## Facts

- The Finleys leased oil and gas rights in two adjacent southern Illinois parcels to Marathon, receiving a one-sixth royalty while Marathon retained five-sixths of production.
- The parties executed a communitization agreement consolidating the two leases for production purposes without changing relevant lease terms.
- A reservoir underlying the Finley parcels extended beneath an adjoining tract (the McCroskey tract) leased to a different operator.
- Marathon conducted secondary recovery by injecting large quantities of water into an injection well (T-2) located on the Finley property.
- The Finleys alleged the waterflood caused oil to migrate from beneath their land to beneath the McCroskey tract and that Marathon breached an implied/contractual duty to protect against drainage by failing to drill a protective producing well near the boundary.
- The Finleys also alleged the communitization agreement created fiduciary obligations running from Marathon to the Finleys.
- The district court dismissed the fiduciary-duty claim before trial; the contract/implied-covenant drainage claim proceeded to a jury, which returned a verdict for Marathon.
- At trial and in pretrial proceedings, the court excluded certain late-disclosed rebuttal expert materials offered by the Finleys.

## Issues

1. Whether Marathon breached an implied covenant or contractual duty to protect the leasehold from drainage by failing to drill a protective well.
2. Whether the communitization agreement created a fiduciary relationship imposing duties beyond those arising from the lessor-lessee contract.
3. Whether excluding late-disclosed rebuttal expert evidence was an abuse of discretion under the federal discovery rules.

## Decision

- The Seventh Circuit affirmed the judgment for Marathon.
- The jury’s verdict rejecting the drainage-based contract claim was supported by evidence, including expert testimony that the relevant area lacked economically recoverable oil.
- The communitization agreement did not create fiduciary duties; the relationship remained governed by the leases and related implied covenants.
- The district court did not abuse its discretion by excluding late-disclosed rebuttal expert materials because the delay was neither substantially justified nor harmless.

## Legal Principles

- A lessee’s duty to protect against drainage is evaluated under a prudent-operator, economic-recoverability framework; absent proof of economically recoverable oil and resulting loss, failure to drill a protective well does not establish breach.
- Pooling or communitizing a lessor’s own tracts with the same lessee, without a multi-party unit or trustee-like undertaking, does not convert a lessor-lessee relationship into a fiduciary one.
- Under the federal disclosure regime for expert evidence, exclusion is a permissible sanction for untimely disclosures when the failure is not substantially justified and is not harmless, and trial courts have broad discretion in managing discovery.

## Conclusion

The court upheld a defense verdict and related rulings, holding that the evidence permitted the jury to find no compensable drainage requiring a protective well, that communitization here did not create fiduciary obligations, and that excluding late rebuttal expert disclosures was within the trial court’s discretion.


Finley v. Marathon Oil Co., 75 F.3d 1225 (7th Cir. 1996)