I plan to flag cases pending before the CA5 that (for whatever reason) I think are particularly interesting and/or important. The first such case is W&T Offshore, Inc. v. Zinke, No. 18-30876 (5th Cir. 2018).

The appeal arises from W&T's challenge to the Department of Interior's new method for collecting royalty payments under its so-called royalty-in-kind program (RIK). To under stand what's going on here, you'll need a bit of background on offshore oil and gas leasing.

The Outer Continental Shelf Lands Act of 1977 gives the Secretary of the Interior authority to lease offshore resources on federal land. 43 U.S.C. 1334(a). Interior and its sub-agencies award leases to private companies through a competitive bidding process. In exchange for the right to explore and develop the resources on federal land, the successful bidder must (among other obligations) pay royalties to Interior. OCSLA permits Interior to collect these royalty payments "in amount [volumes of oil or gas] or value [cash]." 43 U.S.C. 1337(a)(1)(A). Despite statutory provisions requiring Interior to administer the program through regulations promulgated through notice and comment, Interior never passed any such regulations and instead managed the program through informal guidance documents.

W&T began participating in the RIK program in November 2001, as the operator of certain offshore leases. Over the years, W&T over-delivered the volume of natural gas due in some months and under-delivered in others. From 2001 until 2008, W&T, like other operators, paid royalties to Interior through gas volumes instead of cash. That worked fine until Interior announced that it was phasing out the RIK program as a whole, and on March 16, 2010, ordered W&T to pay millions in cash royalties to resolve W&T's delivery shortfall for production months February 2003 through October 2008.

After ONRR and the Interioer Board of Land Appeals (IBLA) rejected W&T's challenges to the orders, W&T appealed to the United States District Court for the Western District of Louisiana. W&T argued that by permitting Interior to collect royalties "in amount or in value," OCSLA prohibited Interior from collecting royalties in amount and in value. According to W&T, that's what Interior did by collecting royalties in kind for years only to demand cash payment when it terminated the RIK program. The district court concluded that while "[t]he use of 'or' in [1337(a)(1)(A)-(H)] may be enough to show, as W&T contends, that DOI cannot demand payments of royalties in kind and in value at once . . . it is not sufficiently unambiguous to evience Congress's intent . . . that DOI be bound by its election such that it is prevented from demanding that an imbalance payment due in kind be resolved instead in cash." Finding Interior's interpretation of the statute permissible, the district court deferred to it under Chevron.

W&T's argument that the orders violated the agency's own regulations by allowing interest to accrue on late or deficient RIK deliveries before the end of W&T's participation in the RIK program fared better. Finding the regulation unambiguous, the district court applied Skidmore instead of Auer deference, and concluded that the final order "should be reversed and remanded to the extent that it upheld accrual of interest on royalties in kind owed on the . . . leases prior to the end of [W&T's] participation in th[e] program."

The district court rejected W&T's argument that Interior's valuation regs, specifically 30 C.F.R. 1202.150(a), prohibited the agency from ordering W&T to value the delivery imbalance according to the prices that the agency received for its sale of the RIK volumes. It agreed with Interior that ONRR was "entitled to recover the value of the additional gas that should have been delivered." "[U]nless the imbalance is valued at the contract sales price," the district court explained, ONNR could not recover the full value due.

Invoking the doctrine of "equitable recoupment," the district court agreed with W&T that Interior's refusal to give W&T credit for deliveries it had made from November 2001 through the end of January 2003 was improper. That doctrine "is a defense that goes to the foundation of a plaintiff's claim by deducting from plaintiff's recovery all just allowances or demands accruing to the defendant with respect to the same transaction." Distrib. Servs., Ltd. v. Eddie Parker Ints., Inc., 897 F.2d 811, 812 (5th Cir. 1990) (cites omitted).

W&T argued that the orders violated APA by adopting a new methodology without providing an opportunity for notice and comment. The district court disagreed, explaining that notice and comment is only required when an agency announces a legislative rule. A new interpretation amounts to a legislative rule if it purports to impose legally binding obligations or prohibitions on regulated parties. As the district court saw it, Interior's new views reflected in the 2010 payment orders merely "merely explain or interpret what OCSLA, FOGRMA, and RSFA already require," making them interpretative rules that do not trigger the APA's rulemaking requirements. The district court acknowledged that Interior's new approach was inconsistent with the agency's "prior interpretations," but concluded that such inconsistencies were "of no moment to the methodology's legislative-versus-interpretative nature, as all DOI sources from which W&T alleges a prior methodology were only interpretative in themselves."

Next, W&T argued that Interior erred by making it liable as "designated operator" on the leases for all royalties owed on those leases. As W&T explained, while it was designated operator for the leases, it did not own any interest in some of them. The district court rejected W&T's argument, though, explaining that Interior had merely "issue[d] a payment order" to W&T; it had not "actually ma[de] W&T liable for any payment on any lease for which it is only the designee."

Finally, the district court rejected W&T's contention that the orders lacked sufficient support in the administrative record. The district court noted that it had ordered W&T to "present any issues concerning the scope or content of the record" within a specified time. Because W&T had failed to speak up in time, the district court refused to consider its argument.

Having thus addressed W&T's arguments, the district court vacated the 2010 orders and remanded the matter to Interior. W&T appealed and has already filed its opening brief in the CA5. It is not yet clear whether the government will cross-appeal on the issues decided against it. According to Pacer, its brief is due December 21, 2018.

I'll be monitoring this case closely. Not only does it involve several important admin-law doctrines, but I'm fairly certain that I'm not the only one interested to see how the CA5 will react to Interior's shifting approach to recovering RIK royalty imbalances. Several other "operators" have raised similar challenges to similar Interior payment orders. Their cases are on hold while the CA5 addresses W&T's appeal. More to come.

Cases Worth Watching
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