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INDEPENDENT PETROLEUM ASS'N OF AMERICA v. BABBITT

July 27, 1997

INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, et al., Plaintiffs,
v.
BRUCE BABBITT, et al., Defendants. SAMEDAN OIL CORPORATION, Plaintiff, v. ADA E. DEER, et al., Defendants.



The opinion of the court was delivered by: LAMBERTH

 This matter comes before the court on plaintiff Independent Petroleum Association of America et al. ("IPAA") and Samedan Oil Corporation's ("Samedan") motion for entry of order implementing mandate of the court of appeals, defendants' motion for entry of order implementing mandate of the court of appeals, and Samedan's motion for entry of permanent injunctive relief. For the reasons stated below, IPAA's motion for entry of order will be denied, and its case dismissed. Samedan's motion for entry of order will be granted in part and denied in part, and defendants' motion will be granted in part and denied in part. Samedan's motion for entry of a permanent injunction will be granted, in accordance with the opinion below.

 This contentious litigation began in West Virginia in 1993, when IPAA, a large trade association of petroleum businesses and organizations, and others, filed suit against the government after the Department of the Interior ("DOI") altered its policies as to the way in which it planned to collect royalties on natural gas take-or-pay settlements -- as discussed at length in IPAA v. Babbitt, 320 U.S. App. D.C. 107, 92 F.3d 1248 (D.C. Cir. 1996). The case was transferred to the United States District Court for the District of Columbia, and through an agreement between oil companies and the government, a specified number of companies were ordered to pay royalties on the natural gas payments in question as a mechanism to test the validity of the department's new "rule" on nonrecoupable take-or-pay settlement payments. A payment involving Samedan Oil Corporation served as one of these test cases, and Samedan was assessed $ 20,000 in royalties. Samedan filed suit.

 The district court upheld the government's new policy -- not as a rulemaking, but as an interpretation of an existing rule, to which courts must give due deference. The United States Court of Appeals for the District of Columbia Circuit reversed, finding DOI's decision to assess royalties on nonrecoupable take-or-pay payments to be the result of its arbitrary and capricious reading of its own rules, as will be discussed in further detail below. Now, the parties have come back before this court seeking to implement the court of appeals' mandate. What exactly this entails raises serious questions about the scope and extent of the circuit's decision in IPAA.

 At its most basic level, IPAA and Samedan simply seek to have the court of appeals' decision apply to them. But this would preclude the government from collecting royalties on nonrecoupable take-or-pay settlements on federal and/Indian oil and gas leases -- covering a large percentage of the natural gas industry and having nationwide effect. In addition to relief from actual payments, plaintiffs further seek to enjoin DOI from requiring companies to prepare reports, post sureties, etc. in connection with claims by the government for royalties on nonrecoupable take-or-pay settlements.

 The government, fearing a broad gutting of its practices with respect to its assessment of royalties on these settlement payments, essentially seeks to exclude IPAA from the appellate decision in IPAA, limiting the reach of the decision solely to Samedan. DOI argues that relief should be granted only to this single oil company, and only within this single circuit. To this end, the government has mounted a multi-front attack against IPAA's claims. First, it argues that IPAA never properly invoked jurisdiction before the court in either its or Samedan's case, and is entitled only to dismissal with prejudice of its claim that the agency engaged in an improper rulemaking, now that the courts have ruled DOI's royalty policy as does not rise to the level of reviewable final agency action. Second, DOI argues that even if IPAA could claim an entitlement to additional relief, standing and collateral estoppel questions which would arise in its quest for nationwide relief cannot be determined on the record presently before this court. Third, the government argues the proposed relief exceeds and conflicts with the decision of the court of appeals in IPAA. Finally, with respect to plaintiff Samedan, the government objects to any grant of relief or summary judgment other than setting aside the overturned order that it pay $ 20,000 in royalties.

 DISCUSSION

 A. RELIEF AVAILABLE TO IPAA

 Does IPAA have any issues before the court?

 The government argues that IPAA challenged only a May 3, 1993 letter by the Associate Director of the Minerals Management Service ("MMS") setting forth a policy on how MMS auditors should proceed to audit gas contract settlement payments received by lessees of federal and Indian oil and gas leases. Def.'s Mot. for Entry of Def.'s Order, March 24, 1997, at 1. By agreement of the parties, a procedure was established to bring test cases for judicial review to determine the validity of the new policy. DOI levied a royalty fee against Samedan pursuant to the new policy as set forth in the May 3 letter, which Samedan then challenged.

 Three issues were brought before the district court: (1) whether the May 3, 1993 letter constituted a rulemaking subject to APA notice-and-comment requirements; (2) what the appropriate standard was for reviewing the Assistant Secretary for Indian Affairs' -- Ada E. Deer's -- decision on September 16, 1994 to uphold the MMS policy as outlined in the May 3 letter; and (3) whether her decision could survive that standard. This court determined that (1) the May 3 letter was not an agency statement with binding effect, but that Deer's decision to apply the policies contained within that letter was entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837, 843, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). Given that deference, (2) the interpretation need be only reasonable and consistent with regulations or governing statutes. Nuclear Information Resource Serv. v. NRC, 297 U.S. App. D.C. 169, 969 F.2d 1169, 1173 (D.C. Cir. 1992). Finally, (3) Deer's decision to interpret "gross proceeds" as a result of natural gas drilling over which royalty payments may be taxed as inclusive of nonrecoupable take-or-pay settlements satisfied that interpretive standard. IPAA, 1995 WL 431305 at *12.

 The court of appeals reversed. In doing so, however, it agreed that the May 3 letter did not constitute a rulemaking, and therefore had no binding effect. IPAA, 92 F.3d at 1256. The court of appeals continued, though, that Deer's decision to assess royalty payments against Samedan did not constitute an internal interpretation of department regulations, but rather served as an interpretation of the Fifth Circuit's decision in Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159 (5th Cir. 1988), a decision which the agency had agreed to be bound by through its regulations. Revision of Gross Proceeds Definition in Oil and Gas Valuation Regulations, 53 Fed.Reg. 45,082, 45,083 (Nov. 8, 1988); IPAA, 92 F.3d at 1257. The court of appeals examined the question in this light, ultimately determining that the September 16, 1994 decision of Assistant Secretary Deer upholding the agency's December 2, 1993 order that Samedan pay royalties was arbitrary and capricious "in light of DOI's adoption of the Diamond Shamrock holding." IPAA, 320 U.S. App. D.C. 107, 92 F.3d 1248 at 1260. The court then pronounced that "neither take-or-pay settlement payments are royalty bearing unless and until they are credited toward the purchase of make-up gas." Id.

 The government strenuously argues that IPAA joined in Samedan's case only insofar as a ruling determining the status of the May 3, 1993 letter was concerned. As the government states, "the only matter with respect to which the IPAA association plaintiffs had sought to invoke the court's jurisdiction in its case -- the May 3 letter -- is not final agency action.' The necessary consequence of that determination by the court of appeals is that the associations are entitled to no relief, because their challenge was rejected." Def.'s Mem. in Supp. of Def.'s Mot. for Entry of Def.'s Order, at 2. In other words, the government argues that IPAA and its collective members had a case, and it has been decided: they lost.

 What, in fact, is the extent of IPAA's role in both civil action no. 93-2544 -- the complaint transferred from West Virginia, and civil action 94-2123, the case filed by Samedan Oil, both of which were eventually consolidated?

 1. Scope of IPAA's Challenge

 IPAA's complaint, filed August 13, 1993 (and later amended) in the United States District Court for the Northern District of West Virginia, contains numerous allegations. Contrary to the government's assertions, IPAA went much further than merely challenging the May 3, 1993 letter. IPAA, in paragraph 4 of its complaint, sought a declaration that royalties are not owed on nonrecoupable natural gas contract settlement payments. Comp., at 3. In IPAA's first cause of action, plaintiffs sought a ruling that those payments were not part of the gross proceeds which lessees received from the disposition of natural gas from the leases, and that the government's efforts to collect royalties on these sums violated federal statutes. Id. at 18. It is only in IPAA's second cause of action that it explicitly challenges the May 3 letter as the adoption of a new rule. It also challenged a June 18, 1993 order by DOI that would require royalty payors to provide information to MMS regarding gas contract settlements.

 The government contends, however, that by agreement of the parties, IPAA dropped its request for a preliminary injunction in exchange for an alteration of the June order, deciding to challenge only the May 3 letter and nothing more. But this is not borne out by the facts of the case. On February 9, 1994, this court granted IPAA's motion to withdraw the preliminary injunction it moved for on August 27, 1993. Plaintiffs' unopposed motion stated that based on the development of "interim procedures" between the parties which substantially addressed the element of irreparable harm," which IPAA originally feared, the need for a preliminary injunction was obviated. Pl.'s Unopp. Mot. for Leave to Wdraw. Mot. for Prelim. Inj., Feb. 8, 1994, at 1-2. The government believes that this leaves as the only basis for a challenge the May 3 letter.

 But in the face of IPAA's wide-ranging pending complaint and its request for declaratory relief, it is clear that IPAA intended to challenge far more than just the May 3 letter. This is especially true in light of its consolidation with Samedan's suit. Obviously, IPAA could not do as an entire group what Samedan could later do -- that is, attack a specific assessment -- because specific royalty assessments had not yet been handed down. Only Samedan was asked to cough up money at that point, and this was done as a test case. But IPAA certainly maintained an interest that the courts declare that royalties are not owed on nonrecoupable settlements, and it pursued that interest. It never dismissed its complaint.

 Yet, the government contends that IPAA should have sought to be a party in the Samedan case if it wanted to have its interests adjudicated with Samedan's. See Def.'s Mem. in Supp. of Def.'s Mot. for Entry of Def.'s Order at 7. Indeed, it runs counter to the notion of a "test case" to believe that the vast number of IPAA members and others were actually parties to Samedan Oil's case. Presumably, a test case is brought to reduce the complexities of widespread litigation, not proliferate them by adding all sorts of standing and jurisdictional issues multiparty litigation must address. As the government argues, the purpose of such a test is to apply real facts to a real party using a new promulgation. The cases here were consolidated, but this does not itself create a unified party status. See, e.g. Brown v. Francis, 33 V.I. 385, 75 F.3d 860, 866 (3d Cir. 1996)(finding the "neither consolidation with a jurisdictionally proper case nor an agreement by the parties can cure a case's jurisdictional infirmities"); General Contracting & Trading Co., L.L.C. v. Interpole, Inc., 940 F.2d 20, 24 (1st Cir. 1991)(stating that although two cases may be consolidated for purposes of convenience and judicial economy, they retain their separate identities).

 Thus, while there are no indications that IPAA dropped its general challenge to the authority of DOI to charge a particular type of royalty, it is equally clear, however, that IPAA cannot be considered a true party to Samedan's case, but must stand or fall on its own. The court must now decide whether IPAA has jurisdiction to mount the broad-based challenge to the government's royalty policy it has sought to do. *fn1"

 2. Jurisdiction over IPAA

 The government's strongest, and most difficult contention, is that regardless of what IPAA believed it was challenging, intended to challenge, or in fact did challenge, this court only had jurisdiction to hear a challenge to the May 3 letter. That is, despite IPAA's claims for wide declaratory and injunctive relief, it may only challenge the agency on a "final agency action" pursuant to § 704 of the Administrative Procedure Act ("APA"). This was alleged to be the May 3 letter. 5 U.S.C. § 704. The government argues that once the courts ruled the May 3 letter did not constitute final agency action in this case, IPAA had no jurisdictional basis on which to sue. See, Def.'s Reply to Pl.'s Opp. to Def.'s Mot. for Entry of Def.'s Order, at 4-5.

 By contrast, IPAA argues (1) the government's failure to raise a finality defense until now has effectively waived its ability to argue this point; (2) the government's waiver of immunity is not based solely on § 704 of the APA but rather § 702, which does not require finality; (3) because it is clear that DOI will continue to enforce a policy of charging royalties on nonrecoupable take-or-pay settlements despite the lack of a formal rule, it would be futile for IPAA to mount administrative challenges, so finality should not be required.

 There were two allegedly "final" actions at issue in this consolidated matter: first, the May 3 letter outlining DOI's policy on nonrecoupable take-or-pay payments and settlements, which was directed all companies making such payments; and second, the department's December 2 decision to implement the policies contained in the May 3 letter and charge a fixed royalty sum against the Samedan corporation -- a decision affecting Samedan alone.

 The government argues that because both the district and appellate court agreed that the May 3 letter is in no way a "rule" and has no binding effect, IPAA is faced with no final agency action to contest. Therefore, DOI says IPAA's case should be dismissed with prejudice.

 Absent an independent provision for review, the APA permits review only of final agency action. Public Citizen v. Office of the U.S. Trade Reps., 297 U.S. App. D.C. 287, 970 F.2d 916, 918 (D.C. Cir. 1992). And furthermore, as will be discussed in greater detail below, finality is a jurisdictional requirement. See, e.g., DRG Funding Corp. v. Sec. of Housing and Urban Dev., 316 U.S. App. D.C. 159, 76 F.3d 1212, 1214 (D.C. Cir. 1996) (stating that the requirement of a final agency action "has been considered jurisdictional," and if the agency action is not final, "the court therefore cannot reach the merits of the dispute."). If IPAA can be considered to have any challenge left in this case, it must have attacked something besides the May 3 letter, or there must be some finality with respect to the agency's decision independent of that letter. *fn2"

 The only credible argument IPAA advances suggesting that there is finality with respect to its case is its assertion that DOI has decided, despite the lack of any formal rule, to continue a policy of assessing royalties against nonrecoupable take-or-pay payments or settlements. As IPAA writes, "after Assistant Secretary Deer's opinion in Samedan, which adopted in full the rationale set forth in the MMS May 3, 1993 letter, there could be no doubt that the Department of Interior would continue to assert the same position in all of MMS's disputes with IPAA member companies regarding royalty on take-or-pay settlement monies." IPAA Surr., June 16, 1997 at 5. Thus, IPAA argues, it would be futile for it to go through the administrative process time after time given a stubborn insistence on the part of DOI to apply this policy. The take-or-pay policy should therefore be treated as a final decision by the agency for purposes of judicial review, IPAA argues.

 3. Final Agency Action

 When a party wishes to challenge an agency policy or practice in the courts, a party may seek judicial review under § 10(a) of the APA, which provides that a person suffering legal wrong because of "agency action", or who is adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof. See, 5 U.S.C. § 702. When the review sought is not pursuant to specific authorization in a substantive statute but only under the general review provisions of the APA, the "agency action" in question must be "final agency action." Lujan v. National Wildlife Federation, 497 U.S. 871, 110 S. Ct. 3177, 3185-86, 111 L. Ed. 2d 695. Though plaintiffs have alleged in their complaint that DOI's policy on take-or-pay royalties violates several statutes, the only relevant basis for review appears to be under the APA, which provided the basis for review the last time the court of appeals had this case. Therefore, under Lujan, final agency action is required before IPAA may seek judicial review.

 The purpose of this finality requirement is to prevent the disruption of the orderly administrative process through avoidance of premature judicial intervention until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties. Eastman Kodak Co. v. Mossinghoff, 704 F.2d 1319, 1322 (4th Cir. 1983). Put another way, "the relevant considerations in determining finality are whether the process of administrative decisionmaking has reached a stage where judicial review will not disrupt the orderly process of adjudication and whether rights or obligations have been determined or legal consequences will flow from agency action." Port of Marine Terminal Ass'n. v. Rederiaktiebolaget Transatlantic, 400 U.S. 62, 63, 27 L. Ed. 2d 203, 91 S. Ct. 203 (1970).

 The question of finality thus "seeks to distinguish a tentative agency position from a situation where the 'agency views its deliberative process as sufficiently final to demand compliance with its announced position.'" Natural Resources Defense Council, Inc. v. E.P.A., 306 U.S. App. D.C. 43, 22 F.3d 1125, 1132-33 (D.C. Cir. 1194) citing Ciba-Geigy Corp. v. EPA, 255 U.S. App. D.C. 216, 801 F.2d 430, 435-36 (D.C. Cir. 1986); see also, Sabella v. United States, 863 F. Supp. 1, 3 (D.D.C. 1994). DOI would have this ...


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