Roco, Inc. v. Eog Res., Inc.

• Decision Date: 09 November 2016
• Docket Number: Case No. 14-1065-JAR-TJJ
• Parties: ROCO, INC. and SONYA SMITH, on behalf of themselves and all others similarly situated, Plaintiffs, v. EOG RESOURCES, INC. (including predecessors and successors), Defendant.
• Court: U.S. District Court — District of Kansas

ROCO, INC. and SONYA SMITH, on behalf of themselves and all others similarly situated, Plaintiffs, v. EOG RESOURCES, INC. (including predecessors and successors), Defendant.

Case No. 14-1065-JAR-TJJ

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

November 9, 2016

MEMORANDUM AND ORDER

Plaintiffs Roco, Inc. and Sonya Smith bring this lawsuit to recover underpaid royalties due on oil and gas wells operated by Defendant EOG Resources, Inc. Before the Court is Defendant's Motion for Summary Judgment as to Roco and Motion to Dismiss All Kansas Claims (Doc. 69). In conjunction with this motion, the Court also considers Roco's Motion to Strike Most of the Declaration of Alan Bates as Improper Opinion and Conclusory Testimony (Doc. 131), and Motion to Strike Most of the Declaration of Michael Cobb of DCP Midstream as Improper Opinion and Conclusory Testimony (Doc. 132). These motions are fully briefed after a period of discovery was provided under Fed. R. Civ. P. 56(d), and the Court is prepared to rule. As described more fully below, the Court denies Roco's motions to strike and grants in part and denies in part EOG's motion for summary judgment as to Roco.

I. Procedural and Factual History

This is a putative class action lawsuit removed to this Court on March 3, 2014, from the District Court of Seward County, Kansas, pursuant to the Class Action Fairness Act, 28 U.S.C. §§ 1446(b)(3), 1453(b). Roco, an alleged royalty owner in one well in Kansas formerly operated by EOG, and Smith, an alleged royalty owner in EOG-operated wells in Oklahoma, claim that EOG underpaid royalties on the gas wells by improperly taking deductions from royalty payments before the gas products were in marketable condition. Plaintiffs purport to bring their claims individually, and on behalf of a putative class of all royalty owners in EOG-operated wells in Kansas and Oklahoma from January 1, 1993, to present.

Natural gas must meet certain quality specifications before it can enter an interstate pipeline. Namely, it must undergo "midstream gathering and processing." EOG contracts with third parties to perform gathering and processing, and this case deals with how those midstream gathering and processing costs are shared, if at all, between EOG and Roco under the terms of the lease, and the implied duties that attach thereto. Roco alleges that EOG underpaid royalty owners by taking numerous volumetric and fee-based deductions before the gas products were in marketable condition that were not revealed on the royalty owners' check stubs. Each gas contract has some type of in-kind fee and some type of monetary fee to pay for the midstream Gathering, Compression, Dehydration, Treatment, and Processing ("GCDTP") services. Roco alleges that EOG paid royalty on the net, not gross, gas contract value, in breach of the marketable condition rule. Roco claims that EOG passed these midstream processing costs onto the royalty owners by entering into purported "sales" to third-party purchasers. Roco claims that these are not true purchases; the actual gas products cannot be sold until they enter the commercial market for the starting price of each gas product.

For these reasons, Roco maintains that EOG breached an implied covenant to place the gas and its constituent parts in "marketable condition" at EOG's exclusive cost, and that EOG breached the implied duty of good faith and fair dealing by entering into gas purchase agreements with third-party purchasers on paper only, thereby hiding the midstream processing costs that were passed on to the royalty owners. Part of Roco's claim is that EOG improperlydeducted the Kansas Conservation Fee, which the Kansas Supreme Court has held may not be shared with royalty owners.¹

The parties entered into a phased pretrial management plan; a Phase I Class Action Certification Scheduling Order was entered on April 25, 2014.² This Order, as amended, contemplated class certification discovery completed in July 2016, and the deadline for Plaintiffs to file a class certification motion was set for January 29, 2016.³ During this period, the parties exchanged a substantial amount of document discovery.

On October 28, 2015, before Plaintiffs had filed their motion for class certification, EOG moved for summary judgment based on a July 2, 2015 Kansas Supreme Court decision, Fawcett v. Oil Producers, Inc. of Kansas.⁴ That case squarely addresses the marketable condition rule as it applies to third-party purchase agreements similar to those EOG entered into in this case. Plaintiffs argued that the summary judgment motion was premature, and that they should not be required to respond until after the class certification motion is decided. Plaintiffs also sought leave to amend, in order to clarify certain facts, align the breach of lease allegations to the standards set forth in Fawcett, and add the claim that EOG improperly passed along the Kansas Conservation Fee to royalty owners. Magistrate Judge James granted Plaintiffs' motion for leave to amend, excusing its untimeliness in light of the Fawcett decision and the relatively early stage of this proposed class action. Judge James further determined that the motion for summary judgment was not premature; EOG was not precluded by the phased deadlines in this case from filing a dispositive motion. Both sides acknowledge the import of the Fawcett decision on theKansas claims in this case, and Judge James determined that whether summary judgment is appropriate as to the named Plaintiff under Fawcett should be decided before class certification. Judge James granted Roco additional time under Fed. R. Civ. P. 56(d) in order to conduct discovery necessary to oppose the summary judgment motion, setting a May deadline for the response. Roco had argued that it needed further discovery regarding the terms of EOG's third-party purchase agreements in order to discuss the implied duties implicated by the Fawcett decision. After the reply was filed, Roco sought leave to file a sur-reply, and moved to strike the declarations of Alan Bates and Michael Cobb that were attached to EOG's reply memorandum. The Court allowed Roco leave to file a sur-reply, and granted EOG's motion to file a sur-response. The parties have also filed notices of supplemental authorities since the briefs were filed. The Court has reviewed all of these pleadings and supplemental authorities in deciding the instant motions.

II. Summary Judgment Standard

Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.⁵ In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party.⁶ "There is no genuine issue of material fact unless the evidence, construed in the light most favorable to the nonmoving party, is such that a reasonable jury could return a verdict for the nonmoving party."⁷ A fact is "material" if, under the applicable substantive law, it is "essential to the proper disposition of the claim."⁸ An issueof fact is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the non-moving party."⁹

The moving party initially must show the absence of a genuine issue of material fact and entitlement to judgment as a matter of law.¹⁰ In attempting to meet this standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party's claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party's claim.¹¹

Once the movant has met this initial burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial."¹² The nonmoving party may not simply rest upon its pleadings to satisfy its burden.¹³ Rather, the nonmoving party must "set forth specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant."¹⁴ To accomplish this, the facts "must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein."¹⁵ Rule 56(c)(4) provides that opposing affidavits must be made on personal knowledgeand shall set forth such facts as would be admissible in evidence.¹⁶ The non-moving party cannot avoid summary judgment by repeating conclusory opinions, allegations unsupported by specific facts, or speculation.¹⁷

Finally, summary judgment is not a "disfavored procedural shortcut;" on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."¹⁸ In responding to a motion for summary judgment, "a party cannot rest on ignorance of facts, on speculation, or on suspicion and may not escape summary judgment in the mere hope that something will turn up at trial."¹⁹

III. The Fawcett Decision

As already mentioned, the instant motion for summary judgment is based almost entirely on the 2015 Fawcett decision by the Kansas Supreme Court. The parties vehemently dispute the scope of the court's holding in Fawcett, and how it applies to the facts of this case. EOG urges that under Fawcett, summary judgment is warranted as a matter of law, whereas Roco contends that Fawcett opens the door to genuine factual disputes about good faith. Both parties filed numerous evidentiary objections and motions to strike the summary judgment evidence. In order to consider these objections and determine the uncontroverted facts in this matter, the Court must first discuss its understanding of the Fawcett decision, and the degree to which it leaves open factual questions that may apply to Roco's breach of lease claim in this case.²⁰

Fawcett was a class action lawsuit alleging underpayment of royalties claimed under twenty-five oil and gas leases where the lessee-operator sold raw natural...