SIGNIFICANT JUDICIAL AND ADMINISTRATIsVE CASES FROM 2000-2003AN INDUSTRY PRACTITIONER'S PERSPECTIVE

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Book 1
(Feb 2004)
CHAPTER 4A
SIGNIFICANT JUDICIAL AND ADMINISTRATIsVE CASES FROM 2000-2003AN INDUSTRY PRACTITIONER'S PERSPECTIVE
Deborah Bahn Haglund
Haglund Law Firm
Dallas, Texas

The preceding paper summarizes the facts and holdings of some of the more significant federal and Indian lease royalty decisions issued since the 2000 Special Institute on Federal and Indian Oil and gas Royalty Valuation and Management. This paper will discuss a few additional cases, including Murphy Exploration and Production Co. v. Norton, a case applying the Fairness Act's 33-month time limit to a refund request; Santa Fe Snyder Corp. v. Norton, a case in which the court partially invalidated MMS' deepwater royalty relief regulations; Torch Operating Co. v. Babbitt, and Shell Offshore, Inc. v. Babbitt, two cases involving the use of FERC tariffs in calculating transportation allowances; and Devon Energy Corp., an Assistant Secretarial valuation determination applying the marketable condition rule in the context of coalbed methane valuation.

As requested by the Institute, cases in which this author has been personally involved are identified with an asterisk. Please note, however, that the views expressed herein are solely the personal views of the author; they do not necessarily represent the views of any particular company or of "the industry" in general.

I. The Fairness Act's 33-Month Time Limit on Administrative Proceedings

Murphy Exploration and Production Co. v. Norton, 252 F.3d 473 (D.C. Cir. 2001)

In February 1989, Murphy Exploration and Production Co. ("Murphy") requested a refund of royalties it overpaid on gas contract settlement proceeds under its federal offshore leases. Nearly ten years later, in November 1998, MMS issued an order denying in part Murphy's refund request; and Murphy filed an administrative appeal shortly thereafter.

While Murphy's administrative appeal was pending, Murphy filed suit in the District Court for the District of Columbia, contending that the 1996 Federal Oil and Gas Royalty Fairness and Simplification Act ("Fairness Act") ¹ gave the court jurisdiction over Murphy's refund request, even though its administrative appeal was still pending. Murphy contended that MMS' failure to issue a final decision on its refund request for more than 33 months resulted in a final "deemed" decision under the Fairness Act. The district court dismissed the suit for lack of jurisdiction, concluding that Murphy's refund request was not an "administrative proceeding" which triggered the Fairness Act's 33-month provision time limit. The Court of Appeals reversed and held that Murphy's refund request was an "administrative proceeding" as defined in the Fairness Act, and, therefore, that the Fairness Act conferred jurisdiction on the district court when the agency failed to act on Murphy's request for over 33 months.

The Fairness Act requires the Secretary of the Interior to "issue a final decision in any administrative proceeding, including any administrative proceedings pending on August 13, 1996, within 33 months from the date such proceeding was commenced or 33 months from August 13, 1996, whichever is later." ² If the Secretary fails to do so within the allotted time, the Secretary "shall be deemed to have issued a final decision ... and the appellant shall have right to judicial review of such deemed final action...." ³ The Fairness Act defines "administrative proceeding" as "any Department of the Interior agency process in which a demand, decision or order issued by the Secretary ... is subject to appeal or has been appealed." ⁴

In 1999, Interior promulgated regulations interpreting these provisions. ⁵ Under these regulations, a court's jurisdiction under the Fairness Act can be invoked when "an appeal ends", which Interior defined as 33 months after an appeal "commences", which Interior defined as the date on which MMS receives an appellant's notice of appeal or the date on which MMS receives the appellant's statement of reasons, whichever is later. ⁶ Thus, the regulations contemplate that only administrative appeals can qualify as an "administrative proceeding" which will trigger the Fairness Act's 33-month time limit. Since Murphy's refund request was not an appeal, MMS' failure to act on that request within 33 months did not result in a deemed final decision under the agency's regulations. The question on appeal was whether or not the courts would agree with the interpretation of the Fairness Act that was embodied in the agency's regulations. As noted above, the district court agreed with the agency's interpretation; the Court of Appeals did not.

The primary difference between the district court's analysis and that of the Court of Appeals is that different standards of review were applied. The district court applied the traditional two-step analysis of Chevron U.S.A. Inc. v. Natural Res. Def. Council. ⁷ First, the court found that the Fairness Act is ambiguous regarding whether a refund request (or any other proceeding that is not an appeal) is an "administrative proceeding" which triggers the 33-month provision. Second, the court found that the agency's interpretation of the ambiguous statute was reasonable and therefore entitled to deference. The Court of Appeals, on the other hand, found that the Chevron standard of review was inapplicable. The Court of Appeals held that MMS' interpretation of the Fairness Act's statutory grant of jurisdiction to the courts was not entitled to deference, regardless of whether the statute was ambiguous or whether the agency's interpretation was a reasonable one. Rather, the Court of Appeals believed it was entitled, indeed required, to interpret the statute for itself, as an original matter.

Applying traditional principals of statutory construction, the Court of Appeals concluded that the Fairness Act unambiguously includes within an "administrative proceeding" any "demand" (regardless of whether it is generated by the department or a lessee), any "decision," or any "order issued by the Secretary." ⁸

Since the Court of Appeals concluded that Murphy's refund request commenced an "administrative proceeding" under the act, and since more than 33 months had expired since its submission, the court held that the district court had jurisdiction to hear Murphy's challenge to MMS' refusal to grant its refund request, and it reversed the district court's dismissal of Murphy's lawsuit.

Significance: Section 10 of the Outer Continental Shelf Lands Act, ⁹ which required offshore lessees to submit a refund request before recouping overpaid royalties, was repealed for production on and after September 1, 1996 by the Fairness Act. Therefore, it is unlikely that the precise issue raised by this case will reappear. Nevertheless, the case is significant for a number of reasons.

First, the case illustrates that Chevron deference to an agency's statutory interpretation will not be appropriate 1) where the statutory provision in question does not delegate authority to the agency (here, for example, the provision in question was a jurisdiction-confirming provision granting judicial power to the courts; it did not delegate any authority to the agency) or 2) where no particular agency expertise is involved (here, for example, the court noted that Interior possessed no particular expertise in determining the scope of an Article III court's jurisdiction).

Second, although the Court of Appeals did not invalidate Interior's appeal regulations (only the district court's jurisdiction was at issue in the appeal), the decision calls into question the validity of the agency's regulations to the extent they make the agency's receipt of a notice of appeal or the appellant's statement of reasons, which ever comes later, the trigger for the Fairness Act's 33-month limitation.

Third, to the extent a lessee might wish to challenge these or other Interior regulations, the Court of Appeals' comments on a preliminary procedural issue should be noted. Interior argued that Murphy had waived its ability to challenge the agency's regulatory interpretation of the Fairness Act because it did not advance that view during the rulemaking process, relying on Ohio v. EPA, ¹⁰ a 1993 District of Columbia Court of Appeals decision. The Court of Appeals in Murphy did not disagree with Ohio, but distinguished it, stating: "Because Murphy had no role in the rulemaking, it cannot be said to have 'waived' its argument by failing to advance it during those proceedings." ¹¹

II. Deepwater Royalty Relief

Santa Fe Snyder Corp. v. Norton, No. 2:00-CV-1641 (W.D. La. 2003), appeal pending, No. 03-30648 (5%gth%g Cir.).

A group of plaintiffs including Santa Fe Snyder Corp. (collectively, "Santa Fe") filed a lawsuit in the Western District of Louisiana to challenge certain regulations ¹² promulgated by the Interior Department pursuant to the 1995 amendments to the Outer Continental Shelf Lands Act commonly known as the Deepwater Royalty Relief Act ("DRRA"). ¹³ Santa Fe also sought judicial review of...