Fawcett v. Oil Producers, Inc. of Kansas

The L. Ruth Fawcett Trust (Fawcett) (plaintiff) represented a group of mineral-rights owners. Oil Producers, Inc. of Kansas (Producers) (defendant) entered into a series of leases with Fawcett to extract gas from Fawcett’s land in exchange for royalty payments. The lease language required Producers to pay Fawcett a royalty on gas sold at the wellhead. Producers sold the raw natural gas at the wellhead to third parties. The third parties processed the gas before the gas entered the interstate pipeline system. The price that Producers was paid by the third parties was based on a formula that started with the price the third parties received for the processed gas; the formula then deducted certain costs incurred or adjustments made by the third party. The royalties Fawcett received from Producers was also based on this formula. Fawcett argued the subtracted costs and adjustments were Producers’ sole responsibility. Fawcett contended that raw natural gas was not marketable until it entered an interstate pipeline. Thus, Fawcett stated that under the marketable-condition rule, the royalties Fawcett received were less than they should be. Producers argued that it fulfilled its duty to market by entering into purchase agreements for sale of the gas at the wellhead. The trial court granted summary judgment to Fawcett. The appeals court affirmed. Producers then appealed to the state supreme court.