The oil and natural gas industry scored a “major victory” this month when the Tenth Circuit Court of Appeals ruled that the Department of Interior (DOI) does not have unfettered authority to collect back royalties from producers, but rather is restricted by the statute of limitations that governs all government contract claims.

The decision, which the court handed down on Oct. 10, essentially says that Interior’s Minerals Management Service (MMS) “has been wrong in recent years to claim it has no statute of limitations limiting its collection of back royalties,” said Poe Leggette, an attorney for the law firm of Fullbright & Jaworski in Washington, DC.

Rather, the court held that MMS — like other federal agencies — was answerable to the “federal statute of limitations governing all government claims for money damages under contracts,” noted Leggette, who represented Shell Oil as a friend-of-the-court in the case.

Specifically, the Tenth Circuit had vacated a prior ruling of the panel, which affirmed MMS’ authority to collect $551,693 in back royalties from Oxy USA Inc. for production that occurred between 1980 and 1983, even though the six-year statute of limitations had already expired [No. 98-5222]. MMS did not issue an order demanding the royalties from Oxy USA until December 1996.

This time the Tenth Circuit majority sided with an earlier district court decision that barred the belated collection of royalties from Oxy USA by MMS. “…[W]e conclude the MMS’ demand that Oxy USA Inc. pay royalties going back to 1980 constitutes an action for money damages, founded on contract, and barred by [federal law],” the court opined.

The legal statutes at issue “manifest Congress’ clear intent to impose a limitation period on administrative as well as judicial claims for unpaid royalties. Congress gave no indication agencies are free to assert their claims at any time by means other than court actions, unencumbered by the six-year limitation period.”

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