper royalties.5 Similar to the leases at issue here, the leases
in Wellman provided for natural gas royalties of “‘one-eighth (1/8) of the market value of
such gas at the mouth of the well[.]’”6 When resolving the question of whether or what
expenses were properly deductible, the Court acknowledged the split of authority regarding
deduction of post-production costs and the rationale of those states holding that post-
4
Ascent Res. - Marcellus, LLC v. Huffman, 244 W. Va. 119, 125, 851 S.E.2d 782,
788 (2020); see also Phillip T. Glyptis, Viability of Arbitration Clauses in West Virginia
Oil and Gas Leases: It Is All About the Lease!!!, 115 W. Va. L. Rev. 1005, 1007 (2013)
(“[A] lease is by definition a contract. All rights and protections are controlled by the
principles of contract law and depend on the proper construction.”).
5
Wellman, 210 W. Va. at 204, 557 S.E.2d at 258.
6
Id.2
production costs are not properly deductible from the lessor’s royalty.7 The Court noted
that under the implied covenant to market, the lessee embraces the responsibility to get the
oil or gas in marketable condition and actually transport it to market.8 Noting simply that
like other marketable product rule states, “West Virginia holds that a lessee impliedly
covenants that he will market oil or gas produced[,]” the Court concluded that “unless the
lease provides otherwise, the lessee must bear all costs incurred in exploring or, producing,
marketing, and transporting the product to the point of sale.”9
As I explained in my dissent in SWN Production Company, LLC v. Kellam,10
the weaknesses in Wellman’s reasoning are well-known. Simply stated, Wellman based its
interpretation of the implied covenant to market on a section from a 1951 treatise that says,
“it has been the practice to compensate the landowner by selling the oil by running it to a
common carrier and paying to [the landowner] one-eighth of the sale price received.”11
7
Id. at 210, 557 S.E.2d at 264.
8
Id.9
See note 1.
10
247 W. Va. 78, 99, 875 S.E.2d 216, 237 (2022) (Walker, J., dissenting).
11
Wellman, 209 W. Va. at 210, 544 S.E.2d at 263 (quoting Robert Donley, The Law
of Coal, Oil and Gas in West Virginia and Virginia § 104 (1951)).
3
But Wellman omitted another section of the treatise that acknowledges that the implied
covenant to market does not extend to minerals sold off-site.12
In Tawney, this Court compounded the faulty reasoning in Wellman and
found the lease’s “at the wellhead” language ambiguous because it was “imprecise” and
did not “indicate how or by what method the royalty is to be calculated or the gas is to be
valued.”13 Citing the “‘general rule as to oil and gas leases . . . that such contracts will
generally be liberally construed in favor of the lessor, and strictly as against the lessee,’”
the Court then construed the lease against the lessee and held that the “at the wellhead”
language was insufficient to allow deduction of post-production expenses.14 Tawney held
that a lease must provide a precise “method of calculating” post-production expenses if a
lessee wishes to contract away Wellman’s expanded implied covenant to market.15 But no
court should require parties to contract away an implied covenant, much less impose a
heightened burden for doing so. Rather, implied covenants are merely gap fillers courts
can use to achieve the parties’ intentions where not otherwise stated in the contract.
12
Kellam, 247 W. Va. at 98, 875 S.E.2d at 236 (Walker, J., dissenting).
13
Tawney, 219 W. Va. at 272, 633 S.E.2d at 28 (emphasis in original).
14
Id. at 273, 633 S.E.2d at 29 (quoting Syl. Pt. 1, Martin v. Consol. Coal & Oil
Corp., 101 W.Va. 721, 133 S.E. 626 (1926)).
15
See note 2.
4
All in all, Wellman and Tawney are problematic and academic commentators
have been unsparing in their criticism.16 For example, Byron C. Keeling has stated that
“Tawney remains a glaring example of an opinion that misapplies the ‘against the lessee’
rule of lease construction[,]” by not recognizing that the “against the lessee” rule is a rule
of last resort.17 Instead of applying the rule properly, Tawney, uses it to rewrite a “lease to
dictate a result that is contrary to its plain terms.”18 But it is not the province of this Court
to rewrite an oil and gas lease to reflect the Court’s view of a fair bargain. We certainly
16
See, e.g., John W. Broomes, Waste Not, Want Not: The Marketable Product Rule
Violates Public Policy Against Waste of Natural Gas Resources, 63 U. Kan. L. Rev. 149,
173-74 (2014) (“In both Wellman and Tawney, we see West Virginia’s unique approach to
the deductibility of post-production costs. . . . The more intriguing aspect of the West
Virginia rule is the manner in which it clings to pre-deregulation marketing practices. As
Professor David Pierce notes in his article, Royalty Jurisprudence: A Tale of Two States,
the treatise on which the West Virginia Supreme Court relied so heavily for its
pronouncement that West Virginia lessors traditionally received a cost-free royalty out of
the sale price was written in 1951 in the midst of the regulatory scheme imposed under the
Natural Gas Act of 1938, in which almost all sales of natural gas occurred at the wellhead.
Similarly, the Tawney court impugned the lessee, stating, ‘although some of the leases
below were executed several decades ago, apparently [the lessee] did not begin deducting
post-production costs from the lessors’ royalty payments until about 1993.’ As Pierce
observes, this change in the lessee’s accounting practices corresponded with the end of the
regulatory scheme in 1993. Accordingly, it seems that the West Virginia court failed to
consider the effects of regulation and deregulation on the sales and marketing practices of
lessees, assuming instead that historical practices from a bygone era of robust regulation
represent industry norms even in an unregulated market.”) (footnotes omitted).
17
Byron C. Keeling, Contra Proferentem in the Oilpatch? The “Against the Lessee”
Rule of Lease Construction, 9 LSU J. Energy L. & Res. 345, 372 (2021).
18
Id. at 375.
5
would not go to such extreme measures to rewrite contracts in any other context.19 Rather,
keeping with our commitment to freedom of contract, we do not add to or subtract from a
contract’s language or interpolate constraints.
As this Court stated in Leggett v. EQT Production Company,20 commentators
have noted that Wellman failed to recognize the variations in the first marketable product
doctrine from state to state and adopted yet another, broader version—the “point of sale
approach.”21 This results in an even bigger windfall for lessors than the already less
popular marketable product approach.22
So, the question is whether the principle of stare decisis limits our ability to
correct what I believe are unsound precedents. The majority sees no reason to “change
decades of law upon which thousands of people have relied in ordering their economic
19
When examining a contract in an employment dispute, this Court stated that:
“Our task is not to rewrite the terms of contract between the parties; instead, we are to
enforce it as written.” Fraternal Ord. of Police, Lodge No. 69 v. City of Fairmont, 196 W.
Va. 97, 101, 468 S.E.2d 712, 716 (1996). In the same fashion, we have held parties to a
contract dispute involving an insurance policy to the plain language in the policy and noted
that: “‘We will not rewrite the terms of the policy; instead, we enforce it as written.’” Auto
Club Prop. Cas. Ins. Co. v. Moser, 246 W. Va. 493, 500, 874 S.E.2d 295, 302 (2022)
(quoting Payne v. Weston, 195 W. Va. 502, 507, 466 S.E.2d 161, 166 (1995)).
20
239 W. Va. 264, 800 S.E.2d 850 (2017).
21
Id. at 273 n.13, 800 S.E.2d at 859 n.13.
22
Id. at 276, 800 S.E.2d at 862 (citing Byron C. Keeling & Karolyn King Gillespie,
The First Marketable Product Doctrine: Just What Is the “Product”?, 37 St. Mary’s L.J.
1, 77, 79 (2005)).
6
affairs.” I recognize that “[c]onsiderations in favor of stare decisis are at their acme in
cases involving property and contract rights[,]”23 but it is our duty to examine and overrule
prior decisions when they are legally unsound to avoid perpetuating the error. “The reason
that the rule of stare decisis was promulgated was on the ground of public policy, and it
would be an egregious mistake to allow more harm than good to accrue from it.”24 This
Court has stated that, “[n]o prior decision is to be reversed without good and sufficient
cause; yet the rule is not in any sense ironclad, and the future and permanent good to the
public is to be considered, rather than any particular case or interest.”25
Stare decisis does not compel unending adherence to Wellman/Tawney’s
abuse of judicial authority. The time has come for this Court to overrule those cases for
the permanent good of the public. This Court never should have resorted to judicial
revision of leases when, even from a basic viewpoint, their plain meaning indicated where
royalty calculations should occur. An unfortunate consequence of Wellman/Tawney’s
23
Payne v. Tennessee, 501 U.S. 808, 828 (1991). Even so, the Supreme Court of
the United States has recently overruled precedent where the Court’s shift threatened vast
regulatory and economic consequences. See Janus v. Am. Fed’n State, Cnty. & Mun.
Emps., 585 U.S. 878 (2018); id. at 952 (Kagan, J., dissenting) (noting that the Court’s
opinion called into question “thousands of . . . contracts covering millions of workers”);
South Dakota v. Wayfair, Inc., 585 U.S. 162, 186 (2018) (noting the “legitimate” burdens
that the Court’s overruling of precedent would place on vendors who had started businesses
in reliance on a previous decision).
24
Adkins v. St. Francis Hosp., 149 W. Va. 705, 719, 143 S.E.2d 154, 163 (1965)
(internal citation and quotation omitted).
25
Id.7
modification of the meaning of “at the well” lease clauses is that lessors receive benefits
that they do not necessarily deserve under the terms of the contract, at the producers’
expense. We cannot pretend to know how producers and royalty owners will respond if
this Court overturns Wellman/Tawney, but this uncertainty cannot guide our approach:
“And even if we could foresee what will happen, we would have no authority to let that
knowledge influence our decision. We can only do our job, which is to interpret the law,
apply longstanding principles of stare decisis, and decide this case accordingly.”26
The majority goes on to defend Wellman and Tawney by noting that the only
post-Tawney case in which this Court evidenced some support for the “industry’s attacks”
on them was Leggett—a case that dealt with West Virginia Code § 22-6-8 (a statute
offering certain protections for royalty owners who hold flat-rate leases27), that was
effectively overruled by the Legislature’s amendments to the statute.28 The majority
attempts to debunk Leggett’s criticism of Wellman/Tawney by devoting considerable
26
Dobbs v. Jackson Women’s Health Org., 597 U.S. 215, 292 (2022).
27
Flat-rate leases require the producer to pay the royalty owner a set royalty per
well, per year, whether that well produces oil and gas or not. In West Virginia Code § 22-
6-8, the Legislature provided certain protections for royalty owners who hold flat-rate
royalty leases, those “not inherently related to the volume of oil or gas produced or
marketed[.]” Id. at § 22-6-8(b). But the Legislature did not extend these statutory
protections to freely negotiated proceeds-based royalty leases.
28
While the majority asserts that Wellman’s holding was “reaffirmed” by the
Legislature’s post-Leggett amendments to West Virginia Code § 22-6-8, those
amendments are irrelevant to the issue before us. The statute does not apply to freely
negotiated proceeds-based royalty leases.
8
attention to Kellam’s criticism of Leggett. This endeavor is both telling and troubling. If
we look beyond the rhetoric of the majority’s indignation toward those who recognize the
weaknesses of Wellman/Tawney—two dissenting Justices in this case, a plurality of the
Court in Leggett, the dissenting Justice in Kellam, and several academic commentators—
we see that Kellam does nothing to advance the majority’s position because it exposes the
flaws of Wellman/Tawney.
In Kellam, the parties agreed that the lessee would pay the lessor royalties
based on the sale price “less any charges for transportation, dehydration, and compression
paid by the [the lessee] to deliver the oil, gas, and/or coalbed methane gas for sale.”29 So,
there should have been little room to dispute the unambiguous contract terms: the lessee
pays the lessor royalties based on the proceeds minus the listed expenses. But considering
Leggett’s criticism of Wellman/Tawney, along with their difficult requirements, the parties
disputed whether their contract terms cracked Tawney’s code to negate an implied
covenant. In Kellam, the district court certified two questions, asking whether Tawney was
still good law and whether the lease met its requirements. We answered the first question
in the affirmative but declined to answer the second question, stating that it presented a
29
Kellam, 247 W. Va. at 82, 875 S.E.2d at 220 (emphasis in original).
9
question of contract interpretation that could only be answered by examining the lease and
applicable principles of contract law.30
Kellam exposed the Gordian knot this Court created in Wellman/Tawney:
when those cases imposed unyielding discriminatory terms to “freely negotiated leases,”
traditional principles of contract interpretation were turned upside down, leaving
practitioners and courts with no clear direction. It is hard to imagine a more unworkable
rule. As I said in my dissent in Kellam, it’s time we untangle this knot; this Court should
“remove all confusion by wiping the slate clean of Wellman and Tawney and allow[] parties
to govern their own affairs—as we do in other commercial relationships. We do not need
to protect parties from their own contracts.”31
The majority also denies that its holdings extend the Wellman/Tawney
doctrine far beyond its original breadth, but they indisputably do. While the phrase “point
of sale” is pulled from Wellman/Tawney’s syllabus points, those syllabus points “must be
read in light of the opinion as a whole.”32 Wellman/Tawney dealt with oil and gas produced
and sold in a local basin, a vastly different fact pattern than the issue presented here. Antero
is processing the oil and gas and shipping it to downstream locations as far away as the
30
Id. at 90, 875 S.E.2d at 228.
31
Id. at 99, 875 S.E.2d at 237 (Walker, J., dissenting).
32
State v. McKinley, 234 W. Va. 143, 149, 764 S.E.2d 303, 309 (2014).
10
Gulf Coast of Louisiana, as well as enhancing it into byproducts such as natural gas liquids.
Antero’s costs of compression, dehydration, treating, gathering, processing, fractionation,
and transportation to move the raw oil and gas from the wellhead to downstream resale
locations are considerable post-production costs not contemplated in Wellman/Tawney.
West Virginia is the only jurisdiction in the country to adopt this “point of
sale” approach. When three members of the majority throw off restraints and set the law
on a drastic new course, it is prudent for us to question whether that power has been
exercised judiciously or whether it is instead another exercise in judicial activism.
Unfortunately, the majority has taken the latter approach in this decision which is the latest
in a series of patently wrong rulings in our oil and gas law. For this reason, I dissent.
11