The government is dramatically shifting its strategy for pursuing alleged underpayments of royalties owed on production from federal and Indian mineral leases. For decades, the Department of the Interior (“DOI”)’s Office of Natural Resources Revenue (“ONRR”) pursued royalty underpayments through administratively appealable orders to pay and, where necessary, civil penalty enforcement under the Federal Oil and Gas Royalty Management Act (“FOGRMA”). Recently, however, a “task force” including ONRR, the DOI Inspector General’s Office, and the U.S. Attorney’s Office for the District of Colorado has pursued certain royalty underpayments using the more draconian False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. Unfortunately, for the regulated industries, this approach raises the stakes significantly, and allows the government to assess both treble damages and stiffer penalties.
Traditional ONRR Approach to Royalty Enforcement
ONRR’s routine approach to pursuing royalty underpayments is through orders to pay that are appealable administratively to the ONRR Director and the Interior Board of Land Appeals (“IBLA”). ONRR also will pursue civil penalties under FOGRMA, 30 U.S.C. § 1719, for lessees that fail to pay or appeal following receipt of such an order. For violations deemed to be non-knowing or willful, FOGRMA mandates that ONRR provide lessees with formal notice of the potential violation and an opportunity to take corrective action, and no civil penalties may be assessed if the lessee timely corrects the alleged violations. For more serious knowing or willful violations, FOGRMA does not require ONRR to provide lessees advance notice or the opportunity to take corrective measures before assessing civil penalties of up to $58,871 per day per violation (as adjusted in 2016 for inflation). The most egregious FOGRMA violations can also create exposure to criminal liability.
Lessees subject to FOGRMA penalties are offered multiple levels of administrative process. The statute provides that ONRR may assess civil penalties only after the lessee has been given the opportunity for a hearing on the record before an Administrative Law Judge. After such a hearing, the lessee may contest any civil penalties assessed before the IBLA, and, if unsuccessful, then proceed to federal court.
In recent months, ONRR has expanded its interpretation of “knowing or willful” violations under FOGRMA triggering that statute’s most severe category of penalties. Those issues are currently the subject of litigation. The government’s latest embrace of the FCA in royalty disputes, however, is at least of equal or greater concern to the regulated community.
ONRR’s New FCA Approach and Implications
In sharp contrast to the multi-stage process generally afforded to lessees that underpay royalties, a lessee accused of an FCA violation has little recourse but to defend itself in federal district court. Unlike FOGRMA, the FCA does not require the government to provide lessees any administrative process. Rather, the U.S. Attorney (as part of the Department of Justice, not DOI where ONRR and the IBLA reside) merely notifies the lessee of the often substantial damages and penalties, and then waits for the lessee to either seek a settlement or litigate the matter – neither of which is an attractive option.
Lessees subject to an FCA violation may incur civil penalties of up to $21,916 per violation, as well as treble damages. As a result, the monetary cost of an FCA violation quickly becomes quite significant. An FCA violation also may cause significant damage to a lessee’s professional reputation and possibly its ability to secure federal leases in the future.
Despite its new use, the FCA “hammer” is not a new tool. In fact, the statute was first enacted in the Civil War era as a means of deterring and punishing “bad actors” who were defrauding the federal government by selling the military deficient goods, or by overbilling the government. The most common modern use of the FCA has involved extreme instances of health care fraud, where the defendants intentionally overbilled or engaged in clear violations.
The government’s shift away from FOGRMA and towards an FCA-based strategy for enforcing royalty underpayments is concerning for a number of reasons. First, it deprives lessees of the opportunity to challenge payment orders or civil penalties administratively. Second, this approach also exposes lessees to large monetary penalties, and forces lessees into more costly federal court venues. Third, using the FCA “hammer” in this new context raises many equitable issues that undercut the overall fairness of such enforcement. This is especially troublesome in this unique context since the underlying regulatory issues are highly complex, and the ONRR royalty valuation and reporting rules can be ambiguous. Indeed, those rules are currently being litigated and reconsidered by ONRR.
In light of this new enforcement strategy, federal and Indian mineral lessees are well-advised to exercise extreme care in their royalty reporting and payment practices, and to review their protocol to ensure compliance. Such internal actions would be prudent in advance of receiving a notice of a FOGRMA or FCA violation from the government.