IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 18-30876

W & T OFFSHORE, INCORPORATED, 

 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 

United States Court of Appeals

Fifth Circuit

FILED

December 23, 2019

Lyle W. Cayce

Clerk

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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 paymentin-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 

 

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

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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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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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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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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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 

 

10 Although 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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