The First Marketable Product Doctrine: Just What Is the Product.

Oil and gas leases normally do not set a fixed price for calculating royalty payments. Instead, oil and gas leases commonly tie royalty calculations to a more flexible yardstick, including “market value” or “net proceeds”. This flexibility allows the lease relationship to survive any dramatic volatility in oil and gas prices, while the same fixed price may be inadequate in shifting markets. Conversely, the flexibility may place lessors and lessees in a position of inherent conflict. In particular, parties vehemently disagree about the proper location for applying the yardstick. Historically, lessees have enjoyed the better side of the argument; though, recently the tide has turned against them. Courts in several states have adopted variations for the “first marketable product doctrine,” which holds that lessees must calculate the value or its price of production at the location where the lessee first obtains a marketable product. Yet, one of the glaring flaws was the courts’ failure to clearly define the term “product”, which created problems surrounding situations where multiple “products” were produced. Lessors have taken advantage of this flaw in the case law, arguing the doctrine requires a lessee to apply the yardstick at not simply the first location but at each separate location where “product” is produced. Although the relationship between lessors and lessees focuses on the leased premises, the first market production doctrine serves more harm than good. The doctrine lacks a sound legal foundation. While it purports to rely on rules of contract construction, it does not give effect to the plain meaning of the term “at the well” in the standard royalty clause. While it claims to rely on implied covenant to market, it improperly uses the covenant to reach a different result from what the parties contemplated in the express terms of their agreement

Entering the Thicket - Mandamus Review of Texas District Court Witness Disclosure Orders.

In the absence of statutory authorization of interlocutory appeal, the writ of mandamus usually is the sole convenient remedy for an egregious trial court decision prior to judgment. The increasing number of mandamus petitions which annually invade the Texas appellate courts reflects the importance of the writ of mandamus. While once described as the “extraordinary” remedy, it is not uncommon for proceedings in a trial court to cease while a party seeks mandamus review of a controversial discovery ruling. One type of discovery rule which has not escaped mandamus review is the admission or exclusion of the testimony of witnesses whom a party has failed to disclose in response to a discovery request. In the decision of Mother Frances Hospital v. Coats, a Texas court of appeals determined, at least in some cases, mandamus is an appropriate remedy for an erroneous trial court witness disclosure order. This opinion could offer litigants an escape valve from pre-trial witness disclosure orders which threaten the effective presentation of a claim or defense. Conversely this opinion could trigger even more mandamus petitions to the appellate courts, thus contributing to the “thicket” of review mechanisms which interrupt trial processes. Having “entered the thicket” to control or correct even one trial court witness disclosure order, the Texas appellate courts will soon be asked to review in mandamus proceedings on more such orders. Some petitions undoubtedly will attempt to implicate the appellate courts in routine questions more appropriately left to the trial court’s discretion, while other petitions will seek appellate intervention in the erroneous exclusion of critical trial witnesses. The appellate courts must tolerate some abuse of mandamus procedures to ensure, in cases where mandamus is necessary, trial proceedings are fair and equitable to all parties

The First Marketable Product Doctrine: Just What Is the Product.

Oil and gas leases normally do not set a fixed price for calculating royalty payments. Instead, oil and gas leases commonly tie royalty calculations to a more flexible yardstick, including “market value” or “net proceeds”. This flexibility allows the lease relationship to survive any dramatic volatility in oil and gas prices, while the same fixed price may be inadequate in shifting markets. Conversely, the flexibility may place lessors and lessees in a position of inherent conflict. In particular, parties vehemently disagree about the proper location for applying the yardstick. Historically, lessees have enjoyed the better side of the argument; though, recently the tide has turned against them. Courts in several states have adopted variations for the “first marketable product doctrine,” which holds that lessees must calculate the value or its price of production at the location where the lessee first obtains a marketable product. Yet, one of the glaring flaws was the courts’ failure to clearly define the term “product”, which created problems surrounding situations where multiple “products” were produced. Lessors have taken advantage of this flaw in the case law, arguing the doctrine requires a lessee to apply the yardstick at not simply the first location but at each separate location where “product” is produced. Although the relationship between lessors and lessees focuses on the leased premises, the first market production doctrine serves more harm than good. The doctrine lacks a sound legal foundation. While it purports to rely on rules of contract construction, it does not give effect to the plain meaning of the term “at the well” in the standard royalty clause. While it claims to rely on implied covenant to market, it improperly uses the covenant to reach a different result from what the parties contemplated in the express terms of their agreement