Century Exploration New Orleans, LLC v. United States ( 2013 )

In the United States Court of Federal Claims
No. 11-54 C
(Filed March 21, 2013)1
*********************
CENTURY EXPLORATION *
NEW ORLEANS, LLC, *
*
Plaintiff, *
* Breach of Oil and Gas Lease;
and * Risk of Regulatory Change;
* Sovereign Acts Doctrine;
CHAMPION EXPLORATION, LLC, * Outer Continental Shelf Lands Act,
* 43 U.S.C. §§ 1331-1356 (2006);
Third-Party Plaintiff, * Motion for Summary Judgment,
* RCFC 56.
v. *
*
THE UNITED STATES, *
*
Defendant. *
*********************
Richard K. Leefe, Metairie, LA, for plaintiff Century Exploration New
Orleans, LLC. Michael R. Gelder and James K. Sticker, III, Metairie, LA, of
counsel.
Guy E. Wall, New Orleans, LA, for plaintiff Champion Exploration, LLC.
Gregg M. Schwind, United States Department of Justice, with whom were
Stuart F. Delery, Principal Deputy Assistant Attorney General, Jeanne E.
Davidson, Director, and Steven J. Gillingham, Assistant Director, Washington, DC,
for defendant.
1
/ This opinion was issued under seal on March 8, 2013. Pursuant to ¶ 5 of the ordering
language, the parties were invited to identify any proprietary information contained in the sealed
opinion and to propose redactions to that opinion. On March 19, 2013, defendant filed a notice
in which it informed the court that the parties had no proposed redactions to the sealed opinion.
______________________________
OPINION
______________________________
Bush, Judge.
Now pending before the court are the parties’ cross-motions for partial
summary judgment, pursuant to Rule 56 of the Rules of the United States Court of
Federal Claims (RCFC), on plaintiffs’ breach claim (Count I of the complaint).
The motions have been fully briefed and are now ripe for a decision by the court.
Because none of the government’s actions in this case breached plaintiffs’ lease,
the government’s motion for partial summary judgment is granted, and plaintiffs’
cross-motion for partial summary judgment is denied.
BACKGROUND2
I. Factual Background
The United States, acting through the Department of the Interior (Interior), is
the defendant in this case. Interior is charged with managing many of the nation’s
energy resources, including resources located under the submerged lands of the
Outer Continental Shelf (OCS)3 in the Gulf of Mexico and in other waters of the
United States. Interior is responsible for the administration of mineral leases on
the OCS, as well as the regulation of mineral exploration and production activities
on the OCS. Plaintiffs Century Exploration New Orleans, LLC (Century) and
Champion Exploration, LLC (Champion) are the holders of an oil and gas lease for
a tract of submerged land located on the OCS in the Gulf of Mexico.4
2
/ The facts recounted here are taken from the parties’ submissions in this case and are
undisputed unless otherwise noted. The court makes no findings of fact in this opinion.
3
/ Due to the large number of acronyms and other abbreviations used in this opinion, the
court has, for the convenience of the reader, provided an appendix defining those terms.
4
/ Century owns a 90.472222-percent interest in the subject lease, while Champion owns
the remaining 9.527778-percent interest. Century initially purchased the lease at an auction in
March 2008, and Champion subsequently acquired a partial interest in the lease from Century.
continue...
2
Following a massive oil spill in 2010, the government adopted a number of
new requirements for drilling operations on the OCS. In this case, plaintiffs argue
that those new requirements repudiated and breached their lease and effected a
taking of their property without the payment of just compensation in violation of
the Fifth Amendment. Because the court has stayed proceedings on plaintiffs’
takings claim, this opinion addresses only plaintiffs’ breach of contract claim.
Accordingly, the court’s recitation of the facts in this case will be limited to those
most relevant to plaintiffs’ breach claim.
A. Legal Framework for Oil and Gas Exploration and Production on
the Outer Continental Shelf
Under the Outer Continental Shelf Lands Act of 1953 (OCSLA), 43 U.S.C.
§§ 1331-1356 (2006), the United States exercises jurisdiction and control over the
submerged lands of the OCS.5 The OCS is defined to include all submerged land
that is beyond the outer limits of state jurisdiction (three nautical miles from shore)
and within the limits of national jurisdiction (200 nautical miles from shore). See
43 U.S.C. §§ 1301, 1331; Amber Res. Co. v. United States, 538 F.3d 1358, 1362
(Fed. Cir. 2008) (Amber Resources II).
In enacting OCSLA, Congress explained that “the [O]uter Continental Shelf
is a vital national resource reserve held by the Federal Government for the public,
which should be made available for expeditious and orderly development, subject
to environmental safeguards, in a manner which is consistent with the maintenance
of competition and other national needs.” 43 U.S.C. § 1332(3). In addition,
OCSLA further provides that “operations in the [O]uter Continental Shelf should
4
/ ...continue
In its overview of the facts, the court will generally refer to both plaintiffs collectively, even
where the described event may have occurred before Champion acquired its interest in the lease.
5
/ OCSLA extends the legal jurisdiction of the United States to “the subsoil and seabed
of the [OCS] and to all artificial islands, and all installations and other devices permanently or
temporarily attached to the seabed, which may be erected thereon for the purpose of exploring
for, developing, or producing resources therefrom, or any such installation or other device (other
than a ship or vessel) for the purpose of transporting such resources, to the same extent as if the
[OCS] were an area of exclusive Federal jurisdiction within a State.” 43 U.S.C. § 1333(a)(1).
OCSLA, in other words, applies to drilling rigs, production platforms, pipelines, and other
structures and facilities, whether permanent or temporary, that are located on the OCS.
3
be conducted in a safe manner by well-trained personnel using technology,
precautions, and techniques sufficient to prevent or minimize the likelihood of
blowouts, loss of well control, fires, spillages, physical obstruction to other users
of the waters or subsoil and seabed, or other occurrences which may cause damage
to the environment or to property, or endanger life or health.” Id. § 1332(6).
Under OCSLA, the Secretary of the Interior (Secretary) is charged with
issuing and administering leases authorizing private parties to explore the OCS for
oil and natural gas and, if such exploration is successful, regulating the production
of oil and natural gas from the leased area. In that regard, OCSLA provides that
the Secretary
shall prescribe such rules and regulations as may be
necessary to carry out such provisions. The Secretary
may at any time prescribe and amend such rules and
regulations as he determines to be necessary and proper
in order to provide for the prevention of waste and
conservation of the natural resources of the [O]uter
Continental Shelf, and the protection of correlative rights
therein, and, notwithstanding any other provisions herein,
such rules and regulations shall, as of their effective date,
apply to all operations conducted under a lease issued or
maintained under the provisions of this subchapter.
43 U.S.C. § 1334(a). In accordance with those directives, the Secretary has
promulgated regulations pursuant to OCSLA. See 30 C.F.R. pt. 250 (2008).6
During the relevant time period, Interior issued and administered OCS
leases, and regulated exploration and production activities on the submerged lands
of the OCS, through the Minerals Management Service (MMS) and its successor
agency, the Bureau of Ocean Energy Management, Regulation and Enforcement
(BOEMRE). BOEMRE was subsequently divided into three separate agencies,
6
/ In this opinion, unless otherwise indicated, the court will generally refer to the version
of the Code of Federal Regulations (C.F.R.) that was in effect when plaintiffs acquired their
lease. The relevant provisions of the C.F.R. governing OCS leasing, exploration, and
development have been relocated from part 250 of title 30 to part 550 of that title.
4
each with distinct functions and authorities.7
The leases issued pursuant to OCSLA “entitle the lessee to explore, develop,
and produce the oil and gas contained within the lease area, conditioned upon due
diligence requirements and the approval of the development and production plan
required by this subchapter.” 43 U.S.C. § 1337(b)(4). However, “[t]he issuance
and continuance in effect of any lease, or of any assignment or other transfer of any
lease, under the provisions of this subchapter shall be conditioned upon
compliance with regulations issued under this subchapter.” Id. § 1334(b).
OCSLA and its implementing regulations establish a multi-stage process for
issuing OCS leases and for conducting exploration and production activities under
those leases. First, the Secretary develops a five-year plan for lease sales based on
the nation’s energy needs. Second, the leases are awarded to individual bidders
based on competitive auctions. Third, the lessees conduct exploration activities on
the leased area to determine whether oil and gas are present. Finally, the lessees
conduct development and production activities on the site. Each of these distinct
stages is governed by OCSLA and its implementing regulations. See generally
Sec’y of Interior v. California, 464 U.S. 312, 337-40 (1984).
The leases are awarded to the highest responsible qualified bidder at
competitive, sealed-bid auctions conducted pursuant to a five-year plan developed
by the Secretary. See 43 U.S.C. §§ 1334, 1337, 1344. In developing that plan, the
Secretary must “select the timing and location of leasing, to the maximum extent
practical, so as to obtain a proper balance between the potential for environmental
damage, the potential for the discovery of oil and gas, and the potential for adverse
impact on the coastal zone.” Id. § 1344(a)(3). In addition, the Secretary must
consider, inter alia, “relevant environmental and predictive information for
different areas of the [O]uter Continental Shelf” in developing the five-year plan.
7
/ In May 2010, the Secretary of the Interior announced that MMS would be split into
three separate agencies: the Bureau of Safety and Environmental Enforcement (BSEE), the
Bureau of Ocean Energy Management (BOEM), and the Office of Natural Resources Revenue
(ONRR). Secretarial Order No. 3299 (May 19, 2010). In June 2010, MMS was renamed
BOEMRE. Secretarial Order No. 3302 (June 18, 2010). The revenue-collection functions of
BOEMRE were transferred to ONRR in October 2010, and BOEMRE was then divided into two
new agencies, BSEE and BOEM, in October 2011. See Direct Final Rule, 76 Fed. Reg. 64432(Oct. 18, 2011).
5
Id. § 1344(a)(2)(H).
Under OCSLA, a lessee must first submit an exploration plan (EP) to
Interior for review and approval before conducting any exploration activities under
its lease, see 43 U.S.C. §§ 1340(c)(1), 1340(e)(2); 30 C.F.R. § 250.201, and
Interior must approve or deny the EP within thirty days of receipt, see 43 U.S.C.
§ 1340(c)(1). The lessee must certify that the EP is consistent with the coastal
management plan of any affected state. Id. § 1340(c)(2); 30 C.F.R. §§ 250.226,
250.232, 250.235. Further, the EP must include an Oil Spill Response Plan
(OSRP) for the proposed drilling facilities, or it must incorporate a previously
approved regional OSRP. 30 C.F.R. § 250.219(a). Once an EP is approved by
Interior, the lessee must conduct all exploration activities on the site in conformity
with the approved EP. 43 U.S.C. § 1340(e)(2).
Following the approval of its EP, an OCS lessee must seek permission to
conduct exploratory drilling, as described in its approved EP, by filing an
Application for Permit to Drill (APD). 43 U.S.C. § 1340(d); 30 C.F.R. §§ 250.281,
250.410. If the application meets each of the requirements of the regulations,
30 C.F.R. §§ 250.411-250.418, the lessee can begin exploratory drilling on the site.
During the development stage, the lessee must submit either a Development and
Production Plan (DPP) or a Development Operations Coordination Document
(DOCD), depending upon the location of the lease site, for review and approval by
Interior.8 43 U.S.C. § 1351; 30 C.F.R. §§ 250.201, 250.241. In addition, the lessee
must file an APD for any production wells it intends to drill, just as it did for its
exploratory wells. 30 C.F.R. §§ 250.281, 250.410.
OCSLA directs the Secretary to promulgate regulations “for the suspension
or temporary prohibition of any operation or activity, including production,
pursuant to any lease or permit.” 43 U.S.C. § 1334(a)(1). Under OCSLA, the
Secretary may issue a suspension “at the request of a lessee, in the national interest,
to facilitate proper development of a lease or to allow for the construction or
negotiation for use of transportation facilities.” Id. § 1334(a)(1)(A). In addition,
the Secretary may issue a suspension without a request from the lessee “if there is a
8
/ DOCDs are issued for development of lease sites within the western Gulf of Mexico,
while DPPs are issued for sites elsewhere. 30 C.F.R. § 250.201. The review and approval
process for a DPP is, according to defendant, somewhat more onerous than the process for a
DOCD. See Def.’s Mot. at 13 n.9.
6
threat of serious, irreparable, or immediate harm or damage to life (including fish
and other aquatic life), to property, to any mineral deposits (in areas leased or not
leased), or to the marine, coastal, or human environment.” Id. § 1334(a)(1)(B).
In addition to the suspension grounds expressly described in OCSLA, the statute’s
implementing regulations state that the Secretary may suspend a lease when
necessary for the installation of safety or environmental protection equipment.
30 C.F.R. § 250.172(c). In the absence of negligence or willful misconduct on the
part of the lessee, the Secretary may extend the duration of a suspended lease for a
period of time equal to the length of the suspension. 43 U.S.C. § 1334(a)(1).
Under the regulations in effect when plaintiffs acquired their lease, MMS
was authorized to issue Notices to Lessees and Operators (NTLs), which
“clarify, supplement, or provide more detail about certain requirements.”
30 C.F.R. § 250.103. Further, “NTLs may also outline what [lessees] must
provide as required information in [their] various submissions to MMS.” Id.NTLs are now issued by BOEM. See 30 C.F.R. § 550.103 (2012).
B. Plaintiffs’ Oil and Gas Lease for Ewing Bank 920
In accordance with the Secretary’s lease program for the years 2007-2012,
the government held an auction in March 2008 (Lease Sale No. 206) for thousands
of OCS tracts in the Gulf of Mexico. Def.’s Ex. 5.9 Plaintiffs submitted the
highest bid on a 5760-acre tract known as Block 920, Ewing Bank (EW920).10
Plaintiffs entered into Lease No. OCS-G 32293 (the lease) on July 8, 2008, and
that lease became effective on August 1, 2008. Def.’s Ex. 1. The lease has an
initial term running through July 31, 2016, and for as long thereafter as oil and gas
are produced from the leased area in paying quantities, or while approved drilling
or well re-working operations are conducted on the submerged land, or for as long
as otherwise provided by regulation. Id. In order to avoid cancellation of their
9
/ In this opinion, citations to “Def.’s Ex. __” refer to the specified exhibit in the
appendix to defendant’s motion for partial summary judgment, as well as the consecutively
numbered exhibits filed with defendant’s response and its notice of subsequent developments.
Similarly, citations to “Pls.’ Ex. __” refer to the exhibits in the appendix to plaintiffs’ motion for
partial summary judgment, as well as the consecutively numbered exhibits to its reply and notice
of subsequent developments.
10
/ The bid submitted by plaintiffs was more than five times as high as the only other bid
submitted for the EW920 lease. See Def.’s Ex. 5 at A138.
7
lease, however, plaintiffs were required to commence an exploratory well on the
site no later than July 31, 2013. See 30 C.F.R. § 256.37(a)(3).
Plaintiffs made an initial bonus payment of $23,236,314 to acquire the lease,
and they have paid the government additional rental payments of $9.50 per acre,
per lease year – $54,720 per year – since that initial payment. Further, once the
lease is developed, the government is entitled to a specified percentage of the
estimated or market value of the oil and gas produced on the leased area as royalty
payments, subject to a minimum royalty payment of $9.50 per acre, per lease year.
Def.’s Ex. 1 at A1.
On December 22, 2008, plaintiffs submitted their EP for the lease to MMS.
See Def.’s Ex. 2. The EP contemplated the drilling and completion of five
exploratory wells on the leased area and incorporated by reference a regional
OSRP approved by MMS in August 2007. See id. at A51-A52. In their initial EP,
plaintiffs certified that they had “the capacity to respond, to the maximum extent
practicable, to a worst-case discharge, or a substantial threat of such a discharge,
resulting from the activities proposed in our EP.” Id. at A52; see also id. at A26
(“Century . . . has the financial capability to drill a relief well and conduct other
emergency well control operations.”). Plaintiffs met their bonding requirements
with an area-wide development bond furnished and maintained in accordance with
applicable regulations and NTLs then in effect. See Pls.’ Ex. 4 at 13; Def.’s Ex. 2
at A25. Plaintiffs stated that they anticipated commencing operations under the EP
as early as March 2009, “[c]ontingent upon receiving regulatory approvals and
based on equipment and personnel availability,” Def.’s Ex. 3 at A80, and would
complete those operations by October 13, 2009, Def.’s Ex. 2 at A13.
In accordance with the Coastal Zone Management Act of 1972 (CZMA),
16 U.S.C. §§ 1451-1464 (2006), plaintiffs also submitted their proposed EP to the
State of Louisiana, which approved the EP on January 29, 2009, through the
Department of Natural Resources, Office of Coastal Restoration and Management.
See Compl. Ex. C; Def.’s Ex. 2 at A62-A66. MMS subsequently approved the EP
on February 6, 2009. See Def.’s Ex. 4.
Plaintiffs performed a reservoir analysis of the leased area, which indicated
“proved reserves” of approximately 12.7 million barrels of oil equivalent (BOE)
8
and “probable reserves” of approximately 2.4 million BOE.11 Those figures were
later confirmed by an independent analysis. See Compl. ¶ 11; Pls.’ Ex. 3.
Plaintiffs have not, however, conducted any drilling – exploratory or otherwise –
on the leased area, nor have any of the site’s prior lessees conducted any drilling
there. Def.’s Ex. 3 at A84.
C. The Deepwater Horizon Disaster and Subsequent Reforms
On April 20, 2010, an explosion and fire occurred on a semi-submersible
drilling rig, the Deepwater Horizon, during the temporary abandonment of the
Macondo exploratory well in the central Gulf of Mexico. The explosion killed
eleven workers, and the subsequent loss of the vessel two days later, on Earth Day,
resulted in an oil spill that lasted several months and released 4.9 billion barrels of
crude oil into the Gulf of Mexico. The blowout preventer (BOP), designed to stop
the flow of oil in the event of a blowout, failed to do so. The operator of the vessel
made a number of unsuccessful attempts, using various techniques, to stop the flow
of crude oil from the well before finally succeeding on July 15, 2010 – eighty-nine
days after the explosion. The reservoir was permanently sealed in mid-September.
See Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling,
National Commission on the BP Deepwater Horizon Oil Spill and Offshore
Drilling, at 1-19, 129-70 (January 2011) (National Commission Report).
In the meantime, more than 45,000 government, industry, and other
personnel were enlisted in the response effort, along with thousands of government
and private vessels and aircraft. Id. at 129-70. The Deepwater Horizon event was
deemed to be a “spill of national significance” – the first time in history that term
had been used. See 40 C.F.R. § 300.5 (2012) (“Spill of national significance
(SONS) means a spill that due to its severity, size, location, actual or potential
impact on the public health and welfare or the environment, or the necessary
response effort, is so complex that it requires extraordinary coordination of federal,
11
/ The term “proved reserves” essentially refers to the quantity of petroleum that is
expected to be recovered from the leased area with a reasonable degree of certainty, while
“probable reserves” refers to the additional quantity of petroleum that is less likely to be
recovered than proved reserves, but more likely to be recovered than “possible reserves.”
Compl. ¶ 11 nn.5-6. There should be at least a fifty percent probability that the quantity of
petroleum actually recovered will equal or exceed the sum of proved reserves and probable
reserves (also known as “2P”). Id. ¶ 11 n.6.
9
state, local, and responsible party resources to contain and clean up the
discharge.”).
Following the Deepwater Horizon event, in the summer and fall of 2010,
MMS – and then BOEMRE – imposed a number of substantial new regulations
and requirements on OCS deepwater drilling operations in the Gulf of Mexico.
Plaintiffs allege that these new requirements have substantially increased the
economic costs of their performance under the lease and have therefore repudiated
and breached that lease.
1. The Safety Measures Report
On April 30, 2010, the President ordered the Secretary to conduct a thorough
review of the Deepwater Horizon disaster and to submit a report recommending
new safety and environmental safeguards for deepwater drilling within thirty
days.12 On May 27, 2010, the Secretary issued a report (the Safety Measures
Report), which recommended a number of new safety precautions for all deepwater
drilling operations on the OCS. See Def.’s Ex. 6.
In the executive summary of the Safety Measures Report, the Secretary
recommended a six-month moratorium on all OCS deepwater drilling activity
using a floating rig in the Gulf of Mexico, as well as all permitting for such
activity, even though there was no specific recommendation for such in the body of
the report. See id. at A210. Following the release of the Safety Measures Report,
five of the seven experts consulted by Interior during its investigation indicated
that they had not endorsed the decision to impose a six-month moratorium on
deepwater operations. The Secretary contacted those individuals, and apologized
for any misunderstanding or confusion created by the executive summary. See
Pls.’ Ex. 32 at 2. Interior’s Office of Inspector General later investigated the issue,
and determined that while the executive summary could have been clearer, that
lack of clarity did not violate applicable law. See Pls.’ Ex. 36 at 2.
12
/ The President also established an independent, bipartisan commission to investigate
the Deepwater Horizon disaster and to make specific recommendations based on that
investigation. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore
Drilling issued its report in January 2011.
10
2. The First Moratorium – NTL-04
On May 28, 2010, the Secretary issued a memorandum to the Director of
MMS, ordering him to commence a six-month suspension of all pending, current,
and approved offshore drilling operations on new deepwater wells on the OCS.
See Def.’s Ex. 7. The memorandum further stated that MMS was not to process
any APDs for deepwater wells during that six-month period. Id. The Secretary
invoked two regulatory bases for his decision. First, he determined that “at this
time and under current conditions that offshore drilling of new deepwater wells
poses an unacceptable risk of serious and irreparable harm to wildlife and the
marine, coastal, and human environment.” Id. (citing 30 C.F.R. § 250.172(b)).
Second, the Secretary “determined that the installation of additional safety or
environmental protection equipment is necessary to prevent injury or loss of life
and damage to property and the environment.” Id. (citing 30 C.F.R. § 250.172(c)).
The Secretary explained that his decision was based on Interior’s thirty-day review
of the Deepwater Horizon disaster, the Safety Measures Report, and the Secretary’s
“further evaluation of the issue.” Id.On May 30, 2010, the Deputy Director of MMS issued Notice to Lessees
No. 2010-N04 (NTL-04), which provided details on the six-month moratorium on
deepwater drilling and permitting. Def.’s Ex. 8. The notice explained that MMS
would not consider applications to drill deepwater wells for a period of six months,
and further noted that MMS would issue directed suspensions to lessees currently
conducting such operations.13 NTL-04 referenced the Secretary’s May 28, 2010
memorandum and the Safety Measures Report as supporting the moratorium.
See id. at A254. The notice stated that the six-month moratorium would not apply
to intervention or relief wells drilled for emergency purposes. With respect to all
other active drilling operations, however, the notice provided that affected lessees
“must proceed at the next safe opportunity to secure the well and take all necessary
13
/ NTL-04 explained that “[f]or the purposes of this Moratorium NTL, deepwater means
depths greater than 500 feet.” Def.’s Ex. 8 at A253. Plaintiffs appear to challenge that definition
of deepwater, arguing that it was inconsistent with an earlier NTL defining that term to include
only operations in depths greater than 400 meters (1312 feet). See Pls.’ Mot. at 25. However,
the relevance of that apparent discrepancy is unclear, as plaintiffs’ proposed activities would
meet either definition of deepwater. See Pls.’ Ex. 4 at 13 (noting that plaintiffs planned to drill
five exploratory wells in approximately 1500 feet of water); Pls.’ Ex. 8 at 5 (same); Def.’s Ex. 2
at A14-A18 (same).
11
steps to cease operations and temporarily abandon or close the well until [they]
receive further guidance from the Regional Supervisor for Field Operations.” Id. at
A253.
On June 22, 2010, a district court in Louisiana issued a preliminary
injunction enjoining the Secretary’s enforcement of the first moratorium. See
Hornbeck Offshore Servs., LLC v. Salazar, 696 F. Supp. 2d 627 (E.D. La. 2010).
The Secretary appealed to the United States Court of Appeals for the Fifth Circuit,
but that court dismissed the appeal as moot when the Secretary later rescinded the
first moratorium on July 12, 2010. See Hornbeck Offshore Servs., LLC v. Salazar,
396 Fed. App’x 147 (5th Cir. 2010).
3. New Safety Measures – NTL-05
On June 8, 2010, MMS issued Notice to Lessees No. 2010-N05 (NTL-05),
entitled “Increased Safety Measures for Energy Development on the OCS,” which
imposed new and increased substantive requirements on drilling operations. See
Def.’s Ex. 11. The new requirements set forth in NTL-05 applied to all OCS
activity, whether in deepwater or in shallow water. NTL-05 adopted various
recommendations described in the Safety Measures Report, and which, in the view
of MMS, warranted immediate implementation. In addition to imposing new
information and inspection requirements for BOPs, NTL-05 required the chief
executive officers (CEOs) of affected operators to certify, under threat of criminal
penalties for false statements, that the operators were in compliance with the
operating regulations set forth in Part 250 of the Code of Federal Regulations
(C.F.R.), as well as the operators’ compliance with several other conditions. See
generally Pls.’ Ex. 4 at 16-18.
On October 19, 2010, the same district court that enjoined the enforcement
of the first moratorium set aside NTL-05 because, according to the court, it
imposed new substantive requirements on drilling operations but was not
promulgated in accordance with the required process of notice-and-comment
rulemaking. See Ensco Offshore Co. v. Salazar, No. 10-1941, 2010 WL 4116892(E.D. La. Oct. 19, 2010).
4. New Information Requirements – NTL-06
On June 18, 2010, MMS issued Notice to Lessees No. 2010-N06 (NTL-06),
12
entitled “Information Requirements for Exploration Plans, Development and
Production Plans, and Development Operations Coordination Documents on the
OCS,” which rescinded certain limitations set forth in an earlier notice to lessees
(Notice to Lessees No. 2008-G04) regarding the information that operators were
required to submit with EPs, DPPs, and DOCDs on blowout and worst-case
discharge scenarios. See Def.’s Exs. 13-14; Pls.’ Ex. 4 at 18-20. NTL-06 appears
to be the most significant obstacle to plaintiffs’ performance under the lease, and
its impacts on plaintiffs will be addressed more fully below.
5. The Second Moratorium
On July 12, 2010, the Secretary issued a memorandum that rescinded the
first moratorium, but also ordered BOEMRE to issue new suspensions and a freeze
on permitting based upon a second deepwater moratorium to be in effect through
November 30, 2010. See Def.’s Ex. 18. In contrast to the May 2010 moratorium,
which applied to all deepwater drilling activities, the July 2010 moratorium applied
only to operations using subsea BOPs or surface BOPs on floating facilities.
Following the permanent closure of the infamous Macondo well in
September 2010, the Director of BOEMRE issued a memorandum to the Secretary
recommending that the second moratorium – both the suspensions of drilling
operations and the prohibition on new permits – be lifted immediately. On October
12, 2010, the Secretary terminated the second moratorium in a decision
memorandum, but also ordered the Director of BOEMRE to require the CEO of
any operator seeking to perform deepwater drilling that would have been subject to
the now-terminated moratorium to certify that the operator had complied with all
applicable regulations. See Def.’s Ex. 19 at A404. In addition, the memorandum
also requires each operator to “demonstrate that it has in place written and
enforceable commitments, pursuant to applicable regulations, that ensure that
containment resources are available promptly in the event of a deepwater
blowout.” Id.
6. The Categorical Exclusions Memorandum
On August 16, 2010, the Director of BOEMRE directed the agency to stop
using certain categorical exclusions in performing reviews of drilling operations
under the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. §§ 4321,
4331-4335 (2006). Under NEPA, the federal government is required to consider
13
the environmental consequences of its actions. In doing so, the agency first
performs an environmental assessment (EA) to determine whether a proposed
action will have a significant impact on the environment. If the agency answers
that question in the negative, it issues a finding of no significant impact (FONSI).
If the agency determines that its proposed action will have a significant impact on
the environment, it must prepare a more extensive environmental impact statement
(EIS). Under regulations promulgated pursuant to NEPA, federal agencies may
categorically exclude certain types of actions from the requirement to perform an
EA or an EIS. See 40 C.F.R. §§ 1500.4(p), 1508.4 (2012). Before the Director’s
memorandum, EPs were categorically excluded from NEPA review; now, those
plans had to meet the requirements of NEPA.
7. The Drilling Safety Rule
The Drilling Safety Rule (DSR) codified the new protocols contained in
NTL-05, as well as a number of new safety requirements recommended in the
Safety Measures Report. The rule was first published without notice or comment,
and became effective immediately upon its publication in the Federal Register on
October 14, 2010. 75 Fed. Reg. 63346 (Oct. 14, 2010); see Def.’s Mot. Exs.
22-23. The DSR was later published as a final rule, following a comment period,
on August 22, 2012. 77 Fed. Reg. 50856 (Aug. 22, 2012); see Pls.’ Ex. 33.
The court need not describe each of the specific provisions of the DSR here; there
appears to be no dispute that the rule contains new substantive requirements related
to well bore integrity and well control equipment and procedure, see Pls.’ Ex. 4 at
26-27, which would impose substantial costs on operators and lessees, see id.
8. The Workplace Safety Rule
BOEMRE published another regulation, the Workplace Safety Rule (WSR),
the day after it published the DSR in the Federal Register. 75 Fed. Reg. 63610(Oct. 15, 2010). The WSR requires each OCS operator to develop and implement
a Safety and Environmental Management System (SEMS) for its operations.
Like the DSR, the WSR imposed new substantive requirements on OCS operators;
unlike the DSR, however, the WSR was not developed or issued in direct response
to the Deepwater Horizon disaster. Instead, the rule issued on October 15, 2010,
was the final version of a rule first published in the Federal Register as an
advanced notice of proposed rulemaking in May 2006, see 71 Fed. Reg. 29277(May 22, 2006), and then as a notice of proposed rulemaking in June 2009, see
14
74 Fed. Reg. 28639 (June 17, 2009). In other words, the rulemaking process that
culminated in the WSR was initiated long before plaintiffs acquired their lease.
9. CEO Compliance Statement and Enhanced Scrutiny of
Containment Resources – NTL-10
On November 8, 2010, BOEMRE issued Notice to Lessees No. 2010-N10
(NTL-10), which requires the CEO statement discussed in the October 12, 2010
memorandum. See Def.’s Ex. 26. NTL-10 also informed lessees that they must
submit information with their OSRPs regarding their access to and deployment of
containment resources, and that such information would be subject to additional
scrutiny by BOEMRE. NTL-10 was later replaced by rules published in the
Federal Register following the process of notice-and-comment rulemaking. See
Pls.’ Ex. 4 at 29.
10. The December 2010 Clarification Document
On December 13, 2010, BOEMRE released a guidance document to clarify
the meaning of many of its actions, such as NTL-06, the new Drilling Safety Rule,
the required NEPA assessments, and the NTL-10 compliance statement. See
Def.’s Exs. 27-28. Plaintiffs do not contend that this document imposed any new
requirements that were not already included in earlier NTLs or regulations.
D. Subsequent Action on Plaintiffs’ Lease
On June 16, 2011, the Secretary sent a memorandum to BOEMRE, in which
he ordered the agency to establish an expedited process for OCS lessees to request
and obtain one-year suspensions and extensions of their leases. See Def.’s Ex. 29.
On June 29, 2011, BOEMRE issued NTL No. 2011-N05, which implemented the
Secretary’s orders. See Def.’s Ex. 30. In order to obtain a suspension and
extension under that notice, an OCS lessee was required to certify that: (1) no oil
or gas had been produced from the leased area as of May 15, 2011; (2) the leased
area is under at least 500 feet of water (i.e., in deepwater); and (3) the lease is set to
expire on or before December 31, 2015. Id. at A529. Plaintiffs requested a
suspension of their lease on July 5, 2011, see Def.’s Ex. 31, and BOEMRE
approved plaintiffs’ request on August 11, 2011, see Def.’s Ex. 32.
Under applicable regulations, OCS lessees are required to submit a revised
15
OSRP for approval every two years. See 30 C.F.R. § 254.30(a). Plaintiffs’ EP was
based on a regional OSRP submitted in May 2007 and approved in August of that
year. See Def.’s Ex. 2 at A51; Pls.’ Ex. 1 at 9.14 Plaintiffs continued to revise their
regional OSRP in accordance with the regulations, even after the occurrence of the
governmental actions challenged in this case, and BSEE approved the most recent
revision to plaintiffs’ OSRP on November 8, 2012. See Def.’s Exs. 16-17, 40.
Plaintiffs have continued to make the required rental payments under their lease,
even after the events that plaintiffs view as a repudiation and total breach of the
lease. Plaintiffs have not, however, ever filed an APD to conduct any exploratory
drilling on the leased area.
II. Procedural History
On January 25, 2011, Century filed its three-count complaint in this matter.15
In its complaint, Century asserts that the government breached its lease agreement
with plaintiffs (Count I); that it effected an uncompensated taking of its private
property in violation of the Fifth Amendment (Count II); and that the government’s
activities may have given rise to other, unspecified causes of action (Count III).
Century asserts that the government’s actions in this case violated various sections
of the Administrative Procedure Act (APA), 5 U.S.C. §§ 553, 706 (2006), and
applicable regulations. Century requests a money judgment for its expectation
damages under the lease or lost profits, whichever is greater. In the alternative,
Century seeks as just compensation the fair market value of its interest in the lease.
In the pre-suit notice sent to the government, Century asserted that its lost profits
are equal to approximately $650 million. Def.’s Ex. 37 at A555.
On April 5, 2011, defendant filed a motion to order the joinder of Champion
14
/ Plaintiffs’ regional OSRP was first approved as early as 2004, see Pls.’ Ex. 1 at 3, and
was revised a number of times before the August 2007 approval, see id. at 4-9. The most recent
revision of the OSRP uses EW920 as the basis for the worst-case discharge scenario, while the
earlier versions of the plan used a different lease tract known as Ship Shoal 153.
15
/ On November 23, 2010, Century sent to the President, the Secretary of the Interior,
the Director of BOEMRE, local BOEMRE officials, and the Governor of Louisiana a letter that
provided notice of Century’s claims and requested a decision on those claims within sixty days
as required under OCSLA, 43 U.S.C. § 1349(a)(2)(A). The letter and supporting documents
were delivered to the United States on November 24, 2010. Century received no response from
the government within the sixty-day time period. See Def.’s Ex. 37.
16
pursuant RCFC 19(a). In the alternative, defendant asserted that the instant suit
must be dismissed in its entirety pursuant to RCFC 12(b)(7) and RCFC 19(b)
should joinder of Champion prove to be infeasible. In the same motion, defendant
argued that the takings claim raised in Count II of the complaint must be dismissed
under RCFC 12(b)(6) for failure to state a claim upon which relief can be granted.
Because the property rights at issue in plaintiffs’ takings claim were created by the
lease that plaintiffs allege has been breached, defendant argued that plaintiffs must
seek relief under a breach of contract theory, not under a takings theory.
On June 21, 2011, the court issued an order directing the Clerk’s Office to
notify Champion of the pendency of this action as a potentially interested party
pursuant to RCFC 14(b). That notice was duly issued by the Clerk’s Office on
July 19, 2011, and Champion subsequently filed a complaint against defendant, in
accordance with RCFC 14(c), on September 12, 2011. In its complaint, Champion
adopted the allegations set forth in the initial complaint filed by Century, but also
reserved its right to make an election of remedies at a later date. Following
briefing and oral argument on defendant’s motion to dismiss under RCFC 12(b)(6),
the court denied that motion on January 24, 2012, and stayed further proceedings
on plaintiffs’ takings claim pending the resolution of their breach of contract claim.
Defendant filed separate answers to plaintiffs’ complaints on March 9, 2012.
On July 13, 2012, defendant filed a motion for partial summary judgment on
plaintiffs’ breach of contract claim.16 In that motion, the government argues that it
did not breach any express term of plaintiffs’ lease, nor did it breach the implied
duty of good faith and fair dealing. In the alternative, defendant argues that even if
there had been a breach in this case, the government is still shielded from liability
under the sovereign acts doctrine. Finally, the government asserts that, should the
court conclude that there was a breach in this case, and that the government is not
protected from liability by the sovereign acts doctrine, plaintiffs are precluded from
seeking damages for a total breach under the election of remedies doctrine.
16
/ The parties filed a Joint Preliminary Status Report (JPSR) on April 27, 2012. In the
JPSR, the government proposed a schedule for the filing and briefing of dispositive motions by
the parties. Plaintiffs, in contrast, argued that the parties should be afforded an opportunity to
conduct discovery before any further motions practice. The court established a briefing schedule
for dispositive motions from the parties, but informed plaintiffs that the court would consider a
motion under RCFC 56(d) at the appropriate time. See Scheduling Order of May 4, 2012.
17
On September 10, 2012, plaintiffs responded to the government’s motion
and filed their own cross-motion for partial summary judgment. In their motion,
plaintiffs argue that the government’s actions following the Deepwater Horizon
disaster breached the express terms of their lease, as well as the implied duty of
good faith and fair dealing. Plaintiffs further assert that defendant cannot invoke
the sovereign acts doctrine in this case because the government’s actions were not
public and general, but were instead targeted at its obligations under OCS leases.
Finally, plaintiffs argue that the election of remedies doctrine does not preclude
their action for total breach because plaintiffs’ post-breach actions were for the sole
purpose of mitigating their damages.
Defendant filed its response and reply on October 30, 2012, and plaintiffs
filed their reply on November 13, 2012. In addition, defendant filed a notice of
subsequent developments in the case on December 11, 2012, and plaintiffs filed a
similar notice on February 5, 2013. The court heard oral argument on the parties’
cross-motions for partial summary judgment on February 12, 2013.
DISCUSSION
I. Standard of Review
“[S]ummary judgment is a salutary method of disposition designed to secure
the just, speedy and inexpensive determination of every action.” Sweats Fashions,
Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562 (Fed. Cir. 1987) (internal
quotations and citations omitted). The moving party is entitled to summary
judgment “if the movant shows that there is no genuine issue as to any material
fact and the movant is entitled to judgment as a matter of law.” RCFC 56(a).
A genuine issue of material fact is one that could change the outcome of the
litigation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).
A summary judgment “motion may, and should, be granted so long as whatever is
before the . . . court demonstrates that the standard for the entry of summary
judgment, as set forth in Rule 56[], is satisfied.” Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986).
“[A] party seeking summary judgment always bears the initial responsibility
of informing the . . . court of the basis for its motion, and identifying those portions
of ‘the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any,’ which it believes demonstrate the absence of a
18
genuine issue of material fact.” Id. (quoting former version of Fed. R. Civ. P.
56(c)). However, the non-moving party has the burden of producing sufficient
evidence that there is a genuine issue of material fact in dispute which would allow
a reasonable finder of fact to rule in its favor. Anderson, 477 U.S. at 256. Such
evidence need not be admissible at trial; nevertheless, mere denials, conclusory
statements or evidence that is merely colorable or not significantly probative is not
sufficient to preclude summary judgment. Celotex, 477 U.S. at 324; Anderson, 477
U.S. at 249-50; Barmag Barmer Maschinenfabrik AG v. Murata Mach., Ltd., 731
F.2d 831, 835-36 (Fed. Cir. 1984). “The party opposing the motion must point to
an evidentiary conflict created on the record at least by a counter statement of a
fact or facts set forth in detail in an affidavit by a knowledgeable affiant.” Barmag,
731 F.2d at 836. Any evidence presented by the non-movant is to be believed and
all justifiable inferences are to be drawn in its favor. Anderson, 477 U.S. at 255
(citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970)).
Issues of contract interpretation are amenable to summary judgment. See
San Carlos Irrigation & Drainage Dist. v. United States, 877 F.2d 957, 959
(Fed. Cir. 1989) (“Whether a contract creates a duty is a legal question of contract
interpretation.”); see also Varilease Tech. Grp. v. United States, 289 F.3d 795, 798
(Fed. Cir. 2002) (“Contract interpretation is a question of law generally amenable
to summary judgment.”); Gov’t Sys. Advisors, Inc. v. United States, 847 F.2d 811,
812 n.1 (Fed. Cir. 1988) (“Contract interpretation is a matter of law and thus is
amenable to decision on summary judgment.”).
II. Analysis of the Cross-Motions for Partial Summary Judgment
The parties have filed cross-motions for partial summary judgment.
Defendant argues that there are no genuine issues of material fact in this case, and
that it is entitled to judgment as a matter of law with respect to whether plaintiffs’
lease has been breached and whether the government would be shielded from such
a breach under the sovereign acts doctrine. Plaintiffs, in contrast, argue that there
are no disputed issues of material fact with respect to their own motion, but
contend that there are such disputes with respect to the government’s motion.
Plaintiffs assert that they are entitled to judgment as a matter of law on the issue of
liability.
19
A. Applicable Law
Plaintiffs seek damages for the government’s alleged breach of contract,
which requires plaintiffs to demonstrate: (1) a valid contract between the parties;
(2) an obligation or duty arising from that contract; (3) a breach of that duty; and
(4) damages caused by the breach. San Carlos, 877 F.2d at 959. Defendant does
not dispute that the lease in this case is a contract; rather, the dispute between the
parties is whether the government has breached any of its duties under the lease.
See Mobil Oil Exploration & Producing S.E., Inc. v. United States, 530 U.S. 604(2000) (holding that offshore leases issued pursuant to OCSLA are contracts);
Amber Res. Co. v. United States, 68 Fed. Cl. 535 (2005) (Amber Resources I)
(same), aff’d, 538 F.3d 1358 (Fed. Cir. 2008).
Plaintiffs argue that the government’s conduct with respect to OCS leases
following the Deepwater Horizon disaster was a repudiation of those leases,
resulting in a total breach. “When the United States enters into contract relations,
its rights and duties therein are governed generally by the law applicable to
contracts between private individuals.” Lynch v. United States, 292 U.S. 571, 579
(1934). In applying private contract law to OCS leases, the court may look to the
Restatement of Contracts for guidance. See Mobil Oil, 530 U.S. at 608.
When the performance of a duty under a contract is due, nonperformance of
that duty is a breach of the contract. Restatement (Second) of Contracts § 235
(1981). Nonperformance of a duty will be considered a total breach when “it so
substantially impairs the value of the contract to the injured party at the time of the
breach that it is just in the circumstances to allow him to recover damages based on
all his remaining rights to performance.” Id. § 243. In addition, an obligor may
commit a breach through repudiation, which is defined as “a voluntary affirmative
act which renders the obligor unable or apparently unable to perform without such
a breach.” Id. § 250.
B. The Government Did Not Repudiate or Otherwise Breach
Plaintiffs’ Lease
For the reasons discussed below, the court concludes that the government’s
actions in this case did not breach any of the express terms of plaintiffs’ lease.
Plaintiffs cannot, moreover, challenge the substantive validity of the government’s
actions in this court on the asserted basis that section 1 of the lease incorporated
20
the judicial review provisions of the APA as an express term of the lease. Finally,
the court holds that the government did not breach its implied duty of good faith
and fair dealing in enacting the comprehensive reform measures challenged by
plaintiffs in this case.
1. None of the Challenged Governmental Actions Breached
Any Express Term of Plaintiffs’ Lease
It is difficult to discern which specific terms of the lease, according to
plaintiffs, have been breached by the government in this case. Plaintiffs argue that
the government has changed the rules governing offshore exploration and
production in unexpected ways, and that those changes have rendered plaintiffs’
performance under the lease commercially impracticable. In plaintiffs’ view, those
actions have breached both section 1 and section 2 of their lease. Plaintiffs further
argue that NTL-06 has breached section 8 of their lease. For the reasons discussed
below, the court concludes that none of those actions breached any express term of
plaintiffs’ lease.
a. The New Regulations Did Not Breach the Lease
Under section 2 of the lease, the government “grant[ed] and lease[d] to the
Lessee the exclusive right and privilege to drill for, develop, and produce oil and
gas resources, except helium gas, in the submerged lands of the [leased area].”
Def.’s Ex. 1 at A1. Plaintiffs argue that the new regulations have breached the
terms of the lease by destroying the fruits of its bargain with the government.
Plaintiffs assert that performance under the lease has been rendered commercially
impracticable due to the new requirements imposed by the DSR and the WSR.
Section 2 of the lease does not, however, grant plaintiffs an absolute right to
conduct exploration or production activities on the leased area. Rather, because
those rights are qualified by the need to obtain various approvals, “the contract, in
practice, amount[s] primarily to an opportunity to try to obtain exploration and
development rights in accordance with the procedures and under the standards
specified in the cross-referenced statutes and regulations.” Mobil Oil, 530 U.S. at
620; see also Sec’y of Interior v. California, 464 U.S. 312, 317 (1984) (“A lessee
does not . . . acquire an immediate or absolute right to explore for, develop, or
produce oil or gas on the OCS; those activities require separate, subsequent federal
authorizations.”); Amber Resources II, 538 F.3d at 1371 (noting that OCS leases do
21
not “give the lessees any ultimate rights to develop the leases or produce oil and
gas, and that granting permission for ongoing exploration and development was
clearly a matter subject to the discretion of the Department of the Interior”).
When they executed their lease, the parties shared a mutual understanding
that the law governing exploration and development under the lease might change
in the future, and the terms of the lease expressly provided for such change in
section 1:
This lease is issued pursuant to the Outer Continental
Shelf Lands Act of August 7, 1953, 67 Stat. 462;
43 U.S.C. § 1331 et seq., as amended (92 Stat. 629),
(hereinafter called the “Act”). The lease is issued subject
to the Act; all regulations issued pursuant to the Act and
in existence upon the Effective Date of this lease; all
regulations issued pursuant to the statute in the future
which provide for the prevention of waste and
conservation of the natural resources of the Outer
Continental Shelf and the protection of correlative rights
therein; and all other applicable statutes and regulations.
Def.’s Ex. 1 at A1.
Under section 1, the lease is subject to the terms of OCSLA and any other
“applicable statutes” that were in effect when the lease was executed. In addition,
the lease is subject to any “applicable regulations” that were in effect at the time of
lease execution. Finally, the lease is subject to future regulations, as long as they
are issued pursuant to OCSLA and “provide for the prevention of waste and
conservation of the natural resources of the Outer Continental Shelf and the
protection of correlative rights therein.” Id.On the other hand, section 1 makes it equally clear that the lease is not
subject to existing statutes or regulations that are not “applicable.” Further, the
lease is not subject to subsequently enacted statutes or to later amendments to
existing statutes. Thus, section 1 allocates the risk of certain legal changes – future
regulations issued pursuant to OCSLA – to plaintiffs, and it allocates the risk of
other legal changes – future statutes, amendments of existing statutes, and future
regulations issued pursuant to statutes other than OCSLA – to the government.
22
This reading is consistent with the Supreme Court’s decision in Mobil Oil
and with the Federal Circuit’s decision in Amber Resources II. In Mobil Oil, the
Supreme Court addressed whether the enactment of the Outer Banks Protection Act
(OBPA), Pub. L. No. 101-380, § 6003, 104 Stat. 484, 555 (1990), breached several
OCS leases. OBPA prevented MMS from approving any plan or permit for
drilling operations off the North Carolina coast before the Secretary received
recommendations from a newly created environmental review panel and made a
report to Congress based upon those recommendations. OBPA further provided
that no such approvals were to occur, in any event, for a period of at least thirteen
months. The plaintiffs in that case asserted that the new statute breached their OCS
leases because those leases incorporated the terms of OCSLA, which required that
EPs be approved within thirty days. The Supreme Court agreed, explaining that
“under the contracts, the incorporated procedures and standards amounted to a
gateway to the companies’ enjoyment of all other rights.” Mobil Oil, 530 U.S. at
620. In the Court’s view, OBPA significantly narrowed that gateway and therefore
materially breached the plaintiffs’ leases.
The Federal Circuit followed the same approach in Amber Resources II.
There, an amendment to the CZMA created a new role for coastal states in MMS’s
review of lessee-requested suspensions. The court first noted that section 1 of the
OCS leases in that case – which was largely identical to section 1 of the lease in
this case – did not incorporate future statutes. For that reason, the court concluded
that the amendment to the CZMA was not incorporated into the plaintiffs’ leases.
Amber Resources II, 538 F.3d at 1371-72. The court further held that the CZMA
amendment effected a substantial change in the governing procedures for granting
lessee-requested suspensions and therefore breached the plaintiffs’ leases.
In both cases, the ultimate result was based on a preliminary determination
that the leases at issue did not incorporate future statutory changes. Those cases
did not hold, however, that the government assumes the risk of future regulations,
at least not those issued under OCSLA. See id. at 1368 (“[W]e treat the lease
agreements as incorporating by reference any statutes or regulations that were in
effect at the time of the leases’ execution and any regulations promulgated
pursuant to those statutes.”), 1371 (noting that the lessees in Mobil Oil “bargained
for a right to explore for and extract oil and gas from the leases, subject to a
particular statutory regime”) (emphasis added).
Plaintiffs argue that section 1 cannot be interpreted to subject their lease to
23
every future regulation issued pursuant to OCSLA because such an interpretation
would render their contract illusory. The court agrees that a contract subject to the
unbounded discretion of the government would be illusory and thus unenforceable.
See Torncello v. United States, 681 F.2d 756, 760 (Ct. Cl. 1982) (explaining that a
contracting party “may not reserve to itself a method of unlimited exculpation
without rendering its promises illusory and the contract void”); see also
Stockton E. Water Dist. v. United States, 583 F.3d 1344, 1357 (Fed. Cir. 2009)
(“[T]here is the obvious question of whether making the contracts subject to
whatever future federal law or policy may hold would make the contracts
illusory.”). In this case, however, section 1 does not grant the government
unfettered authority to change the rules during the game; instead, its discretion is
cabined by an important limiting principle.
Section 1 of the lease creates a substantial degree of certainty for lessees by
allocating to the government the risk of future statutory changes, while allocating
to the lessee the risk of future regulations issued pursuant to a single statute, to
which the lease is expressly subject. As this court explained in Amber Resources I,
68 Fed. Cl. at 547, “[a] regulation’s scope and effect . . . are subject to the enabling
statute.” For that reason, “subjecting a lease to any future regulation issued
pursuant to the OCSLA limits the lease’s modification to the contours of that act.”
Id. The lease is subject only to future regulations issued pursuant to OCSLA,
which constrains the scope and content of those regulations. In short, plaintiffs are
entitled to a stable statutory regime under section 1 of the lease, but they assumed
the risk of future regulatory changes within the context of that statutory regime.
In addition to section 1, a number of other sections in the lease describe
plaintiffs’ obligation to conduct their activities in accordance with controlling
regulations. The lease provides in section 9, for example, that all operations on the
leased area must be conducted “in accordance with approved exploration plans and
approved development and production plans as are required by regulations.”
Def.’s Ex. 1 at A2. Section 10 of the lease states that “[t]he Lessee shall comply
with all regulations and Orders.” Id. Further, section 12 of the lease provides that
the lessee must “maintain all operations within the leased area in compliance with
regulations or orders intended to protect persons, property, and the environment on
the [OCS].” Id. at A6.
There is no dispute that plaintiffs’ lease is subject to the terms of OCSLA,
which is expressly incorporated into their lease by reference. The statute provides
24
in part that “[t]he Secretary may at any time prescribe and amend such rules and
regulations as he determines to be necessary and proper in order to provide for the
prevention of waste and conservation of the natural resources of the [OCS].”
43 U.S.C. § 1334(a). Importantly, OCSLA provides that any regulations issued
under the statute apply to both new and existing leases as of their effective date.
See id. (“[N]otwithstanding any other provisions herein, such rules and regulations
shall, as of their effective date, apply to all operations conducted under a lease
issued or maintained under the provisions of this subchapter.”) (emphasis added).
The Secretary’s ability to regulate offshore operations pursuant to OCSLA
does not provide the government with a “route of complete escape” from its duties
under its contract with plaintiffs. See Torncello, 681 F.2d at 769 (“It is hornbook
law . . . that a route of complete escape vitiates any other consideration furnished
and is incompatible with the existence of a contract.”). Indeed, the ability to
regulate is essential to the discharge of the Secretary’s statutory duty to prevent
waste and conserve the natural resources of the OCS. See 43 U.S.C. § 1334(a).
Here, the regulations challenged by plaintiffs – the DSR and the WSR – are
amendments to the regulations that implement OCSLA, and were themselves
promulgated pursuant to OCSLA. See Def.’s Exs. 22, 24; 30 C.F.R. § 250.101.
For that reason, plaintiffs’ lease is subject to those regulations under section 1.
Plaintiffs argue that the regulations nonetheless breached the lease because they
were not issued for the purpose of preventing waste and conserving the resources
of the OCS. See Pls.’ Reply at 17. Plaintiffs’ assertions in that regard are both
unsubstantiated and irrelevant in the context of an action for breach of contract.
Plaintiffs may challenge the substantive validity of the regulations in district court,
but they may not do so here. See Murphy v. United States, 993 F.2d 871, 874
(Fed. Cir. 1993).17 In sum, neither the DSR nor the WSR breached any term of
plaintiffs’ lease.
b. Neither of the Moratoria Breached the Lease
Plaintiffs assert that the moratoria that were in effect from May 2010 until
October 2010 breached their lease. The moratoria, according to plaintiffs, harmed
17
/ Plaintiffs argue that the judicial review provisions of the APA are incorporated into
the lease by reference (in section 1) and thus allow plaintiffs to sue for damages in this court
based on alleged violations of the APA. The court addresses that argument more fully infra.
25
them in two ways. First, plaintiffs assert that the first moratorium diminished the
availability of drilling rigs and personnel in the Gulf of Mexico. Compl. ¶¶ 17-18.
Further, plaintiffs assert that the second moratorium, in combination with other
regulatory measures, increased plaintiffs’ borrowing costs by preventing drilling
on the leased area. Pls.’ Mot. at 52-53; Pls.’ Ex. 12 ¶¶ 3-4. The court concludes
that the moratoria did not breach any term of plaintiffs’ lease.
The first moratorium was implemented through NTL-04 on May 30, 2010.
See Def.’s Ex. 8. NTL-04 informed lessees that MMS would not consider any
applications to conduct deepwater drilling operations for a period of six months,
i.e., until November 30, 2010, and also instructed lessees to terminate any such
operations at the next safe opportunity. The first moratorium was in effect for
approximately four weeks before it was preliminarily enjoined by a district court
on June 22, 2010. See Hornbeck, 696 F. Supp. 2d at 639. On July 12, 2010, the
Secretary issued a decision memorandum, which rescinded the first moratorium
and imposed a new moratorium, to remain in effect until November 30, 2010.18
See Def.’s Ex. 18. Based on a recommendation from the BOEMRE Director, the
Secretary lifted the second moratorium on October 12, 2010. See Def.’s Ex. 19.
Both moratoria did two things: first, they suspended drilling operations in
deepwater, and, second, they temporarily ceased permitting for such activities.
There is no dispute that plaintiffs were not affected by the suspensions because
plaintiffs were not conducting any drilling operations on the site, nor had they
submitted an application to do so. MMS issued letters to the lessees who were
actually conducting such operations pursuant to their leases; plaintiffs were not
among them. See Def.’s Ex. 8 at A253 (“Under 30 CFR 250.172, the Regional
Supervisor for Production and Development will issue Suspensions of Operations
(SOO) to all OCS Lessees and Operators currently drilling or proposing to drill
new deepwater wells consistent with this Moratorium NTL.”); Def.’s Ex. 18 at
A395 (“I direct you to withdraw the suspension letters issued under [NTL-04], and
I direct you to issue new suspensions . . . . To provide certainty to affected
18
/ The first moratorium applied to activities in more than 500 feet of water, while the
second moratorium applied to operations using a subsea BOP or a surface BOP on a floating
facility, without regard to water depth. As explained in the Secretary’s memorandum, however,
both moratoria generally applied to the same facilities because “as a practical matter, 500 feet of
depth is the typical trigger for needing to use floating drilling facilities.” Def.’s Ex. 18 at A382.
26
operators, please issue the suspension orders promptly.”).19
Plaintiffs never submitted an APD that might have been considered and
approved by MMS in the absence of the moratoria, but they argue that doing so
would have been futile. Plaintiffs state that they intended to conduct operations
under their lease in 2010, and that the moratoria prevented them from doing so.
It is far from clear, however, that the moratoria had any real effect on plaintiffs’
ability to move forward with their plans. Plaintiffs submitted their EP to conduct
operations under the lease on December 22, 2008, see Def.’s Ex. 2, and MMS
approved that EP on February 6, 2009, see Def.’s Ex. 4. In their EP, plaintiffs
stated that they planned to commence operations under their lease by March 2009.
Def.’s Ex. 2 at A13; see also Def.’s Ex. 3 at A80. But plaintiffs had not filed an
application to pursue those operations by the time of the explosion on the
Deepwater Horizon more than a year later, on April 20, 2010, nor have they made
any attempt to file an application since that time. Further, the second moratorium
was terminated more than two years ago, and plaintiffs have not yet filed an
application for a drilling permit. Plaintiffs’ assertion that a total breach of their
lease resulted from an inability to secure a drilling permit during the four months
the moratoria were in effect is untenable. The court further notes that plaintiffs
requested, and were granted, a one-year extension of their lease. See Def.’s Exs.
31-32.
Even if plaintiffs had submitted an application during the moratoria, and
MMS had refused to consider that application while the two moratoria were in
effect, it is far from clear that the resulting delay would have breached their lease.
In Sun Oil Co. v. United States, 572 F.2d 786 (Ct. Cl. 1978), the Court of Claims
concluded that the government’s delay in approving the plaintiffs’ application to
install a production platform on one of the two oil fields covered by their lease
19
/ Even if plaintiffs had been operating under their lease and had received a suspension
pursuant to either of the moratoria, the suspension would not have breached plaintiffs’ lease.
Section 13 of the lease states that “[t]he Lessor may suspend or cancel this lease pursuant to
section 5 of the Act,” Def.’s Ex. 1 at A6, and the referenced section of OCSLA, as well as its
implementing regulations, authorize suspensions of the type at issue in this case, see 43 U.S.C.
§ 1334(a)(1)(B); 30 C.F.R. § 250.172. Plaintiffs’ argument that the suspensions were infirm
because they were issued as part of a blanket moratorium, rather than as individual suspensions,
is without merit because BOEMRE issued a suspension letter to each affected lessee or operator.
27
following a blowout at another nearby well did not breach the plaintiffs’ lease.20
The plaintiffs in that case argued that the government had delayed the approval of
their application for more than six months. The court, however, first explained that
“[t]he blow out was a devastating event and required careful, prudent and cautious
actions by Interior to control the oil spill first, and, second, to assure that such a
blow out did not occur again.” Id. at 804. The court noted that under OCSLA,
“the Secretary was responsible for the administration of [OCS] leases and was
under a duty to protect the environment against waste and to conserve natural
resources.” Id. For that reason, according to the court, “it was not only reasonable,
but also the legal obligation of the Secretary to employ procedures different from
those followed prior to the blow out to assure that such disasters would not occur.”
Id.The temporary pause in deepwater permitting in this case was well within
the government’s authority under both the terms of the lease and applicable law.
Furthermore, plaintiffs’ operations under the lease were never suspended because
there were no active operations to suspend. Plaintiffs never attempted to secure a
drilling permit. Even if plaintiffs had filed an application for a drilling permit, and
the approval of that permit had been delayed due to the moratorium, such a short
delay would not have effected a total breach of the lease, particularly in light of the
absence of any express deadlines for the review and approval of APDs in the lease,
under the statute, or under the regulations. Finally, the circumstances that resulted
in the implementation of the moratorium, described in exhaustive detail in the
Secretary’s memorandum, see Def.’s Ex. 18, demonstrate that any hypothetical
delay would have been entirely reasonable, see Sun Oil, 572 F.2d at 804. Neither
of the moratoria breached plaintiffs’ lease.21
20
/ The blowout in that case occurred off the coast of Santa Barbara, California, and, until
the Deepwater Horizon disaster in 2010, had been the largest oil spill in U.S. history. See
National Commission Report at 28-29.
21
/ Plaintiffs also assert that there was a sustained downturn in the rate of permit issuance
– the cleverly named “permitorium” – following the termination of the second moratorium. See
Pls.’ Mot. at 58-59; Pls.’ Ex. 7. Plaintiffs do not explain how an apparent slowdown in the
issuance of permits to other lessees could somehow breach their own lease, aside from noting
their claimed inability to obtain a permit under the modified regulatory regime.
28
c. The Notices to Lessees Did Not Breach the Lease
Plaintiffs further contend that notices issued to lessees by MMS and
BOEMRE – NTL-05, NTL-06, and NTL-10 – breached the terms of their lease.22
Plaintiffs argue that none of the notices could have been reasonably foreseen by the
parties at the time of contracting, and that each of the notices has dramatically
increased their costs of performance under the lease. For the reasons discussed
below, the court concludes that none of those notices breached any express term of
plaintiffs’ lease.
Section 10 of plaintiffs’ lease states that “[t]he Lessee shall comply with all
regulations and Orders.” Def.’s Ex. 1 at A2 (emphasis added). In addition, the
lease is further modified by Stipulation No. 8, which states that “[t]he lessee and its
operators, personnel, and subcontractors are responsible for carrying out the
specific [environmental] mitigation measures outlined in the most current MMS
Notices to Lessees, which interpret requirements in the above-mentioned
implementing regulations,” which the stipulation defines as 30 C.F.R. Part 250.23
Def.’s Ex. 1 at A5. Accordingly, there is no question that the lease contemplated
the government’s issuance of NTLs, and requires plaintiffs, as well as their
operators, employees, and subcontractors, to meet the requirements of the “most
current” NTLs issued under OCSLA’s implementing regulations.
Plaintiffs do not dispute that their lease incorporated the regulations in effect
when the lease was executed. Those regulations provide that “MMS may issue
Notices to Lessees and Operators (NTLs) that clarify, supplement, or provide more
detail about certain requirements.” 30 C.F.R. § 250.103. Further, “NTLs may also
outline what [lessees and operators] must provide as required information in [their]
22
/ Plaintiffs argue that NTL-04 breached their lease as well, but the court has already
addressed that notice supra. In addition, it appears – although it is not clear – that plaintiffs also
assert that NTL No. 2012-N06 breached their lease. See Pls.’ Mot. at 12.
23
/ While the primary focus of Stipulation No. 8 is the protection of marine mammals and
other threatened and endangered species, see Def.’s Ex. 1 at A5, that provision also notes that the
general purpose of OCSLA is to promote the expeditious and orderly development of the OCS
subject to environmental safeguards, and then references the implementing regulations for
OCSLA contained in Part 250 of the Code of Federal Regulations. Further, the requirement that
lessees and their operators, employees, and subcontractors comply with the most current NTLs is
not expressly limited to the protection of marine mammals or other species.
29
various submissions to MMS.” Id. Defendant notes that the government has
issued NTLs for those purposes since 1992. See Def.’s Mot. at 32 n.11.
i. NTL-05 Did Not Breach the Lease
NTL-05 was issued by MMS on June 8, 2010, see Def.’s Ex. 11, and it was
set aside by the district court on October 19, 2010, Ensco, 2010 WL 4116892. In
setting aside the notice, the district court held that NTL-05 was a substantive rule
that should have been issued under the formal process of notice-and-comment
rulemaking. Here, plaintiffs assert that the notice dramatically increased their costs
of performance, see Pls.’ Mot. at 55, and also breached the lease by “denying
Century its statutory right to participate in the notice and comment procedure,”
Compl. ¶ 21. Plaintiffs’ arguments in this regard are without merit.
NTL-05 imposed a number of information, certification, and inspection
requirements that had been recommended for immediate implementation in the
Safety Measures Report. Compare Def.’s Ex. 6 at A18-A28 with Def.’s Ex. 11.
Plaintiffs were never ordered to meet those requirements, because they apply only
to drilling operations, and plaintiffs have never conducted any drilling operations
under their lease, nor have they submitted an application to do so. NTL-05,
moreover, was in effect for only four months, and, with the exception of one week
in late-October 2010, would not have affected active operations under any lease
during that time due to the moratoria. Plaintiffs do not dispute the short duration
of NTL-05, nor do they respond to the argument that plaintiffs could not have been
affected by its requirements. Instead, plaintiffs point out that the requirements
contained in NTL-05 were later incorporated, along with new requirements, into
the DSR and thus remain in effect to this day. Because the court has already held
that the DSR did not breach plaintiffs’ lease, there is no basis for concluding that
the less onerous requirements of NTL-05 breached the lease, particularly when
those requirements were never applied to plaintiffs.
ii. NTL-06 Did Not Breach the Lease
NTL-06 requires plaintiffs to adopt new assumptions in their calculation of
the worst-case discharge scenario required under the regulations. Plaintiffs argue
that, due to those new assumptions, NTL-06 has breached their lease in two ways.
First, plaintiffs contend that they are now required to demonstrate the financial
capability to respond to a much higher worst-case discharge volume than before,
30
and that they are unable to do so.24 That change, according to plaintiffs, breaches
sections 1 and 2 of their lease. Second, plaintiffs argue that the higher worst-case
discharge volume has increased their bonding requirement in violation of section 8
of their lease.25 The court concludes that NTL-06 does not breach any term of the
lease.
Under the regulations in effect when plaintiffs executed their lease, lessees
were required to include a blowout scenario with their EP. 30 C.F.R. § 250.213(g).
In addition, lessees were required to include an OSRP with their EP, or they could
refer to a previously approved regional OSRP. Id. § 250.219. The OSRP, in turn,
was required to include the lessee’s calculation for worst-case discharge volume.
Id. §§ 250.219(a)(2)(iv), 254.26(a). The lessees were instructed to “provide any
assumptions made and the supporting calculations used to determine this volume,”
id. § 254.26(a); additionally, the regulations set forth a number of assumptions that
had to be made in calculating the worst-case discharge volume, id. § 254.47.
Under the regulations in effect for EPs, plaintiffs were required to attest that they
“have or will have the financial capability to drill a relief well and conduct other
emergency well control operations” and they were also required to demonstrate
sufficient Oil Spill Financial Responsibility (OSFR), which is often satisfied with a
bond. See id. § 250.213(e).
In essence, plaintiffs argue that the regulations set forth a limited number of
assumptions that had to be made when calculating the worst-case discharge
24
/ Plaintiffs argue that, before NTL-06, they were required to certify that they had the
financial capability to respond to a worst-case discharge volume of 1500 barrels for 30 days;
following NTL-06, however, plaintiffs state that they must now certify that they have the
financial capability to respond to a worst-case discharge volume of 142,977 barrels for 120 days.
Plaintiffs assert that the change in worst-case discharge volume and response time has increased
their required financial certification amount from only $4.3 million to more than $1.8 billion.
Pls.’ Mot. at 33-34. Those precise dollar figures, however, are based on a ten-day response with
a daily volume of 1500 barrels and a 120-day response with a daily volume of 50,000 barrels.
See Pls.’ Ex. 8 at 2.
25
/ Plaintiffs also argue that NTL-06 is a substantive regulation that should have been
issued in accordance with the requirements of notice-and-comment rulemaking. Pls.’ Mot. at 54.
That argument is not properly before this court. If plaintiffs believe that NTL-06 did not meet
the procedural requirements of the APA, they are entitled to file a petition for review in district
court. See 5 U.S.C. §§ 702, 706(2)(D); Ensco, 2010 WL 4116892.
31
volume, and that NTL-06 added a number of new substantive requirements not
contained in the regulations. That argument, however, mischaracterizes both the
nature of the regulations and the effect of the notice. The OSRP regulations do set
forth a number of assumptions and factors to be considered in calculating the
worst-case discharge volume, see id. § 254.47, and those assumptions are
incorporated into the regulations that govern EPs, see id. § 250.219, as well as the
regulations that govern OSFR, see id. § 253.14.
With respect to the information required for an EP, however, the regulations
provide that “[o]n a case-by-case basis, the Regional Supervisor may require you
to submit additional information if the Regional Supervisor determines that it is
necessary to evaluate your proposed plan or document.” Id. § 250.201(b).
Similarly, the regulations provide that “[t]he Regional Supervisor may limit the
amount of information or analysis that you otherwise must provide in your
proposed plan or document under this subpart” when certain requirements are met.
Id. § 250.201(c). In other words, the information required for EPs, including the
required blowout scenario, is not a fixed or stagnant set of requirements, as
plaintiffs suggest.
In NTL No. 2008-G04, MMS modified the regulatory requirements by
reducing the amount of information that operators were required to provide for
their EPs and DOCDs. See Def.’s Ex. 15. Therefore, plaintiffs in this case
prepared their EP based not on what the regulations required on their face, but on
the more limited information required under NTL No. 2008-G04. NTL-06, in turn,
rescinded NTL No. 2008-G04, and thus required plaintiffs to again provide the
information originally mandated under the regulations – regulations that were in
effect when the lease was executed and to which the lease has continually,
therefore, been subject. Stipulation No. 8 of the lease also requires plaintiffs to
meet the mitigation measures “outlined in the most current MMS Notices to
Lessees” issued pursuant to the OCSLA regulations. See Def.’s Ex. 1 at A5.
Plaintiffs acknowledge in their complaint that the effect of NTL-06 was to
“rescind[] certain limitations previously put into place by NTL No. 2008-G04.”
Compl. ¶ 23.
To the extent that the government requested additional information from
plaintiffs via electronic mail or other means, see Pls.’ Exs. 21, 25-26, such requests
were authorized by the regulations in effect when the lease was executed, see 30
C.F.R. § 250.201(b), and plaintiffs were required to comply with those requests,
32
see id. § 250.186(a) (“You must submit information and reports as MMS
requires.”). In sum, the requirements imposed by both NTL-06 and the e-mail
correspondence from the agency were well within the government’s authority
under the lease; the regulations in effect when the lease was executed; and the lease
requirements that subjected operators to the most current NTLs issued pursuant to
the implementing regulations. The calculations currently required for a worst-case
discharge scenario are fully consistent with both the lease terms and regulations in
effect when the lease was executed. Thus, where the referenced calculations have
now resulted in plaintiffs’ inability to demonstrate their financial capability, that
inability does not reflect a breach of section 1 or section 2 of plaintiffs’ lease.
Likewise, the court holds that NTL-06 did not breach section 8 of the lease,
which provides that “[t]he Lessee shall maintain at all times the bond(s) required
by regulation prior to the issuance of the lease and shall furnish such additional
security as may be required by the Lessor if, after operations have begun, the
Lessor deems such additional security to be necessary.” Def.’s Ex. 1 at A2.
Plaintiffs argue that the new assumptions and calculations required by NTL-06
increased their required bond from $35 million to $150 million.
The court first notes that section 8 of the lease does not impose a duty on the
government; rather, it imposes a duty on the lessees to secure and maintain a bond
in the amount required by the regulations in effect on the date of lease execution.
Section 8 further provides that the government may require the lessees to furnish
“additional security” if it is deemed to be necessary after the commencement of
operations on the site. In order to demonstrate a breach of section 8 of the lease,
plaintiffs must establish that they are now required to furnish a bond that exceeds
the bond required under the regulations in effect when the lease was executed.
They have failed to do so.
Before NTL-06 was issued, plaintiffs were required to maintain their bond in
accordance with the regulations that were in effect when their lease was executed;
after the issuance of NTL-06, plaintiffs have remained under an obligation to
maintain their bond in accordance with the regulations in effect when their lease
was executed. Contrary to plaintiffs’ assertions, there has been no change in the
bonding requirements set forth in the regulations; those requirements, from the
outset, have been based on specified worst-case discharge volumes as follows:
33
Worst-Case Discharge Volume Applicable Amount of OSFR
More than 1000 barrels but not more than $35,000,000
35,000 barrels
More than 35,000 barrels but not more than $70,000,000
70,000 barrels
More than 70,000 barrels but not more than $105,000,000
105,000 barrels
More than 105,000 barrels $150,000,000
30 C.F.R. § 253.13(b)(1). Under these regulations, moreover, the government may
require an operator to furnish a bond that exceeds what is set forth in the table
presented above, based on environmental and other concerns, with an upper limit
of $150 million. See id. § 253.13(b)(3). Neither the table, nor the government’s
ability to deviate from that table, has changed since plaintiffs executed their lease.
Compare 30 C.F.R. § 253.13(b)(1), (b)(3) with 30 C.F.R. § 553.13(b)(1), (b)(3)
(2012).
NTL-06 does not require plaintiffs to furnish a bond that exceeds what was
required under the regulations in effect when they signed their lease; instead, what
has changed are the underlying factors that determine which category the required
bond amount falls under – specifically, plaintiffs’ worst-case discharge volume.
Because that volume was only 1500 barrels before NTL-06 became effective,
plaintiffs fell within the category requiring only a $35 million bond under the
regulations. NTL-06 changed the calculation of worst-case discharge volume, and
had the effect of increasing that volume to 142,977 barrels for plaintiffs’ proposed
operations under their lease. Under the regulations in effect when plaintiffs signed
their lease – and under the regulations in effect today – a worst-case discharge
volume of that magnitude places plaintiffs in the highest category and requires
them to furnish a bond in the amount of $150 million. The court has already held
that the changes in the calculation of worst-case discharge volume effected through
NTL-06 did not breach plaintiffs’ lease. Similarly, the fact that the new
calculations raised plaintiffs’ discharge volumes and consequently elevated
plaintiffs’ bond requirement to a higher category does not reflect a breach of
section 8 of the lease by defendant.
Plaintiffs are correct that the government may not, consistent with section 8,
34
require them to furnish a bond that exceeds what the regulations required when the
lease was signed until after operations have commenced. In this case, however, the
government has never required plaintiffs to furnish a bond that exceeds what the
regulations have always required. In any event, even if the court has misread the
language of section 8, and NTL-06 has in fact breached section 8 of the lease, the
government is nonetheless protected from liability for such a breach under the
sovereign acts doctrine, as discussed more fully infra.
iii. NTL-10 Did Not Breach the Lease
Plaintiffs argue that NTL-10 breached their lease by imposing substantial
new costs on their performance. NTL-10 does set forth two new requirements,
but neither of them breaches plaintiffs’ lease. First, the notice requires operators
to certify, through an “authorized company official,” that its activities will comply
with applicable regulations, including the new regulations that were issued in 2010.
Def.’s Ex. 26 at A501-A502. The court has already held that those regulations did
not breach plaintiffs’ lease, so plaintiffs fail to establish why requiring an operator
to certify its compliance with them, and with other pre-existing regulations, would
do so.
NTL-10 also informs operators that “BOEMRE will evaluate whether each
operator has submitted adequate information demonstrating that it has access to
and can deploy surface and subsea containment resources that would be adequate
to promptly respond to a blowout or other loss of well control.” Def.’s Ex. 26 at
A502. The regulations that were in effect when plaintiffs signed their lease, and
that remain in effect today, require plaintiffs to demonstrate that they have both the
financial capability to respond to a worst-case discharge scenario and access to the
equipment needed to do so. See 30 C.F.R. §§ 250.213(e), 254.23-254.26; see also
30 C.F.R. §§ 550.213(e) (2012). The regulations also provide that “[i]n addition to
the requirements listed in this part, [operators] must provide any other information
the Regional Supervisor requires for compliance with appropriate laws and
regulations.” 30 C.F.R. § 254.5(d). NTL-10 does not breach plaintiffs’ lease.
d. The Categorical Exclusions Memorandum Did Not
Breach the Lease
Plaintiffs assert that the memorandum issued by the Director of BOEMRE
on August 16, 2010 breached their lease. That memorandum stated that the agency
35
would review its use of categorical exclusions for certain plans and documents, and
that those plans and documents would not be categorically excluded from NEPA
during the pendency of the agency’s review. See Def.’s Ex. 21. Plaintiffs assert
that this change has increased the costs of their performance under the lease, see
Pls.’ Mot. at 56, and has therefore breached the lease. Plaintiffs are incorrect.
Plaintiffs’ lease is subject to NEPA and its implementing regulations, at least
those regulations that were in effect when the lease was executed. Under NEPA,
agencies may exempt certain categories of activities from environmental review
when they “do not individually or cumulatively have a significant effect on the
human environment and have been found to have no such effect in procedures
adopted by a Federal agency.” 40 C.F.R. § 1508.4. The categorical exclusion of
activities from environmental review was and is within the discretion of individual
agencies; nothing in plaintiffs’ lease can be read to provide static treatment for
their activities in perpetuity. In fact, the regulations then in effect expressly state
that the government would perform the environmental reviews and documentation
required by NEPA in reviewing EPs. See 30 C.F.R. § 250.232(c). The categorical
exclusions memorandum did not breach any term of plaintiffs’ lease.
2. This Court May Not Hear Plaintiffs’ Challenges to the
Substantive Validity of the Government’s Actions
In their motion, plaintiffs argue that this court is empowered to review the
government’s actions in this case under the standard of judicial review set forth in
section 706 of the APA. By its own terms, the lease is subject to statutes that were
in existence on the effective date of the lease. Plaintiffs therefore argue that the
substantive standard of review described in the APA is, in effect, a term of the
lease, which was breached when the government imposed requirements on lessees
that were, according to plaintiffs, arbitrary and capricious. As discussed above,
section 1 of plaintiffs’ lease states that
[t]his lease is issued pursuant to the Outer Continental
Shelf Lands Act of August 7, 1953, 67 Stat. 462;
43 U.S.C. § 1331 et seq., as amended (92 Stat. 629),
(hereinafter called the “Act”). The lease is issued subject
to the Act; all regulations issued pursuant to the Act and
in existence upon the Effective Date of this lease; all
regulations issued pursuant to the statute in the future
36
which provide for the prevention of waste and
conservation of the natural resources of the Outer
Continental Shelf and the protection of correlative rights
therein; and all other applicable statutes and regulations.
Def.’s Ex. 1 at A1. Plaintiffs argue that the term “other applicable statutes,” as
used in section 1, must be interpreted to include the APA. The court disagrees
because that term of the lease applies only to “applicable statutes,” and the court
concludes that the APA is not applicable.
There is no question that this court is without subject matter jurisdiction over
claims under the APA. See Lion Raisins, Inc. v. United States, 416 F.3d 1356,
1370 n.11 (Fed. Cir. 2005) (“Of course, no APA review is available in the Court of
Federal Claims.”); Crocker v. United States, 125 F.3d 1475, 1476 (Fed. Cir. 1997)
(affirming that this court “lacks the general federal question jurisdiction of the
district courts, which would allow it to review the agency’s actions and to grant
relief pursuant to the Administrative Procedure Act”); Murphy, 993 F.2d at 874(Fed. Cir. 1993) (“[T]he Claims Court has no authority to invoke the APA.”).
Interior cannot, through its standard lease forms, somehow endow this court
with jurisdiction over claims challenging government action under the APA;
Congress has vested subject matter jurisdiction over such claims in other fora. Cf.
Belk v. United States, 858 F.2d 706, 711 (Fed. Cir. 1988) (Bennett, J. concurring)
(“Further, the parties cannot by their consent confer jurisdiction on a court.”).
To the extent that plaintiffs seek to challenge the reasonableness or substantive
validity of the government’s actions, they have an available remedy in the district
courts. See Bowen v. Massachusetts, 487 U.S. 879, 891 n.16 (1988) (noting that
federal district courts may review agency action under the APA pursuant to their
federal question jurisdiction); Russell v. United States, 78 Fed. Cl. 281, 288 (2007)
(noting that “the APA confers jurisdiction for judicial review of final agency
decisions on the United States district court and not the Court of Federal Claims”);
McNabb v. United States, 54 Fed. Cl. 759, 767 (2002) (holding that “APA reviews
are conducted in federal district court rather than the Court of Federal Claims”).
Because this court has no jurisdiction to hear plaintiffs’ claims challenging the
substantive validity or reasonableness of the government’s actions, the APA cannot
37
be construed as an “applicable statute” under section 1 of the lease.26
3. The Government Did Not Breach Its Implied Duty of
Good Faith and Fair Dealing
Plaintiffs further argue that the government has breached the implied duty of
good faith and fair dealing by dramatically increasing their costs of performance
under the lease. In plaintiffs’ view, even if the APA is not incorporated as an
express term of the lease under section 1, an implied duty imposes the exact same
standard of conduct on the government. In other words, when the government acts
in a manner that is arbitrary or capricious, it necessarily breaches the implied duty
of good faith and fair dealing, according to plaintiffs, even if such conduct does not
breach any express term of the lease. Defendant, in contrast, argues that the duty
must be tethered to an express term of the lease and cannot create new obligations
that do not appear on the face of the lease. On that point, defendant is correct.
The covenant of good faith and fair dealing is implied in every contract and
imposes certain obligations on the contracting parties, including a duty not to
“interfere with the other party’s performance and not to act so as to destroy the
reasonable expectations of the other party regarding the fruits of the contract.”
Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005); see also
Restatement (Second) of Contracts § 205 (“Every contract imposes upon each
party a duty of good faith and fair dealing in its performance and its
enforcement.”).
In Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir.
26
/ The court notes that certain statutes are clearly “applicable” in that they are part of the
comprehensive scheme that governs offshore exploration and development, and many of those
statutes are in fact expressly referenced in the lease, in the statute, or in the regulations. See,
e.g., Def.’s Ex. 1 at A5 (the Endangered Species Act and the Marine Mammal Protection Act);
43 U.S.C. § 1351(d) (CZMA); id. § 1351(e) (NEPA). In contrast, the Federal Circuit has refused
to read general contract terms as incorporating specific rights under the APA and other statutes.
See, e.g., Nat’l Leased Hous. Ass’n v. United States, 105 F.3d 1423, 1431-33 (Fed. Cir. 1997)
(rejecting the plaintiffs’ argument that a provision in a housing assistance payment contract,
which made the parties subject to “all applicable regulations,” incorporated the rulemaking
procedures of the APA, 5 U.S.C. §§ 551, 553 (2006), or the disclosure requirements of the
Freedom of Information Act, 5 U.S.C. § 552 (2006)). Plaintiffs’ expansive reading of section 1
would incorporate the entire United States Code as a term of the lease.
38
2010), the plaintiff in that case argued that the government breached the implied
duty of good faith and fair dealing when it suspended timber harvesting activities
under a number of contracts. The court first explained that the government
breaches the implied duty “when the subsequent government action is specifically
designed to re-appropriate the benefits the other party expected to obtain from the
transaction, thereby abrogating the government’s obligations under the contract.”
Id. at 829. In that case, however, the court concluded that the government had not
breached the implied duty because there was no evidence that the challenged
suspensions “were undertaken for the purpose of delaying or hampering [the]
contracts.” Id. at 830.
The court in Precision Pine explained that “[t]he implied duty of good faith
and fair dealing cannot expand a party’s contractual duties beyond those in the
express contract or create duties inconsistent with the contract’s provisions.” Id. at
831. In that case, the court noted that the plaintiff had acquired the right to harvest
timber, but also explained that the right was expressly qualified by a contract
clause under which the plaintiff agreed to interrupt or delay activities under the
contract in order to prevent environmental degradation or to comply with a court
order. Because the challenged suspension was expressly contemplated under the
terms of the contract, the court held that it did not result in a breach of the implied
duty of good faith and fair dealing.
In Scott Timber Co. v. United States, 692 F.3d 1365 (Fed. Cir. 2012), the
Federal Circuit applied the same legal standard in similar factual circumstances.
Following its earlier decision in Precision Pine, the court held that there was no
breach of the implied duty of good faith and fair dealing when the government
suspended timber harvesting contracts for what the plaintiff asserted was an
unreasonable period of time. The court held that there was no evidence that the
government had targeted the suspended contracts for the purpose of preventing
performance by the plaintiff or to re-appropriate any benefit under the contract.27
Id. at 1374-75.
Here, likewise, there is no evidence that the government’s actions targeted
plaintiffs’ lease for the purpose of re-appropriating any of plaintiffs’ benefits under
27
/ There is substantial overlap between the Federal Circuit’s approach to the implied
duty of good faith and fair dealing, and the “public and general” inquiry required under the
sovereign acts doctrine, discussed infra.
39
the lease. Plaintiffs argue that their claim is tethered to section 2 of the lease,
which grants them the “exclusive right and privilege to drill for, develop, and
produce the oil and gas resources” on the leased area. Pls.’ Mot. at 73-74. Much
like the contract rights at issue in Precision Pine, however, plaintiffs’ rights under
their lease are limited by its express terms, as well as the statutory and regulatory
requirements incorporated by reference. Because the government’s actions were
authorized under the lease and applicable law, they cannot breach the implied duty
of good faith and fair dealing. See Precision Pine, 596 F.3d at 830; see also 13
Richard A. Lord, Williston on Contracts § 63:22 (2000) (“As a general principle,
there can be no breach of the implied promise or covenant of good faith and fair
dealing where the contract expressly permits the actions being challenged, and the
defendant acts in accordance with the express terms of the contract.”).
Plaintiffs assert that the implied duty has been breached because the actions
taken by the government have dramatically increased plaintiffs’ costs. However,
there is no express term in the lease that immunizes them from future increases in
their costs of performance. See Bradley v. Chiron Corp., 136 F.3d 1317, 1326
(Fed. Cir. 1998) (noting that “implied covenants of good faith and fair dealing are
limited to assuring compliance with the express terms of the contract and cannot be
extended to create obligations not contemplated in the contract”).
Finally, the record indicates that the government has acted in good faith,
granting plaintiffs an extension of their lease to afford them additional time to
comply with the new regulatory requirements and to account for any time lost due
to the moratoria on permitting and other activities. The lease extension further
undermines plaintiffs’ assertion that the government targeted their contracts for the
purpose of preventing performance or to re-appropriate a benefit for itself.28 Cf.
Conner Bros. Constr. Co. v. United States, 550 F.3d 1368, 1378 (Fed. Cir. 2008)
28
/ Plaintiffs argue that the extension granted to them is not evidence of the government’s
good faith because such an extension was required under OCSLA. See, e.g., Pls.’ Mot. at 66.
However, the section of OCSLA referenced by plaintiffs does not require the Secretary to grant
extensions to any particular lessee; rather, it simply requires the Secretary to promulgate
regulations providing for such extensions. See 43 U.S.C. § 1334(a)(1) (stating that the
“regulations prescribed by the Secretary under this subsection shall include, but not be limited
to, provisions . . . for the extension of any such permit or lease affected by suspension . . . by a
period equivalent to the period of such suspension . . ., except that no permit or lease shall be so
extended when such suspension . . . is the result of gross negligence or willful violation of such
lease or permit, or of regulations issued with respect to such lease or permit”).
40
(“The Corps of Engineers did not seek to shift its costs to [the plaintiff], and it
granted [the plaintiff] contract extensions to compensate for the period in which
[the plaintiff] was shut down.”).
C. Even if the Court Were to Hold that the Government Breached
Plaintiffs’ Lease, It Would Be Shielded from Liability under the
Sovereign Acts Doctrine
The government argues that even if its actions breached the lease, it is still
immune from liability under the sovereign acts doctrine. In that regard, defendant
contends that the reforms adopted in the wake of the Deepwater Horizon disaster
were public and general in nature, and that those sovereign actions rendered its
contractual performance under the original lease impossible. Plaintiffs, in contrast,
argue that the doctrine does not apply in this case because the government’s
actions were not public and general, but were instead nothing more than an effort
to escape its contractual obligations. The court agrees with defendant.
1. Applicable Law
The sovereign acts doctrine is a variation of the common law doctrine of
impossibility, adapted for the unique circumstances faced by the government as a
contractor. Under the impossibility doctrine, also known as the impracticability
doctrine,
[w]here, after a contract is made, a party’s performance is
made impracticable without his fault by the occurrence of
an event the non-occurrence of which was a basic
assumption upon which the contract was made, his duty
to render that performance is discharged, unless the
language or the circumstances indicate the contrary.
Restatement (Second) of Contracts § 261. The impossibility doctrine applies to,
inter alia, statutory, regulatory, or other legal changes that render performance by
one of the contracting parties impracticable:
If the performance of a duty is made impracticable by
having to comply with a domestic or foreign
governmental regulation or order, that regulation or order
41
is an event the non-occurrence of which was a basic
assumption on which the contract was made.
Id. § 264; see Hicks v. United States, 89 Fed. Cl. 243, 258 (2009) (noting that the
the doctrine may be applied when performance by one of the parties is rendered
impracticable because of an intervening government order).
In general, the impossibility defense is not available when the barrier to
performance was created by the party seeking to invoke the defense. See
Restatement (Second) of Contracts § 261 (limiting a contractor’s use of the defense
to impracticability caused by the occurrence of an event “without his fault”); id.
§ 261, comment d (“If the event is due to the fault of the obligor himself, this
Section does not apply.”). The sovereign acts doctrine was established in the early
years of the Court of Claims, see Wilson v. United States, 11 Ct. Cl. 513 (1875);
Jones v. United States, 1 Ct. Cl. 383 (1865); Deming v. United States, 1 Ct. Cl. 190(1865), and addresses situations in which the government’s acts as a sovereign
render the performance of its duties as a contractor impracticable. In such cases,
“[t]he two characters which the government possesses as a contractor and as a
sovereign cannot be thus fused; nor can the United States while sued in the one
character be made liable in damages for their acts done in the other.” Jones, 1 Ct.
Cl. at 384.
In those early cases, the court emphasized that the sovereign acts doctrine
did not afford any special treatment for the government. Rather, its purpose was to
ensure that the government as contractor was treated the same as any private
contractor whose performance was rendered impracticable by an intervening act of
the government. See id. (“In this court the United States appear simply as
contractors; and they are to be held liable only within the same limits that any other
defendant would be in any other court.”); Deming, 1 Ct. Cl. at 191 (“In this court
the United States can be held to no greater liability than other contractors in other
courts.”).
In order to ensure that the government was afforded the same treatment as a
private contractor, the court held that it was necessary to draw a sharp distinction
between the government-as-sovereign and the government-as-contractor, and that
the distinction between the two would be maintained as long as the sovereign acts
that rendered performance impracticable were “public and general.” See Jones,
1 Ct. Cl. at 384 (“Whatever acts the government may do, be they legislative or
42
executive, so long as they be public and general, cannot be deemed specially to
alter, modify, obstruct or violate the particular contracts into which it enters with
private persons.”); see also Wilson, 11 Ct. Cl. at 521 (“This double character of the
Government cannot be lost sight of in any of its transactions.”); Deming, 1 Ct. Cl.
at 191 (“The United States as a contractor are not responsible for the United States
as a lawgiver.”).
The doctrine was later adopted by the Supreme Court of the United States,
see Horowitz v. United States, 267 U.S. 458, 461 (1925) (“It has long been held by
the Court of Claims that the United States when sued as a contractor cannot be held
liable for an obstruction to the performance of the particular contract resulting from
its public and general acts as a sovereign.”), and it has been applied in a number of
cases by this court and the Federal Circuit. In the leading case on the doctrine, the
Supreme Court explained that
[t]he sovereign acts doctrine thus balances the
Government’s need for freedom to legislate with its
obligation to honor its contracts by asking whether the
sovereign act is properly attributable to the Government
as contractor. If the answer is no, the Government’s
defense to liability depends on the answer to the further
question, whether that act would otherwise release the
Government from liability under ordinary principles of
contract law.
United States v. Winstar Corp., 518 U.S. 839, 896 (1996).
In subsequent years, the Federal Circuit has followed the general approach
set forth by the Court of Claims in its earliest cases on the sovereign acts doctrine.
First, that court has explained that the government-as-sovereign must be separated
from the government-as-contractor, and that the latter must be treated in the same
manner as any private contractor:
The basic notion of the sovereign acts doctrine is that the
United States as a contracting party acts in a different
capacity from its role as a sovereign. As a contractor, it
stands in the same shoes as any private party would in
dealing with another private party; as a sovereign, it
43
stands apart. The acts of one are not to be ‘fused’ with
the other – if an act of the Government as sovereign
would justify non-performance by any other defendant
being sued for contract breach, then the Government as
contractor is equally free from liability for non-
performance.
Stockton East, 583 F.3d at 1366.
Further, when the government’s actions render performance impracticable,
those actions will be viewed as sovereign acts only if they are public and general,
while any interference with the government’s contracts must be only incidental.
See Klamath Irrigation Dist. v. United States, 635 F.3d 505, 520 (Fed. Cir. 2011)
(“The government is not liable for breach of contract whenever it takes any
generally applicable action in its sovereign capacity that incidentally frustrates
performance of a contract to which it is a party.”); see also Winstar, 518 U.S. at
896 (noting that “governmental action will not be held against the Government for
purposes of the impossibility defense so long as the action’s impact upon public
contracts is, as in Horowitz, merely incidental to the accomplishment of a broader
governmental objective”).
In contrast, the sovereign acts defense never applies when the government’s
actions were designed to target its contractual obligations or when those actions
have the substantial effect of releasing it from its obligations. See Winstar, 518
U.S. at 899 (explaining that a government action is not public and general when
“it has the substantial effect of releasing the Government from its contractual
obligations”); Stockton East, 583 F.3d at 1366 (noting that the relevant question is
whether the “act [is] simply one designed to relieve the Government of its contract
duties, or is it a genuinely public and general act that only incidentally falls upon
the contract?”); Conner Bros., 550 F.3d at 1374 (“[T]he sovereign acts defense is
unavailable where the governmental action is specifically directed at nullifying
contract rights.”); Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569, 1575
(Fed. Cir. 1997) (“The Government-as-contractor cannot exercise the power of its
twin, the Government-as-sovereign, for the purpose of altering, modifying,
obstructing or violating the particular contracts into which it had entered with
private parties.”).
Finally, even if the government demonstrates that its actions were sovereign
44
in nature, it must still prove that those actions rendered its performance impossible.
Casitas Mun. Water Dist. v. United States, 543 F.3d 1276, 1287 (Fed. Cir. 2008)
(“[P]erformance by the government is excused under the sovereign acts defense
only when the sovereign act renders the government’s performance impossible.”).
However, the Federal Circuit “and its predecessor have long recognized that the
doctrine of impossibility does not require a showing of actual or literal
impossibility of performance but only a showing of commercial impracticability.”
Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1294 (Fed. Cir. 2002).
For the reasons noted below, the court concludes that the actions challenged here
were sovereign in nature – i.e., they were public and general – and rendered the
government’s performance under the lease not only impracticable, but legally
impossible.
2. The Government’s Response to the Deepwater Horizon
Disaster Was a Sovereign Act
The government asserts that the actions challenged by plaintiffs in this case
were designed to achieve important public purposes, such as drilling safety and
environmental protection, and were not an attempt to relieve the government of its
contractual obligations. Plaintiffs disagree, arguing that the government’s actions
fail to meet the first prong of the sovereign acts defense for two different reasons.
First, plaintiffs argue that the government has not established that its response to
the Deepwater Horizon disaster was truly motivated by its ostensible objectives.
Rather, according to plaintiffs, it is possible that the government may have used the
disaster as a mere pretext for escaping its duties under the lease. Second, plaintiffs
argue that the government’s actions were not public and general because they did
not directly affect anyone other than OCS lessees.
The Supreme Court and the Federal Circuit have identified a number of
questions that are relevant to a court’s determination of whether a sovereign act is
public and general in nature. First, was the government action designed for the
specific purpose of abrogating its contractual obligations? This inquiry focuses on
the government’s intent. Second, was the primary consequence of the government
action to release the government from its contracts or otherwise confer some
material benefit on the government as a contractor? This inquiry focuses on the
effects of the government’s action. Finally, was the government action targeted
solely at its contracting partners or did it have a broader impact? This inquiry
focuses on the distribution or scope of the government’s action. For the reasons
45
discussed below, the court holds that each of these factors leads to the conclusion
that the government was acting in its sovereign capacity when it adopted the
regulatory reforms now challenged by plaintiffs.
a. The Government Did Not Engage in the Challenged
Actions for the Purpose of Escaping Its Obligations
Plaintiffs assert that the moratoria, the new regulations, and the guidance
issued through NTLs were not really intended to ensure human safety, protect the
environment, or conserve the natural resources of the OCS. Instead, according to
plaintiffs, the disaster merely provided a convenient excuse for the government to
disregard its obligations under the lease. See Pls.’ Mot. at 2 (asserting that there
“are disputed issues of material fact regarding the promulgation and scope of the
rules and regulations and the Government’s bad faith and unfair dealing”); 63
(asserting that “the precise purpose of the reform efforts” was to release the
government from its contractual obligations); Pls.’ Reply at 17 (“Plaintiffs dispute
the Government’s unsubstantiated conclusions that its actions and inactions
following Deepwater Horizon were ‘for the prevention of waste and conservation
of the natural resources of the Outer Continental Shelf and the protection of
correlative rights therein’ within the contemplation of Section 1 of the Lease, or
were ‘public and general’ for purposes of the sovereign acts and unmistakability
doctrines.”).
The Federal Circuit has held that actions carried out with the purpose of
relieving the government-as-contractor of its duties are not sovereign in nature.
See Conner Bros., 550 F.3d at 1374 (“[W]hen considering whether the alleged
sovereign act is exclusively directed to aborting performance of government
contracts, courts addressing the sovereign acts doctrine have looked to the extent to
which the governmental action was directed to relieving the government of its
contractual obligations.”). Plaintiffs argue, in effect, that the government’s actions
in this case were designed with the purpose of escaping its contractual obligations.
In Yankee Atomic, 112 F.3d at 1569, the government entered into contracts
with a number of nuclear utilities, under which it agreed to provide uranium
enrichment services to those utilities at fixed prices. Many years later, the
government discovered that decontaminating and decommissioning the facilities
used to enrich uranium under its earlier contracts might exceed $20 billion over
forty years. In order to cover those unexpected costs, Congress imposed a special
46
assessment on all domestic utilities that had purchased uranium enrichment
services in the past, whether those services were purchased directly from the
government or from another party on the secondary market. The plaintiff in that
case argued that the special assessments breached its earlier contract with the
government for uranium enrichment services by retroactively increasing the price
of those services.
The Federal Circuit rejected that argument and held that the government was
protected from liability under the sovereign acts doctrine. The court focused on the
purpose of the governmental action – i.e., on whether the legislation imposing the
special assessment was enacted for the benefit of the government-as-contractor or
for the benefit of the public. The court concluded that “Congress’s main purpose
was to spread the costs of a problem that it realized only after the contracts had
been performed.” Id. at 1575-76. In addition, the Federal Circuit distinguished the
Supreme Court’s earlier decisions in Lynch v. United States, 292 U.S. 571 (1934),
and Perry v. United States, 294 U.S. 330 (1935), explaining that those cases
“involved situations where the congressional act made clear that its purpose was, at
least in part, to abrogate past public contracts.” Yankee Atomic, 112 F.3d at 1577.
In short, what the Federal Circuit found most important was whether the action
asserted by the government to be a sovereign act was designed to benefit the
government-as-contractor or the public. See id. at 1575 (“Thus, it is not a hard and
fast rule, but rather a case-specific inquiry that focuses on the scope of the
legislation in an effort to determine whether, on balance, that legislation was
designed to target prior governmental actions.”).
Similarly, in Conner Bros., 550 F.3d at 1368, the Federal Circuit held that
the government’s actions were not motivated by an intent to benefit the
government as a contractor, but were instead based on important and unrelated
national security concerns. There, the plaintiff was constructing a headquarters
facility for the Army Rangers at Fort Benning, Georgia, but was temporarily
denied access to the construction site following the events of September 11, 2001.
The Federal Circuit denied the contractor’s claim for delay damages and held that
the government was protected from liability under the sovereign acts doctrine. In
reaching that decision, the court emphasized that the purpose of the exclusion order
was to maintain security, not to relieve the government of its contractual
obligations:
The Army did not exclude [the contractor] from the
47
worksite because it was unhappy with [its] performance,
or because it was unhappy with the contract price, or
because it decided that it no longer wanted a new Ranger
headquarter facility. Rather, [the commander] made a
determination that excluding [the contractor] directly
served the government’s broader objective of restricting
access to the compound in order to minimize potential
threats to operational security and to facilitate
deployment.
550 F.3d at 1377.
Here, plaintiffs’ argument simply strains credulity. The record compiled by
the parties in this case is replete with contemporaneous documents discussing the
impacts of the Deepwater Horizon disaster, and explaining how the augmented
regulatory regime would reduce the risk of such a catastrophic event in the future.
The court concludes that there is no genuine issue of material fact as to whether the
purposes of the government’s reform efforts were to ensure human safety, protect
the environment, and conserve the natural resources of the OCS.29
b. The Government Gained No Material Benefit by
Virtue of the Challenged Actions
In addition to examining the purpose of the government’s actions, courts
have reviewed whether those actions would inure to the benefit of the government
in its role as a contractor. See Conner Bros., 550 F.3d at 1378 (finding it relevant
that the “government gained no economic advantage” in exercising its sovereign
powers); see also Winstar, 518 U.S. at 896 (noting that the sovereign acts doctrine
is inapplicable to governmental actions tainted by an object of “self-interest” or
“self-relief”). Here, there is no evidence that the government will derive any
economic or other material benefit by virtue of its actions in the wake of the
Deepwater Horizon disaster. Rather, it appears that those actions might actually
impose significant economic costs and administrative burdens on the government.
29
/ In contrast, there is a genuine dispute between the parties with respect to whether the
government’s specific responses to the disaster were reasonable, but, for the reasons discussed
above, that issue is not properly before the court in this case.
48
First, the government states that the administrative burden of implementing
its new regulatory requirements will be substantially greater than the burden of
administering leases under the earlier regulatory regime. Plaintiffs do not dispute
that assertion. Given the amount of new information required from operators,
which plaintiffs argue will impose a nearly insurmountable burden upon them,
the government’s predictions of increased burdens of its own appear to be well-
founded.
Further, to the extent that the new regulatory requirements delay or foreclose
exploration and production activities under existing leases, as plaintiffs predict
they will, the government stands to incur substantial economic losses due to
unrealized royalties. In this case, neither the purpose nor the consequence of the
government’s actions is to release the government from its contractual obligations
or to confer an economic or other material benefit upon the government. Thus, the
substantial effect of the regulatory reforms challenged by plaintiffs supports the
government’s assertion of the sovereign acts doctrine.
Plaintiffs fare no better in their contention that this is a “change of heart”
case, asserting that “in response to Deepwater Horizon, the Government lowered
its acceptable level of risk and imposed new conditions on its obligations to allow
drilling – mandatory conditions commensurate with its new, lower tolerance for
risk.” Pls.’ Mot. at 66. Plaintiffs’ argument is based on the faulty assumption that
it was the government, rather than plaintiffs, who agreed to bear the costs of
responding to a catastrophic blowout or other similar event under the lease.
Section 14 of the lease states that “[t]he Lessee shall indemnify the Lessor for, and
hold it harmless from, any claim, including claims for loss or damage to property
or injury to persons resulting from any operation on the leased area conducted by
or on behalf of the Lessee.” Def.’s Ex. 1 at A6. In addition, the regulations in
effect when the lease was executed state that the lessee or operator “must
immediately control, remove, or otherwise correct any hazardous oil and gas
accumulation or other health, safety, or fire hazard.” 30 C.F.R. § 250.107(b); see
generally id. pt. 253 (requiring lessees to demonstrate sufficient OSFR); id. pt. 254
(requiring lessees to submit an OSRP). The challenged reforms do not protect the
government from exposure to risks it assumed under the lease. Rather, they ensure
that the parties contractually responsible for responding to blowouts and spills –
lessees and operators – are actually able to meet their responsibilities.
49
c. The Impact of the Government’s Actions Are Broad
and Are Not Limited to the OCS Lessees
In plaintiffs’ view, the government’s actions in this case are not protected by
the sovereign acts doctrine, regardless of whether they serve an important public
purpose, because they are targeted exclusively at OCS lessees. The Federal Circuit
has explained that “[a]nother factor relevant to the ‘public and general’ inquiry is
whether the governmental action applies exclusively to the contractor or more
broadly to include other parties not in a contractual relationship with the
government.” Conner Bros., 550 F.3d at 1375. In this case, it is clear that the
government’s actions will have impacts on parties other than the OCS lessees.
Further, those actions are clearly designed to prevent another catastrophic oil spill
– an event that, like the Deepwater Horizon disaster, would have immeasurable
impacts on parties other than the lessees.
Plaintiffs assert that the environmental and safety risks the new regulations
and requirements are designed to address were created by contract and exist only
because the government has decided to allow exploration and production on the
OCS pursuant to those contracts. Further, plaintiffs note that many of the new
requirements were issued as NTLs, which by definition apply only to OCS lessees.
The fact that subcontractors and service providers may be impacted by the
regulations is irrelevant, plaintiffs argue, because the only parties directly affected
by the new requirements are lessees.
First, as defendant notes, the Federal Circuit has applied the sovereign acts
doctrine to government actions that directly affected only its contracting partners
and addressed risks that were created by the existence of the affected contracts.
In Klamath, 635 F.3d at 505, and Casitas, 543 F.3d at 1276, for example, the
Federal Circuit held that the government’s actions in those cases were sovereign,
even though the water reductions affected only the plaintiff water districts and
addressed environmental risks that were created by the reclamation projects.
The government argues that a sovereign act is public and general when it
impacts parties that are not in contractual privity with the government. Plaintiffs,
in contrast, argue that such an act is public and general only when it affects parties
that have absolutely no connection to the contracts. The government’s position is
consistent with case law from this court and the Federal Circuit. In Yankee Atomic,
112 F.3d at 1575-76, for example, the Federal Circuit explained that the special
50
assessments in that case were imposed not only on the government’s contracting
partners, but also on nuclear utilities that purchased uranium enrichment services
on the secondary market. While those utilities were not parties to the contracts,
they were certainly connected to them because they purchased enrichment services
from parties who had purchased those services directly from the government.
Plaintiffs are incorrect in their assertion that NTLs are addressed to lessees
alone. While those documents are referred to as “NTLs,” each NTL clearly states
that it is a “Notice to Lessees and Operators.” See, e.g., Def.’s Ex. 8 at A253.
Further, not all OCS lessees are operators, nor are all operators OCS lessees. See
30 C.F.R. § 250.150 (defining an operator as the party the lessees have designated
as having control over the leased area, and noting that “[a]n operator may be a
lessee, the MMS-approved designated agent of the lessee(s), or the holder of
operating rights under an MMS-approved operating rights assignment”). Many of
the requirements set forth in the NTLs challenged by plaintiffs are directed at
operators rather than lessees. See, e.g., Def.’s Ex. 26 (stating that BOEMRE will
evaluate whether operators have adequately demonstrated their access to sufficient
containment resources in their OSRP) (emphasis added).
In addition, while the NTLs are sent to OCS lessees and operators, those
notices and the regulations challenged by plaintiffs have impacts on parties other
than lessees and operators, and the new requirements they contain are designed to
reduce the risk of blowouts and other events that could threaten the entire Gulf
region. It is instructive to note that the plaintiffs in Hornbeck and Ensco, two cases
upon which plaintiffs rely heavily in this case, were not OCS lessees; they were
service providers involved in the offshore industry in the Gulf of Mexico.
3. The Government’s Sovereign Acts Rendered Performance
by the Government Impossible
In addition to proving that its actions were public and general in nature, the
government must also prove that those actions rendered its performance under the
lease impracticable. In this case, the impracticability of the performance is plain:
the government cannot allow plaintiffs to proceed under the old regulatory regime
without violating the law. Plaintiffs do not contend that the government may allow
them to explore and develop the leased area in accordance with the requirements
that were in effect when the lease was originally executed. Instead, plaintiffs argue
that the government has failed to demonstrate impracticability in this case because
51
the lease allocates the risk of unforeseeable regulatory changes to the government.
In short, plaintiffs assert that the government cannot demonstrate impracticability
because it breached the lease. Plaintiffs’ argument fails for two reasons.
First, the sovereign acts doctrine is an affirmative defense, and it applies
only when there has been a breach of contract. See Conner Bros., 550 F.3d at 1371
(“The doctrine is an affirmative defense that is an inherent part of every
government contract.”); see also Stockton East, 583 F.3d at 1360 (“Once the
Government’s breach of contract has been established, the Government is liable for
the breach and ensuing damages, unless it can prove an affirmative defense of
some kind that absolves it from that liability.”). For that reason, the existence of a
breach does not preclude the applicability of the sovereign acts doctrine; indeed,
the existence of a breach is a prerequisite to its applicability.30
Further, plaintiffs’ argument is in direct conflict with the central holding in
this case: that plaintiffs assumed the risk of future regulations under the lease.
Because the court has already held that the lease allocates the risk of such changes
to plaintiffs, it cannot accept a contrary argument that the lease allocates the risk of
those changes to the government for purposes of the sovereign acts doctrine. The
government has demonstrated that if the sovereign acts doctrine applies here, the
reform efforts implemented in the summer and fall of 2010 have rendered its
performance under the earlier regulatory regime – i.e., by allowing plaintiffs to
perform under the old rules – legally impossible. See Restatement (Second) of
Contracts § 264, comment a (“The fact that it is still possible for a party to perform
if he is willing to break the law and risk the consequences does not bar him from
claiming discharge.”).
CONCLUSION
The court concludes that the actions undertaken by defendant in the wake of
the Deepwater Horizon disaster did not breach any term of plaintiffs’ lease. In the
30
/ The court has already held that none of the government’s actions in this case breached
plaintiffs’ lease, and the court’s discussion of the sovereign acts doctrine necessarily assumes –
in contrast to the court’s holding on the issue of breach – that the government had breached the
lease. The court’s two holdings in this case – i.e., that the government did not breach the lease,
and that the government is protected from liability under the sovereign acts doctrine – are thus
alternative, rather than complementary.
52
alternative, even if the court were to hold that the government breached plaintiffs’
lease, defendant would be shielded from liability under the sovereign acts doctrine.
For these reasons, defendant’s motion for partial summary judgment on plaintiffs’
breach claim is granted, and plaintiffs’ cross-motion for partial summary judgment
on the same breach claim is denied. The court thus directs the parties to confer for
the purpose of proposing the most appropriate means for expeditiously resolving
plaintiffs’ remaining claims.31
Accordingly, it is hereby ORDERED that
(1) Defendant’s Motion for Partial Summary Judgment, filed
July 13, 2012, is GRANTED;
(2) Plaintiffs’ Cross Motion for Partial Summary Judgment, filed
September 10, 2012, is DENIED;
(3) Pursuant to RCFC 54(b), insofar as there is no just reason for delay,32
the Clerk’s Office is directed to ENTER judgment for defendant as to
Count I of the complaints of both Century and Champion, and to
DISMISS that count, with prejudice;
(4) The parties are directed to CONFER to determine how they wish to
proceed with respect to the remaining claims (Count II and Count III);
31
/ The court notes that Century’s complaint set forth three counts: the breach claim
(Count I), the takings claim (Count II), and an unspecified claim (Count III), which purports to
include “any and all other causes of action that the actions and inactions of the United States
give rise to, including those as described in this Complaint.” Compl. ¶ 63. In the two years
since Century filed its complaint in this court, plaintiffs have made no attempt to further develop
or explain the content or jurisdictional basis of the third count of that complaint.
32
/ In Count II of their complaints, plaintiffs argue that the government has effected an
uncompensated taking of their contract rights. Because this court’s disposition of Count I of the
complaint will be critically important to its consideration of Count II, the court believes that a
final resolution of plaintiffs’ breach claim will promote judicial economy and conserve the
parties’ resources. For that reason, the court has ordered the entry of judgment on Count I
pursuant to RCFC 54(b) to afford plaintiffs the opportunity to seek immediate review of this
court’s decision in the Federal Circuit in the event they determine an appeal is warranted.
53
(5) On or before March 19, 2013, the parties shall CONFER and FILE
with the Clerk’s Office a redacted copy of this opinion, with any
material deemed proprietary blacked out and enclosed in brackets, so
that a copy of the opinion can then be prepared and made available in
the public record of this matter; and
(6) The parties shall FILE a Joint Status Report by March 29, 2013,
proposing the next steps in this litigation.
/s/Lynn J. Bush
LYNN J. BUSH
Judge
54