One of my very first posts flagged W&T Offshore Inc. v. Bernhardt, No. 18-30876 as a case worth watching. As you may recall, this case asks whether an agency can change its settled approach on an important issue without notice and comment and then seek to enforce its newly announced policy retroactively in a series of adjudications. The Fifth Circuit's answer? No it may not. This post summarizes the Fifth Circuit's opinion and then digs a bit deeper into some of its noteworthy features.

BACKGROUND

W&T challenges orders from the Department of the Interior commanding W&T to pay past-due royalties under offshore oil and gas leases in cash instead of in gas. Under section 1337(a)(1)(A) of OCSLA, Interior has authority to require royalty payments in cash or in kind. See 42 U.S.C. 1337(a)(1)(A) (Secretary may demand payments "in amount [(cash)] or value of the production saved, removed, or sold [(in kind)]."). For years, Interior had permitted W&T to pay in kind. Oil and gas markets are complicated, however, and operators like W&T often can't deliver the precise volume of gas actually owed. Some months they over-deliver; other months there's a shortfall. From time to time, Interior would issue informal guidance instructing operators to resolve accumulated shortfalls by delivering the additional volume of gas owed within a certain time frame or, failing that, through a cash payment.

In October 2008, however, Interior changed its mind and began demanding payment in cash. Shortly thereafter, Interior demanded millions in cash from W&T to make up for delivery imbalances that had accumulated from February 2003 to October 2008 (Interior believed a statute of limitations barred it from demanding payments for months before February 2003, see 30 U.S.C. § 1724(b)(1)). Interior also provided its methodology for calculating the amount due: multiplying the amount under-delivered in each month by the contract sales price it would have collected in each month had the proper amount of gas been delivered.

W&T's PATH TO THE FIFTH CIRCUIT

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, 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). The parties eventually filed cross-motions for summary judgment.

W&T argued first that the “or” in the phrase “amount or value,” 43 U.S.C. § 1337(a)(1)(A), precluded  Interior from requiring make-up cash payments for past months in which it had originally required payment in kind. Second, W&T argued that Interior’s decision to require retroactive in-cash payments—and its methodology for doing so—created a new substantive rule that should have been subject to notice and comment under the APA. Third, W&T argued that the Interior was obligated to comply with the valuation regulations, see 30 C.F.R. part 1206, that value gas at the price the lessee receives rather than Interior’s contract sales price. Fourth, W&T argued that the Interior should have credited its overdeliveries prior to February 2003, despite the statute of limitations in 30 U.S.C. § 1724.

The district court partially granted and partially denied the parties’ cross-motions for summary judgment. On the statutory interpretation issue, the district court deferred under Chevron to Interior's view that nothing in the statute bars Interior from switching its election from payment in kind to payment in cash. As to the APA, the district court concluded that 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 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 under-deliveries 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 over-deliveries because “[a]s a purely defensive procedure, [equitable recoupment] is available to defendant so long as plaintiff’s claim survives—even though an affirmative action by defendant is barred by limitations.”

Both sides appealed. W&T challenged the district court’s Chevron, APA, and valuation rulings, and Interior challenges its equitable recoupment ruling.

THE FIFTH CIRCUIT WEIGHS IN

The Fifth Circuit agreed with the district court on the statutory interpretation question, holding that Interior permissibly required resolution of delivery imbalances via cash payment. Importantly, however, it agreed with W&T that the payment orders at issue were substantive rules and that Interior lacked authority to issue them without notice and comment.The Court also agreed with W&T that Interior should have given W&T credit for over-deliveries under the doctrine of equitable recoupment. Accordingly, the Court affirmed in part, reversed in part, and remanded.

While each of the Court's holdings is important, the rest of this post will focus on the Court's treatment of the Chevron question and its ruling that Interior's orders were substantive rules requiring notice and comment.  

Beginning with Chevron, the last time the Fifth Circuit deferred to an agency's interpretation of a statute under that doctrine, was August 2019 in Brackeen v. Barnhardt (I covered that case here), but Judge Dennis's opinion in that important case triggered a petition for rehearing en banc, which the full Court granted. As a result, to find the Court's last undisputed application of Chevron deference, it seems we need to go even further back in time. How far? Nearly a year to the Court's per curiam opinion in Cardoso de Flores v. Whitaker, 913 F.3d 379 (5th Cir. 2019), where  the Court deferred to the BIA's position that the "circumstance-specific approach applies to the personal-use exception in § 1227(a)(2)(B)(i)" of the Immigration and Naturality Act, 8 U.S.C. § 1227(a)(2)(B)(i). To give you a bit more perspective, you have to wade through fourteen Fifth Circuit Chevron cases on Westlaw before you finally hit step-two pay-dirt in Cardoso de Flores. Simply put, the Fifth Circuit doesn't grant Chevron deference very often, so when it does, I pay close attention.

DEFERRING UNDER CHEVRON

Let's start with the Court's recitation of the Chevron standard itself:

Three observations. First, the Court's description of the step two inquiry is unorthodox. Here's how Chevron itself described the required inquiry:

Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). To this familiar liturgy, the panel adds the qualifier "if the agency action carries the force of law." That sounds sort of like the step-zero question: whether "it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority." United States v. Mead Corp., 533 U.S. 218, 226-27 (2001). But step zero obviously isn't part of step two.

Second, you might notice that the Court dropped a footnote (footnote 3) right after the Mead-like gloss on step two, which says that "[n]o party argues that the orders to pay did not carry the force of law." Fair enough, but it's not clear to me what difference that makes. After all, the step-zero inquiry from Mead and the panel's Mead-like gloss on step two both focus on whether the agency in fact spoke with the force of law--not whether the parties dispute the issue. Those strike me as very different questions.

And third, in support of this novel rendition of the step two standard, the Court cites Exelon Wind 1, L.L.C. v. Nelson, 766 F.3d 380, 392 n.10 (5th Cir. 2014), which, according to the Court's parenthetical, quotes Chevron, 467 U.S. at 843 (1984). Naturally, I reread Exelon Wind 1 to see if I had overlooked a similar description of step two in that case. As far as I can tell, I did not. Here is the full text of the cited footnote:

As you can see, that footnote does quote Chevron, but it does not mention any Mead-like inquiry at all, much less in its description of step two. The question thus becomes what significance, if any, we should attribute to these idiosyncracies. I'll give you my thoughts on that question later. First, though, I need to make a few points about the Court's actual application of Chevron in this case.

W&T argued that the CERCLA provision permitting Interior to require monthly royalties “in amount or value of the production saved, removed, or sold,” 43 U.S.C. § 1337(a)(1)(A), creates a “disjunctive” choice: once Interior requires payment in kind for a given month, it cannot later require payment in cash to resolve an outstanding balance for that month. Interior didn't dispute that the choice is “disjunctive” in the sense that the agency cannot require operators to pay twice, once in kind and then again in cash. Instead, Interior argued that the two methods of payment aren't mutually exclusive, meaning that until it has received full payment for any particular month, it can change its election between payment types.

Both parties argued that the statutory language was unambiguous. The Court sends mixed signals on that score. At the outset of its Chevron discussion, the panel agrees with the district court that the statute is ambiguous:

Later, though, it seems to walk that conclusion back a bit:

It is therefore unclear whether the panel actually thinks the statute is ambiguous or if it simply holds that even assuming it is ambiguous, it would still accept Interior's interpretation under Chevron.

The panel's refusal to take a clear position on the ambiguity issue is important. Among other things, whether a court adopts a particular interpretation of a statute because the language is clear or instead because the language is ambiguous and the agency's interpretation is permissible can determine whether the agency's future interpretation to the contrary trumps the appellate court's otherwise binding view of the statute. See Brand X. It would be very interesting to see how a Brand X analysis would go in a case like this one where the appellate court seems to go out of its way not to draw a conclusion regarding whether the statutory provision at issue is ambiguous. My guess is that the agency's future, contrary interpretation would win out under Brand X in this circumstance because while the panel sends mixed messages regarding the clarity of the statutory language, this much seems certain: The Court didn't adopt Interior's view because the panel believed that view was compelled by the unambiguous statutory text. Under Brand X, that likely is enough to leave the door open for the agency to nullify the Court's statutory interpretation holding simply by adopting a contrary but still permissible interpretation later.

Note also that because Interior argued that the statute was unambiguous, this case presents a Chevron Step One and a Half problem. Don't know what that is? See my discussion of the doctrine here. Or, better yet, read Aaron Nielson and Daniel Hemel's awesome article on the topic here.

Nor is the panel's approach to Chevron compatible with the Supreme Court's approach to Auer in Kisor v. Wilkie. To be clear, I'm not saying the two standards should look the same. Indeed, I spent a lot of time in a previous post (here) sorting out the many differences between Chevron and Auer/Seminole Rock/Kisor.  Thing is, though, lots of smart people, including many Article III judges have already started applying the Supreme Court's Kisor holdings in the Chevron context. I discuss examples here and here. As I show next, the Fifth Circuit isn't part of that club.

For one thing, Kisor repeatedly and sternly warns lower courts that they must never under any circumstances defer to an agency's interpretation of a regulation without first exhausting the traditional tools of construction and concluding the regulatory language at issue is genuinely ambiguous. Here, though, as I've already discussed, the Fifth Circuit defers without concluding that the statutory language at issue is ambiguous.

Furthermore, Kisor requires the Court to consider lots of additional factors before deferring to an agency's interpretation, like the agency's expertise on the topic at issue relative to the court's; whether the agency brought that expertise to bear in forming its interpretation; whether the interpretation is just a convenient litigating position; whether the interpretation embodies the agency's settled and authoritative view etc. The Fifth Circuit didn't address any of those factors. It did mention the "force of law" point, but (1) it didn't analyze it in any depth, noting instead that the parties didn't dispute that the orders carried the force of law and (2) Kisor never mentions the "force of law" point among the considerations courts should include in their analysis of whether deference is appropriate. (I discuss that point particular nuance in greater depth here if you're interested).

Finally, let's return to the question I posed earlier:  why did the panel describe the Chevron framework in such an unconventional way? Recall that the Court describes step two as including a Mead-like "force of law" requirement. It also dropped a footnote emphasizing that the parties didn't dispute that the orders at issue carried the force of law. As I explained above, these glosses on the canonical Chevron test are peculiar and, as far as I know, novel. So why would the Court include them? My speculative guess is that it might have something to do with the panel's subsequent holding that the orders were invalid because Interior didn't subject them to notice and comment. Let me explain.

Ordinarily, to have the force of law--and thus to be enforceable against a regulated party like W&T--an agency policy must be promulgated through notice and comment rulemaking. Through the orders at issue here, Interior announced a new policy and attempted to apply it retroactively to regulated parties. As I explain next, the Fifth Circuit rejected that attempt as improper, holding that if Interior wanted its new policy to have the force of law, it needed to subject it to notice and comment first. If the Fifth Circuit is right, though, doesn't that necessarily mean that because the orders weren't the products of notice and comment rulemaking, they cannot possibly have the force of law and thus are not eligible for Chevron deference? Perhaps the panel felt it necessary to flag the lack of any argument from either party that the orders lack the force of law to justify deferring under Chevron without contradicting its later holding that the orders actually lacked the force of law because Interior had failed to subject them to notice and comment.

I reiterate that I'm just speculating here. I actually have no idea why the panel decided to include the force-of-law qualifier in its description of step two. Maybe it was pure accident, or maybe there's another explanation. If you have an idea or think my guess is wrong, please share your thoughts in the comments or e-mail them to me if you'd rather they not be public.

INVALID SUBSTANTIVE RULE

Having rejected W&T's argument that Interior lacked statutory authority to demand that W&T pay cash to resolve payment discrepancies, the Court proceeded to hold that the orders were nevertheless invalid under the APA because they were substantive rules that Interior had not subjected to notice and comment. The upshot is: (1) the statute doesn't bar Interior from changing its mind about whether it wants payments in cash or in kind, but (2) if it wants to change its election in the way it did here, it must do so through notice and comment.

If you're not familiar with the mystifying and constantly recurring problem of distinguishing between substantive or "legislative" rules and interpretive or "non-legislative rules," please allow me to introduce you to one of the most frustrating problems in adlaw--an area of law brimming with doctrines and standards that seem designed to keep law professors employed rather than facilitate efficient and predictable resolution of challenges to agency action. Here's the lay of the land: There are two key distinctions between legislative rules and interpretive rules--one substantive, the other procedural. Substantively, legislative rules are designed to bind the agency that issues them and the regulated public; procedurally, the APA demands that agencies promulgate such rules only after subjecting them to the costly and time-consuming process of notice and comment rulemaking. Non-legislative (or interpretive) rules, by contrast, aren't binding and are exempt from the APA's notice and comment requirement.

Easy enough, right? Don't be fooled. These lines, which seem so easy to draw in the abstract, seem to vanish into the thin air in the rough and tumble of litigation--or, stated differently, when it counts. Here's how it usually goes down: an agency issues some sort of pronouncement—say, an informal guidance document—without bothering with notice and comment; regulated parties freak out and run to court before the policy at issue has even been enforced against anyone; the regulated parties breathlessly insist that the agency guidance is, in reality, a legislative rule that the agency should have subjected to notice and comment; but because the agency didn't undertake notice and comment, they argue, the guidance is ultra vires and an affront to the APA.

To say that courts have struggled to draw a coherent and predictable line between legislative and non-legislative rules would be an understatement. To give you an idea of just how difficult this problem is, Judge Rubin described the puzzle in the Fifth Circuit's 1981 decision in American Trucking Associations, Inc. v. I.C.C., 659 F.2d 452, 462 n.40 (5th Cir. 1981), as "baffling" and "enshrouded in considerable smog.” (quotations omitted). And let me assure you, that smog is as thick as ever nearly forty years later.

Yet, this case didn't present the typical and notoriously difficult debate regarding where to draw the line between legislative and non-legislative rules because Interior argued that the orders weren't "rules" at all. According to Interior, they were "adjudicative orders." An "order," according to the APA, is "a final disposition, whether affirmative, negative, injunctive, or declaratory in form, of an agency in a matter other than rule making." An "adjudicative order," then, presumably is an "order" formulated during an adjudication. The important point, for our purposes, though, is that adjudicative orders don't require notice and comment.

The Fifth Circuit rejected Interior's characterization of the orders as adjudicative orders because orders apply pre-existing legal requirements to specific cases, whereas the orders at issue here applied an entirely new valuation methodology retroactively. As the Court explained, to enforce a particular valuation methodology--like the one at issue in the orders--against regulated parties in an adjudication or enforcement action, the underlying policy must already have the force of law. And under the APA, that means it must be the product of notice and comment rulemaking.  Because Interior used the orders in this case to announce a new payment method and valuation methodology without first subjecting those policies to notice and comment, they were invalid and unenforceable.

Interior insisted that its orders couldn't be "rules" because the APA defines "rule" as an agency action that has "future effect." According to Interior, nothing in its orders prevented the agency from applying "a different methodology" "in future adjudications," to the orders didn't qualify as "rules" at all. The Fifth Circuit's refutation of that argument is worth quoting in full:

One final note. In contrast to its discussion of Chevron, which I described as incompatible with the Supreme Court's approach to Auer deference in Kisor v. Wilkie, the Fifth Circuit's approach to the legislative/non-legislative rules issue echoes some of Justice Kagan's reasoning from portions of the Kisor opinion that didn't garner the votes of a majority of the Court:

While Interior resisted the "interpretive rule" label for its orders, it plainly did attempt to make a policy that had not undergone notice and comment the basis for an enforcement action. Kisor confirms that the Fifth Circuit was right to reject that attempt as improper and invalid under the APA.

W&T Offshore Inc. v. Bernhardt, No. 18-30876 (5th Cir. Dec. 23, 2019) (Clement, Elrod, Duncan)
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