Farrar v. Mobil Oil Corp.

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No. 103,009

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

WILLIE JEAN FARRAR and KEITH FARRAR, as cotrustees of the KEITH FARRAR
REVOCABLE TRUST, dated October 22, 1999;
JOHN ELDON GREGG and KEITH THOMAS GREGG, as co-trustees of the MARIE GREGG
TRUST U/A, dated APRIL 26, 1979, as amended; and
THOMAS L. and PATRICIA A. LAHEY, individually and jointly,
Appellees,

v.

MOBIL OIL CORPORATION,
Appellant.


SYLLABUS BY THE COURT

1.
Applying K.S.A. 60-223(a), the threshold requirements for a class action in
Kansas are: (1) The number of class members is so large that joinder of all members is
impracticable; (2) the class claims present common questions of fact or law; (3) the
named parties' claims and defenses are representative of the claims and defenses of the
other class members; and (4) the class representatives will fairly and adequately protect
the interests of the class as a whole.

2.
In addition to the threshold requirements of K.S.A. 60-223(a), the certification of a
class under K.S.A. 60-223(b)(3) requires that the 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.

3.
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District courts have substantial discretion in deciding whether to certify a case as a
class action. Both state and federal class action rules require that a class should be
certified only after a rigorous analysis that the prerequisites of the applicable statute have
been satisfied.

4.
We review the certification of a class action for an abuse of discretion. A trial
court abuses its discretion if it fails either to evaluate carefully the legitimacy of the
plaintiffs' allegations and evidence supporting class treatment or to conduct a rigorous
analysis to determine whether the statutory prerequisites have been satisfied. An abuse of
discretion occurs when the trial court has gone outside the framework of legal standards
or statutory limitations or when it fails to properly consider the factors on that issue given
by the higher courts to guide the discretionary determination.

5.
Our Supreme Court has consistently applied the law of Kansas—not the law of
other states—to disputes requiring the construction and enforcement of oil and gas leases
on Kansas properties. Kansas has adopted lex rei sitae or the law of the situs of the lease
properties as the choice-of-law doctrine that should be applied in cases involving oil and
gas leases covering properties in Kansas.

6.
Courts in other oil and gas producing states likewise apply their own state law to
disputes regarding the payment of royalties on oil and gas produced from leases covering
lands located within their boundaries.


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7.
Under the facts of this case, the district court did not err in holding that the
doctrine of lex rei sitae governs the claims of the plaintiffs' class and in rejecting Mobil's
contention that a proper application of lex loci contractus would defeat the prerequisites
for maintenance of a class action because of the need to apply varying and disparate laws
of numerous states where the instruments were executed.

8.
For a state's substantive law to be selected in a constitutionally permissible
manner, that state must have a significant contact or significant aggregation of contacts,
creating state interests, such that the choice of its own law is neither arbitrary nor
fundamentally unfair.

9.
Whether the lessor's rights to royalty are technically classified as personalty or
realty, it is difficult to imagine a more intimate contact with Kansas than the construction
and enforcement of instruments that license the exploration of Kansas minerals.

10.
Under the facts of this case, we conclude that the allegations of the plaintiffs' class
implicate significant contacts with Kansas and there is no arbitrariness or unfairness in
the application of Kansas law in determining how the subject oil and gas leases should be
construed and enforced.

11.
Kansas has long recognized the duty of the lessee under an oil and gas lease not
only to explore for and develop oil and gas production but to use reasonable diligence in
finding a market for the product. The implied obligation is to market the produced
minerals at reasonable terms within a reasonable time following production.
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12.
Smith v. Amoco Production Company, 272 Kan. 58, 31 P.3d 255 (2001), is
discussed and distinguished.

13.
Under the facts of this case, where a purported class action claims improper
deductions in calculating royalties under oil and gas leases, there is no need for
individualized examination of lease formation or the intent of the parties thereto for
purposes of determining predominance of common issues or manageability in
certification proceedings where there has been shown a systemic common course of
conduct by an oil and gas lessee in calculating royalties payable pursuant to leases to
explore and develop Kansas minerals.

14.
Because class action certification is discretionary with the trial court, the class
may be altered, expanded, subdivided, or abandoned as the case develops. Class actions
may be amended, limited, or subclasses of plaintiffs may be established if needed.

Appeal from Stevens District Court; TOM R. SMITH, judge. Opinion filed June 11, 2010.
Affirmed.

Shannon H. Ratliff, of Ratliff Law Firm, P.L.L.C., of Austin, Texas, and Richard C. Hite and
Arthur S. Chalmers, of Hite, Fanning, & Honeyman, L.L.P., of Wichita, for appellant.

David G. Seely, Thomas D. Kitch, Gregory J. Stucky, Charles E. Millsap, and Daniel E.
Lawrence, of Fleeson, Gooing, Coulson & Kitch, L.L.C., of Wichita, and Erick E. Nordling, of Kramer,
Nordling & Nordling, LLC, of Hugoton, for appellees.

Before RULON, C.J., GREENE, J., and LARSON, S.J.
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GREENE, J.: ExxonMobil Oil Corporation, formally Mobil Oil Corporation
(Mobil), appeals the district court's certification of a class action against it by Mobil's oil
and gas lessors of Kansas minerals within the Hugoton Field, or by the successors in
interest to such lessors, alleging breach of express and implied covenants by Mobil in the
purported improper deduction of expenses from the payment of royalties to lessors.
Mobil contends the district court abused its discretion in certifying a class because it
failed to rigorously analyze the requirements of K.S.A. 60-223, that choice-of-law issues
and variations in the circumstances surrounding execution of individual leases defeat the
predominance of any common issues of law or fact, and that these individual issues
would make management of a class action difficult if not impossible. Concluding there
was no abuse of discretion by the district court, we affirm the class certification and
remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs initially sought to certify a class action on behalf of interest owners of
minerals burdened by 1,200 leases on acreage within the areal extent of the Kansas
Hugoton Field, whose gas flowed through the Bushton gathering system owned by
ONEOK. The action alleged that Mobil had breached express and implied contractual
obligations by deducting from royalty payments a pro-rata portion of the amount paid by
Mobil to ONEOK for services necessary to gather the gas and transport it to the
processing plant. These claims were expanded 3 years later to include claims of the
additional mineral interest owners whose gas flowed through the Jayhawk Plant on the
Hickok gathering system owned by Mobil. Counsel indicated at oral argument that the
scope of the litigation now involves approximately 2000 leases and more than 5000
potential class members.

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After Mobil's attempts to remove the action to federal court failed, discovery was
conducted, the certification issue was joined, and the district court conducted an
evidentiary hearing. Following posttrial submissions from the parties, the court entered
its 21-page journal entry certifying a class action under K.S.A. 60-223(b)(3) and defining
the class as:

"'All persons or concerns owning mineral interests in lands located in the areal confines
of the Kansas Hugoton Gas Field, burdened by oil and gas leases owned in whole or in
part by defendant insofar as such leases are productive of gas from above the base of the
Panoma Council Grove Field, the gas from which has been subject to the Gathering
Agreement, including the instrumentalities of the United States of America and federally
chartered corporations, such as, but not limited to, the Farm Credit Bank of Wichita and
the Federal Land Bank, but excluding the United States of America insofar as its mineral
interests are managed by the Mineral Management Service.'"

On September 1, 2009, Mobil filed its application with this court to take an
interlocutory appeal pursuant to K.S.A. 60-223(f). This court granted the application and
stayed the district court proceedings pending resolution of this interlocutory appeal.
Mobil then timely filed its notice of appeal.

STANDARDS FOR CLASS CERTIFICATION AND APPELLATE REVIEW THEREOF

There are four statutory threshold prerequisites to bringing a class action in
Kansas. A class action is only proper if (1) the number of class members is so large that
joinder of all members is impracticable; (2) the class claims present common questions of
fact or law; (3) the named parties' claims and defenses are representative of the claims
and defenses of the other class members; and (4) the class representatives will fairly and
adequately protect the interests of the class as a whole. K.S.A. 60-223(a). In shorthand,
the threshold elements are identified as "(1) numerosity, (2) commonality, (3) typicality,
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and (4) adequacy of representation." Dragon v. Vanguard Industries, Inc., 277 Kan. 776,
778, 89 P.3d 908 (2004) (Dragon I).

In addition to meeting all the threshold elements, a putative class plaintiff must
establish that a class action is maintainable under one of the three provisions of K.S.A.
60-223(b). Here, plaintiffs rely on the criteria of K.S.A. 60-223(b)(3), which state:

"[T]he court finds that the 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 matters pertinent to the findings include: (A) The interest of the
members of the class in individually controlling the prosecution of defense of separate
actions; (B) the extent and nature of any litigation concerning the controversy already
commenced by or against members of the class; (C) the desirability or undesirability of
concentrating litigation of the claims in the particular forum; (D) the difficulties likely to
be encountered in the management of a class action." (Emphasis added.)

Mobil's primary contentions focus on whether the common issues predominate
over the individual issues framed by variations in applicable state law and by the
individualized examination of lease formation. The predominance inquiry of Rule
23(b)(3) of the Federal Rules of Civil Procedure, which parallels K.S.A. 60-223(b)(3),
tests whether proposed classes are sufficiently cohesive to warrant adjudication by
representation, a standard "far more demanding" than the commonality requirement of
Fed R. Civ. Proc. 23(a). Amchem Products, Inc. v. Windsor, 521 U.S. 591, 623-24, 138 L.
Ed. 2d 689, 117 S. Ct. 2231 (1997). Thus, predominance "require[s] more than a common
claim." Newton v. Merrill Lynch, Pierce, Fenner & Smith, 259 F.3d 154, 187 (3d Cir.
2001).

Mobil also challenges the manageability of the action as a class action. The other
prong under subsection (b)(3), "[c]ommonly referred to as 'manageability,' . . .
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encompasses the whole range of practical problems that may render the class action
format inappropriate for a particular suit." Eisen v. Carlisle & Jacquelin, 417 U.S. 156,
164, 40 L. Ed. 2d 732, 94 S. Ct. 2140 (1974). The superiority requirement insures that no
other available method of handling the claims has greater practical advantages. See In re
Univ. Serv. Fund Tel. Billing Practices Lit., 219 F.R.D. 661, 679 (D. Kan. 2004) (obvious
alternative of individual suits by each plaintiff would be grossly inefficient, costly, and
time consuming because the parties, witnesses, and courts would be forced to endure
unnecessarily duplicative litigation).

District courts have substantial discretion in deciding whether to certify a case as a
class action. Dragon I, 277 Kan. at 779. Both state and federal class action rules require
that a class should be certified only "'after a rigorous analysis, that the prerequisites of
[the statute] have been satisfied.'" Dragon I, 277 Kan. at 780 (quoting General
Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160-61, 72 L. Ed. 2d 740, 102 S.
Ct. 2364 [1982]). In conducting this "rigorous analysis," the district court may be
required to look behind the plaintiffs' pleadings before resolving the certification
question. The factual inquiry, however, does not require an actual determination of the
merits of the plaintiffs' claims. Dragon I, 277 Kan. at 781; see In re Univ. Serv., 219
F.R.D. at 679.

We review the certification of a class action for an abuse of the discretion as
outlined above. A trial court abuses its discretion if it fails either to evaluate carefully the
legitimacy of the plaintiffs' allegations and evidence supporting class treatment or to
conduct a rigorous analysis to determine whether the statutory prerequisites have been
satisfied. See Dragon I, 277 Kan. at 779-81. An abuse of discretion occurs when the trial
court goes outside the framework of legal standards or statutory limitations or fails to
properly consider the factors given by the higher courts to guide the discretionary
determination. Dragon v. Vanguard Industries, 282 Kan. 349, 354, 144 P.3d 1279 (2006)
(Dragon II).
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SUMMARY OF CHALLENGES TO THE DISTRICT COURT'S CLASS CERTIFICATION

Mobil's challenge to the district court's class certification order is multifaceted.
Mobil initially argues the district court "ignores the Kansas Supreme Court's directives in
Dragon I and Dragon II by failing to hold Plaintiffs to their burden," by shifting that
burden to Mobil, and by failing to perform a rigorous analysis of the predominance and
manageability elements.

More specifically, Mobil claims that the district court's apparent application of lex
fori—the law of the forum—as the choice of law is contrary to Kansas caselaw because
the subject royalty interests are governed by leases executed in many states, and the
application of the law of the forum is unconstitutional as "to a nationwide class's claims."
Moreover, Mobil argues that when the proper choice-of-law doctrine of lex loci
contractus is considered, a host of legal questions framed by the action will be subject to
various state laws, thus demonstrating that common questions of law do not predominate.

Additionally, Mobil claims that a proper reading of Smith v. Amoco Production
Company, 272 Kan. 58, 75-76, 31 P.3d 255 (2001), means that implied covenants in oil
and gas leases are implied in fact and not in law, thus requiring "an examination of the
lease and its amending documents and the facts and circumstances surrounding these
documents' execution" in order to determine whether the parties reached "the unspoken
agreement specifically alleged." Thus, Mobil suggests that its duty to each purported
class member is dependent upon an individualized factual inquiry "governed by
thousands of leases and amending documents with materially different royalty clauses
that were executed at various times under varying circumstances."

In summary and for purposes of our analysis, we address two major concerns in
this appeal: (1) Did the district court abuse its discretion in failing to consider the proper
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choice-of-law doctrine and would application of the proper doctrine create such diversity
of legal issues that statutory prerequisites for a class action would be defeated? and (2)
Did the district court abuse its discretion in misconstruing controlling caselaw governing
implied covenants of the oil and gas leases and would a proper construction and
application of such caselaw result in a myriad of individualized factual inquiries that
would inevitably defeat the statutory prerequisites for a class action?

DID THE DISTRICT COURT ABUSE ITS DISCRETION IN FAILING TO CONSIDER THE PROPER
CHOICE-OF-LAW DOCTRINE FOR THIS LITIGATION?

Mobil contends the district court erred in addressing the choice-of-law issues
raised in this case. Mobil argues that the district court improperly applied a lex fori
approach to resolving the conflicts issue, which it claims is inconsistent with Kansas law.
Further, Mobil contends such an application of lex fori to every class member's claim
would be unconstitutional and that Kansas law requires the application of the lex loci
contractus principle adopted by Kansas in some class actions framing contract disputes,
requiring the application of the law where each lease was finalized. In a conflict-of-law
situation, the determination of which state's law applies is a question of law over which
this court has unlimited review. Foundation Property Investments v. CTP, 37 Kan. App.
2d 890, 894, 159 P.3d 1042 (2007), aff'd 286 Kan. 597, 186 P.3d 766 (2008).

The district court's findings and conclusions as to the proper choice of law
included the following:

"The Kansas Supreme Court has applied Kansas Law to oil and gas leases located in
Kansas, regardless of where they were executed. Phillips Petroleum Co. v. Shutts, 472
U.S. 797, 815, 105 S.Ct. 2965, 2976, 86 L.Ed.2d 628 (1985) ('Shutts II'); Shutts v.
Phillips Petroleum Co., 240 Kan. 764, Syl. ¶ 4, 732 P.2d 1286 (1987) ('Shutts III');
Sternberger v. Marathon Oil Co., 257 Kan. 315, 322, 894 P.2d 788 (1995). This practice
is consistent with established law.
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. . . .
"3. Mobil and its royalty owners under Kansas leases have previously applied
Kansas Law when resolving royalty payment disputes between them. Lightcap v. Mobil
Oil Corp., 221 Kan. 448, 562 P.2d 1 (1977); Matzen v. Cities Service Oil Co., 233 Kan.
846.
. . . .
"5. Mobil does not claim to have applied the law of any state other than Kansas
when deciding how to pay its royalty owners for gas produced in Kansas.
"6. Mobil has admitted that Kansas law applies to this case.
"7. Mobil's expert who conducted a random review of Mobil's lease files saw no
evidence among Mobil's documents to indicate that it applied non-Kansas law to the
administration of its leases.
"The Court has carefully considered Mobil's position regarding choice of law,
and finds that allowing this case to proceed as a class action will not result in the
predominance of individual issues, nor render the case unmanageable."

The District Court's Choice-of-Law Selection

Mobil's argument here borders on disingenuous. Although Mobil has characterized
the district court's choice of law as lex fori, it is clear to this court that the choice-of-law
doctrine selected and applied by the district court was lex rei sitae—the law of the place
where the property is situated. Our Supreme Court has consistently applied the law of
Kansas to disputes requiring the construction and enforcement of oil and gas leases
covering Kansas real estate. In Smith, 272 Kan. 58; Sternberger v. Marathon Oil Co., 257
Kan. 315, 894 P.2d 788 (1995); Shutts, v. Phillips Petroleum Co., 240 Kan. 764, Syl. ¶ 4,
732 P.2d 1286 (1987) (Shutts III); Matzen v. Cities Service Oil Co., 233 Kan. 846, 667
P.2d 337 (1983); and Lightcap v. Mobil Oil Corporation, 221 Kan. 448, 562 P.2d 1
(1977), there were not any serious contentions made that any other state's law rather than
Kansas law should govern the resolution of disputes involving oil and gas leases covering
Kansas properties, and our Supreme Court either impliedly or expressly held that the law
of the situs of the lease properties (lex rei sitae) should be applied in such cases. See also
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Wortman v. Sun Oil Co., 241 Kan. 226, 232, 755 P.2d 488 (1987), aff'd, 486 U.S. 717,
100 L. Ed. 2d 743, 108 S. Ct. 256 (1988) (regarding statute of limitations application). In
fact, the only occasion where our Supreme Court seems to have applied lex fori to a
dispute such as this, Shutts v. Phillips Petroleum Co., 235 Kan. 195, 221-22, 679 P.2d
1159 (1984), the United States Supreme Court reversed the court on its choice-of-law
doctrine in favor of the determination that the "laws of the States where the leases were
located" should be applied. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 815-23, 86 L.
Ed. 2d 628, 105 S. Ct. 2965 (1985).

Application of the lex rei sitae choice of law to resolve disputes in the construction
and enforcement of oil and gas leasehold interests is not unique to Kansas. Courts in
other oil and gas producing states apply lex rei sitae to disputes regarding the payment of
royalties on oil and gas produced from leases covering acreage located within their
boundaries. See, e.g., Exxon Mobil v. Ala. Dept. of Conservation, 986 So. 2d 1093 (Ala.
2007); SEECO, Inc. v. Hales, 22 S.W.3d 157 (Ark. 2000); Atlantic Richfield Co. v. State,
214 Cal. App. 3d 533, 262 Cal. Rptr. 683 (1989), rev. denied, December 14, 1989;
Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994); Duhe v. Texaco, Inc., 779 So. 2d
1070 (La. App.), writ denied 791 So. 2d 637 (La. 2001); Schroeder v. Terra Energy, 223
Mich. App. 176, 566 N.W.2d 887 (1997), appeal denied 458 Mich. 863 (1998); Darr v.
Eldridge, 66 N.M. 260, 346 P.2d 1041 (1959); West v. Alpar Resources, Inc., 298
N.W.2d 484 (N.D. 1980); Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla.
1998); Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996); Flying
Diamond Oil v. Newton Sheep Co., 776 P.2d 618 (Utah 1989); Wellman v. Energy
Resources, Inc., 557 S.E.2d 254 (W. Va. 2001); Cabot Oil & Gas Corp. v. Followill, 93
P.3d 238 (Wyo. 2004).

Mobil argues that in contract cases Kansas courts have generally applied the rule
of lex loci contractus—the law of the place where the contract was made controls. See
Dragon I, 277 Kan. at 784; Novak v. Mutual of Omaha Ins. Co., 29 Kan. App. 2d 526,
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534-35, 28 P.3d 1033, rev. denied 272 Kan. 1419 (2001); see also Wilkinson v. Shoney's,
Inc., 269 Kan. 194, 209-13, 4 P.3d 1149 (2000) (determining where contract was made);
Restatement (First) of Conflicts of Law § 332 (1934). The Kansas courts, on a few
occasions, also have applied the law of the place of contract performance in determining
issues related to performance of the contract. See Sykes v. Bank, 78 Kan. 688, 689-90, 98
P. 206 (1908) (in determining whether promissory note was negotiable, law of place of
performance governs); Aselco Inc. v. Hartford Ins. Group, 28 Kan. App. 2d 839, Syl. ¶ 7,
21 P.3d 1011, rev. denied 272 Kan. 1417 (2001) (applying law of place of performance to
decide whether insurer had a duty to defend).

In support of its contention that lex loci contractus is the proper choice-of-law
principle to apply in a case requiring the construction and enforcement of oil and gas
leases, Mobil cites Roberts v. Chesapeake Operating, Inc., 426 F. Supp. 2d 1203 (D.
Kan. 2006), and a line of other cases including Sidwell Oil & Gas Co. v. Loyd, 230 Kan.
77, 630 P.2d 1107 (1981). Mobil also cites Coral Prod. Corp. v. Central Resources, 273
Neb. 379, 730 N.W.2d 357 (2007), a Nebraska oil and gas case applying lex loci
contractus.

Mobil's reliance on these cases is not persuasive. First, while Roberts cited the lex
loci contractus rule in a case where mineral estate owners sued for additional royalties on
Kansas leaseholds, that language is mere dicta. After citing the lex loci contractus rule,
the federal district court in Roberts noted that the parties failed to provide any facts as to
where the contract was formed and both parties agreed in the pretrial order that Kansas
contract law should govern; accordingly, the court did not determine where the contract
was formed and simply applied Kansas law by default. 426 F. Supp. 2d at 1206-07.

Mobil's reference to Sidwell also is unhelpful. Sidwell and the other cases cited by
Mobil merely applied general contract principles to oil and gas leases, but none of these
cases involved choice-of-law issues. Thus, they do not undermine Shutts III or
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Sternberger as to which choice-of-law principles apply when litigation frames issues
surrounding construction and performance of oil and gas leases covering Kansas acreage.

Mobil's citation to Coral Production, 273 Neb. 379, also provides little assistance
to Mobil's arguments. Coral Production involved a dispute between various oil
companies that were fractional interest owners of oil and gas interests and focused on the
parties' rights to purchase assets of the lease operator. One party argued Nebraska law
should apply because the case involved eventual ownership in real estate in Nebraska.
The court held the dispute involved the meaning and construction of an operating
agreement which "'"normally is not intended to affect the ownership of the minerals or
the rights to produce."' [Citation omitted.]" 273 Neb. at 389-90. In the same opinion,
however, the court recognized under its own precedent that oil and gas leases have many
of the same components as real estate interests and that an interest in an oil and gas lease
is an interest in real property to the extent that it grants the lessee the right to remove
minerals from the land. 273 Neb. at 389. Thus, Coral Production does not support
Mobil's arguments.

Indeed, Mobil admitted in answers to interrogatories that Kansas law was a
driving factor in determining how it should deduct expenses in calculating royalty
payments—the essence of this dispute. Mobil was asked for each reason why it
contended "it is entitled to take each such royalty deduction," and it responded in part:

"Under these [different] leases and Kansas law, if the gas is not sold at the wellhead, the
market value of gas at the well may be determined by deducting from the amount for
which gas is sold off the leased premises the reasonable cost of getting the gas from the
well to the point of sale." (Emphasis added.)

For all these reasons, the district court did not err in holding that the doctrine of
lex rei sitae governs the claims of the plaintiffs' class and in rejecting Mobil's contention
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that a proper application of lex loci contractus would defeat the prerequisites for
maintenance of a class action because of the need to apply varying and disparate laws of
numerous states where the instruments were executed.

Mobil's Constitutional Challenge

Mobil's challenge to the constitutionality of applying Kansas law here is also
rather disingenuous. For a state's substantive law to be selected in a constitutionally
permissible manner, that state must have a significant contact or significant aggregation
of contacts, creating state interests, such that the choice of its law is neither arbitrary nor
fundamentally unfair. Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13, 66 L. Ed. 2d 521,
101 S. Ct. 633 (1981). There is simply no question that Kansas has such significant
contacts in applying its law to the enforcement of oil and gas leases on properties within
its own boundaries.

Mobil's constitutional argument is fundamentally premised on the suggestion that
the district court applied a lex fori approach to a nationwide class action. The premise is
false in two regards. As already discussed, we do not believe the court applied the lex fori
doctrine. Moreover, this action is not a typical nationwide class action; instead, it
involves only the enforcement of provisions in oil and gas leases covering Kansas realty.
Application of Kansas law to such an action cannot be said to be unconstitutional.

First, we are aware of no authority holding that it is unconstitutional to apply the
law where real property is located to disputes surrounding enforcement of lease
obligations. See 16 Am Jur. 2d, Conflict of Laws § 24. Although an oil and gas lease is
generally classified as personalty in Kansas, see, e.g., 1 Pierce, Kansas Oil and Gas
Handbook § 4.11, p. 4-15 (1991), Kansas has recognized that the rights to future royalty
payments pursuant to such leases are essentially part of the lessor's realty interests:

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"The lessor's rights to royalty do not originate with the lease. The lessor reserves his
rights to royalty out of the grant. His rights arise from his ownership of the real estate
rather than the lease and are therefore interests in real estate until the oil and gas are
captured. It follows then that future royalty (unaccrued royalty) is a part of the real estate
of the lessor; it is uncaptured and of an undetermined amount or location." In re Estate of
Sellens, 7 Kan. App. 2d 48, 51, 637 P.2d 483 (1981), rev. denied 230 Kan. 818 (1982).

Indeed, oil and gas leasehold interests are to be treated as real property under the
statutes pertaining to recordation of instruments conveying real estate. See K.S.A. 58-
2221(b); Ingram v. Ingram, 214 Kan. 415, 420-21, 521 P.2d 254 (1974). In any event, an
oil and gas lease conveys a license to explore, or a "profit a predre." State, ex rel., v.
Board of Regents, 176 Kan. 179, 190, 269 P.2d 425 (1954). Whether the lessor's rights to
royalty are technically classified as personalty or realty, it is difficult to imagine a more
intimate contact with Kansas than the construction and enforcement of instruments that
license the exploration for Kansas minerals.

We conclude that the allegations of the plaintiffs' class implicate significant
contacts with Kansas and there is no arbitrariness or unfairness in the application of
Kansas law in determining how the subject oil and gas leases should be construed and
enforced. Mobil's constitutional challenge to the district court's choice of law is rejected.

DID THE DISTRICT COURT ABUSE ITS DISCRETION IN MISCONSTRUING CONTROLLING
CASELAW GOVERNING IMPLIED COVENANTS OF THE OIL AND GAS LEASES?

Mobil also argues class action certification was improper because individual issues
would predominate over the common questions of law or fact. Mobil argues that to
determine whether there was a breach of an implied covenant within the leases would
require evaluating each of the individual leases and their various amendments, together
with an individualized examination of the factual circumstances and intent of the parties
at the time each of the lease instruments were executed. As argued by Mobil, the
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controlling caselaw means "the facts and circumstances surrounding each particular lease
must be analyzed to determine if the alleged implied obligation may be inferred" and this
includes the express language of the lease, other relevant writings, and "all the
circumstances and conditions which confronted the parties when the contract was
formed."

The district court rejected Mobil's contention, essentially finding that
individualized examination of lease variations and circumstances surrounding lease
formation was unnecessary:

"This Court does not agree with Mobil's contention that the Plaintiffs must
present evidence that the lessee and the lessor intended to require the lessee to fulfill the
implied covenant to market minerals produced.
"Most of the leases in the Hugoton Gas Field were signed in the 1930's and
1940's. Those who executed those leases, either as a lessee or a lessor, are long dead.
"There is an implied covenant to market minerals produced under all oil and gas
leases in Kansas.
"To claim that there needs to be evidence produced to prove that at the time of
execution of the lease, that the parties intended the lessee to fulfill the implied covenant is
an abstract absurdity.
"This Court believes Mobil misapplies the law of Smith v. Amoco, supra.
"Mobil has admitted that the terms of the leases speak for themselves. When the
leases were executed, if Mobil or its predecessor wished to avoid the implied covenant,
they were obligated to include clear and express language to this effect in the royalty
instrument itself. Gilmore v. Superior Oil, 192 Kan. at 391, 388 P.2d at 605.
"The Court has considered Mobil's objection based on its theory of how the
implied covenant must be established in each lease and finds that its pursuit of such
defense will not result in the predominance of individual issues or otherwise render the
case unmanageable.
. . . .
18

"Mobil as the lessee-producer, has treated all of its royalty owners the same way,
regardless of any variations in the lease language, and that makes this proposed class a
manageable class action."

Mobil's challenge is based solely on its reading of our Supreme Court's opinion in
Smith v. Amoco Production Company, 272 Kan. 58, 31 P.3d 255 (2001), and specifically
the court's holding that the implied covenant to market gas produced at reasonable terms
within a reasonable time is implied in fact rather than in law. There seems to be no
dispute that Kansas has long recognized the duty of the lessee under an oil and gas lease
not only to explore for and develop oil and gas production but to use reasonable diligence
in finding a market for the product. The implied obligation is to market the produced
minerals at reasonable terms within a reasonable time following production. See Robbins
v. Chevron U.S.A., Inc., 246 Kan. 125, 131, 785 P.2d 1010 (1990) (also citing K.S.A. 55-
223). Given Smith, however, Mobil argues that whether an implied duty is inherent in
each of the subject leases requires a detailed evaluation of each individual lease and the
circumstances of lease formation to determine the intent of the parties.

No owner of a Kansas royalty interest has been required to prove a specific intent
to include an implied covenant in an oil and gas lease. Robbins, 246 Kan. at 131 ("We
have long held that there is an implied obligation to market oil and gas under a lease
agreement."); Vonfeldt v. Hanes, 196 Kan. 719, 722, 414 P.2d 7 (1996) ("'[W]here the
lease itself does not contain express provisions creating duties in the lessee to drill
exploratory wells [and] to . . . market the product if oil and gas are discovered in paying
quantities, . . . the law imposes such duties upon the lessee under the doctrine of implied
covenants.'"); Gilmore v. Superior Oil Co., 192 Kan. 388, 392, 388 P.2d 602 (1964)
("Kansas has always recognized the duty of the lessee under 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."); see Temple v. Continental Oil Co., 182 Kan. 213, 234, 320 P.2d 1039, reh.
denied 183 Kan. 471, 328 P.2d 358 (1958); Molter v. Lewis, 156 Kan. 544, 549, 134 P.2d
19

404 (1943); Greenwood v. Texas-Interstate P. L. Co., 143 Kan. 686, 690, 56 P.2d 431
(1936); Thiessen v. Weber, 128 Kan. 556, 559-60, 282 P. 190 (1929); Webb v. Croft, 120
Kan. 654, 657, 244 P. 1033 (1926); Cole v. Butler, 103 Kan. 419, 421, 173 P. 978 (1918),
overruled in part on other grounds Brinkman v. Empire Gas and Fuel Co., 120 Kan. 602,
245 P. 107 (1926); see also Shell Petroleum Corporation v. Shore, 72 F.2d 193, 194 (10th
Cir. 1934) (lease contained implied covenant to develop and protect premises). Some
implied covenants in oil and gas leases have been codified in Kansas. See, e.g., K.S.A.
55-223 et seq.

Under Kansas law, an implied covenant can only be defeated by express language
showing a contrary intent. Christiansen v. Virginia Drilling Co., 170 Kan. 355, Syl. ¶ 1,
226 P.2d 263 (1951) ("In the absence of provision to the contrary, there is an implied
covenant to develop with reasonable diligence, an oil and gas lease in furtherance of the
interests of both the lessor and the lessee."); Fischer v. Magnolia Petroleum Co., 156
Kan. 367, 372, 133 P.2d 95, aff'd on rehearing 156 Kan. 722, 137 P.2d 139 (1943) ("It is
well established that in such a case there in an implied covenant to develop further, unless
otherwise provided in the instrument itself."); see also Ashland Oil and Refining Co. v.
Cities Service Gas Co., 462 F.2d 204, 213 n.9 (10th Cir. 1972) ("[A]bsent any express
provisions negativing such an implication, Kansas law will imply a covenant to diligently
explore, drill, produce and market the product in oil and gas leases.").

Mobil contends that the Supreme Court effectively overruled all of this precedent
in Smith. The limited issue in Smith, however, was whether the implied covenant to
market gas produced from the leasehold was implied in fact or implied in law for
purposes of selecting the proper statute of limitations. The court concluded the covenant
was implied in fact, resulting in the application of the 5-year statute of limitations for
express contracts. 272 Kan. at 60. Although the court discussed the countervailing
authorities addressing whether implied covenants in these leases are implied in fact
versus implied in law, the court restricted its discussion, noting that
20


"'[i]n those instances in which the court has been called upon to determine which statute
of limitations should be applied to actions on the implied covenants, it has been held that
the statute governing the bringing of actions on written contracts is applicable.'
(Emphasis added.) 5 Kuntz, A Treatise on the Law of Oil and Gas § 54.3(b), pp. 9-10
(1978)." 272 Kan at 74.

Likewise, the court cited another authority, noting: "'Does it make any difference whether
covenants are implied in fact or in law? Judging from the reported cases, the answer
seems to be, not often and not much.' [Citation omitted.]" 272 Kan. at 73.

The Smith opinion is limited to holding that implied covenants are implied in fact
for purposes of the statute of limitations. The opinion contains no hint that the court
intended to overrule in any way prior cases which have not required proof of a factual
intent for implied covenants to exist. And most importantly, if this were the case, Smith
would have required a very different remand that may well have destroyed the
prerequisites for a class action. Instead, the remand directed only a finding on whether the
implied covenants were breached. 272 Kan. at 85.

A federal court of appeals long ago in a very celebrated and still viable case
applying Kansas law suggested that implied covenants within oil and gas leases are not so
much a function of intent but rather of the obligation inherent in the language of the
contract:

"Implication is but another name for intention, and if it arises from the language of the
contract when considered in its entirety, and is not gathered from the mere expectations
of one or both of the parties, it is controlling." Brewster v. Lanyon Zinc Co., 140 F. 801,
809 (8th Cir. 1905) (noted for its "continued vitality" in 5 Williams & Meyers, Oil and
Gas Law, §§ 802, 806 [2009]).

21

Treatise law is in agreement—specific intentions of the parties to an oil and gas
lease are of no legal moment to the existence of covenants implied from the express
language of the contract:

"When it comes to the application of an implied covenant to a particular dispute, courts
may move some distance away from the fact of parties' intention and closer to the law as
an instrument for enforcing ethical norms. Thus when the lessor sues the lessee for his
[or her] failure to use sandfracing to increase production, he may claim as a fact that he
expected diligent efforts to be made to maximize production, but he can hardly claim that
he expected the use of sandfracing when the lease antedated the invention of the process."
5 Williams & Meyers, Oil and Gas Law § 803, p. 24.

Indeed, one need not examine parole evidence, surrounding circumstances, or extant
industry practice to determine whether such covenants should be implied. This has
simply never been the law or practice in Kansas.

Thus, Mobil's contentions appear to read far too much into the Smith opinion. No
direct language in Smith indicates that the implied covenants which have been read into
oil and gas leases for years are hereafter to be proven to be within the subjective intent of
the parties at the times the leases were entered into. As before, implied covenants are
essentially presumed to be the intent of both parties and need not be proven by reviewing
the specific intent of the executing parties; individualized proof of intent has never been
required. We do not see that Smith intended to change this practice when its focus was
solely on the statute of limitations issue. And most importantly, had the court been
interested in an examination of individualized lease variations and circumstances
surrounding formation, the remand would have been far different than ordered. See 272
Kan. at 60-61.

Mobil's suggestion that such an individualized examination defeats the
prerequisites for class action has been characterized as the de rigeur defense of such class
22

actions and rejected by most courts. See McArthur, A Minority of One? The Reasons to
Reject the Texas Supreme Court's Recent Abandonment of the Duty to Market in Market-
Value Leases, 37 Tex. Tech. L.R. 271 (Winter 2005). With Texas notably the stand-out
nonconformist jurisdiction, most courts have rejected this defense when faced with
remarkably similar facts. See, e.g., Duhe v. Texaco, Inc., 779 So. 2d 1070, 1082 (La.
App. 2001) (class certified despite each royalty owner having a different lease, noting
that "the underpayment was systemic, through one common course of conduct, giving
rise to a common nucleus of operative facts"); Bice v. Petro-Hunt, L.L.C., 681 N.W.2d
74, 77-78 (N.D. 2004) (standardized conduct toward the royalty owners presents a
common nucleus of operative facts even if differences in lease terms); Shockey v.
Chevron U.S.A., No. 98,063 (Okla. App., unpublished opinion filed April 4, 2003) (class
certified despite 45 to 50 variations in lease language).

We align our court with those of Louisiana, North Dakota, and Oklahoma in
holding that in a purported class action claiming improper calculation of royalties, there
is no need to examine individual lease formation and the intent of the parties thereto for
purposes of determining predominance of common issues or manageability in
certification proceedings where there has been shown a systemic common course of
conduct by an oil and gas lessee in calculating royalties payable. We agree with the
district court and its rationale in rejecting Mobil's argument that a need for individualized
examination of lease formation and language defeats predominance of common issues or
otherwise renders this case unmanageable as a class action.

Having so held, we are not suggesting that all purported class members can be
treated identically. Although Mobil does not seem to rely on the obvious major categories
of potential class members in challenging the district court's certification order, it was
noted by the district court and it appears to this court that those for whom a 1984
settlement is applicable will likely need to be treated differently than those for whom the
settlement is not applicable. Moreover, the record reflects that among the leases at issue,
23

some were executed or amended recently to expressly abrogate the implied covenant that
underlies the plaintiffs' class allegations. These and other easily defined categories of
potential plaintiffs, however, need not bar initial class certification.

Class action certification is discretionary with the trial court. Anderson v. City of
Albuquerque, 690 F.2d 796, 799 (10th Cir. 1982). A class may be altered, expanded,
subdivided or abandoned as a case develops. Class actions may be amended, limited, or
subclasses of plaintiffs may be established if needed. See 3 Conte & Newberg, Newberg
on Class Actions §7.47, pp. 154-55 (4th ed. 2002).

In summary, we conclude the district court rigorously analyzed whether the
prerequisites of the statute were satisfied. Especially with regard to the two areas
challenged on appeal, the district court took the proper factors into account in the proper
way and made a decision within the legal applicable legal standards to certify the class
action. There was no abuse of discretion in the selection of choice of law principles or in
rejecting an individualized examination of the circumstances surrounding each of the
leases in order to determine whether implied covenants were intended. It is the judgment
of this court that the district court performed a particularly comprehensive review of the
statutory prerequisites, gave consideration to Mobil's views on predominance and
manageability, entered findings supported by the evidence, and made conclusions of law
that were entirely sound and fully explained in the final journal entry of judgment.

Affirmed.