     Case: 18-30876   Document: 00515246589     Page: 1    Date Filed: 12/23/2019




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                             United States Court of Appeals
                                                                      Fifth Circuit

                                 No. 18-30876                       FILED
                                                            December 23, 2019
                                                               Lyle W. Cayce
W & T OFFSHORE, INCORPORATED,                                       Clerk

             Plaintiff – Appellant – Cross-Appellee

v.

DAVID BERNHARDT, SECRETARY, U.S. DEPARTMENT OF THE
INTERIOR; GREGORY J. GOULD, DIRECTOR, OFFICE OF NATURAL
RESOURCES REVENUE, U.S. DEPARTMENT OF THE INTERIOR,


             Defendants – Appellees – Cross-Appellants



                Appeals from the United States District Court
                    for the Western District of Louisiana


Before CLEMENT, ELROD, and DUNCAN, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
      This is an oil and gas royalty case concerning orders to pay issued by the
Department of the Interior to W&T, a company that operated natural gas
deposits leased from the federal government, in order to resolve volumetric gas
delivery imbalances. The parties each appeal the district court’s partial grant
of each other’s motions for summary judgment.             We conclude that the
Department of the Interior permissibly required resolution of delivery
imbalances via cash payment, but that it improperly promulgated a
substantive rule without subjecting it to notice and comment. We also hold
that the Department of the Interior should have credited all W&T’s deliveries
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                                No. 18-30876


under the doctrine of equitable recoupment. We therefore AFFIRM in part,
REVERSE in part, and REMAND for proceedings consistent with this opinion.
                                      I.
      W&T operated offshore natural gas deposits leased from the federal
government. The Department of the Interior leased the deposits, pursuant to
its authority under the Outer Continental Shelf Lands Act (“OCSLA”), 43
U.S.C. §§ 1331–1356b, in exchange for a monthly royalty payment. See 43
U.S.C. § 1337(a)(1)(A); 30 U.S.C. § 1724(c)(2).        The OCSLA gives the
Department of the Interior discretion to require royalties “in amount or value
of the production saved, removed, or sold”—i.e., payment in kind or payment
in cash. 43 U.S.C. § 1337(a)(1)(A) (emphasis added).
      Several decades ago, the Department of the Interior began a pilot
program that expanded the number of leases for which it required payment in
kind, and W&T’s leases were included in that program. As both parties point
out, “[n]atural gas markets are complex,” and operators like W&T routinely
struggled to “deliver the exact volume of gas actually owed.” Some months,
W&T delivered too much gas; other months, too little. As the pilot program
progressed, the Department of the Interior sometimes issued delivery shortfall
guidance in the form of “Dear Operator” letters. These letters gave industry
entities like W&T instructions and options for remedying underdelivered
royalties: for instance, one typical letter advised operators to make up
shortfalls with additional gas deliveries “within 120 days of the end of the
production month” in question, or—failing that—to deliver the additional gas
on a mutually-agreeable schedule or make a cash payment.
     In October 2008, the Department of the Interior elected to begin
requiring payment in cash from W&T. It subsequently shuttered the payment-
in-kind pilot program altogether. In 2010, having determined that W&T’s
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underdeliveries had exceeded its overdeliveries during its participation in the
pilot program, the Department of the Interior issued orders requiring W&T to
make up the cumulative shortfall with a final cash payment. 1 The orders
superseded all previous “Dear Operator” letters. The period over which W&T’s
delivery imbalances were calculated ran backwards from October 2008 to
February 2003, past which point the Department of the Interior reasoned the
statute of limitations barred any inquiry. See 30 U.S.C. § 1724(b)(1). The
Department of the Interior also provided its methodology for calculating the
amount due: multiplying the amount underdelivered in each month by the
contract sales price it would have collected in each month had the proper
amount of gas been delivered.
       W&T appealed the orders to the Director of the Office of Natural
Resources Revenue, who denied the appeal. See W&T Offshore, Inc., 184 IBLA
272, 305 (2014). W&T then appealed that denial to the Interior Board of Land
Appeals (“IBLA”), which affirmed. See id. at 305–06. W&T proceeded to file a
request for judicial review of the IBLA decision in the district court. See W&T
Offshore, Inc. v. Jewell, No. 14-cv-2449, 2018 WL 2437677, at *1 (W.D. La. Feb.
23, 2018); see also 43 U.S.C. § 1349(b); 5 U.S.C. § 704. There, the parties
eventually filed cross-motions for summary judgment.
       On the issues relevant to this appeal, W&T argued first that the “or” in
the phrase “amount or value,” 43 U.S.C. § 1337(a)(1)(A), precluded the




       1  The Department of the Interior also ordered W&T to pay interest on past-due
royalties from the time the royalties originally became due (though the royalties had then
been due in kind), despite having previously assured operators that interest would not begin
to run until after the Department of the Interior began requiring payment in cash. The
district court determined that this retroactive interest order was arbitrary and capricious,
and remanded it to the Department of the Interior. The Department of the Interior does not
challenge this ruling on appeal.
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Department of the Interior from requiring make-up cash payments for past
months in which it had originally required payment in kind. Second, W&T
argued that the Department of the Interior’s decision to require retroactive
payment-in-cash royalties—and its methodology for doing so—created a new
substantive rule that should have been subject to notice and comment under
the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 552, 553. Third, W&T
argued that the Department of the Interior was obligated to comply with the
valuation regulations set out in 30 C.F.R. part 1206, which generally value gas
at the price the lessee receives, rather than at the Department of the Interior’s
contract sales price. Fourth, W&T argued that the Department of the Interior
should have credited its overdeliveries prior to February 2003, despite the
statute of limitations in 30 U.S.C. § 1724.
       The district court partially granted and partially denied the parties’
cross-motions for summary judgment. 2 On the statutory interpretation issue,
applying the framework set out in Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984), the district court determined that
the statutory text was ambiguous and deferred to the Department of the
Interior’s interpretation: that nothing in the statute bars the Department of
the Interior from switching its election from payment in kind to payment in
cash. As to the APA, the district court concluded that the Department of the
Interior’s orders were “grounded in and logically justified by the specific
statutory text,” making them mere interpretive rules for which notice and
comment is not required. The district court also rejected W&T’s claim that the
Department of the Interior used the wrong valuation methodology, reasoning


      2 The district court’s reasoning is set out in the report and recommendation of the
magistrate judge, which the district court adopted.

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that the regulations W&T pointed to applied only to royalties “owed in value
in the first place—not [to] the valuation of underdeliveries of royalties in kind.”
Finally, the district court agreed with W&T that the Department of the
Interior should have credited W&T’s previous overdeliveries because “[a]s a
purely defensive procedure, [equitable recoupment] is available to defendant
so long as plaintiff’s claim survives—even though an affirmative action by
defendant is barred by limitations.”        Distrib. Servs., Ltd. v. Eddie Parker
Interests, Inc., 897 F.2d 811, 812 (5th Cir. 1990).
      As a result, the district court partially granted and partially denied the
parties’ cross-motions for summary judgment, resulting in a final judgment
vacating the orders to pay and remanding them to the Department of the
Interior for re-issuance consistent with the court’s rulings.         The parties
appealed. W&T challenges the district court’s Chevron, APA, and valuation
rulings, and the Department of the Interior challenges its equitable
recoupment ruling. The arguments will be considered in turn.
                                        II.
      The court “review[s] de novo a grant of summary judgment, applying the
same legal standards that the district court applied.” Kerr-McGee Oil & Gas
Corp. v. U.S. Dep’t of Interior, 554 F.3d 1082, 1084 (5th Cir. 2009). Summary
judgment is appropriate “if the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). When cross-motions for summary judgment have
been ruled upon, “we review each party’s motion independently, viewing the
evidence and inferences in the light most favorable to the nonmoving party.”
Green v. Life Ins. Co. of N. Am., 754 F.3d 324, 329 (5th Cir. 2014) (quoting
Duval v. N. Assurance Co. of Am., 722 F.3d 300, 303 (5th Cir. 2013)).


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                                         III.
      We begin by considering whether the Department of the Interior
exceeded its statutory authority by changing its election from payment in kind
to payment in cash for overdue royalties. W&T argues that the statutory text
permitting the Department of the Interior to require monthly royalties “in
amount or value of the production saved, removed, or sold,” 43 U.S.C. §
1337(a)(1)(A), evinces a “disjunctive” choice in that once the Department of the
Interior requires payment in kind for a given month, it cannot later require
payment in cash to resolve the outstanding balance for that month. The
Department of the Interior does not dispute that the choice is “disjunctive” in
some sense—i.e., that it cannot require operators to pay the amount due twice
over, once in kind and once in cash. Instead, the Department of the Interior
argues that the two methods of payment are not mutually exclusive, and
therefore that it can change its election between payment types for a given
monthly obligation until the full value has been paid.            The district court
concluded that the statute was ambiguous and deferred to the Department of
the Interior’s interpretation. We agree.
      Chevron supplies the familiar two-step framework for judicial review of
an agency’s interpretation of its statutory authority:
      First, always, is the question whether Congress has directly
      spoken to the precise question at issue. If the intent of Congress is
      clear, that is the end of the matter . . . . If, however . . . the statute
      is silent or ambiguous with respect to the specific issue, the
      question for the court is whether the agency’s answer is based on
      a permissible construction of the statute.

467 U.S. at 842–43. At the first step, courts “apply[] the traditional tools of
statutory interpretation” to gauge statutory clarity, “bear[ing] in mind the
Supreme Court’s admonition” to “interpret the statute as a symmetrical and
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coherent regulatory scheme.” BNSF Ry. Co. v. United States, 775 F.3d 743,
751 (5th Cir. 2015) (quoting FDA v. Brown & Williamson Tobacco Corp., 529
U.S. 120, 133 (2000)). At the second step, if the agency action carries the force
of law, 3 courts defer to the agency’s interpretation of the governing statute as
long as that interpretation is a “permissible construction of the statute.”
Exelon Wind 1, L.L.C. v. Nelson, 766 F.3d 380, 392 n.10 (5th Cir. 2014) (quoting
Chevron, 467 U.S. at 843). An interpretation is “permissible” when it is a
“reasonable” one. Id. (quoting Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208,
218 (2009)).
       Here, W&T’s contention that the statutory phrase “amount or value”
unambiguously prohibits the Department of the Interior from changing its
election from payment in kind to payment in cash for overdue royalties is
unpersuasive. Nothing in the statutory text or context purports to limit the
Department of the Interior’s ability to elect—or re-elect—its preferred method
of royalty payment. To the extent the statutory context provides any insight
into the Department of the Interior’s royalty collection power, it evinces a grant
of discretion to the Department of the Interior to determine how best to
“achieve effective collections of royalty and other payments.”                 30 U.S.C.
§ 1712(a); see id. (stating that “a lessee who is required to make any royalty or
other payment under a lease or under the mineral leasing laws, shall make
such payments in the time and manner as may be specified by the Secretary”);
30 U.S.C. § 1711(c)(1) (“The Secretary shall audit and reconcile, to the extent
practicable, all current and past lease accounts for leases of oil or gas and take
appropriate actions to make additional collections or refunds as warranted.”). 4


      3 No party argues that the orders to pay did not carry the force of law.
      4 W&T points out that these provisions are not an independent grant of regulatory
power, such that the authority to “take appropriate actions” does not permit the Department
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       W&T advances several arguments in support of its reading, but each
falls short. W&T begins by citing several cases for the proposition that “[i]t is
well-established that the disjunctive term ‘or’ unambiguously signifies
mutually exclusive options that cannot be combined.” But only one of these is
a case in which a simple “or” was clearly construed as creating mutually
exclusive alternatives—and that case is distinguishable. In D.P. ex rel. E.P. v.
School Board, 483 F.3d 725 (11th Cir. 2007), the Eleventh Circuit construed
the following statutory text:
       [D]uring the pendency of any proceedings conducted pursuant to
       this section, unless the State or local educational agency and the
       parents otherwise agree, the child shall remain in the then-current
       educational placement of the child, or, if applying for initial
       admission to a public school, shall, with the consent of the parents,
       be placed in the public school program until all such proceedings
       have been completed.

20 U.S.C. § 1415(j). The Eleventh Circuit rejected appellants’ contention that
this language allowed a free choice between the two alternative placements.
Instead,    because     of “the placement of the disjunctive coordinating
conjunction—between the two alternatives, but before the imperative,” the
Eleventh Circuit held that the statute created mutually exclusive alternatives:
the fact of whether the child was applying for an initial admission unavoidably
determined the child’s placement. D.P., 483 F.3d at 729. Here, unlike in D.P.,
the relevant statutory language does not place the “or” before an imperative,
making D.P.’s statutory interpretation unhelpful.



of the Interior to exceed specific limitations on its authority. See Santa Fe Snyder Corp. v.
Norton, 385 F.3d 884, 892 (5th Cir. 2004). As discussed infra, however, W&T does not
demonstrate how the Department of the Interior’s decision to change its royalty type election
exceeds its statutory authority in any way.
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      Next, W&T argues that—because the statutory definition of “obligation”
includes “any duty of the Secretary . . . to take oil or gas royalty in kind,” 30
U.S.C. § 1702(25)—the Department of the Interior is forever bound to accept
payment in kind for a given month if it once elects to require payment in kind
for that month. This definitional provision cannot bear the weight W&T places
on it, as it says nothing about what the scope of any such “duty” might be.
Instead, W&T’s unexplained assumption that any duty to accept in-kind
payments is permanent for a given monthly obligation is merely a repackaging
of its unexplained assumption that the Department of the Interior’s election
between royalties in kind and royalties in cash is also permanent.
      W&T also argues that the incorporation of § 1337(a)(1)(A)’s “amount or
value” language into its lease provisions created an “alternative contract” and
that the Department of the Interior’s original election of in-kind payment
forever fixed the parties’ obligations under that contract. See generally 11
Timothy Murray, Corbin on Contracts § 59.4 (rev. ed. 2019) (discussing
alternative contracts).      However, W&T does not explain how the
“incorporat[ion of the] OCSLA provisions as promises,” Mobil Oil Expl. &
Producing Se., Inc. v. United States, 530 U.S. 604, 614 (2000), causes those
provisions to take on a meaning different from the one they already had.
Therefore, W&T’s argument again assumes its conclusion—that the statutory
phrase “amount or value” permanently locks the Department of the Interior in
to its election for a given month.
      Finally, in its reply brief, W&T argues that Congress’s use of the words
“or both” after setting out alternatives elsewhere in the OCSLA—but not in
§ 1337(a)(1)(A)—evinces an intent that the Department of the Interior not be
allowed to elect “both” payment in kind and payment in cash here. See 43
U.S.C. §§ 1337(a)(1)(B), 1350(c)–(d), 1352(b)(2), 1353(a)(1); see also Hamdan v.
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Rumsfeld, 548 U.S. 557, 578 (2006) (“[A] negative inference may be drawn from
the exclusion of language from one statutory provision that is included in other
provisions of the same statute.”).
      This contention misses the mark because the other “or both” provisions
in the OCSLA are instances in which Congress appears to countenance the
application of multiple alternatives at the same time.            For instance,
§ 1337(a)(1)(B) discusses royalties “in amount or value of the production saved,
removed, or sold, with either a fixed work commitment based on dollar amount
for exploration or a fixed cash bonus as determined by the Secretary, or both.”
43 U.S.C. § 1337(a)(1)(B) (emphasis added). Presumably, leases under this
provision could permissibly and simultaneously require a “fixed work
commitment based on dollar amount for exploration” and “a fixed cash bonus.”
Id. Thus, Congress’s decision not to use the words “or both” in § 1337(a)(1)(A)
might reasonably signify only that Congress intended to limit the Department
of the Interior to requiring one type of payment at a time. As the district court
concluded:
      The use of “or” in the above-cited provisions of the OCSLA may be
      enough to show, as W&T contends, that [the Department of the
      Interior] cannot demand payments of royalties in kind and in value
      at once; however, it is not sufficiently unambiguous to evince
      Congress’s intent, within the royalty scheme set out under the
      OCSLA, that [the Department of the Interior] be bound by its
      election such that it is prevented from demanding that an
      imbalance of a payment due in kind be resolved instead in cash.

      Moreover, W&T’s argument proves too much. If the Department of the
Interior’s choice between requiring payment “in amount or value” truly
“signifie[d] mutually exclusive options that may not be combined,” the
Department of the Interior would appear to be permanently bound by its initial

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royalty election over the lifetime of the lease. But even W&T admits that the
Department of the Interior is not “bound forever by electing to take royalties
on a given lease either in cash or in kind.” Instead, W&T’s reading would allow
the Department of the Interior to change its election for future months—just
not for past months for which payment is overdue. W&T does not cogently
explain how such a result is the unambiguous intent of Congress as expressed
by its direction that the Department of the Interior collect royalties “in amount
or value.” 43 U.S.C. § 1337(a)(1)(A).
      For its part, the Department of the Interior simply argues that “[n]othing
in OCSLA or the implementing regulations (or any other statute) provides that
once [it] elects to take royalties in kind, it is barred from later taking royalties
in value to satisfy an outstanding royalty deficiency on the lease.” In essence:
§ 1337(a)(1)(A) allows the Department of the Interior to choose the method of
payment for outstanding royalties, and there is no textual support for a
limitation on its ability to so choose. Thus, argues the Department of the
Interior, the OCSLA unambiguously permits it to demand a cash payment
from W&T to satisfy past-due royalties originally due in kind.
      The Department of the Interior’s straightforward argument has some
force, but we need not dwell here on the distinction between whether the
statute   unambiguously      supports    the   Department      of   the   Interior’s
interpretation or whether it does not definitively speak to the issue and is thus
ambiguous. Even assuming that Congress left a statutory gap here, the lack
of any clear indication that the Department of the Interior’s election authority
was to be cabined to a one-time-only choice for a given monthly obligation
makes the Department of the Interior’s interpretation a permissible one to
which we accord Chevron deference. This is especially so given Congress’s
expressed intent to “increase receipts and achieve effective collections of
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royalt[ies]” by commanding lessees to “make such payments in the time and
manner as may be specified by the Secretary.” 30 U.S.C. § 1712(a).
      Because    the      Department    of    the    Interior’s     interpretation    of
§ 1337(a)(1)(A) is permissible, the district court properly granted summary
judgment to the Department of the Interior on this ground.
                                        IV.
      We next consider whether the Department of the Interior’s requirement
of a cash payment to resolve delivery shortfalls is a new substantive rule that
should have been subject to notice and comment under the APA. W&T argues
that the requirement is a substantive rule, while the Department of the
Interior maintains that it is not a rule at all, but rather an adjudicative order.
The district court concluded that the requirement was an interpretive rule not
subject to notice and comment. We disagree.
      The APA obligates agencies to subject their substantive rules to notice
and comment. See 5 U.S.C. § 553. A “rule” is “an agency statement of general
or particular applicability and future effect designed to implement, interpret,
or prescribe law or policy.” 5 U.S.C. § 551(4). Substantive rules “are those
which create law, usually implementary to an existing law.”                    Phillips
Petroleum Co. v. Johnson, 22 F.3d 616, 619 (5th Cir. 1994) (quoting Brown
Express, Inc. v. United States, 607 F.2d 695, 700 (5th Cir. 1979)), modified on
other grounds, No. 93-1377, 1994 WL 484506 (5th Cir. Sept. 7, 1994). They
typically “grant rights, impose obligations, or produce other significant effects
on private interests.” Avoyelles Sportsmen’s League, Inc. v. Marsh, 715 F.2d
897, 908 (5th Cir. 1983) (quoting Batterton v. Marshall, 715 F.2d 694, 701–02
(D.C. Cir. 1980)). Substantive rules not subjected to notice and comment may
not be enforced against a party. See Phillips Petroleum, 22 F.3d at 621 (citing
5 U.S.C. § 552(a)(1)).
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         Adjudicative orders, on the other hand, are not rules at all and therefore
need not go through notice and comment. See generally 5 U.S.C. § 551(6)
(defining “order” as “a final disposition, whether affirmative, negative,
injunctive, or declaratory in form, of an agency in a matter other than rule
making”); 5 U.S.C. § 551(7) (defining “adjudication” as the “agency process for
the formulation of an order”). 5
         While the Fifth Circuit may accord “some deference” to “the agency’s
characterization of its own rule,” this deference is minimal—courts “focus[]
primarily” on the actual characteristics of the agency action. Prof’ls & Patients
for Customized Care v. Shalala, 56 F.3d 592, 595 (5th Cir. 1995); see also id. at
596 (“The label that the particular agency puts upon its given exercise of
administrative power is not, for our purposes, conclusive; rather, it is what the
agency does in fact.” (alteration omitted) (quoting Brown Express, 607 F.2d at
700)).
         Here, the Department of the Interior’s characterization of its orders to
pay as the result of an adjudicative order is unpersuasive. Phillips Petroleum
Co. v. Johnson, 22 F.3d 616 (5th Cir. 1994) and Shell Offshore Inc. v. Babbitt,
238 F.3d 622 (5th Cir. 2001) are instructive.
         In Phillips Petroleum, Phillips owed natural gas royalties to the
Department of the Interior. 22 F.3d at 618. Until 1988, the Department of the
Interior “considered several factors in determining the value of federal offshore



         Interpretive rules, meanwhile, need not be subject to notice and comment. Phillips
         5

Petroleum, 22 F.3d at 619. An interpretive rule is generally a “statement[] as to what the
administrative officer thinks the statute or regulation means.” Id. (quoting Brown Express,
607 F.2d at 700); see also Avoyelles, 715 F.2d at 908–09 (noting that interpretive rules “are
not determinative of issues or rights addressed,” but rather “express the agency’s intended
course of action, its tentative view of the meaning of a particular statutory term, or internal
house-keeping measures” (quoting Batterton, 648 F.2d at 702)). The Department of the
Interior does not argue on appeal that the orders to pay were interpretive rules.
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production for royalty purposes.” Id. But in 1989, the Department of the
Interior directed Phillips to recalculate and pay previously-due royalties
pursuant to the methodology set out in an “unpublished internal agency paper
referred to as the ‘Procedure Paper’” which created “new criteria for valuing
natural gas liquid products.” Id. On appeal to this court, the Department of
the Interior argued that the Procedure Paper was not a substantive rule
because it merely clarified existing regulations. We disagreed. Noting that
the new valuation methodology “effect[ed] a change in the method used by [the
Department of the Interior] in valuing” natural gas products, we concluded
that it constituted a new substantive rule. Id. at 619–20.
      Shell Offshore concerned the Department of the Interior’s previous
practice of accepting crude oil tariffs merely “filed” with the Federal Energy
Regulatory Commission (“FERC”) as satisfying a regulatory exception
applicable to tariffs “approved” by FERC. 238 F.3d at 624–25. In 1994, when
Shell filed tariffs with FERC and asked the Department of the Interior to verify
that it had satisfied the regulatory exception, the Department of the Interior
changed its position. It issued an order denying the request because Shell had
not “receive[d] from FERC a determination affirmatively stating that FERC
possessed jurisdiction” over the tariffs. Id. at 625–26. On appeal to this court,
the Department of the Interior argued that its denial of Shell’s tariff request
evinced nothing more than a workaday adjudicatory order, not a substantive
rule. We disagreed. We first noted that the Department of the Interior’s
requirement of an affirmative jurisdictional statement from FERC was “a
departure from [the Department of the] Interior’s previous practice of treating
as approved all filed FERC tariffs.” Id. at 628. Next, we noted that the
adjudication resulting in the denial could not be described as the application
of a pre-existing “general regulation to the specific facts of Shell’s case.” Id.
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Rather, the Department of the Interior had “established a new policy and then
applied that new policy to several [industry entities], including Shell.” Id.
Because “the adjudication . . . was wholly predicated upon a new requirement
that [was], in effect, a new substantive rule,” we concluded that the
Department of the Interior should have subjected its new policy to notice and
comment. Id. at 627–28. 6
      At oral argument, counsel for the Department of the Interior admitted
that “this court’s caselaw [on this issue] is Phillips [Petroleum] and Shell
[Offshore], neither of which are particularly helpful for us.” Oral Argument at
25:41.    We agree with this assessment.            Like in Phillips Petroleum, the
Department of the Interior engaged in an internal effort to develop a new
royalty     valuation      methodology—expressly           “supersed[ing]”      previous
practices—which it then ordered industry entities to adhere to and to apply to
royalties due in previous years. 7 Like in Shell Offshore, the Department of the
Interior did not apply a pre-existing regulation to the specific facts of an
industry entity’s case. Rather, it followed up the development of a new policy
with adjudications in which the new policy “controlled the adjudicative
process” and was applied across the board to a number of industry entities.
Shell Offshore, 238 F.3d at 628. The Department of the Interior may not cloak


      6  The Shell Offshore court elsewhere relied on a doctrine stemming from Paralyzed
Veterans of America v. D.C. Arena L.P., 117 F.3d 579 (D.C. Cir. 1997), which was later
rejected by the Supreme Court. See Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199 (2015).
None of this abrogates the analysis relied on here.
       7 As early as 2009, the Department of the Interior reported to the Government

Accountability Office that it was “drafting regulations that address among other things the
operator’s obligation . . . to resolve or mitigate production imbalances.” This would match
the Department of the Interior’s approach to resolving overdue royalties due in cash, which
the Department of the Interior addressed through formal rulemaking. See, e.g., 30 C.F.R.
§ 1206.159(e)(1). However, the Department of the Interior eventually jettisoned its plan to
establish regulations governing overdue royalties due in kind in lieu of applying its new
valuation methodology to industry entities through nearly-identical adjudications.
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its development—and industry-wide          application—of    a new      valuation
methodology in the guise of simple adjudicative orders.
      The Department of the Interior’s arguments to the contrary are
unavailing. First, the Department of the Interior attempts to distinguish
Phillips Petroleum because there it had “admitted” that the policy at issue “was
a new rule.” Id. (internal quotation marks omitted). But that fact does nothing
to vitiate Phillips Petroleum’s analysis of what makes up a substantive rule—
analysis that is directly applicable here. Next, the Department of the Interior
argues that it was merely carrying out its “statutory duty to resolve the
existing imbalances,” and merely applied the relevant statutes to W&T. Shell
Offshore already aptly explains why the Department of the Interior’s creation
and uniform application of a new methodology is not an adjudicatory
application of an existing rule to the facts of a specific case, and Phillips
Petroleum explains why the new methodology can only be a substantive rule.
      Finally, the Department of the Interior points to the APA’s definition of
a “rule” as an agency action that has “future effect,” 5 U.S.C. § 551(4), and
argues that here it would be free in future adjudications to apply a different
methodology. This hypothetical rings hollow in light of the Department of the
Interior’s actual actions in this case: its purposeful development of a
comprehensive new policy to address an industry-wide problem and its
application of that new policy across the board in all subsequent adjudications
of the issue. Indeed, the Department of the Interior’s approach would permit
an agency to create new policies and uniformly apply them to every industry
entity going forward without ever undertaking notice and comment so long as
it declined to say that it would necessarily stick to the policy forever. Our
approach to the substantive-rule analysis, grounded in Phillips Petroleum and


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                                      No. 18-30876


Shell Offshore, is not just an empty formalism that would permit that result. 8
At any rate, the language in the orders to pay—stating, for instance, that the
Department of the Interior “cashes out the volume imbalances using the
contracted sales price, less transportation, fuel, and/or quality bank costs each
month there is an imbalance”—flatly communicates what the Department of
the Interior’s new payment valuation approach is, without any temporal
limitation.
       Because the Department of the Interior’s orders to pay evince the
creation of a new substantive rule, the district court improperly granted the
Department of the Interior summary judgment on this issue. 9
                                             V.
       As a final matter, we address the issue of whether—whatever valuation
methodology the Department of the Interior employs—the agency must credit
all of W&T’s prior overdeliveries in calculating the cumulative delivery
shortfall. The Department of the Interior appeals the district court’s ruling
that it must do so, arguing that the statute of limitations set out in 30 U.S.C.
§ 1724(b)(1) prohibits it from crediting overdeliveries prior to the limitations
period. W&T argues that the doctrine of equitable recoupment applies here to
overcome the statute of limitations.           We agree that equitable recoupment
applies and therefore affirm.
       We “hold unlawful and set aside agency action, findings, and
conclusions” that are “arbitrary, capricious, an abuse of discretion, or



       8  It is unclear how the Department of the Interior’s new methodology in this case has
less “future effect” than the procedure paper in Phillips Petroleum, which the Department of
the Interior had represented was a mere “policy guideline.”
        9 This conclusion obviates the need to address W&T’s appeal of the district court’s

determination that Interior did not contradict its own valuation regulations in calculating
the amount due.
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                                  No. 18-30876


otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The statute of
limitations at issue states the following:
      A judicial proceeding or demand which arises from, or relates to an
      obligation, shall be commenced within seven years from the date
      on which the obligation becomes due and if not so commenced shall
      be barred. If commencement of a judicial proceeding or demand
      for an obligation is barred by this section, the Secretary, a
      delegated State, or a lessee or its designee . . . shall not take any
      other or further action regarding that obligation, including . . .
      completion of an audit with respect to that obligation . . . [and]
      shall not pursue any other equitable or legal remedy, whether
      under statute or common law, with respect to an action on or an
      enforcement of said obligation.

30 U.S.C. § 1724(b)(1). The common-law doctrine of equitable recoupment,
meanwhile, provides “a defense that goes to the foundation of [a] plaintiff’s
claim by deducting from plaintiff’s recovery all just allowances or demands
accruing to the defendant with respect to the same contract or transaction.”
Eddie Parker Interests, 897 F.2d at 812. “As a purely defensive procedure, it
is available to defendant so long as plaintiff’s claim survives—even though an
affirmative action by defendant is barred by limitations.” Id.
      As the magistrate judge’s report and recommendation succinctly and
aptly explains, equitable recoupment is “never barred by the statute of
limitations so long as the main action itself is timely.” Bull v. United States,
295 U.S. 247, 262 (1935); see also Eddie Parker Interests, 897 F.2d at 812.
Because W&T asserted equitable recoupment as a defense to the Department
of the Interior’s orders to pay, the statute of limitations does not apply.
      The Department of the Interior offers three reasons to conclude
otherwise, but none is persuasive. First, the Department of the Interior argues
that Congress expressly precluded application of equitable recoupment in the
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                                  No. 18-30876


text of the statute by barring “pursu[it of] any other equitable or legal remedy,
whether under statute or common law” regarding obligations outside the
limitations period.    30 U.S.C. § 1724(b)(1).     But the Supreme Court has
required “the clearest congressional language” to defeat equitable recoupment,
United States v. W. Pac. R.R., 352 U.S. 59, 71 (1956), and the language the
Department of the Interior cites falls short. This is because Congress’s bar on
equitable remedies does not clearly bar equitable defenses. Equitable remedies
typically take the form of “an injunction or specific performance,” and are
typically affirmatively sought and “obtained when available legal remedies . . .
cannot adequately redress the injury.”         Equitable Remedy, Black’s Law
Dictionary (10th ed. 2014).
      Here, W&T did not institute an action to recover its overpayments.
Instead, the Department of the Interior instituted the adjudications at issue
and W&T merely raised equitable recoupment in its appeal of those
adjudications. The distinction between the two finds further support in United
States v. Western Pacific Railroad Co., 352 U.S. 59 (1956), where the Supreme
Court addressed a statute of limitations governing “all actions at law.” Id. at
70. The Court stated that even assuming “that the Government would have
been barred by [the statute of limitations] from filing an affirmative suit . . . to
recover overcharges,” the statute of limitations does not bar “questions raised
by way of defense in suits which are themselves timely brought.” Id. at 71.
      Second, the Department of the Interior notes that equitable recoupment
applies only to obligations arising under “the same contract or transaction” and
argues that here each monthly obligation under the lease was a separate
transaction. Eddie Parker Interests, 897 F.2d at 812; see also Rothensies v.
Elec. Storage Battery Co., 329 U.S. 296, 299 (1946) (noting that equitable
recoupment “has never been thought to allow one transaction to be offset
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                                      No. 18-30876


against another, but only to permit a transaction which is made subject of suit
by a plaintiff to be examined in all its aspects”). This objection is easily
dispatched, as the Department of the Interior’s requirement that payments be
made on a monthly basis does not trump the reality that each monthly
obligation arises from a single contract: the lease. The Department of the
Interior’s cramped view of the meaning of “the same contract or transaction”
in this context is at odds with the aim of equitable recoupment doctrine, which
is to allow the contract or transaction at issue to be “examined in all its aspects,
and judgment to be rendered that does justice in view of the one transaction as
a whole.” Rothensies, 329 U.S. at 299 (emphasis added). 10
       Third, and finally, the Department of the Interior argues that equitable
recoupment should not be applied here because there is no real-world inequity.
In the Department of the Interior’s view: because it applied the statute of
limitations to a number of industry entities with outstanding royalty
obligations regardless of “whether the imbalances benefitted the government”
or not, its treatment of W&T was not inequitable.                     Moreover, as the
Department of the Interior points out, W&T could have rectified the delivery
imbalances earlier.       Even if we accept the Department of the Interior’s
principle that a party asserting equitable recoupment must make an
independent showing of inequity beyond a failure to credit its payments, the
Department of the Interior’s logic is unsound. The Department of the Interior’s




       10Although the Supreme Court has specified that individual tax payments are
individual transactions for recoupment purposes, this is because each tax obligation was
created by its own “single taxable event.” Rothensies, 329 U.S. at 300; see also Ferguson v.
Comm’r, 568 F.3d 498, 505 (5th Cir. 2009). Not so in this case, where each one of W&T’s
monthly obligations became due because of the obligations set out in a single lease
agreement.

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neutral application of the statute of limitations across the industry does not
counteract the inequitable result that W&T suffered—the Department of the
Interior’s refusal to credit deliveries it received from W&T. And W&T had no
way to know that it needed to act quickly or else lose credit for its past
overdeliveries, as the Department of the Interior had previously assured the
industry that “total [royalty-in-kind] . . . natural gas volumes” would be
“carr[ied] over to the next month to resolve aggregated imbalances that have
occurred in prior months.” 73 Fed. Reg. 19241, 19242 (Apr. 9, 2008).
      Because the Department of the Interior should have credited all of
W&T’s deliveries under the lease, the district court properly granted summary
judgment to W&T on this issue.
                                     VI.
      Accordingly, the judgment of the district court is AFFIRMED in part,
REVERSED in part, and REMANDED.




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