Oil & Gas Industry Welcomes New Era of Administrative Law

July 11, 2024

The Supreme Court recently issued a trilogy of landmark decisions, setting the stage for a new era of litigation challenging federal agency actions and regulations. Energy producers unfairly burdened by over-reaching and ever-changing federal oil and gas royalty obligations are particularly likely to benefit from these changes. 

Corner Post Inc. v. Board of Governors of the Federal Reserve System

On July 1st, the Court issued a simple, but particularly significant, administrative law decision – resolving and extending the timeframe in which litigants may bring facial challenges to an agency’s rule.

 In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, No. 22-1008, 603 U.S. ___ (2024), the Supreme Court held the six-year statute of limitations for suits against the United States, brought under 28 U.S.C. § 2401(a), does not begin until an injury is suffered. Notwithstanding when a regulation is promulgated or published, the Court held a suit is timely when brought within six years after injury by the final agency action:

The default statute of limitations for suits against the United States requires “the complaint [to be] filed within six years after the right of action first accrues.” 28 U. S. C. §2401(a). We must decide when a claim brought under the Administrative Procedure Act “accrues” for purposes of this provision. The answer is straightforward. A claim accrues when the plaintiff has the right to assert it in court—and in the case of the APA, that is when the plaintiff is injured by final agency action. (1)

The Court’s decision is expected to usher in a variety of new challenges to current regulations, including those previously assumed to have been settled by law. 

Federal royalty payors receiving (or even currently litigating) demands for additional royalties by the Office of Natural Resources Revenue (ONRR) may consider re-reviewing those demands to determine whether any additional facial challenges to the underlying regulations could be appropriate (e.g., whether the enforced regulations may be unlawful because they exceed statutory authority). Energy producers may also wish to consider whether bringing similar affirmative causes of action could be appropriate.

Ohio v. Environmental Protection Agency

On June 27th, the Court also provided a significant example of what would likely qualify as “arbitrary” or “capricious” agency action or rulemaking, justifying reversal.

In Ohio v. Environmental Protection Agency, No. 23A349, 603 U.S. ___ (2024), the Court granted states’ requests for a stay of certain final agency action, holding the agency’s final rule was not reasonably explained and thus likely to be reversed:

The applicants argue that a court is likely to hold EPA’s final FIP “arbitrary” or “capricious” within the meaning of the Act and thus enjoin its enforcement against them. An agency action qualifies as “arbitrary” or “capricious” if it is not “reasonable and reasonably explained.” … Although commenters posed this concern to EPA during the notice and comment period, EPA offered no reasoned response. … [I]f there is an explanation, it does not appear in the final rule. As a result, the applicants are likely to prevail on their argument that EPA’s final rule was not “reasonably explained.” (2)

The facts of the case are interesting. In a nutshell, the Environmental Protection Agency (EPA) had set certain new standards for air quality. After disapproving various states’ implementation plans to meet the new standards, EPA proposed its own unified framework (its own federal implementation plan) for notice and comment. 

Immediately, commenters warned of a potential pitfall in the approach – namely, that it was based on EPA’s improper assumption that the federal plan would apply to all. Many believed EPA’s prior disapprovals were legally flawed, and thus as a result, some states would legally apply their own implementation plans, instead of the federal framework. If the federal plan did not apply to all, as EPA envisioned, commenters argued a new assessment was needed.

Despite these concerns, coupled with other confirming legal developments (district courts had stayed some of EPA’s prior disapprovals), EPA proceeded to issue its final rule and federal implementation plan. In “response” to the comments, EPA had adopted a severability provision, stating its plan would still apply regardless of the number of states participating.

The Court found the EPA’s response did not address the concern, but merely sidestepped it:

None of this, however, solves the agency’s problem. True, the severability provision highlights that EPA was aware of the applicants’ concern. But awareness is not itself an explanation. The severability provision highlights, too, the agency’s desire to apply its rule expeditiously and “‘to the greatest extent possible,’” no matter how many States it could cover. Ibid. But none of that, nor anything else EPA said in support of its severability provision, addresses whether and how measures found to maximize cost effectiveness in achieving downwind ozone air-quality improve-ments with the participation of 23 States remain so when many fewer States, responsible for a much smaller amount of the originally targeted emissions, might be subject to the agency’s plan. Put simply, EPA’s response did not address the applicants’ concern so much as sidestep it. (3)

Like Corner Post, this decision is also expected to usher in new challenges to regulations. Oil and gas royalty practitioners may consider re-reviewing ONRR’s prior notice-and-comment rulemaking to determine whether additional challenges to the regulations may be appropriate, and federal royalty payors may consider seeking legal counsel and assistance in reviewing and responding to any future rulemaking. 

Loper Bright Enterprises v. Raimondo

Finally, on June 28th, the Court issued a landmark decision overturning what has been known as “Chevron deference” – marking the end of forty years of judicial deference to federal agencies’ interpretations of the statutes they administer. 

Chevron’s reversal represents a substantial shift not only in the balance of power between the judiciary and the executive branch but also between industry and our regulating federal agencies. 

In Loper Bright Enterprises v. Raimondo, No. 22-1919, 603 U.S. ___, 2024 WL 3208360 (2024), the Court held the Administrative Procedure Act (APA), 5 U.S.C. §§ 551, et seq., requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority. Courts may not defer to an agency’s interpretation of the law simply because a statute is ambiguous:

Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous. (4)

Indeed, it is under the APA that nearly all federal royalty litigation is brought for judicial review. 

The Court’s decision thus ends and overrules a policy of deference that has shaped federal administrative law for decades – ever since the Court’s 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Chevron had provided federal agencies great power to shape the law as they saw fit, by requiring courts to “defer” to “permissible” agency interpretations. As we previously emphasized, studies have shown federal administrative agencies have enjoyed considerable success when defending against industry challenges, in the wake of Chevron deference. 

Federal royalty litigation has been no different. Industry challenges to the demands and interpretations of the Department of the Interior, including ONRR, have also routinely faced uphill, lengthy battles.

Chevron’s reversal is expected to change these statistics, as courts take a more active role in reviewing agency action – potentially even allowing litigants to “shake up” areas once presumed to be stable. In turn, federal agencies may also exercise more caution in their rulemaking and enforcement actions, resulting in more conservative rulemaking or a slower pace of change.

The reversal of Chevron could also bring about much-needed certainty and consistency regarding the currently ever-changing costs and fees associated with energy production. Indeed, as the Court described it, Chevron had “allow[ed] agencies to change course even when Congress has given them no power to do so. By its sheer breadth, Chevron fosters unwarranted instability in the law, leaving those attempting to plan around agency action in an eternal fog of uncertainty.” (5)

A resurgence in litigation forum-shopping may also be on the horizon. While it is true any divergence of law across circuits could add uncertainty (at least temporarily), as courts exercise their independent judgment, as the Court saw it, “there is little value in imposing a uniform interpretation of a statute if that interpretation is wrong. We see no reason to presume that Congress prefers uniformity for uniformity’s sake over the correct interpretation of the laws it enacts.” (6)

Federal royalty payors facing (or currently litigating) demands for additional royalties by ONRR may thus consider reviewing the contours of the Federal Oil and Gas Royalty Management Act of 1982 (FORMA), 30 U.S.C. §§ 1701, et seq., the Mineral Leasing Act of 1920 (MLA), 30 U.S.C. §§ 181, et seq., and the Outer Continental Shelf Lands Act of 1953 (OCSLA), 43 U.S.C.  §§ 1331, et seq.

If you have a royalty dispute or are interested in pursuing a refund of overpaid royalties, please contact Rosario Doriott Domínguez directly at rosario.doriottdominguez@ryanlawyers.com.

ROSARIO C. DORIOTT DOMINGUEZ and HASTINGS R. C. WOOLSTON have extensive experience litigating and resolving federal royalty disputes. They regularly advise companies in connection with the calculation, payment, and reporting of onshore and offshore oil and gas royalties. They routinely assist and defend companies responding to data mining requests, compliance reviews, audits, investigations, demands, and other orders. And they frequently appear in proceedings before the Director of ONRR, the Interior Board of Land Appeals, and in federal district and circuit courts. 

 (1) Id., slip. op. at 1.

 (2) Id., slip op. at 11-13 (citations omitted).

 (3) Id., slip. op. at 14 (footnote omitted).

 (4) Id., slip. op. at 35.

 (5) Id., slip. op. at 33.

 (6) Id., slip. op. at 25.