IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 01-50632
_____________________
JACK D. STIRMAN;
BETH BLAKEMORE HUNTER,
Plaintiffs - Appellees,
versus
EXXON CORPORATION, ET AL.,
Defendant,
EXXON CORPORATION,
Defendant - Appellant.
_________________________________________________________________
Appeal from the United States District Court
for the Western District of Texas
_________________________________________________________________
February 1, 2002
Before JOLLY, SMITH, and BENAVIDES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
The plaintiffs in this class action case, John Stirman and
Beth Blakemore Hunter, allege that defendant Exxon Corporation
breached its lease obligations to them and to a class of similarly
situated individuals by violating an implied covenant to market the
natural gas and natural gas liquids (collectively, “natural gas”)
that were the subject of the leases. Exxon allegedly did so by
1
transferring the natural gas within its own divisions at a lower
price than the price realized in third party sales, causing the
royalty owners to receive lower royalty payments. The plaintiffs
moved for class certification and the district court twice denied
their motions, but in its second order called for an evidentiary
hearing on the matter. After the hearing, the district court
certified a class consisting of:
(1) All private persons and private entities who own or
owned royalty interests under leases located in the
continental United States,
(2) where Exxon Corporation is the lessee,
(3) the leases provide for payment of royalties on
natural gas production on an amount realized/net proceeds
basis or a market value/market price basis, and
(4) from which Exxon Corporation has produced natural gas
(including natural gas liquids) that was directly or
indirectly sold or transferred to Exxon Corporation or
within Exxon Corporation,
(5) during the time period July 14, 1995 through the
present (the “Class”).
Exxon filed a Petition for Permission to Appeal, which we granted.
We hold that the district court failed adequately to examine
whether the plaintiffs met all the requirements for class
certification under Federal Rule of Civil Procedure 23 (“Rule 23").
We REVERSE the certification order and REMAND for further
proceedings not inconsistent with this opinion.
I
Plaintiffs Stirman and Hunter are residents of Colorado.
Stirman is apparently not a member of the class, although his name
2
is still on the caption of this case.1 Hunter is a royalty
interest owner under a natural gas leasehold owned and/or operated
by Exxon. This suit was filed on July 14, 1999. The suit was
brought under diversity jurisdiction, and alleged breach of
contract and unjust enrichment, and sought an accounting. The
plaintiffs allege that Exxon breached an implied covenant to market
diligently the natural gas that is the subject of their leaseholds
and to obtain the highest price reasonably possible. Exxon
allegedly did so by transferring the gas purchased from the
plaintiffs within Exxon at lower prices than those it received in
third party sales. The plaintiffs also allege that Exxon lists
unreasonable and excessive charges and costs in its books, leading
to undervaluation of the gas and unreasonably low royalties. The
plaintiffs sought to certify a class of all current and former
owners of royalty interests on Exxon natural gas leases where any
subsidiary, affiliate, or division of Exxon markets or purchases
the natural gas. The putative class included royalty interest
owners in Alabama, Arkansas, California, Colorado, Florida, Kansas,
Louisiana, Mississippi, Montana, New Mexico, North Dakota,
Oklahoma, Texas, Utah, and Wyoming.
Hunter’s royalty interests arise from three separate 1934
leases, a 1938 Royalty Contract, and a Division Order. Her 1934
1
Plaintiffs’ counsel conceded at the hearing on class
certification that Stirman does not qualify as a member of the
class.
3
Port City Tract Mineral Lease provides for royalty payments based
on market value for gas sold or used off the premises, but for
royalty payments based on the amount realized from the sale of gas
sold at the wells. Another of her 1934 leases provides for
payments of gas royalties based on “the reasonable market value at
the wells of all gas produced or manufactured from said premises
and sold or used off said premises . . . .” However, the 1938
Royalty Contract contains a clause which the defendant’s expert,
Professor Bruce Kramer, testified could be held to modify any
implied covenant to market.2
In its initial order on February 24, 2000, the district court
found the plaintiffs met the requirements of Rule 23(a) for class
certification. These requirements are:
(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.
2
The clause states, in Section X of the 1938 Royalty Contract:
The extent to which Humble [the predecessor in interest
to Exxon] will be required to develop and operate said
land described in Exhibit “A”, hereto attached, and said
leases described in Exhibit “B”, hereto attached, is
expressly set out in this contract and in the original
leases, respectively, and no obligations are to be
implied on account of the royalties and overriding
royalties provided for in said deed and assignment of
even date herewith, and provided for in this contract, or
by reason of any other terms and provisions of said deed,
assignment, and this contract.
4
Fed. R. Civ. P. 23(a). The parties do not dispute the first
requirement, numerosity. According to the affidavit of John
Rockwell, the Litigation Coordinator for Exxon Mobil’s North
American Controller’s Ownership Group, Upstream Business Services,
Exxon has over 13,000 natural gas leases and 67,904 unique interest
owners who receive royalty and/or working interest owner payments.3
As to commonality, the district court stated:
Plaintiffs claim that Exxon Mobil engaged in a class-wide
course of conduct by failing to market gas in such a way
as to maximize the Plaintiffs’ returns. Whether or not
this conduct satisfied the “reasonably prudent operator”
standard is, as Plaintiffs argue, a common issue of fact
and law. The Court finds that commonality has been
satisfied.
Stirman v. Exxon Corp., No. SA-99-CA-0763 (W.D. Tx.), Feb. 24, 2000
Order at 2 (“February 24, 2000 Order”). Although the putative
class members had different types of leases, the district court
found that this did not destroy typicality, as all the asserted
claims would consist of the same basic legal elements (subject to
a finding that state law variations did not make class
certification infeasible). Id. at 2-3. The court determined that
counsel was qualified to represent the class, but did not address
whether Hunter and Stirman were themselves adequate class
representatives. Id. at 3. The court’s discussion of each of
these factors was brief.
Additionally, in order to maintain an action as a class
3
These numbers include leases with state and federal
government entities, which are not a part of the class.
5
action, the plaintiffs must qualify under one of the three prongs
of Federal Rule of Civil Procedure 23(b). The plaintiffs sought to
certify the class under 23(b)(3), which requires that “questions of
law or fact common to the members of the class predominate over any
questions affecting only individual members, and that a class
action is superior to other available methods for the fair and
efficient adjudication of the controversy.” The court found that
variations in individual leases and in applicable statutes of
limitation did not destroy commonality. However, the court found
that differences in the applicable law of the fifteen different
states where leases were held, as well as difficulties in
identifying individual class members and determining whether a
breach occurred in each case, could present problems. Accordingly,
the court did not yet find that common issues predominated, but
instead ordered more discovery on these issues. Id. at 5. The
district court did not address superiority.
After additional discovery, the plaintiffs again moved for
class certification. In its February 22, 2001 order, the district
court did not certify the class, but called for an evidentiary
hearing on whether class certification was appropriate given the
different state laws that could apply. In its order, the district
court stated that:
there is little serious question that an implied covenant
to market exists throughout the jurisdictions at issue,
unless the lease in issue expressly precludes that
conclusion. In addition, there seems to be a consensus
6
in the law that the standard to be applied in determining
whether such a covenant has been breached is the
reasonably prudent operator standard.
Stirman v. Exxon, No. SA-99-CA-0763 (W.D. Tx.), Feb. 22, 2001 Order
at 2 (“February 22, 2001 Order”). However, the court noted that it
had not reached a final determination on these issues. Further,
the court listed nine considerations raised by the defendant that
it found to be of concern and to require an evidentiary hearing
before resolution.4
At the evidentiary hearing, the plaintiffs offered the expert
testimony of John Tysseling, an economist familiar with the natural
gas industry. He testified that royalties are often calculated on
4
These issues were:
(1) whether the implied covenant [to market] is implied
in law or in fact; (2) whether parties may modify, by
agreement, the reasonably prudent operator standard; (3)
whether a covenant to market is equally applicable to
leases or division orders using the terms “net proceeds,”
“gross proceeds,” “market value,” or “prevailing market
price”; (4) whether any express terms in the documents at
issue negate the presence of an implied covenant; (5)
whether the implied covenant in a given jurisdiction
encompasses the duty the Plaintiffs seek to impose here;
(6) how, or if, the relevant market value is to be
determined; (7) whether the jurisdiction at issue has
statutory provisions for division orders and whether
those orders specify the calculation for royalty payments
and whether the terms of any division orders may change
the royalty calculation methodology specified in the
relevant leases; (8) whether a condition precedent must
be fulfilled prior to the filing of a lawsuit raising the
implied covenant to market; (9) the necessity of
conducting an individualized inquiry regarding Exxon’s
selling practices throughout the United states [sic] at
a single time.
February 22, 2001 Order at 2.
7
the basis of a field price index, which is an index of the value of
the gas measured at a point in the field near the wellhead, and
that this was how the price of the plaintiffs’ gas was calculated.
He added that this most likely does not represent the best price
reasonably available. Further, he did not believe that there would
be a need to analyze market value in each individual transaction,
because Exxon’s own computerized records would demonstrate the
price it paid for gas in third-party transactions, which would
represent a fair market value for the gas. He did admit that
particularized facts and circumstances, including different
geographic locations, might lead to different market valuations.
He also admitted that if state laws differed on whether Exxon could
deduct the costs of making gas marketable from royalty payments,
this would affect the price upon which royalties are calculated.
He stated that the computer records should be able to identify
sales of gas to Exxon affiliates, and would keep track of royalty
transactions.
They also offered the legal analysis of Professor Jacqueline
Weaver, professor of oil and gas law at the University of Houston.5
She argued that all oil and gas lessors are subject to the
reasonably prudent operator standard, and that in very few cases do
lessees attempt to lessen the burden of this standard by express
5
Prof. Weaver was originally retained by the plaintiffs as an
expert in this case, but by the time of the evidentiary hearing had
become one of the plaintiffs’ lawyers instead.
8
lease provisions. She also pointed to cases stating that an
implied covenant to market exists in both market value and proceeds
leases, and this includes the duty to obtain the best current price
reasonably available. Weaver also cited statutes from eight of the
states involved, which state that division orders cannot override
an oil and gas lease, and noted that the Howard Williams and
Charles Meyers Oil and Gas Law treatise concurred. The plaintiffs
also pointed to a law review article by Professor Kramer which
notes that a lessee has a duty to secure the highest price
obtainable for the gas being marketed.
The defendants called Professor Kramer, the revisor and editor
of the Williams and Meyers treatise since 1996, as an expert
witness. Contrary to Professor Weaver’s arguments, he stated that
the division order statutes were not uniform. Some do not address
the impact of a division order on an oil and gas lease, and
therefore the common law of the jurisdiction in question would
control the matter, which is often not clear. Some division order
statutes do not make it clear if they are retroactive or not. He
testified that the reasonably prudent operator standard applies
differently to different areas of operation of the lease, and that
different jurisdictions use different standards in defining this
term. Further, he stated that the highest court of each state has
not made clear that an implied covenant to market even exists in
each state. He testified that many factors go into calculating
9
market value, including geographic area, volume of gas, quality of
gas, point in time, and competition in the market, and that market
value can differ based on all of these.
On May 22, 2001, the district court issued an order certifying
a class in this case. The court implicitly found that there is an
implied covenant to market gas in a gas lease in each of the
relevant states. It further found that differences among the
jurisdictions as to whether an implied covenant to market was
implied in fact or implied in law are irrelevant, because what is
at issue here is whether Exxon violated the implied covenant to
market. Stirman v. Exxon Corp., No. SA-99-CA-0763 (W.D. Tx.), May
22, 2001 Order at 2 (“May 22, 2001 Order”). Further, although it
would be burdensome to determine if individual leases have express
clauses negating the implied covenant to market, the district court
found that, “with the assistance of a special master, [this] is not
an insurmountable challenge.” Id. The court found that there is
no serious question that the reasonably prudent operator standard
applies to the implied covenant to market in all the applicable
states, and that parties do not ordinarily draft express provisions
to avoid this standard. Id. at 3. According to the court, the
statutes in all the jurisdictions at issue “are uniform in the
effect that a division order does not alter the terms of a gas
lease, and that to the extent of any variance between a lease and
a division order, the lease prevails.” Id. The court found that
10
notice and demand were not a prerequisite to an action to recover
damages for breach of covenant. Id. at 4. Further, market value
could be determined from Exxon’s records of sales to third parties,
which ordinarily occur in large aggregated packages of gas. Id.
Although there might be some individual sales at the wellhead, the
court felt these would not be so numerous as to prevent class
certification. Id. The court therefore found that common legal
and factual issues would predominate, and certified the class.
II
We review the decision of a district court to certify a class
for abuse of discretion. Castano v. American Tobacco Co., 84 F.3d
734, 740 (5th Cir. 1996). However, that discretion must be
exercised within the framework of rule 23. Id., citing Gulf Oil
Co. v. Bernard, 452 U.S. 89, 100 (1981). “A district court must
conduct a rigorous analysis of the rule 23 prerequisites before
certifying a class.” Id., citing General Tel. Co. v. Falcon, 457
U.S. 147, 161 (1982); Applewhite v. Reichhold Chems., 67 F.3d 571,
573 (5th Cir. 1995). "Whether the district court applied the
correct legal standard in reaching its decision on class
certification, however, is a legal question that we review de
novo." Berger v. Compaq Computer Corp., 257 F.3d 475, 479 (5th
Cir. 2001), clarified on other grounds on denial of rehearing, 2002
U.S. App. LEXIS 579 (5th Cir. Jan 14, 2002) (per curiam), quoting
Allison v. Citgo Petroleum Corp., 151 F.3d 402, 408 (5th Cir.
11
1998). The party seeking certification bears the burden of
demonstrating that the rule 23 requirements have been met. Id.,
citing Horton v. Goose Creek Ind. Sch. Dist., 690 F.2d 470, 486
(5th Cir. 1982), cert. denied, 463 U.S. 1207; In re American
Medical Sys., 75 F.3d 1069, 1086 (6th Cir. 1996).
We first consider the district court’s analysis of the FRCP
23(a) requirements. The parties do not dispute that numerosity is
met, satisfying FRCP 23(a)(1). Exxon argues that there are not
common questions of law or fact, as required by 23(a)(2). We
address this contention in our discussion in Part III of whether
common issues of law or fact predominate.
Exxon also argues that Hunter’s claims are not typical of the
claims of the class, as required by 23(a)(3). We have stated that:
the test for typicality is not demanding. It focuses on
the similarity between the named plaintiffs' legal and
remedial theories and the theories of those whom they
purport to represent. Typicality does not require a
complete identity of claims. Rather, the critical
inquiry is whether the class representative's claims have
the same essential characteristics of those of the
putative class. If the claims arise from a similar
course of conduct and share the same legal theory,
factual differences will not defeat typicality.
James v. City of Dallas, 254 F.3d 551, 571 (5th Cir. 2001)
(citations and quotation marks omitted), petition for cert. filed,
70 U.S.L.W. 3194 (U.S. Sept. 17, 2001) (No. 01-475). The
plaintiffs allege that Exxon engaged in a similar course of conduct
with respect to each of them, i.e. the underpayment of royalties
based on breach of an implied duty to market. Hunter’s royalty
12
agreements provide for payments based on both market value and
actual proceeds bases. The Texas Supreme Court has recently held
that there is no implied covenant to market in market value leases,
as these have their own express covenant, though there is such an
implied covenant in proceeds leases. See Yzaguirre v. KCS
Resources, Inc., 53 S.W.3d 368, 373 (Tex. 2001). Therefore, in a
class action based on alleged breach of an implied covenant to
market, there cannot be typicality where there are both market-
value and proceeds leases included in the class, at least under
Texas law.6 Other states take different views of the implied
covenant to market, and some have not addressed whether such a
covenant exists (see Part III). Plaintiffs seem to rely on the
fact that Hunter, owning both market-value and proceeds-basis
leaseholds, is typical of the class. But the test is whether her
claims are typical, not whether she is. Given the differences
among the state laws, it cannot be said that Hunter’s claims are
“typical” of the class as it is currently defined, that is, to
include all leases.
Exxon also contests adequacy of representation under 23(a)(4).
“Rule 23(a)'s adequacy requirement encompasses class
representatives, their counsel, and the relationship between the
6
In an unpublished opinion, a Texas appeals court recently
decertified a class of oil and gas royalty interest owners which
included both market-value and proceeds leases, in the wake of
Yzaguirre. See Phillips Petroleum Co. v. Bowden, 2001 WL 1249995,
*1-*2 (Tex. App. 2001). Although this opinion was unpublished and
is not precedent, we agree with its reasoning.
13
two.” Berger, 257 F.3d at 479. We must consider “[1] the zeal and
competence of the representative[s'] counsel and ... [2] the
willingness and ability of the representative[s] to take an active
role in and control the litigation and to protect the interests of
absentees[.]” Id., citing Horton v. Goose Creek Indep. Sch. Dist.,
690 F.2d 470, 484 (5th Cir. 1982) (citations omitted). The
district court found plaintiffs’ counsel to be adequate, and Exxon
does not argue in its brief that they are not adequate. However,
the district court never addressed whether Hunter is herself an
adequate representative. Although the district court stated that
“no conflicts exist to preclude certification,” this is not a
sufficiently “rigorous” analysis to demonstrate that Hunter is an
adequate representative. For example, it is suggested that
Hunter’s leases differ from the leases of other class members.
Further, Hunter has already agreed to abide by the Texas statute of
limitations, even though this might cause other class members who
might live in other jurisdictions with longer statutes of
limitations to lose some of their claims. Therefore, because the
district court is required to conduct its own analysis to determine
if the rule 23 requirements are met,7 the district court erred by
7
Plaintiffs erroneously argue that “Exxon’s contention that
Ms. Hunter is an inadequate representative . . . was not raised
below and has therefore been waived.” Even if Exxon had stipulated
to certification, the court was bound to conduct its own thorough
rule 23(a) inquiry. “‘The purpose of this analysis is to protect
unknown or unnamed potential class members, and by definition those
people do not and cannot participate in any stipulations concocted
by the named parties.’” Berger, 257 F.3d at 480 n.8 (quoting
14
failing to consider Hunter’s adequacy.
III
We next consider the district court’s analysis under FRCP
23(b)(3). We first ask whether common questions of law or fact
predominate over individual questions. In Castano, the district
court certified a nationwide class under FRCP 23(b)(3), consisting
of nicotine-dependent persons who had bought and smoked cigarettes
manufactured by the defendants, as well as their estates and
relatives who were their heirs or survivors.8 We stated:
Hervey v. City of Little Rock, 787 F.2d 1223, 1227 (8th Cir.
1986)). The court has the duty to protect the constitutional, due
process rights of the absent class members. Id. at 481. The
district court made no findings as to Hunter’s adequacy; it only
concluded that Hunter’s counsel was adequate. Nor do the
plaintiffs seem to have submitted any evidence on this count.
There is reason to suspect that Hunter will not be an adequate
representative. “The adequate representation requirement overlaps
with the typicality requirement because in the absence of typical
claims, the class representative has no incentive to pursue the
claims of the other class members.” In re American Medical Sys.,
75 F.3d at 1083. Hunter has no incentive to fully litigate those
claims not applicable to her. Further, if one of her leases is
more valuable than the others, she has an incentive to litigate
claims relating to that lease over other claims.
Hunter may have already forfeited the rights of some class
members. She has offered to stipulate to Texas’s statute of
limitations and a four-year limit on seeking damages. Presumably,
some potential class members’ claims will be barred under such an
agreement.
8
Specifically, the class consisted of:
(a) All nicotine-dependent persons in the United States . . .
who have purchased and smoked cigarettes manufactured by the
defendants;
(b) the estates, representatives, and administrators of these
nicotine-dependent cigarette smokers; and
(c) the spouses, children, relatives and “significant others”
of these nicotine-dependent cigarette smokers as their heirs
15
In a multi-state class action, variations in state law
may swamp any common issues and defeat predominance . .
. . Accordingly, a district court must consider how
variations in state law affect predominance and
superiority . . . . A requirement that a court know
which law will apply before making a predominance
determination is especially important when there may be
differences in state law.
Castano, 84 F.3d at 741 (citations omitted). A cursory review of
state law variations is not sufficient. Id. at 742.
Here the district court did consider variations in state law,
and found them to not prevent class certification. However, this
analysis did not take into account significant variations in state
law that defeat predominance.
In order for common issues to predominate, each of the states
whose law is at issue must recognize an implied covenant to market,
which is the heart of this class action.9 An implied covenant to
market has been found generally in Arkansas,10 Colorado,11 Kansas,12
or survivors.
Castano, 84 F.3d at 737.
9
The relevant state laws must be uniform in other necessary
aspects as well, but here we address only the implied covenant to
market.
10
See Seeco, Inc. v. Hales, 22 S.W.3d 157, 180-81 (Ark. 2000)
(discussing implied covenant to market claim brought by plaintiffs,
and giving no indication that this was improper).
11
See Davis v. Cramer, 808 P.2d 358, 361 (Col. 1991) (en banc)
(“Embodied in the covenant to operate diligently and prudently is
the implied covenant to market.”)
12
See Smith v. Amoco Production Co., 31 P.3d 255, 257 (Kan.
2001); Gilmore v. Superior Oil Company, 388 P.2d 602, 606 (Kan.
1964) ("Kansas has always recognized the duty of the lessee under
16
Louisiana,13 Montana,14 and New Mexico.15 Oklahoma generally
recognizes an implied covenant to market,16 but does not always
recognize such a covenant on behalf of overriding royalty owners.17
In contrast, Colorado has allowed overriding royalty owners to sue
an oil and gas lease not only to find if there is oil and gas but
to use reasonable diligence in finding a market for the product.").
13
See Caskey v. Kelly Oil Co., 737 So.2d 1257, 1261 (La. 1999)
(Louisiana cases have recognized “the obligation to diligently
market the minerals discovered and capable of production in paying
quantities”).
14
See Severson v. Barstow, 63 P.2d 1022, 1024 (Mont. 1936)
(“Where, as here, the principal consideration for a lease is the
payment of royalty, the lease carries an implied covenant to use
reasonable diligence to market the product when produced, although
the lease is silent on the subject, and whatever is implied in a
contract is as effectual as what is expressed . . . .”).
15
See Libby v. De Baca, 179 P.2d 263, 265 (N.M. 1947) (a lessee
“must proceed with reasonable diligence, as viewed from the
standpoint of the reasonably prudent operator . . . to market the
product”).
16
See Crain v. Hill Resources, Inc., 972 P.2d 1179, 1181 (Okla.
Civ. App. 1998) (“An oil and gas lease may be terminated for breach
of the implied covenant to market the product.”); Gazin v. Pan
American Petroleum Corp., 367 P.2d 1010, 1012 (Okla. 1961), quoting
McVicker v. Horn, Robinson and Nathan, 322 P.2d 410, 411 (Okla.
1958) (“Where an oil and gas lease does not, in express terms,
provide for the marketing of the product of a well drilled on
leased land, any covenant on the part of the lessee to do this can
only be an implied one, in which instance said lessee has a
reasonable time, after completion of the well, to comply with such
covenant.”)
17
See XAE Corp. v. SMR Property Management Co., 968 P.2d 1201,
1202 (Okla. 1998) (“We hold that there is no implied covenant to
market applicable in this case because no obligation was undertaken
in the instrument creating the overriding royalty interest and
because the interest was an in-kind interest deliverable at the
wellhead.”)
17
based on an implied covenant to market.18 Texas recognizes an
implied covenant to market in proceeds leases, but not in market
value leases.19 In a case involving Utah oil and gas leases, the
Tenth Circuit stated that there is an implied covenant to market in
oil and gas leases.20 However, the Tenth Circuit did not cite any
Utah authorities for this proposition, and the Utah courts do not
seem to have addressed this issue. Finally, the Wyoming courts
seem to have recognized an implied covenant to market.21
Although the plaintiffs cited cases from the remaining
jurisdictions, these cases do not in fact demonstrate that there is
an implied covenant to market in these states. In Sheffield v.
Exxon Corp., 424 So.2d 1297, 1299-1300 (Ala. 1982), the lessors in
a number of oil and gas leases sued the lessees (various oil and
gas companies), alleging, in part, breach of implied obligations
reasonably to develop the subject premises and to protect against
18
See Rogers v. Westerman Farm Co., 29 P.3d 887, 902 (Colo.
2001); Garman v. Conoco, 886 P.2d 652, 657 (Colo. 1994).
19
See Yzaguirre v. KSC Resources, 53 S.W.3d 368, 374 (Tex.
2001).
20
See Phillips Petroleum Co. v. Peterson, 218 F.2d 926, 934
(10th Cir. 1954).
21
See Phillips v. Hamilton, 95 P. 846, 848 (Wyo. 1908) (“But
it is admitted in argument-and we think rightly so-that the lease
does contain an implied covenant that the work of prospecting and
development should continue, after the expiration of the year
within which the lessee was to commence operation, with reasonable
diligence. It is evident that the purpose of the lease was to
explore the premises, and, if oil or gas was found therein in
paying quantities, to produce and market the same for the mutual
benefit of both parties.”).
18
drainage. The court’s statements indicated that the reasonably
prudent operator standard applies to the implied covenant of
protection against drainage, but the court did not mention an
implied covenant to market. Id. at 1304. Hartman Ranch Co. v.
Associated Oil Co., 73 P.2d 1163, 1166 (Cal. 1937) stated that,
“[i]n the absence of express provisions, it is well settled that
covenants will be implied to use reasonable diligence in the
exploration and discovery of oil, and thereafter in the development
of the oil lease, and protection from drainage through wells on
adjoining land,” but did not discuss an implied covenant to market.
Welles v. Berry, 434 So.2d 982, 985 (Fla. App. 1983) discusses
implied covenants to exploit the land for oil and gas, but not an
implied covenant to market. See also Deerfield Rock Corp. v.
McClellan, 121 So.2d 822, 824 (Fla. App. 1960) (“in the absence of
an express provision designating the time for commencing and
performing mining operations, there arises an implied covenant to
begin the mining operations within a reasonable period of time and
to develop and work the mine in a proper manner and with reasonable
diligence.”). The Mississippi case that Hunter points to does not
discuss an implied covenant to market. See Phillips Petroleum Co.
v. Millette, 72 So.2d 176, 178-79 (Miss. 1954). Instead, the case
holds that the prudent operator rule is not applicable to suits for
recovery of drainage through a well drilled on an adjoining tract,
by a common lessee of one tract of land, although the lessee is
19
required to pay the lessor for his oil that is extracted. Id.
Ridl v. EP Operating Limited Partnership, 553 N.W.2d 784, 788 (N.D.
1996), discusses the prudent operator standard in the context of
the implied covenant of reasonable development of an oil and gas
lease, but not an implied covenant to market. This court has not
adduced any other authorities in these states that demonstrate that
they have recognized an implied covenant to market.
These differences in the law of the jurisdictions at issue
demonstrate that the law is not uniform as to any implied covenant
to market, or at least that the plaintiffs have not demonstrated
uniformity. The plaintiffs have not met their burden of showing
that there are common issues of law or fact, or that these
predominate over individual issues.
Additionally, the district court never considered whether a
class action is a superior method for adjudicating this
controversy. The district court must conduct a “rigorous analysis”
of the Rule 23 requirements, see Castano, 84 F.3d at 740. This was
not done in this case.
We therefore find that it was an abuse of discretion for the
district court to certify this class.22
22
Because we find that the plaintiffs have not demonstrated
that the law with respect to an implied covenant to market is
uniform among the fifteen jurisdictions in this case, we need not
address Exxon’s other arguments with respect to differences in
state law. However, on remand the plaintiffs would have to show
uniformity with respect to all relevant aspects of the states’
laws. We also need not address Exxon’s due process, Seventh
Amendment, Article III, and Rules Enabling Act arguments. Nor do
20
IV
For the foregoing reasons, we REVERSE the district court’s
certification of this class and REMAND for further proceedings not
inconsistent with this opinion.
REVERSED AND REMANDED.
we express any view regarding whether a different class structure
might be acceptable in this case.
21