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Nation v. United States Dep't of the Interior

July 16, 2010


Appeal from the United States District Court for the District of Columbia (No. 1:07-cv-00803).

The opinion of the court was delivered by: Brown, Circuit Judge.

Argued January 21, 2010

Before: GINSBURG, GARLAND and BROWN, Circuit Judges.

Jicarilla Apache Nation (Jicarilla) challenges the denial of its claim for additional royalties for natural gas leases in force from January 1984 through June 1995. After the United States Department of the Interior (Interior) rejected the claim, Jicarilla filed this suit in the district court. The district court denied Jicarilla's motion for summary judgment and, on its own motion, granted summary judgment to Interior. Jicarilla Apache Nation v. U.S. Dep't of the Interior, 604 F. Supp. 2d 139 (D.D.C. 2009). Because we are persuaded Interior failed to consider an important aspect of the problem when it retrospectively applied regulations intended to have only prospective effect and failed to engage in reasoned decisionmaking when it made an unacknowledged volte-face on the applicability of the Jicarilla methodology, we reverse in part and remand the case to the district court for further proceedings consistent with this opinion.


Jicarilla is a federally recognized Indian Tribe with a reservation in northwest New Mexico (the Reservation). Jicarilla obtains royalty payments by leasing the rights to produce natural gas from Reservation lands. Lessees agree to pay Jicarilla royalties equal to one-sixth or one-eighth the value of the natural gas produced and sold from the Reservation. Sometimes the price paid for Reservation gas does not reflect market value because the gas is not sold under arm's-length contracts. To ensure full royalties in such instances, the leases contain a provision describing how to calculate the "value" of gas for royalty purposes by reference to a "major portion" price:

"[V]alue" for the purposes hereof may . . . be calculated on the basis of the highest price paid or offered . . . at the time of production for the major portion of the . . . gas . . . produced and sold from the field where the leased lands are situated . . . . Oil and Gas Mining Lease-Tribal Indian Lands, ¶ 3(c) (Mar. 7, 1952). The instant dispute over how the major portion price should be calculated under Interior's regulatory authority arises because the leases do not define the term "major portion."

The Indian Mineral Leasing Act of 1938 (IMLA), 25 U.S.C. §§ 396a-396g, permits an Indian Tribe, such as Jicarilla, to lease its lands for "mining purposes," with the Secretary of the Interior's (Secretary) approval and subject to the rules and regulations promulgated by the Secretary. Id. §§ 396a, 396d. During all relevant times, Jicarilla's leases were managed jointly by the Minerals Management Service (MMS) and the Bureau of Indian Affairs (BIA). Both agencies have regulations for computing the value of gas royalties by reference to a "major portion" price. Those regulations can be divided into two categories: first, MMS' and BIA's regulations in effect prior to 1988 (the "pre-1988 Regulations"), and second, MMS' revised regulations in effect beginning March 1, 1988 (the "1988 Regulations").

In 1996, MMS and Jicarilla began developing an entirely new methodology for calculating the major portion for Jicarilla's natural gas leases. Since no database contained all of the necessary information about arm's-length gas sales for the Reservation, MMS decided to rely on data from Jicarilla's own gas sales through its Royalty-in-Kind (RIK) program.

Under the RIK program, Jicarilla received its royalty share from the gas leases "in kind" and then sold the gas in arm'slength transactions. MMS extrapolated the price Jicarilla earned selling its one-sixth or one-eighth RIK shares to establish the major portion price for the remaining five-sixths or seven-eighths shares of gas sold by lessees. This became known as the "Jicarilla methodology." In 1998 and 1999, MMS used the Jicarilla methodology to compute the major portion prices for gas sold under Jicarilla's leases during the period from January 1984 through June 1995 and then issued thirty-nine Orders to Perform, directing lessees to pay additional royalties for this period.

Several companies appealed the Orders to Perform. In 2000, Interior issued three similar decisions affirming Orders to Perform. Robert L. Bayless, MMS-98-0132-IND (Dec. 22, 2000), Dugan Prod. Corp., MMS-98-0130-IND (Dec. 22, 2000), Merrion Oil & Gas Corp., MMS-98-0228-IND (Dec. 22, 2000) (collectively "Bayless"). In Bayless, Interior denied the lessees' appeals, concluding the Jicarilla methodology was consistent with the 1988 Regulations and the major portion price was properly calculated. See, e.g., Bayless, MMS-98- 0132-IND, at 2-9.

Then, in 2007, Interior overruled an Order to Perform in which MMS had directed Intervenors Vastar Resources, Inc., Union Texas Petroleum, and Unicon Producing Co. (collectively "Vastar") to pay additional royalties to Jicarilla. Vastar Res., Inc., MMS-98-0131-IND (Mar. 28, 2007) ("Vastar"). In Vastar, Interior determined the Jicarilla methodology was inconsistent with the 1988 Regulations and could not be used to determine the major portion price for gas sold from January 1984 through June 1995. Id. at 6-11.

Interior granted Vastar's appeal but noted MMS could recalculate the major portion price if it could do so consistent with the regulations. Id. at 12. The decision neither cited nor mentioned the contrary result reached in Bayless.

Jicarilla promptly filed suit in the district court, challenging Vastar as arbitrary and capricious under the Administrative Procedure Act (APA) and as a violation of Interior's trust responsibility. In its motion for summary judgment Jicarilla raised three arguments: (1) the Vastar decision departed from Bayless without explanation; (2) the decision erroneously concluded the 1988 Regulations were consistent with the major portion provision of Jicarilla's leases and the Jicarilla methodology was inconsistent with both; and (3) the decision violated Interior's fiduciary duty to protect Jicarilla's interest in the gas leases. As an alternative to its second argument, Jicarilla noted Vastar's reasoning could not apply to the period from January 1984 through February 1988 because the 1988 Regulations were not in effect until March 1, 1988. The district court ...

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