SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated

FILED
June 14, 2022
released at 3:00 p.m.
EDYTHE NASH GAISER, CLERK
Walker, J., dissenting, SUPREME COURT OF APPEALS
OF WEST VIRGINIA

The district court certified four questions to this Court, but we only need to

answer the first: whether Tawney is “still good law”? The answer is yes in the sense that

we have not yet overruled it, but no in the sense this Court wrongly decided it and its

predecessor Wellman. Five years ago when this Court decided Leggett, we highlighted the

flawed reasoning in Wellman and Tawney when we were “compelled to further illustrate

the faulty legs upon which [they] and [their] iteration of the marketable product rule

purports to stand.”1 Tawney was the next step in the illogical path blazed in Wellman, and

we should take this opportunity to overrule them both.

Before “deregulation,” oil and gas sales occurred at the wellhead. 2 After

deregulation, lessees started enhancing the “sour” gas removed from lessors’ property,

transporting it to an off-site location, and selling the “sweetened” gas for more than the

market value of the raw minerals. 3 We first addressed the effects of deregulation in

1
Leggett v. EQT Prod. Co., 239 W. Va. 264, 276, 800 S.E.2d 850, 862 (2017).
2
Id. at 271, 800 S.E.2d at 857.
3
Id. at 271-72, 800 S.E.2d at 858-59.

1
Wellman v. Energy Res., Inc.,4 which we later observed formed “the foundation of the

current state of West Virginia’s law on deduction of post-production costs.” 5 And as the

law stands under Wellman, lessees bear all post-production transportation and

enhancement expenses and pay royalty owners based on the proceeds of the enhanced

product. 6 So, because of Wellman, lessees compensate royalty owners for value beyond

the raw minerals that they own, unless they contract otherwise. 7 The Wellman Court

supported the default rule based on the implied covenant to market, but the decision appears

“to arise more from an unwillingness to accept the realities of deregulation in the natural

gas market than from implied covenant law.”8

Tellingly, the Wellman Court did not acknowledge the new industry

landscape wrought by deregulation. Instead, it focused on what it viewed as

4
210 W. Va. 200, 557 S.E.2d 254 (2001).
5
Leggett, 239 W. Va. at 272, 800 S.E.2d at 858 (citing Wellman, 210 W. Va. 200,
557 S.E.2d 254).
6
See Leggett, 239 W. Va. at 276-77, 800 S.E.2d at 862-63 (citation omitted).
7
Id.
8
Id. at 277, 800 S.E.2d at 863 (quoting 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, 170–71 (2014)).

2
 an attempt on the part of oil and gas producers in recent years
to charge the landowner with a pro rata share of various
expenses connected with the operation of an oil and gas lease
such as the expense of transporting oil and gas to a point of
sale, and the expense of treating or altering the oil and gas so
as to put it in a marketable condition.[9]

The Court blamed the trend on lessees’ efforts “[t]o escape the rule that the lessee must

pay the costs of discovery and production . . . [,]” 10 in other words, to escape the implied

covenant to market. Before Wellman, the implied covenant to market required that “the

lessee exercise reasonable diligence to market the products, defined as ‘whatever, in the

circumstances, would be reasonably expected of all operators of ordinary prudence, having

regard to the interests of both lessor and lessee.’” 11 Although the Wellman Court chose not

to acknowledge deregulation, one cannot ignore the obvious goal of the decision: to grant

the benefits of deregulation to lessors while shifting the burden to lessees. And Wellman

did that by removing the notion that lessees could regard their own interest and, instead,

expanded the implied covenant to market to require lessees to bear all expenses of

enhancing already discovered and produced minerals and compensate lessors based on the

9
Wellman, 210 W. Va. at 210, 557 S.E.2d at 264.
10
Id.
11
Leggett, 239 W. Va. at 272-73 n.12, 800 S.E.2d at 858-59 n.12 (quoting Rogers
v. Westerman Farm Co., 29 P.3d 887, 903 (Colo. 2001)).

3
value added post-production. The approach “[is] nothing more than a re-writing of the

parties’ contract to take money from the lessee and give it to the lessor.”12

Wellman based its interpretation of the implied covenant to market on a

section from a 1951 treatise that says

From the very beginning of the oil and gas industry 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. This practice
has, in recent years, been extended to situations where gas is
found . . . .[13]

But Wellman overlooked another section of the treatise that acknowledges that the implied

covenant to market does not extend to minerals sold off-site and that lessees should pay

royalties

equal to one-eighth (1/8) of the proceeds received by the
[l]essee from the sale of gas if measured and sold at the well,
but if not sold at the well but after transmission or commingling
with gas from other properties, then equal to one-eighth (1/8)
of the average prevailing price currently paid at the well in the
same field by public utility companies . . . .[14]

12
Leggett, 239 W. Va. at 277, 800 S.E.2d at 863 (quoting David E. Pierce, Royalty
Jurisprudence: A Tale of Two States 374 (2010)).
13
Wellman, 209 W. Va. at 210, 557 S.E.2d at 263 (quoting Robert Donley, The Law
of Coal, Oil and Gas in West Virginia and Virginia § 104 (1951)).
14
Donley, supra at § 159 (emphasis added).

4
It is not clear whether the parties in Wellman put the latter rule to the Court. But what is

clear is that the latter rule is the logical adaptation of the implied covenant to market in

view of deregulation’s realties. The Wellman Court looked past the realties, extended the

implied covenant to market to obligate lessees to cover expenses incurred after discovery

and production, and built our jurisprudence on faulty legs.

This Court compounded the flawed reasoning in Tawney v. Columbia Nat.

Res., L.L.C.15 There, the Court held that a lease must provide a “method of calculating”

post-production expenses if a lessee wishes to contract away Wellman’s expanded implied

covenant to market. 16 But no court should require parties to contract away an implied

covenant, much less impose a heightened burden for doing so. Instead, implied covenants

are merely gap fillers courts can use “to implement the parties[’] intentions where not

otherwise stated[.]” 17 As Petitioners put it, “[t]he fundamental legal flaw underlying

Wellman and Tawney is that they invert the roles of express contractual terms and implied

covenants.” So, when express terms state that parties will calculate royalties based on

15
219 W. Va. 266, 633 S.E.2d 22 (2006).
16
See Syl. Pt. 10, Id. at 266, 633 S.E.2d at 22.
17
Leggett, 239 W. Va. at 275, 800 S.E.2d at 861.

5
minerals’ value at the wellhead, courts should not supersede the express terms with an

implied covenant, which are “only justified on grounds of legal necessity” and should not

be at issue where express terms cover the point. 18 And by adding unprecedented

impediments to lessees’ freedom of contract—like creating an ambiguous “method of

calculating” requirement—it seems this Court doubts this State’s mineral owners’ ability

to contract for themselves. The heightened requirements undermine the basic underpinning

of contract law that “[i]t is not the right or province of a court to alter, pervert or destroy

the clear meaning and intent of the parties as expressed in unambiguous language in their

written contract or to make a new or different contract for them.” 19 In other contexts, this

Court has lamented impediments to contractual freedom and deemed the public policy to

outweigh countervailing policy concerns:

[Persons] of full age and competent understanding shall have
the utmost liberty of contracting, and . . . their contracts, when
entered into freely and voluntarily, shall be held sacred, and
shall be enforced by courts of justice. Therefore, you have this

18
See Id. (quoting Allen v. Colonial Oil Co., 92 W. Va. 689, 115 S.E.2d 842, 844
(1923)).
19
Syl. Pt. 3, Cotiga Dev. Co. v. United Fuel & Gas Co., 147 W. Va. 484, 128 S.E.2d
626 (1962).

6
 paramount public policy to consider,—that you are not lightly
to interfere with this freedom of contract.[20]

Next, the question is whether the principle of stare decisis limits our ability

to correct what I believe are the errors of the past. And this Court’s approach to precedent

supports correcting the flawed reasoning that started in Wellman and continued in Tawney.

As we have explained, stare decisis is flexible when this Court erroneously decided cases

or when an outmoded rule should not apply to changed circumstances:

Stare decisis is not a rule of law but is a matter of
judicial policy . . . . It is policy which promotes certainty,
stability and uniformity in the law. It should be deviated from
only when urgent reason requires deviation. However, stare
decisis is not an inflexible policy. In the rare case when it
clearly is apparent that an error has been made o[r] that the
application of an outmoded rule, due to changing conditions,
results in injustice, deviation from that policy is warranted.[21]

We follow the guidance of Supreme Court of the United States, which provided factors to

consider:

[1] the desirability that the law furnish a clear guide for
the conduct of individuals, to enable them to plan their affairs
with assurance against untoward surprise; [2] the importance

20
Wellington Power Corp. v. CNA Sur. Corp., 217 W. Va. 33, 38, 614 S.E.2d 680,
685 (2005) (quoting State v. Mem’l Gardens Dev. Corp., 143 W. Va. 182, 191, 101 S.E.2d
425, 430 (1957)).
21
Adkins v. Francis Hosp. of Charleston, 149 W. Va. 705, 718, 143 S.E.2d 154,
162 (1965) (internal citation omitted).

7
 of furthering fair and expeditious adjudication by eliminating
the need to relitigate every relevant proposition in every case;
and [3] the necessity of maintaining public faith in the judiciary
as a source of impersonal and reasoned judgments.[22]

In this instance, that nature of the certified questions from the district court

highlights the ambiguous and unworkable standards that Wellman and Tawney created.

The doctrine established by the cases is so unsound that courts cannot determine whether

the cases remain binding precedent or, much less, apply novel concepts like the “method

of calculating” requirement. And, here again, this Court refuses to answer the certified

question about what the unprecedented term of art means. Instead, the majority further

convolutes the doctrine by punting the question as if answering it may accidentally allow

lessees to contract away Wellman’s baseless default rule.

With such unclear and unfounded standards, it is impossible for lessees and

lessors to confidently plan their affairs, which leads to unneeded litigation. For example,

the parties to this case 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 marketed . . . .” In any other

Meadows v. Meadows, 196 W. Va. 56, 64, 468 S.E.2d 309, 317 (1996) (quoting
22

Moragne v. States Marine Lines, Inc., 398 U.S. 375, 403 (1970)).
8
context, there would be little room to dispute the unambiguous contract terms: the lessee

pays the lessor royalties based on the proceeds minus the listed expenses. But under

Wellman and Tawney’s novel standard, a dispute exists as to whether the express contract

terms crack Tawney’s undefined code to negate an implied covenant. We could remove

all confusion by wiping the slate clean of Wellman and Tawney and allowing parties to

govern their own affairs—as we do in other commercial relationships. We do not need to

protect parties from their own contracts.

For these reasons, I respectfully dissent.

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