Fifth Circuit Holds Interior's Cash-for-Kind Royalty Switch Requires Notice-and-Comment Rulemaking
W & T Offshore challenged Interior's demand for cash payment to resolve shortfalls in prior in-kind natural gas royalty deliveries on federal OCS leases, arguing the agency's policy shift constituted an unenforceable substantive rule promulgated without APA notice-and-comment procedures. The Fifth Circuit affirmed the district court's holding that Interior's requirement was not a substantive rule subject to notice-and-comment rulemaking, but reversed on equitable recoupment, holding that the doctrine applied to overcome OCSLA's limitations period and required Interior to credit W & T's over-deliveries against cumulative shortfalls.
Background
W & T Offshore, Inc., an operator of offshore natural gas deposits leased from the federal government under the Outer Continental Shelf Lands Act (OCSLA), was required to make in-kind royalty payments to the Department of the Interior. When W & T under-delivered natural gas in certain months, Interior demanded a final cash payment to resolve the cumulative delivery shortfall. W & T appealed Interior's demand to the Interior Board of Land Appeals (IBLA), which denied the appeal. W & T then sought judicial review in the Western District of Louisiana, which granted partial summary judgment to both parties on different issues. Both parties appealed to the Fifth Circuit.
The Dispute
The case presented two principal issues. First, whether Interior's requirement that operators resolve in-kind royalty shortfalls through cash payments—rather than through subsequent in-kind deliveries—was a substantive rule requiring notice-and-comment rulemaking under the Administrative Procedure Act, or merely an adjudicative order exempt from such procedures. Second, whether the doctrine of equitable recoupment allowed W & T to offset months in which it over-delivered gas against months in which it under-delivered, despite OCSLA's statute of limitations that would otherwise bar consideration of older over-deliveries.
The Court's Holding on Rulemaking Requirements
The Fifth Circuit affirmed the district court's holding that Interior's cash payment requirement was not a substantive rule subject to notice-and-comment rulemaking. The court concluded that Interior's requirement was permissible and entitled to deference under the Chevron framework. The court found that nothing in OCSLA barred Interior from changing the form in which it would accept royalty payments, and that permitting Interior to do so comported with the purpose of OCSLA to increase receipts and achieve effective collections of royalties.
Equitable Recoupment Analysis
On the equitable recoupment issue, the Fifth Circuit reversed the district court. The court held that the doctrine of equitable recoupment applied to overcome the limitations period in OCSLA, such that Interior had to credit over-deliveries that W & T made in some months when calculating the cumulative delivery shortfall. This ruling allowed W & T to offset its over-deliveries against under-deliveries across the relevant time period, even where some of those over-deliveries might otherwise have fallen outside OCSLA's statute of limitations.
Significance
The decision clarified Interior's authority under OCSLA to require cash payments to resolve in-kind royalty shortfalls without engaging in notice-and-comment rulemaking. At the same time, the court's application of equitable recoupment provided operators with a defense based on cumulative delivery performance, requiring the agency to account for both over-deliveries and under-deliveries when calculating royalty obligations.