CHAPTER 15 MANAGING RISK WHEN CONFRONTING GOVERNMENT LIMITS ON RESOURCE DEVELOPMENT
| Jurisdiction | United States |
(May 2008)
MANAGING RISK WHEN CONFRONTING GOVERNMENT LIMITS ON RESOURCE DEVELOPMENT
University of Denver
Sturm College of Law
Denver, Colorado
I. INTRODUCTION
When natural resources companies wish to extract or develop a natural resource, one of the most significant potential obstacles standing in the way of that goal is a government entity, at the local, state or federal level, that wishes to restrict, condition, delay, or prohibit the company's desire to make economically productive use of the resource. Government has several legal tools available to it, should it wish to impose such limits on private development of a resource.1 Government actions may also occur which act as an impediment or barrier to resource use. When private resource owners, or companies, confront these government rules or actions, several issues immediately arise.
First, the natural resources company needs to classify and categorize the Nature of the Harm that it has experienced at the hands of the government, and the possible Legal Recourse available. The first question in this inquiry is: How has the government affected the company's desire to develop or use the resource? The second question is: In what way has the company's goal of resource use been impeded by that particular government act? The third question is: Is there some recognized or arguable legal claim that can be asserted against the government action, which at least has the potential of preventing or modifying the government act that is slowing, making more expensive, or prohibiting the resource development goal?
Next, after the company has determined the existence of some potential legal claim, it should consider and take into account the strategic risks associated with Threatening, but not yet bringing, formal legal action against the government. The chances of a successful outcome will vary depending on the kind of government agency that is imposing the limit on resource use and development (i.e., is it a citizen board or full time regulator?) and its level of government (i.e., is it from a federal-state-local agency?). Companies should also engage in a risk-assessment analysis when considering whether to threaten the government with legal action.
Risk assessment roughly has two components. First, the company should engage in a comparative risk assessment, where it considers whether to invest its resources in its possible course of action (i.e., a threat of legal action), where to invest resources, the
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relative degree of benefit associated with this course of action, and whether the course of action contemplated is riskier than the original problem (i.e., the government action that limits resource use and development).2 Second, the company should next undertake a risk management strategy, which is the process of identifying, evaluating, selecting, and implementing actions to reduce the risk of harm to the company.3 These two risk assessment strategies should help the company decide whether to threaten the government with legal action.
Finally, the company should decide whether to proceed from a threat of legal action to the act of Taking Legal Action. There are at least three critical risks associated with a company pursuing formal legal action against some government entity, especially in court. First, there are risks involved with the various legal claims, or causes of action, that a company might wish to bring. If the claim is brought in court, a court might never reach the substantive merits of a claim, and even if it does, the likelihood of success on the merits of the claim might be low. Second, there are risks to the company itself when it is engaged in litigation against the government. Third, a litigation strategy brings about risks incurred by the company with respect to the government entity whose actions are being challenged in court. With respect to each of these three risks a company should not just identify the appropriate risks; it should also undertake a risk management strategy intended to reduce the risks of a litigation strategy.
II. LEGAL CLAIMS CHALLENGING GOVERNMENT ACTIONS
When a natural resources company wishes to develop a resource, government actions might interfere with the company's development strategy. Companies should first decide, and classify, exactly how the government has limited the company's desire to use and develop the resource. If the government action appears to be unfair, illegal, or unconstitutional, the company needs to decide the precise nature of the legal claim that, in theory, can be brought against the government to try to undo the action that is limiting resource use.
A. THE MOST COMMONLY LITIGATED COMPLAINTS THAT NATURAL RESOURCES COMPANIES HAVE ABOUT GOVERNMENTS
If one reviews reported appellate decisions over the past 15 years or so, one will discover that in nearly every year, private parties, both individuals and companies, have experienced a number of similar complaints against government agencies. These agencies have taken some kind of action that has restricted or adversely affected the company's desire to develop the resource under its control. The government's actions have in some way harmed the company's resource development strategy, engendering the "complaint against the government." These complaints roughly fall within 12 categories,
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which correspond to 12 different legal claims that can, in theory, be brought against the government. Each of the complaints reflects either the company's belief that the government has acted improperly in some way, or the fact that the government action has interfered with the company's ability to make profitable use of the natural resource affected by the government action.
Here is a summary of how a resources company might shorthand these commonly litigated complaints against government:
1. You broke your word.
2. You changed the rules on us.
3. Your action has caused us (1) to lose 100% of our economic viability, or (2) to make far less profit than we expected.
4. You singled us out for harsh treatment (alternatively, you are treating us differently than similarly situated companies).
5. You have imposed on us an unreasonable, or extortionate, condition.
6. You have allowed a third party to invade our property (alternatively, you have invaded our property).
7. You have failed to follow your enabling law.
8. You have unreasonably favored someone else's interests over ours.
9. We relied to our detriment on existing law, and we made investment decisions based on that law, and now your decision to ignore that original law has harmed us economically.
10. The rule you are imposing on us is not for a legitimate purpose, and does not accomplish a valid goal.
11. Your actions shock the conscience.
12. You have maliciously tried to harm us.
B. THE LEGAL CLAIMS ASSOCIATED WITH THESE COMPLAINTS
Of course, a natural resources company can simply point out to the government that it has taken some action that gives rise to one or more of the above complaints. And, in
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some theoretical world, the government might reconsider its action simply based upon the fact that a company had complained. But in a more realistic world, the company's complaint needs to be attached to a recognized legal claim before the complaint will have much credibility or likelihood of getting the government's attention. Each of the above complaints has some connection to a cause of action grounded in equity, constitutional law, or statute.
What follows is a shortened version of the company's complaint, and the consequential cause of action that might be brought against the government:
1. Government breaks its word -- Equitable or promissory estoppel; or possible violation of the Contracts Clause of the United States Constitution
2. Government changes the rules -- Anti-retroactivity provisions of state constitutions; federal due process limits on retroactive laws
3. Government deprives company of economic viability -- Per se taking under the Takings Clause, or regulatory taking under the Takings Clause
4. Singling out prohibition -- Equal protection violation
5. Unreasonable conditions -- Unconstitutional conditions doctrine under the Takings Clause
6. Invasion of property -- Physical invasion takings under the Takings Clause
7. Failure to follow authorizing law -- Ultra vires doctrine
8. Government favoring someone else's interest -- The "average reciprocity of advantage" test under the Takings Clause
9. Reliance to one's detriment -- Defeating investment-backed expectations under the Takings Clause; the vested rights doctrine
10. Failure of law to advance a legitimate goal -- Violation of due process (or violation of the Contracts Clause if a contract is involved)
11. Government shocks the conscience by its actions -- Due process violation
12. Government acting maliciously -- Federal RICO and Bivens claims; or punitive damages against government pursuant to § 1983
These are the specific legal causes of action that could potentially be brought against the government whose action has caused the different complaints by the natural resources company. The questions for the company, or the company's general counsel, then, are:
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1. Should I threaten the government with legal action based on one or more of the above claims?
2. If I do decide to bring an action in court against the government, what are the attendant risks?
3. For example, what are the chances that a court will never address the merits of the above claims?
4. If a court does address the merits, what are the chances of success?
5. Irrespective of success in court, what are the risks for the company that might occur from addressing complaints, and trying to seek redress, in court?
6. And, irrespective of success in court, what are the risks for the company that...
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