Noble Energy, Inc. v. Kenneth Salazar

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 9, 2011 Decided March 2, 2012
No. 11-5114
NOBLE ENERGY, INC.,
APPELLANT
v.
KENNETH LEE SALAZAR, SECRETARY, UNITED STATES
DEPARTMENT OF INTERIOR, AND UNITED STATES
DEPARTMENT OF THE INTERIOR,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:09-cv-02013)
Steven J. Rosenbaum argued the cause for appellant. With
him on the briefs was Elliott Schulder.
John Emad Arbab, Attorney, U.S. Department of Justice,
argued the cause for appellees. With him on the brief was
Elizabeth Ann Peterson, Attorney.
Before: GRIFFITH, Circuit Judge, and WILLIAMS and
RANDOLPH, Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
RANDOLPH.
2
Concurring opinion filed by Senior Circuit Judge
WILLIAMS.
RANDOLPH, Senior Circuit Judge: The Outer Continental
Shelf Lands Act authorizes the Secretary of the Interior to sell
and administer oil and gas leases on the submerged lands located
between state coastal waters and the high seas. 43 U.S.C. §§
1331(a), 1332, 1337(a). The Act also empowers the Secretary
to promulgate rules and regulations governing those leases. Id.§ 1334(a). At issue here are regulations obligating lessees to
plug permanently and to abandon their oil wells.
On September 1, 1979, Noble Energy1 acquired a lease to
drill for, develop, and produce oil and natural gas on roughly six
thousand acres of submerged lands off the coast of California.
Pursuant to the lease, Noble drilled an exploratory oil well in
1985 – “Well 320-2” – and discovered oil and gas in
commercially viable quantities. Before producing any oil or
gas, Noble temporarily plugged and abandoned the well, a
technique that seals the well but allows for re-entry after
additional testing or exploration.2 See 30 C.F.R. § 250.1721.
Twenty-seven years later, Well 320-2 remains temporarily
plugged and abandoned.
1
For ease of reference, we refer to Noble Energy, Inc. and its
commercial predecessors as “Noble Energy.”
2
In comparison, the permanent plugging and abandonment of
a well requires, among other things, the following steps: placing a
series of cement plugs in the borehole beneath the sea floor; removing
both the wellhead – the pressure containing access point at the sea
floor – and large portions of the well’s piping; and totally clearing the
well site. 30 C.F.R. §§ 250.1715, 250.1716.
3
During the intervening years, suspensions of Noble’s lease
were common. A suspension – issued either at the lessee’s
request, after agency approval, or at the Interior Department’s
directive – has two principal effects: (1) it extends the life of a
lease, which typically has an initial term of five years; and (2) it
defers the lessee’s obligation to produce oil. 43 U.S.C. §§
1334(a)(1), 1337(b)(2) & (5); 30 C.F.R. §§ 250.105, 250.169.
Interior grants suspensions when, for example, a lessee needs
additional time to develop its lease, to obtain transportation
facilities, or to negotiate sales contracts. 30 C.F.R. §§ 250.174,
250.175. Absent a threat of immediate or irreparable harm,
suspensions generally do not interfere with a lessee’s ability to
explore, develop, or prepare its lease for oil production.
Noble requested and received its last suspension in 1999.
Two years into the suspension’s four-year term, a federal district
court in California set it aside. The court ruled that suspensions
had to comply with the 1990 amendments to the Coastal Zone
Management Act, 16 U.S.C. § 1451 et seq. Under those
amendments, “[e]ach Federal agency activity within or outside
the coastal zone that affects any land or water use or natural
resource of the coastal zone shall be carried out in a manner
which is consistent to the maximum extent practicable with the
enforceable policies of approved State management programs.”
Id. § 1456(c)(1)(A); see California ex rel. Cal. Coastal Comm’n
v. Norton, 150 F. Supp. 2d 1046, 1053, 1057 (N.D. Cal. 2001),
affirmed 311 F.3d 1162, 1173 (9th Cir. 2002). Because Noble’s
suspension had not been assessed for consistency with
California’s coastal management plan, the court ordered it
revoked.
For the first time, states and their coastal management
programs obtained a degree of influence over the suspension
process. This new-found influence arguably made it more
difficult for lessees to acquire suspensions. It undoubtedly
4
interfered with ongoing leasehold activities – the government
directed many lessees to cease operations pending a review of
their prior suspension requests. Noble and other lessees sued in
the Court of Federal Claims, alleging that application of the
Coastal Zone Management Act to suspension requests
constituted a material breach of their lease agreements. The
Court of Federal Claims agreed; on appeal the Federal Circuit
affirmed. Amber Res. Co. v. United States, 538 F.3d 1358 (Fed.
Cir. 2008) (affirming 68 Fed. Cl. 535 (2005) and 73 Fed. Cl. 738(2006)). The courts concluded that the government’s
compliance with the California court order made the
development of leased property more difficult and the pursuit of
suspensions more burdensome. Amber Res., 538 F.3d at 1373-
74. Thus, the government had effectively “repudiated the lease
agreements by putting into practice the new [court-mandated]
rules applicable to the availability of requested suspensions.”
Id. at 1370.
The lessees received $1.1 billion in restitution damages and
were discharged from all obligations arising from their lease
agreements.3 Noble’s share of the recovery was roughly $1.2
million. Among its discharged contractual duties was the
obligation to “remove all devices, works, and structures from the
premises no longer subject to the lease.”
This brings us to the current dispute: one year after the
Federal Circuit’s decision in the breach-of-contract litigation,
3
Under the common law rule of discharge, one party’s
material breach of a contract will excuse the other party’s
performance. See RESTATEMENT (SECOND) OF CONTRACTS § 237
(1981); Costello v. Grundon, 651 F.3d 614, 640 (7th Cir. 2011); 3511
13th Street Tenants’ Ass’n v. 3511 13th Street, N.W., Residences, LLC,
922 A.2d 439, 445 (D.C. 2007); see also Amber Res., 68 Fed. Cl. at
548-49.
5
the Minerals Management Service, at that time an arm of the
Interior Department, sent a letter to Noble ordering it to plug and
abandon Well 320-2 permanently. Because this controversy
arises directly from that letter, we quote it at length:
The purpose of this letter is to notify you of
outstanding decommissioning obligations that exist on
one of your OCS leases. Our records indicate that your
Well OCS P-0320, No 2, has not been permanently
abandoned. The Minerals Management Service
(MMS) has determined that there is no longer
justification for maintaining the well in temporarily
abandoned status. Therefore, as required by 30 CFR
250.1723, you must: promptly and permanently plug
the well according to 250.1715; clear the well site
according to 250.1740 through 250.1742; and perform
any additional activity necessary to fully satisfy your
decommissioning obligations.
The total cost of such tasks is estimated at more than $20
million.
Noble responded to the order by explaining “that the
Government’s material breach discharged the lessees from any
obligation to conduct, arrange or pay for the plugging and
abandonment of the 320 # 2 exploratory well.” Its letter to
MMS also announced that Noble had sued the Secretary of the
Interior and his agency for injunctive and declaratory relief. The
suit alleged that the plug and abandon order was arbitrary,
capricious, an abuse of discretion, and not in accord with the
law. See 5 U.S.C. § 706(2)(A).
6
The district court first determined, correctly we believe, that
it had jurisdiction over Noble’s complaint.4 Noble Energy, Inc.
v. Salazar, 770 F. Supp. 2d 322, 328-29 (D.D.C. 2011). As to
the merits, the court ruled that the common law doctrine of
discharge did not relieve Noble of the regulatory obligation to
plug its well permanently, an obligation that the lease did not
itself create. Id. at 331-32. Our review is de novo. Ne. Hosp.
Corp. v. Sebelius, 657 F.3d 1, 4 (D.C. Cir. 2011).
Interior’s regulations require that lessees “[p]romptly and
permanently plug” their temporarily-abandoned oil wells if the
government so orders. 30 C.F.R. § 250.1723. Lessees must in
any event “permanently plug all wells on a lease within 1 year
after the lease terminates.” Id. § 250.1710; see also id. §
250.1703(b). As with other regulatory duties regarding the outer
Continental Shelf, these obligations accrue the moment an entity
drills a well or becomes a lessee, id. §§ 250.1701(a),
250.1702(a) & (d), and generally are discharged only when
satisfied, id. § 250.1701(a). The obligations expressly survive
4
Although Noble did not go through any formal process to
relinquish its lease, see 30 C.F.R. § 556.76, the district court was
“inclined” to agree that the government’s material breach had the
effect of terminating the lease as a matter of law. This placed Noble’s
lawsuit squarely within the provision of the Outer Continental Shelf
Lands Act conferring jurisdiction on district courts over “controversies
arising out of, or in connection with . . . the cancellation, suspension,
or termination of a lease or permit under this [Act].” 43 U.S.C. §
1349(b)(1). Additionally, the court concluded that while the Tucker
Act grants exclusive jurisdiction to the Court of Federal Claims over
claims for more than $10,000 founded on a contract with the United
States, Noble’s claim, which did not seek monetary relief, turned
exclusively on whether MMS had authority to issue the plug and
abandon order. The government has not renewed its jurisdictional
objection on appeal.
7
assignment, id. § 556.62(d); transfer, id. § 556.64(a)(5); and
termination of a lease, id. §§ 556.76, 250.1710.
Noble’s argument against application of the regulations
proceeds as follows. The government materially breached its
lease agreement when it applied the Coastal Zone Management
Act to suspension requests. Under the common law rule of
discharge, Noble’s remaining contractual obligations were
therefore excused, including any contractual duties to plug and
abandon Well 320-2. Because federal regulations impose
similar decommissioning obligations, and because those
regulations exist to govern contractual relationships, the
“common law rule of discharge applies to the regulatory plug
and abandonment requirement[s]” as well.
The argument relies in large measure on United States v.
Texas, 507 U.S. 529 (1993). In that case, the Court held that (1)
“[s]tatutes which invade the common law . . . are to be read with
a presumption favoring the retention of long-established and
familiar principles, except when a statutory purpose to the
contrary is evident,” id. at 534 (quoting Isbrandsten Co. v.
Johnson, 343 U.S. 779, 783 (1952)); and (2) “[i]n order to
abrogate a common-law principle, the statute must ‘speak
directly’ to the question addressed by the common law,” id.(quoting Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625
(1978)). Noble thinks these holdings require common law
principles of discharge to “be read into the OCS Lands Act and
regulations.”
The government’s main counter-argument is that neither
United States v. Texas, nor any of the other cases Noble invokes,
holds that “at common law a breach of contract by the United
States (or by a private party for that matter) discharges the non-
breaching party from compliance with its independent statutory
and regulatory obligations.”
8
Resolution of this dispute depends on what the plugging
regulations mean. If the regulations impose an obligation to
plug Well 320-2 regardless of the government’s breach of the
lease contract, Noble’s argument fails. If the regulations release
the duty to plug once the government materially breaches the
lease agreement, then Noble prevails. Nothing in § 250.1710,
§ 250.1723, or any of the agency’s other regulations clearly
addresses this question.
It is important to remember that we are considering these
regulations in the context of judicial review of agency action
under the Administrative Procedure Act, 5 U.S.C. § 701 et seq.
The “agency action” here is MMS’s order, or as the government
calls it, MMS’s “decision letter.” Section 706 of the APA
instructs reviewing courts to “determine the meaning or
applicability of the terms of an agency action” when necessary.
But with respect to the decision letter, we are unable to perform
this duty with any confidence. We know that MMS issued the
letter about a year after the Federal Circuit ruled that the
government materially breached the lease. What we do not
know is whether MMS actually decided that the regulatory
obligation to plug Well 320-2 continued post-breach. There is
not a word in MMS’s letter indicating that it considered the
common law doctrine of discharge. And even if the letter was
the result of careful consideration regarding how the regulations
operate in light of the Amber rulings, MMS’s letter contains no
hint of the agency’s reasoning or the factors that it took into
account. We therefore cannot be sure whether MMS’s letter
embodied an interpretation of the regulations’ applicability after
breach. One might infer this, but as we have said in a similar
situation, “an implication is not an agency interpretation.”
Menkes v. DHS, 486 F.3d 1307, 1314 (D.C. Cir. 2007); see also
PDK Labs. Inc. v. DEA, 362 F.3d 786, 798 (D.C. Cir. 2004)
(“Yes, DEA did exercise discretion when it issued the order
here, but before doing so it necessarily had to decide what [the
9
provision] meant. That is the issue the agency must reconsider
on remand . . . so that it can fill in the [interpretative] gap” left
unexplained.). Remand therefore is necessary.
Our reluctance to speculate about how MMS interpreted its
regulations follows from the principle laid down in a line of
cases reaching back at least to Prill v. NLRB, 755 F.2d 941 (D.C.
Cir. 1985). Those cases hold that on judicial review this court
will not choose between competing meanings of an ambiguous
law until the relevant agency weighs in.5 Id. at 948; see also
Peter Pan Bus Lines, Inc. v. Fed. Motor Carrier Safety Admin.,
471 F.3d 1350, 1354 (D.C. Cir. 2006); Teva Pharm. USA, Inc.
v. FDA, 441 F.3d 1, 4 (D.C. Cir. 2006); PDK Labs., 362 F.3d at
798; Arizona v. Thompson, 281 F.3d 248, 259 (D.C. Cir. 2002);
Transitional Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019,
1029 (D.C. Cir. 2000); Alarm Indus. Commc’ns Comm. v. FCC,
131 F.3d 1066, 1072 (D.C. Cir. 1997). Put simply, “an agency
is entitled to construe its own regulations in the first instance.”
Am. Petroleum Inst. v. EPA, 906 F.2d 729, 742 (D.C. Cir. 1990)
(per curiam). If we cannot tell whether it has done so, remand
is appropriate. See Menkes, 486 F.3d at 1313-15; Akzo Nobel
Salt, Inc. v. Fed. Mine Safety & Health Review Comm’n, 212
F.3d 1301, 1302, 1304-05 (D.C. Cir. 2000); Ohio v. U.S. Dep’t
of the Interior, 880 F.2d 432, 461 (D.C. Cir. 1989). Cf. Oil,
Chem. & Atomic Workers Int’l Union, AFL-CIO v. NLRB, 46
5
The actual holding of Prill and the cases following it is this:
when an agency incorrectly concludes that Congress mandated a
particular regulatory interpretation of a statute – and the agency
therefore stops itself at Chevron step one – this court will vacate and
remand. Upon remand, the agency is required to bring its experience
and expertise to bear in parsing the statute and implementing an
appropriate regulatory response. 755 F.2d at 948. While that holding
does not apply here, the underlying principle, as explained in the text,
clearly does.
10
F.3d 82, 93 (D.C. Cir. 1995); Int’l Longshoremen’s Ass’n, AFL-
CIO v. Nat’l Mediation Bd., 870 F.2d 733, 735-36 (D.C. Cir.
1989).
We acknowledge that judicial deference to an agency’s
interpretation of its own regulation may be appropriate even
though the interpretation appears for the first time in a legal
brief. See Auer v. Robbins, 519 U.S. 452, 462 (1997) (giving
deference to an interpretation contained in an amicus brief);
Drake v. FAA, 291 F.3d 59, 68-69 (D.C. Cir. 2002) (adversarial
brief). That said, we cannot find any definitive interpretation of
the plug and abandon regulations in the government’s brief.
This may be attributable to the fact that MMS was abolished in
May 2010 – more than a year before the government filed its
brief in this proceeding. Area Energy LLC v. Salazar, 642 F.3d
212, 214 (D.C. Cir. 2011) (citing Sec’y of Interior, Secretarial
Order 3299 (May 19, 2010)). What we are left with is a brief
written by the Department of Justice, defending the actions of a
disbanded Interior Department office, without – as far as we can
tell – any consideration of the regulations by MMS’s successor.
This is not the stuff of Auer deference.
In short, it is up to MMS’s successor to interpret its
regulations in the first instance and to determine whether they
apply in situations like Noble’s. If they do, the agency must
explain why. See Int’l Longshoremen’s Ass’n, 870 F.2d at 735-
37. We therefore vacate the judgment and send the case back to
the district court with instructions to vacate Interior’s order and
to remand to the Secretary for further proceedings consistent
with this opinion.
So ordered.
WILLIAMS, Senior Circuit Judge, concurring: I concur in
the court’s opinion and judgment but write separately to
express doubt whether the Interior Department, on remand,
will be able to offer an interpretation that is both reasonable
and supportive of its action here.
Noble has invoked the rule in United States v. Texas, 507
U.S. 529 (1993), which, as the court’s opinion notes, creates a
presumption “favoring the retention of long-established and
familiar principles” of the common law, rebuttable by an
evident statutory purpose to the contrary. Id. at 534, quoted
ante at 7. The variant of that rule that Noble needs in order to
win is very narrow: that when the government behaves as a
market actor, and promulgates statutes or regulations
governing the relationship between it and private-sector
market actors in a manner parallel to what in the private sector
would be controlled by contract or the common law, the
statutes or regulations are presumptively subject to the sort of
implied caveats and qualifications that apply to comparable
contract language or common law understandings.
The government ventured into oil-and-gas production as a
rather standard market actor—a lessor of property potentially
productive of oil or gas. It promulgated regulations that
exactly match the set of parties governed by its leases: itself
and those lessees. The regulations cover all such lessees—
and no other private parties whatsoever. 30 C.F.R.
§ 250.1701. The lease’s text is short, only four pages, Joint
Appendix (“J.A.”) 82-85, shorter than many leases used in the
private sector, and much shorter what might be expected of a
private lease prepared by a lessor with anything like the
government’s “bargaining power.” See NANCY SAINT-PAUL,
5 SUMMERS OIL AND GAS § 59:10 (3d. ed. 2009). The
regulations plainly function as a supplement to the lease, and
2
the specific ones at issue here directly complement a lease
provision. Section 22 of the lease, governing “Removal of
Property on Termination of Lease,” provides:
Within a period of one year after termination of
this lease in whole or in part, the Lessee shall
remove all devices, works, and structures from
the premises no longer subject to the lease in
accordance with applicable regulations and
orders of the Director. However, the Lessee
may, with the approval of the Director,
continue to maintain devices, works, and
structures on the leased area for drilling or
producing on other leases.
J.A. 85. The disputed regulations essentially repeat the terms
of § 22 in more detail, providing when and how a lessee must
decommission a well. See, e.g., 30 C.F.R. § 250.1710-1716;
id. § 250.1725-1728. Using regulations to amplify the lease
terms saves paper (though of course it may have other
purposes).
As a market actor the government is subject to the normal
common law rules of contract, unless a law “speak[s] directly
to the question addressed by the common law.” Texas, 507
U.S. at 534. The government argues that the regulations have
no explicit provision that total breach by a party (here the
government) has the effect of discharging the other party from
its obligations. Quite true. Neither does the lease itself. Yet
common law courts have found the principle implicit in
contracts generally, presumably filling in what the parties
would likely have specified had they addressed the issue. See
PETER LINZER, 6 CORBIN ON CONTRACTS § 26.2.A. (Joseph
M. Perillo ed., 2010) (in filling gaps “the court quite properly
asks what the parties would have done if the issue had been
raised when the contract was being negotiated.”); see also
3
RESTATEMENT (SECOND) OF CONTRACTS § 204 cmt. d (1981).
Of course the government had the authority to insist on a
contract reversing the implication. The question posed by this
case is whether it did so, silently. The Texas principle
suggests a negative answer.
Of cases applying the Texas concept, two are very similar
to this case: ABN AMRO Bank v. United States, 34 Fed. Cl.
126 (1995), and Amoco Production v. Fry, 904 F. Supp. 3(D.D.C. 1995). In the first, an individual deposited a check
purportedly issued by the federal government and payable to a
supermarket chain. 34 Fed. Cl. at 127. The depository bank,
ABN AMRO, accepted the check and presented it to the
federal government for payment. Id. It turned out that the
government had not issued the check and that the individual
depositing the check was not in fact a representative of the
supermarket chain. This combination made the case one of
“double forgery.” Id. at 128. ABN AMRO invoked the
traditional common law rule in such cases, namely that the
drawee bank, here the government, would be liable for the
loss. The government claimed that its regulations superseded
that rule. Id. at 130 n.2 (quoting 31 C.F.R. § 240.5). The
court, while acknowledging that the regulations were “fairly
comprehensive” and apparently accepting the government’s
argument that their literal language would abrogate the
common law, nevertheless held that the regulations did not
“make evident” an intent to displace the double forgery rule.
Id. at 131, 132. It thus rejected the government’s theory. Id.Amoco Production applies similar reasoning to the Outer
Continental Shelf Lands Act, the statute supporting the
regulations here. Plaintiffs, oil and gas producers on offshore
federal leases, paid royalties to the federal government on oil
and gas they produced. 904 F. Supp. at 7. The oil and gas
producers frequently overpaid, and the statute provided that in
such a case, on lessee’s request and after confirmation of such
4
excess by the Interior Secretary and a delay for congressional
review, “‘such excess shall be repaid without interest.’” Id. at
7 (quoting 43 U.S.C. § 1339(a)). Lessees could alternatively
have the excess applied as a credit on future royalty payments.
Id. An audit determined that the producers had in fact
underpaid at some points in the past, and the Minerals
Management Service (“MMS”) ordered the producers to “pay
royalties the audit determined to be due.” Id. The producers
refused, and the MMS responded by withholding written
permission for the producers’ overpayment credits. Id. at 7-8.
In doing so the MMS invoked the general common law right
of offset, “the right of a creditor to use money it owes to a
debtor to satisfy the debt owed to it.” Id. at 9. The court
found that the statute’s command that “excess [royalty
payments] shall be repaid” expressed no intent to abrogate
MMS’s common law right of offset or to otherwise
“invalidate[] the MMS’s procedures.” Id. at 9. The oil and
gas producers appealed the district court decision but not its
ruling that the MMS’s common law offset right survived the
statute. Brief for Appellants at 1-2, Amoco Production v.
Fry, 118 F.3d 812 (D.C. Cir. 1997) (No. 96-5030).
In both ABN AMRO and Amoco Production positive law
stated a general rule but did not address a specific eventuality
for which the common law provided an exception. Both
courts concluded that the statute or regulations in question,
expressing no explicit intent to displace the common law
exception, in fact had no such effect. It therefore prevailed
against the statutory or regulatory language.
At oral argument we tried to extract from counsel the
government’s theory for distinguishing these two cases.
Counsel responded that Noble had failed to identify a
common law principle allowing “discharge from regulatory
obligations.” Oral Arg. at 28:30. This seems to mix two
ideas, neither of them helpful to the government. Insofar as it
5
notes that neither ABN AMRO nor Amoco involved
“discharge,” it is a distinction but a pointless one; both
involved the relation between the common law and a statute
or regulation; the specific common law principle at issue
seems unimportant. Insofar as the government’s argument
asks that the common law principle have an effect on a
regulation, it offers no distinction at all. In both the cases the
party invoking the common law made no claim that there was
a common law principle directly applying to “regulatory
obligations”; they argued simply that the regulations, despite
their literal language, should be read in light of the common
law principles that governed parallel transactions in the
private sector. Here too the government was performing the
kind of ordinary business transactions that a private party
might have performed. Accordingly, the Texas case similarly
calls for applying common law principles as an interpretive
gloss on the parallel regulation’s literal language. Noble
acknowledges that Interior possessed legal authority to issue
regulations displacing the common law; nothing in the current
regulations seems to have exercised that authority.