Opinion ID: 6316351
Heading Depth: 3
Heading Rank: 2

Heading: Sunk Costs

Text: The Trust argues that sunk costs—costs that have “already been incurred and that cannot be recovered,” Black’s Law Dictionary (11th ed. 2019)—should be considered when evaluating whether the discovery of a “valuable mineral deposit” was made under the Mining Act. In order to rule on 14 GRAND CANYON TRUST V. PROVENCIO this issue, we must first review the relevant law and the standard of review.
The General Mining Act of 1872 (Mining Act) allows citizens of the United States to gain rights to “valuable mineral deposits” on federal land. 30 U.S.C. § 22. To do so, a claimant must first “locate” a mining claim by following certain statutory and regulatory procedures, including posting notice. United States v. Shumway, 199 F.3d 1093, 1099 (9th Cir. 1999). Locating a mining claim gives the claimant a vested possessory right to the real property at issue. Id. at 1095. For the claimant to secure an enforceable property right, a claimant must make a “discovery” of a “valuable mineral deposit.” See 30 U.S.C. §§ 22–23. Congress has delegated the authority to administer the Mining Act to the Secretary of the Interior and the Bureau of Land Management. Cameron v. United States, 252 U.S. 450, 459–60 (1920). The Mining Act does not define what constitutes a “valuable mineral deposit,” so the Secretary has applied a “prudent person” test to assess whether a claimant has discovered a valuable mineral deposit. In the Secretary’s view, the prudent person test means that where minerals have been found and the evidence is of such a character that a person of ordinary prudence would be justified in the further expenditure of his labor and means, with a reasonable prospect of success, in developing the valuable mine, the requirements of the statute have been met. GRAND CANYON TRUST V. PROVENCIO 15 Castle v. Womble, 19 Pub. Lands Dec. 455, 457 (D.O.I. 1894). That test has been repeatedly cited with approval by the Supreme Court. See Watt v. West. Nuclear, Inc., 462 U.S. 36, 58 n.18 (1983); Andrus v. Charlestone Stone Prod. Co., 436 U.S. 604, 607 n.4 (1978); United States v. Coleman, 390 U.S. 599, 602 (1968); Best v. Humboldt Placer Mining Co., 371 U.S. 334, 335–36 (1963); Chrisman v. Miller, 197 U.S. 313, 322 (1905). In 1962, the Secretary issued an opinion restating the “prudent person” test in terms of a “marketability test,” which requires that a claimant show that a mineral can be “extracted, removed and marketed at a profit” for it to be considered “valuable” under the Mining Act. See Coleman, 390 U.S. at 600. The Supreme Court approved the restatement as “an admirable effort to identify with greater precision and objectivity the factors relevant to a determination that a mineral deposit is ‘valuable.’ It is a logical complement to the ‘prudent-man test’ which the Secretary has been using to interpret the mining laws since 1894.” Id. at 602. The Court explained that the Mining Act “was to reward and encourage the discovery of minerals that are valuable in an economic sense.” Id. “Thus, profitability is an important consideration in applying the prudent-man test, and the marketability test” because if a claimant is pursuing a mineral deposit that lacks “economic value and cannot in all likelihood be operated at a profit” it “may well suggest that a claimant seeks the land for other purposes”—purposes not sustainable under the Mining Act. Id. at 602–03. In 1980, DOI first announced that when determining whether a mine is profitable, it would not consider sunk costs. United States v. Mannix, 50 IBLA 110 (1980). In Mannix, 16 GRAND CANYON TRUST V. PROVENCIO the government attorneys argued that “all earlier expenses in development of the property must be considered, e.g., the cost of constructing cabins, shed, and an access road and the purchase of rail and ore cars and that such expenses must be recouped before it can be said the mine is a profitable venture.” Id. at 119. DOI rejected the argument, reasoning that “[t]here is no case law of which we have knowledge . . . that compels consideration of the above mentioned development costs in determining if an ongoing operation is presently profitable.” Id. So long as “the mineral material may be now mined, removed, and marketed at a present profit over and above the costs of such operations,” the mine may be considered “valuable” under the Mining Act. Id. DOI has applied this rule for over forty years. See United States v. Clouser, 144 IBLA 110, 131–32 (1998); United States v. Collord, 128 IBLA 266, 288 n.24 (1994); United States v. Copple, 81 IBLA 109, 129 (1984). In this case, the mineral examination was conducted by the U.S. Forest Service. Although DOI has primary jurisdiction to determine the validity of mining claims, the Forest Service is authorized to conduct mineral examinations on National Forest System lands and to recommend that DOI initiate administrative contests of invalid mining claims. See 16 U.S.C. §§ 478, 482; Forest Service Manual §§ 2810.41, 2814.11, 2819, 2819.1–2.
The Forest Service determined that Energy Fuels has a valid existing right to operate Canyon Mine. The VER Determination relied on the legal standard for discovery of a valuable mineral deposit announced by DOI. It twice cited DOI’s core decision in Castle v. Womble, and it noted which GRAND CANYON TRUST V. PROVENCIO 17 costs it regarded as sunk. The parties disagree over what standard of review we should apply here. The Trust argues that we can review DOI’s interpretation of the Mining Act de novo, because it is a pure question of law. The district court disagreed, finding that the question was whether the Forest Service’s reliance on DOI’s construction of the act was arbitrary and capricious, rather than whether the interpretation itself was valid. See Grand Canyon Tr., 467 F. Supp. 3d at 819–21. The Forest Service argues that, since an action by DOI is not being challenged and DOI is not a party to this lawsuit, the validity of DOI’s interpretation is not before us. The district court was correct. When reviewing the Forest Service’s VER Determination, the proper standard of review is arbitrary and capricious. We have consistently applied the arbitrary and capricious standard to cases in which an agency relies on or defers to the opinions or interpretations of another agency. See, e.g., San Luis & Delta-Mendota Water Auth. v. Jewell, 747 F.3d 581, 640 (9th Cir. 2014); Wild Fish Conservancy v. Salazar, 628 F.3d 513, 532 (9th Cir. 2010); Pyramid Lake Paiute Tribe of Indians v. U.S. Dep’t of Navy, 898 F.2d 1410, 1415 (9th Cir. 1990). The Trust argues that arbitrary and capricious review applies only when an agency defers to another agency’s judgment about factual matters, as opposed to pure questions of law. Our law is to the contrary. In Defenders of Wildlife v. U.S. EPA, we concluded that the Fish and Wildlife Service had prepared a biological opinion that relied on legal errors. 420 F.3d 946 (9th Cir. 2005), rev’d on other grounds and remanded sub nom. Nat’l Ass’n of Home Builders v. Defs. of Wildlife, 551 U.S. 644 (2007). EPA had, in turn, relied on the biological opinion. We held EPA was arbitrary and capricious when it relied on the flawed opinion. Id. at 976. Although we observed that an agency 18 GRAND CANYON TRUST V. PROVENCIO “should be able to rely on the expert judgments that underlie [a] Biological Opinion[]” prepared by another agency, in this case “the Biological Opinion’s flaws are legal in nature. Discerning them requires no technical or scientific expertise.” Id. They were errors “EPA should have understood.” Id. Since the VER Determination cited and applied DOI’s interpretation of the Mining Act,2 we may reach through the VER Determination and review DOI’s interpretation “only to the extent that [it] demonstrate[s] whether [the Forest Service’s] reliance on the [interpretation] is ‘arbitrary and capricious.’” Pyramid Lake, 898 F.2d at 1415 (quoting Stop H-3 Ass’n v. Dole, 740 F.2d 1442, 1460 (9th Cir. 1984)). Because DOI has authority to administer the Mining Act, its interpretation is analyzed under Chevron, U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984).3 Lambert v. Saul, 980 F.3d 1266, 1275 (9th Cir. 2 Although the VER Determination cited Castle v. Womble, it did not refer explicitly to Mannix. That suggests the possibility that the Forest Service expressed its own views on the irrelevance of sunk costs, rather than reflecting DOI’s view of such costs. Since both agencies took the same view of sunk costs, and we conclude that such position is not arbitrary and capricious, we do not need to explore further this question. The result would be the same in either case. 3 The Trust argues that Chevron deference should not apply because DOI failed to provide the “minimal level of analysis” required. Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 221 (2016) (requiring that an agency give “adequate reasons for its decisions,” meaning that the agency’s explanation must be “clear enough that its ‘path may be reasonably discerned’” (quoting Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974)). While DOI’s analysis in Mannix is brief, it cites cases that use language consistent with its interpretation. See Mannix, 50 IBLA at 117–18 (citing Castle, 19 Pub. Lands Dec. at 457; United States v. McKenzie, 20 IBLA 38, 45 (1975) (“[E]vidence should focus on current estimates of costs and prices.”)). GRAND CANYON TRUST V. PROVENCIO 19 2020). If DOI’s interpretation of the Mining Act is not entitled to Chevron deference, then it is arbitrary and capricious for the Forest Service to rely on the erroneous interpretation. This approach is consistent with that of our sister circuits. See, e.g., Florida Key Deer v. Paulison, 522 F.3d 1133, 1145 (11th Cir. 2008) (“If [one agency’s opinion is] arbitrary and capricious, an[other] agency’s decision to adopt [it] is likewise arbitrary and capricious and may be challenged.”); CTIA-Wireless Ass’n v. FCC, 466 F.3d 105, 117 (D.C. Cir. 2006) (finding that, if the court must defer to the agency’s interpretation, it is not arbitrary and capricious for another agency to do so).
Chevron analysis has two steps: “[W]e must first exhaust the traditional tools of statutory construction to determine whether Congress has directly spoken to the precise question at issue.” Turtle Island Restoration Network v. U.S. Dep’t of Com., 878 F.3d 725, 733 (9th Cir. 2017) (internal quotations omitted). If the statute is “silent or ambiguous on the question at hand, then at Chevron step two we must respect the agency’s interpretation so long as it is based on a permissible construction of the statute”—that is, one not “arbitrary, capricious, or manifestly contrary to the statute.” Id. (internal quotations omitted). This would indicate that DOI was reading the Mining Act to be consistent with its prior case law on the prudent person and marketability tests, which the Supreme Court approved of on multiple occasions. This is sufficient for us to proceed with a Chevron analysis. See Encino Motorcars, 579 U.S. at 222 (“[S]ummary discussion may suffice . . . .”). 20 GRAND CANYON TRUST V. PROVENCIO At Chevron step one, “[t]o maintain the proper separation of powers between Congress and the executive branch, we must ‘exhaust all the traditional tools of construction’ before we ‘wave the ambiguity flag.’” Route v. Garland, 996 F.3d 968, 978 (9th Cir. 2021) (quoting Medina Tovar v. Zuchowski, 982 F.3d 631, 634 (9th Cir. 2020)). In this case, however, we have little difficulty determining that the critical term in the Mining Act—“valuable mineral deposits”—is ambiguous. See 30 U.S.C. §§ 22–23. It is neither a defined term nor a term of art in the industry. In Chrisman, the Court first considered, and approved the Secretary’s “prudent person” test. 197 U.S. at 322–23. The Court stated the statutory requirement in the most general of terms: “[T]here must be such a discovery of mineral as gives reasonable evidence of the fact, either that there is a vein or lode carrying the precious mineral, or, if it be claimed as placer ground, that it is valuable for such mining.” Id. at 323. Examining the purpose and history of the Mining Act similarly yields no definitive understanding of the term. In Coleman, the Supreme Court said that the purpose of the Mining Act was to make “public lands available to people for the purpose of mining valuable mineral deposits and not for other purposes. The obvious intent was to reward and encourage the discovery of minerals that are valuable in an economic sense.” 390 U.S. at 602. That description is far too general to cabin the definition of “valuable mineral deposits.” That does not mean that an enforcing agency such as DOI can define it in any way it pleases, but it also means that we may not insist that the phrase is so clear as to be capable of a single meaning. If the terms of the statute are not capable of precise definition at step one, we cannot see how we could determine GRAND CANYON TRUST V. PROVENCIO 21 that “valuable mineral deposits”—which the agency has concluded means that the deposits would be pursued by a prudent person—forecloses how the agency accounts for “sunk costs,” which is not a statutory term, but is a commonly used economic phrase. Concluding that the statute is ambiguous, we may now proceed to step two. At Chevron step two, we hold that DOI’s interpretation of the Mining Act—in which sunk costs are not considered when determining whether a mine is profitable—is a permissible one and not “arbitrary and capricious in substance, or manifestly contrary to the statute.” Mayo Found. for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 53 (2011) (quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)). First, we find that the fact that DOI excludes sunk costs from its profitability analysis is not manifestly contrary to the Mining Act because this interpretation is consistent with the prudent person and marketability tests, which the Supreme Court has repeatedly upheld. See West. Nuclear, Inc., 462 U.S. at 58 n.18; Coleman, 390 U.S. at 602. Although the Court has not addressed the question of sunk costs specifically, the language of these tests and the cases in which they are applied suggest that the profitability analysis is forward looking. See, e.g., Coleman, 390 U.S. at 602 (“. . . a person of ordinary prudence would be justified in the further expenditure of his labor and means.”); see also McKenzie, 20 IBLA at 38, 45 (“[E]vidence should focus on current estimates of costs and prices.”). Sunk costs, on the other hand, are backward looking. More importantly, DOI’s interpretation is not arbitrary and capricious in substance because it is consistent with established economic principles. It is a basic principle of 22 GRAND CANYON TRUST V. PROVENCIO economics that sunk costs should be ignored when making a rational decision about whether to make further expenditures. See N. Gregory Mankiw, Principles of Economics 275 (8th ed. 2016) (“Because nothing can be done about sunk costs, you should ignore them when making [rational] decisions about various aspects of life, including business strategy.”); Richard A. Posner, Economic Analysis of Law 8 (9th ed. 2014) (“‘Sunk’ (already incurred) costs do not affect a rational actor’s decisions on price and quantity. . . . Fully rational people base their decisions on expectations of the future rather than on regrets about the past.”); Paul A. Samuelson & William D. Nordhaus, Economics 179 (18th ed. 2005) (“One of the most important lessons of economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs.” (emphasis omitted)); Thomas Kelly, Sunk Costs, Rationality, and Acting for the Sake of the Past, 38 Noûs 60, 61 (2004) (“[I]t is widely agreed that honoring sunk costs is obviously and clearly irrational, and that doing so is, without exception, to be avoided. In economics and business textbooks, the tendency to honor sunk costs is treated as an elementary fallacy.”); Armen A. Alchian & William R. Allen, Exchange and Production: Theory in Use 288 (1969) (a “fixed or sunk cost” is “‘fixed’ upon you and irrevocable. For any subsequent decision this ‘cost’ is totally irrelevant and can be forgotten.”). Federal courts have acknowledged the validity of the sunk cost principle in other contexts. See, e.g., Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467, 499 n.17 (2002) (stating that “costs” in an economic sense do not include sunk costs); Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608, 615–16 (5th Cir. 2000); Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 969 (D.C. Cir. 1999) (rejecting an argument that a business’s actions are motivated by its past investment because “[t]his is a foolish notion that should not be GRAND CANYON TRUST V. PROVENCIO 23 entertained by anyone who has had even a single undergraduate course in economics,” and collecting sources); MCI Commc’ns Corp. v. Am. Tel. & Tel. Co., 708 F.2d 1081, 1117 (7th Cir. 1983). See also United States v. Park Place Assoc., Ltd., 563 F.3d 907, 921 (9th Cir. 2009). To illustrate, let us suppose that ABC Mining spent $31 million to develop what it thought was a valuable mine, but had to take it out of operation when the market value of the mineral declined. Let us also suppose that if ABC Mining wishes to restart operation of the mine, it will earn $50 million in revenue but incur $20 million in further capital and operating expenses. If we ignore sunk costs, ABC Mining should reopen the mine because the benefit from mining ($50 million) still exceeds the nonsunk cost of operating the mine ($20 million). In fact, the revenue far exceeds the nonsunk cost. The operation stands to make $30 million by extracting the deposit; by any measure that makes the mineral deposit a valuable one. By contrast, if ABC Mining considers the sunk costs as part of its decision whether to re-start operations, it would refuse to continue operation because it would stand to lose $1 million after considering sunk costs ($31 million + 20 million ! 50 million). But if ABC Mining decides not to re-open the mine, it will lose $31 million total, instead of $1 million, because it chose not to offset its prior losses against the promise of a $30 million benefit. No prudent person should follow such a plan. ABC Mining will have misjudged the situation by considering its total costs rather than its nonsunk costs. It is true that the mine operator will have lost $1 million over the life of the mine, but if the 24 GRAND CANYON TRUST V. PROVENCIO operator declines to proceed when its revenues will exceed its costs, it will have lost $31 million at the mine.4 DOI’s sunk costs rule from Mannix5 simply recognizes that a prudent person cannot change sunk costs, and thus those costs should not be considered when determining whether that person is “justified in the further expenditure of his labor and means.” Castle, 19 Pub. Lands Dec. at 457; see also Thomas T. Nagle, John E. Hogan, & Joseph Zale, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably 224 (5th ed. 2011) (“Since nonincremental fixed and sunk costs do not change with a pricing decision, they do not affect the relative profitability of one price versus an alternative.”); David D. Friedman, Price 4 Of course if a mine operator knew from the outset that it would lose even one dollar over the life of the mine, it would decline to file the mineral claim. But the operator—and DOI, which must approve such claims—can only work off the information they have. They are not responsible for accurately predicting the vagaries of the market over the life of the mine. And DOI has decided not to punish operators whose claims, once unprofitable, have returned to profitability. 5 The Trust argues that, even if DOI’s interpretation is entitled to deference, the Forest Service erred in applying Mannix because Mannix has an exception for withdrawn land. The Trust relies on the “absent a prior withdrawal” language in the Mannix opinion and a concurrence in Collord, in which the concurring ALJ stated that the existence of the withdrawal was “critical” to the Mannix decision. Mannix, 50 IBLA at 119; Collord, 128 IBLA at 304 (Burski, J., concurring in the result). However, the majority in Collard decided to exclude sunk costs even in the face of a withdrawal. See Collard, 128 IBLA at 288 n.24. Furthermore, DOI has applied the Mannix rule consistently—without an exception for withdrawal—for the past forty years. See, e.g., Clouser, 144 IBLA at 131; Copple, 81 IBLA at 129. Given this precedent, the Forest Service did not act arbitrarily and capriciously by failing to apply a nonexistent exception for withdrawn land. GRAND CANYON TRUST V. PROVENCIO 25 Theory: An Intermediate Text ch. 13, pt. 1 (2d ed. 1990), http://www.daviddfriedman.com/Academic/Price_Theor y/PThy_ToC.html (“The significance of sunk costs is that a firm will continue to produce even when revenue does not cover total cost, provided that it does cover nonsunk costs (called recoverable costs), since nonsunk costs are all the firm can save by closing down.”). We need not go so far as to pronounce DOI’s approach to sunk costs required by the statute or correct as a matter of principle. See Friends of Santa Clara River v. U.S. Army Corps of Eng’rs, 887 F.3d 906, 922 (9th Cir. 2018). We do not decide that any other approach would be arbitrary and capricious. It is sufficient that we can conclude that DOI’s rule excluding sunk costs is not arbitrary and capricious. And since we would be required to give DOI deference under the Chevron doctrine, it was appropriate for the Forest Service to do so as well in its VER Determination. As such, it was not arbitrary and capricious for the Forest Service to rely on DOI’s interpretation of the Mining Act.