W & T Offshore, Incorporated v. David Bernhardt, eW & T Offshore, Incorporated v. David Bernhardt, e
Before CLEMENT, ELROD, and DUNCAN, Circuit Judges.
This is an oil and gas royalty case concerning orders to pay issued by the Department of the Interior to W&T, a company that operated natural gas deposits leased from the federal government, in order to resolve volumetric gas delivery imbalances. The parties each appeal the district court‘s partial grant of each other‘s motions for summary judgment. We conclude that the Department of the Interior permissibly required resolution of delivery imbalances via cash payment, but that it improperly promulgated a substantive rule without subjecting it to notice and comment. We also hold that the Department of the Interior should have credited all W&T‘s deliveries under the doctrine of equitable recoupment. We therefore AFFIRM in part, REVERSE in part, and REMAND for proceedings consistent with this opinion.
I.
W&T operated offshore natural gas deposits leased from the federal government. The Department of the Interior leased the deposits, pursuant to its authority under the Outer Continental Shelf Lands Act (“OCSLA“),
Several decades ago, the Department of the Interior began a pilot program that expanded the number of leases for which it required payment in kind, and W&T‘s leases were included in that program. As both parties point out, “[n]atural gas markets are complex,” and operators like W&T routinely struggled to “deliver the exact volume of gas actually owed.” Some months, W&T delivered too much gas; other months, too little. As the pilot program progressed, the Department of the Interior sometimes issued delivery shortfall guidance in the form of “Dear Operator” letters. These letters gave industry entities like W&T instructions and options for remedying underdelivered royalties: for instance, one typical letter advised operators to make up shortfalls with additional gas deliveries “within 120 days of the end of the production month” in question, or—failing that—to deliver the additional gas on a mutually-agreeable schedule or make a cash payment.
In October 2008, the Department of the Interior elected to begin requiring payment in cash from W&T. It subsequently shuttered the payment-in-kind pilot program altogether. In 2010, having determined that W&T‘s underdeliveries had exceeded its overdeliveries during its participation in the pilot program, the Department of the Interior issued orders requiring W&T to make up the cumulative shortfall with a final cash payment.1 The orders superseded all previous “Dear Operator” letters. The period over which
W&T appealed the orders to the Director of the Office of Natural Resources Revenue, who denied the appeal. See W&T Offshore, Inc., 184 IBLA 272, 305 (2014). W&T then appealed that denial to the Interior Board of Land Appeals (“IBLA“), which affirmed. See id. at 305–06. W&T proceeded to file a request for judicial review of the IBLA decision in the district court. See W&T Offshore, Inc. v. Jewell, No. 14-cv-2449, 2018 WL 2437677, at *1 (W.D. La. Feb. 23, 2018); see also
On the issues relevant to this appeal, W&T argued first that the “or” in the phrase “amount or value,”
The district court partially granted and partially denied the parties’ cross-motions for summary judgment.2 On the statutory interpretation issue, applying the framework set out in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the district court determined that the statutory text was ambiguous and deferred to the Department of the Interior‘s interpretation: that nothing in the statute bars the Department of the Interior from switching its election from payment in kind to payment in cash. As to the APA, the district court concluded that the Department of the Interior‘s orders were “grounded in and logically justified by the specific statutory text,” making them mere interpretive rules for which notice and comment is not required. The district court also rejected W&T‘s claim that the Department of the Interior used the wrong valuation methodology, reasoning
that the regulations W&T pointed to applied only to royalties “owed in value in the first place—not [to] the valuation of underdeliveries of royalties in kind.” Finally, the district court agreed with W&T that the Department of the Interior should have credited W&T‘s previous overdeliveries because “[a]s a purely defensive procedure, [equitable recoupment] is available to defendant
As a result, the district court partially granted and partially denied the parties’ cross-motions for summary judgment, resulting in a final judgment vacating the orders to pay and remanding them to the Department of the Interior for re-issuance consistent with the court‘s rulings. The parties appealed. W&T challenges the district court‘s Chevron, APA, and valuation rulings, and the Department of the Interior challenges its equitable recoupment ruling. The arguments will be considered in turn.
II.
The court “review[s] de novo a grant of summary judgment, applying the same legal standards that the district court applied.” Kerr-McGee Oil & Gas Corp. v. U.S. Dep‘t of Interior, 554 F.3d 1082, 1084 (5th Cir. 2009). Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
III.
We begin by considering whether the Department of the Interior exceeded its statutory authority by changing its election from payment in kind to payment in cash for overdue royalties. W&T argues that the statutory text permitting the Department of the Interior to require monthly royalties “in amount or value of the production saved, removed, or sold,”
Chevron supplies the familiar two-step framework for judicial review of an agency‘s interpretation of its statutory authority:
First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter . . . . If, however . . . the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency‘s answer is based on a permissible construction of the statute.
467 U.S. at 842–43. At the first step, courts “apply[] the traditional tools of statutory interpretation” to gauge statutory clarity, “bear[ing] in mind the Supreme Court‘s admonition” to “interpret the statute as a symmetrical and coherent regulatory scheme.” BNSF Ry. Co. v. United States, 775 F.3d 743, 751 (5th Cir. 2015) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)). At the second step, if the agency action carries the force of law,3 courts defer to the agency‘s interpretation of the governing statute as long as that interpretation is a “permissible construction of the statute.” Exelon Wind 1, L.L.C. v. Nelson, 766 F.3d 380, 392 n.10 (5th Cir. 2014) (quoting Chevron, 467 U.S. at 843). An interpretation is “permissible” when it is a “reasonable” one. Id. (quoting Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208, 218 (2009)).
Here, W&T‘s contention that the statutory phrase “amount or value” unambiguously prohibits the Department of the Interior from changing its election from payment in kind to payment in cash for overdue royalties is unpersuasive. Nothing in the statutory text or context purports to limit the Department of the Interior‘s ability to elect—or re-elect—its preferred method of royalty payment. To the extent the statutory context provides any insight into the Department of the Interior‘s royalty collection power, it evinces a grant of discretion to the Department of the Interior to determine how best to “achieve effective collections of royalty and other payments.”
W&T advances several arguments in support of its reading, but each falls short. W&T begins by citing several cases for the proposition that “[i]t is well-established that the disjunctive term ‘or’ unambiguously signifies mutually exclusive options that cannot be combined.” But only one of these is a case in which a simple “or” was clearly construed as creating mutually exclusive alternatives—and that case is distinguishable. In D.P. ex rel. E.P. v. School Board, 483 F.3d 725 (11th Cir. 2007), the Eleventh Circuit construed the following statutory text:
[D]uring the pendency of any proceedings conducted pursuant to this section, unless the State or local educational agency and the parents otherwise agree, the child shall remain in the then-current educational placement of the child, or, if applying for initial admission to a public school, shall, with the consent of the parents, be placed in the public school program until all such proceedings have been completed.
Next, W&T argues that—because the statutory definition of “obligation” includes “any duty of the Secretary . . . to take oil or gas royalty in kind,”
W&T also argues that the incorporation of
Finally, in its reply brief, W&T argues that Congress‘s use of the words “or both” after setting out alternatives elsewhere in the OCSLA—but not in
This contention misses the mark because the other “or both” provisions in the OCSLA are instances in which Congress appears to countenance the application of multiple alternatives at the same time. For instance,
The use of “or” in the above-cited provisions of the OCSLA may be enough to show, as W&T contends, that [the Department of the Interior] cannot demand payments of royalties in kind and in value at once; however, it is not sufficiently
unambiguous to evince Congress‘s intent, within the royalty scheme set out under the OCSLA, that [the Department of the Interior] be bound by its election such that it is prevented from demanding that an imbalance of a payment due in kind be resolved instead in cash.
Moreover, W&T‘s argument proves too much. If the Department of the Interior‘s choice between requiring payment “in amount or value” truly “signifie[d] mutually exclusive options that may not be combined,” the Department of the Interior would appear to be permanently bound by its initial royalty election over the lifetime of the lease. But even W&T admits that the Department of the Interior is not “bound forever by electing to take royalties on a given lease either in cash or in kind.” Instead, W&T‘s reading would allow the Department of the Interior to change its election for future months—just not for past months for which payment is overdue. W&T does not cogently explain how such a result is the unambiguous intent of Congress as expressed by its direction that the Department of the Interior collect royalties “in amount or value.”
For its part, the Department of the Interior simply argues that “[n]othing in OCSLA or the implementing regulations (or any other statute) provides that once [it] elects to take royalties in kind, it is barred from later taking royalties in value to satisfy an outstanding royalty deficiency on the lease.” In essence:
The Department of the Interior‘s straightforward argument has some force, but we need not dwell here on the distinction between whether the statute unambiguously supports the Department of the Interior‘s interpretation or whether it does not definitively speak to the issue and is thus ambiguous. Even assuming that Congress left a statutory gap here, the lack of any clear indication that the Department of the Interior‘s election authority was to be cabined to a one-time-only choice for a given monthly obligation makes the Department of the Interior‘s interpretation a permissible one to which we accord Chevron deference. This is especially so given Congress‘s expressed intent to “increase receipts and achieve effective collections of royalt[ies]” by commanding lessees to “make such payments in the time and manner as may be specified by the Secretary.”
Because the Department of the Interior‘s interpretation of
IV.
We next consider whether the Department of the Interior‘s requirement of a cash payment to resolve delivery shortfalls is a new substantive rule that should have been subject to notice and comment under the APA. W&T argues that the requirement is a substantive rule, while the Department of the Interior maintains that it is not a rule at all, but rather an adjudicative order. The district court concluded that the requirement was an interpretive rule not subject to notice and comment. We disagree.
Adjudicative orders, on the other hand, are not rules at all and therefore need not go through notice and comment. See generally
While the Fifth Circuit may accord “some deference” to “the agency‘s characterization of its own rule,” this deference is minimal—courts “focus[] primarily” on the actual characteristics of the agency action. Profls & Patients for Customized Care v. Shalala, 56 F.3d 592, 595 (5th Cir. 1995); see also id. at 596 (“The label that the particular agency puts upon its given exercise of administrative power is not, for our purposes, conclusive; rather, it is what the agency does in fact.” (alteration omitted) (quoting Brown Express, 607 F.2d at 700)).
Here, the Department of the Interior‘s characterization of its orders to pay as the result of an adjudicative order is unpersuasive. Phillips Petroleum Co. v. Johnson, 22 F.3d 616 (5th Cir. 1994) and Shell Offshore Inc. v. Babbitt, 238 F.3d 622 (5th Cir. 2001) are instructive.
In Phillips Petroleum, Phillips owed natural gas royalties to the Department of the Interior. 22 F.3d at 618. Until 1988, the Department of the Interior “considered several factors in determining the value of federal offshore production for royalty purposes.” Id. But in 1989, the Department of the Interior directed Phillips to recalculate and pay previously-due royalties pursuant to the methodology set out in an “unpublished internal agency paper referred to as the ‘Procedure Paper‘” which created “new criteria for valuing natural gas liquid products.” Id. On appeal to this court, the Department of the Interior argued that the Procedure Paper was not a substantive rule because it merely clarified existing regulations. We disagreed. Noting that the new valuation methodology “effect[ed] a change in the method used by
Shell Offshore concerned the Department of the Interior‘s previous practice of accepting crude oil tariffs merely “filed” with the Federal Energy Regulatory Commission (“FERC“) as satisfying a regulatory exception applicable to tariffs “approved” by FERC. 238 F.3d at 624-25. In 1994, when Shell filed tariffs with FERC and asked the Department of the Interior to verify that it had satisfied the regulatory exception, the Department of the Interior changed its position. It issued an order denying the request because Shell had not “receive[d] from FERC a determination affirmatively stating that FERC possessed jurisdiction” over the tariffs. Id. at 625–26. On appeal to this court, the Department of the Interior argued that its denial of Shell‘s tariff request evinced nothing more than a workaday adjudicatory order, not a substantive rule. We disagreed. We first noted that the Department of the Interior‘s requirement of an affirmative jurisdictional statement from FERC was “a departure from [the Department of the] Interior‘s previous practice of treating as approved all filed FERC tariffs.” Id. at 628. Next, we noted that the adjudication resulting in the denial could not be described as the application of a pre-existing “general regulation to the specific facts of Shell‘s case.” Id.
Rather, the Department of the Interior had “established a new policy and then applied that new policy to several [industry entities], including Shell.” Id. Because “the adjudication . . . was wholly predicated upon a new requirement that [was], in effect, a new substantive rule,” we concluded that the Department of the Interior should have subjected its new policy to notice and comment. Id. at 627-28.6
At oral argument, counsel for the Department of the Interior admitted that “this court‘s caselaw [on this issue] is Phillips [Petroleum] and Shell [Offshore], neither of which are particularly helpful for us.” Oral Argument at 25:41. We agree with this assessment. Like in Phillips Petroleum, the Department of the Interior engaged in an internal effort to develop a new royalty valuation methodology—expressly “supersed[ing]” previous practices—which it then ordered industry entities to adhere to and to apply to royalties due in previous years.7 Like in Shell Offshore, the Department of the Interior did not apply a pre-existing regulation to the specific facts of an industry entity‘s case. Rather, it followed up the development of a new policy with adjudications in which the new policy “controlled the adjudicative process” and was applied across the board to a number of industry entities. Shell Offshore, 238 F.3d at 628. The Department
its development—and industry-wide application—of a new valuation methodology in the guise of simple adjudicative orders.
The Department of the Interior‘s arguments to the contrary are unavailing. First, the Department of the Interior attempts to distinguish Phillips Petroleum because there it had “admitted” that the policy at issue “was a new rule.” Id. (internal quotation marks omitted). But that fact does nothing to vitiate Phillips Petroleum‘s analysis of what makes up a substantive rule—analysis that is directly applicable here. Next, the Department of the Interior argues that it was merely carrying out its “statutory duty to resolve the existing imbalances,” and merely applied the relevant statutes to W&T. Shell Offshore already aptly explains why the Department of the Interior‘s creation and uniform application of a new methodology is not an adjudicatory application of an existing rule to the facts of a specific case, and Phillips Petroleum explains why the new methodology can only be a substantive rule.
Finally, the Department of the Interior points to the APA‘s definition of a “rule” as an agency action that has “future effect,”
Because the Department of the Interior‘s orders to pay evince the creation of a new substantive rule, the district court improperly granted the Department of the Interior summary judgment on this issue.9
V.
As a final matter, we address the issue of whether—whatever valuation methodology the Department of the Interior employs—the agency must credit all of W&T‘s prior overdeliveries in calculating the cumulative delivery shortfall. The Department of the Interior appeals the district court‘s ruling that it must do so, arguing that the statute of limitations set out in
We “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
A judicial proceeding or demand which arises from, or relates to an obligation, shall be commenced within seven years from the date on which the obligation becomes due and if not so commenced shall be barred. If commencement of a judicial proceeding or demand for an obligation is barred by this section, the Secretary, a delegated State, or a lessee or its designee . . . shall not take any other or further action regarding that obligation, including . . . completion of an audit with respect to that obligation . . . [and] shall not pursue any other equitable or legal remedy, whether under statute or common law, with respect to an action on or an enforcement of said obligation.
As the magistrate judge‘s report and recommendation succinctly and aptly explains, equitable recoupment is “never barred by the statute of limitations so long as the main action itself is timely.” Bull v. United States, 295 U.S. 247, 262 (1935); see also Eddie Parker Interests, 897 F.2d at 812. Because W&T asserted equitable recoupment as a defense to the Department of the Interior‘s orders to pay, the statute of limitations does not apply.
The Department of the Interior offers three reasons to conclude otherwise, but none is persuasive. First, the Department of the Interior argues that Congress expressly precluded application of equitable recoupment in the text of the statute by barring “pursu[it of] any other equitable or legal remedy, whether under statute or common law” regarding obligations outside the limitations period.
Here, W&T did not institute an action to recover its overpayments. Instead, the Department of the Interior instituted the adjudications at issue and W&T merely raised equitable recoupment in its appeal of those adjudications. The distinction between the two finds further support in United States v. Western Pacific Railroad Co., 352 U.S. 59 (1956), where the Supreme Court addressed a statute of limitations governing
Second, the Department of the Interior notes that equitable recoupment applies only to obligations arising under “the same contract or transaction” and argues that here each monthly obligation under the lease was a separate transaction. Eddie Parker Interests, 897 F.2d at 812; see also Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 299 (1946) (noting that equitable recoupment “has never been thought to allow one transaction to be offset against another, but only to permit a transaction which is made subject of suit by a plaintiff to be examined in all its aspects“). This objection is easily dispatched, as the Department of the Interior‘s requirement that payments be made on a monthly basis does not trump the reality that each monthly obligation arises from a single contract: the lease. The Department of the Interior‘s cramped view of the meaning of “the same contract or transaction” in this context is at odds with the aim of equitable recoupment doctrine, which is to allow the contract or transaction at issue to be “examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole.” Rothensies, 329 U.S. at 299 (emphasis added).10
Third, and finally, the Department of the Interior argues that equitable recoupment should not be applied here because there is no real-world inequity. In the Department of the Interior‘s view: because it applied the statute of limitations to a number of industry entities with outstanding royalty obligations regardless of “whether the imbalances benefitted the government” or not, its treatment of W&T was not inequitable. Moreover, as the Department of the Interior points out, W&T could have rectified the delivery imbalances earlier. Even if we accept the Department of the Interior‘s principle that a party asserting equitable recoupment must make an independent showing of inequity beyond a failure to credit its payments, the Department of the Interior‘s logic is unsound. The Department of the Interior‘s neutral application of the statute of limitations across the industry does not counteract the inequitable result that W&T suffered—the Department of the Interior‘s refusal to credit deliveries it received from W&T. And W&T had no way to know that it needed to act quickly or else lose credit for its past overdeliveries, as the Department of the Interior had previously assured the industry that “total [royalty-in-kind] . . . natural gas volumes” would be “carr[ied] over to the next month to resolve aggregated imbalances that have occurred in prior months.” 73 Fed. Reg. 19241, 19242 (Apr. 9, 2008).
Because the Department of the Interior should have credited all of W&T‘s deliveries under the lease, the district court properly granted summary judgment to W&T on this issue.
Accordingly, the judgment of the district court is AFFIRMED in part, REVERSED in part, and REMANDED.
JENNIFER WALKER ELROD
CIRCUIT JUDGE