Rockies Express Pipeline LLC v. Salazar

• Decision Date: 10 January 2014
• Docket Number: 2012–1174.,Nos. 2012–1055,s. 2012–1055
• Citation: 730 F.3d 1330
• Parties: ROCKIES EXPRESS PIPELINE LLC, Appellant, v. Ken SALAZAR, Secretary of the Interior, Appellee. Ken Salazar, Secretary of the Interior, Appellant, v. Rockies Express Pipeline LLC, Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

730 F.3d 1330

ROCKIES EXPRESS PIPELINE LLC, Appellant,

v.Ken SALAZAR, Secretary of the Interior, Appellee.

Ken Salazar, Secretary of the Interior, Appellant,

v.Rockies Express Pipeline LLC, Appellee.

Nos. 2012–1055, 2012–1174.

United States Court of Appeals,Federal Circuit.

Sept. 13, 2013.

Rehearing Denied Jan. 10, 2014.

L. Poe Leggette, Fulbright & Jaworski, L.L.P., of Denver, CO, argued for Rockies Express Pipeline LLC. With him on the brief were Osborne J. Dykes, III, Benjamin M. Vetter and Lucy D. Arnold.

Domenique Kirchner, Senior Trial Counsel, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for Ken Salazar, Secretary of the Interior. With her on the brief were Stuart F. Delery, Acting Assistant Attorney General, Jeanne E. Davidson, Director, and Harold D. Lester, Jr., Assistant Director.

Before RADER, Chief Judge, REYNA, Circuit Judge, and DAVIS^*, Chief Judge.

REYNA, Circuit Judge.

This case involves a dispute over the interpretation of a series of contracts enteredinto by Rockies Express Pipeline LLC (“Rockies Express”) and Minerals Management Service, a unit of the Department of the Interior (collectively “Interior”). The dispute centers on the Royalty–in–Kind (RIK) provisions found in the contracts. The Civilian Board of Contract Appeals (“Board”) determined that Interior had materially breached the contract, but that Rockies Express was only entitled to damages that had accrued before the Secretary of the Interior announced a decision to phase-out RIK contracts. We agree that Interior materially breached the contract, but we reverse the Board's decision to limit damages. Accordingly, we affirm-in-part, reverse-in-part, and remand.

I. Background

In 2005, Rockies Express set out to build a $6.8 billion pipeline to ship natural gas from Wyoming to Eastern Ohio. The pipeline was to be built in two phases. The first phase, Rockies Express West, would be completed first and would stretch from Wyoming to Missouri. The second phase, Rockies Express East, would connect to Rockies Express West and continue from Missouri to Ohio. In exchange for building the pipeline, Interior agreed to pay Rockies Express a reservation charge for at least ten years per section, reserving 2.5% of the gas shipped on the pipeline.¹ Interior would receive the natural gas as a royalty-in-kind for gas Rockies Express extracted from federal land. ² Interior agreed to pay the reservation charge regardless of whether or not it shipped gas on the pipeline and Rockies Express agreed to maintain shipping capacity for Interior. Interior also agreed to initial reservation charges for Rockies Express West of $1,207,540/month. Upon completion of Rockies Express East, Interior promised to pay reservation charges of $1,663,800/month. For Interior, the reservation charges created firm transportation capacity for its reserved natural gas. For Rockies Express, the reservation charges enabled it to recoup the massive capital investment it incurred in building the pipeline. The parties unquestionably intended for the relationship to continue for at least ten years following the completion of Rockies Express East. The terms guiding the relationship were considered and agreed upon prior to construction beginning on the pipelines.

As required by the Federal Energy Regulatory Commission, before construction could begin, Rockies Express and Interior entered into a Precedent Agreement in order to memorialize the parties' agreement. The Precedent Agreement is a primary agreement that obligated the parties to enter into follow-on agreements. During negotiations on the Precedent Agreement, Interior requested a termination for convenience clause or a clause that would allow it to terminate the agreements if Interior later abandoned the RIK program, but Rockies Express refused to agree to either clause. As a result, the parties agreed that under Provision 3(b) of the Precedent Agreement, Interior could terminate the agreement only if it was “directed by Legislative Action or required by a change in the Federal or State policy to discontinue taking gas in kind ... upon (30) thirty days written notice to [Rockies Express].” Joint App'x 273 (emphasis added). Conversely, Rockies Express could be excused from liability to Interior upon the occurrence of certain events listed in Section 9(b) provided that it gave Interior a five-day notice. Most notably, Section 9(b)(v) provided that

Transporter [ i.e., Rockies Express] shall have the right to terminate this Precedent Agreement with no liability to Shipper [ i.e., Interior] by giving Shipper five (5) days advance written notice (which notice must be given, if at all, within ten (10) days after the occurrence or nonoccurrence of the relied upon-event) ..., in the event: ... Shipper fails to comply with any of its material obligations hereunder or under any FTSA then in effect....

Joint App'x 279.

The Federal Energy Regulatory Commission reviewed the Precedent Agreement between Rockies Express and Interior, as well as the precedent agreements that Rockies Express entered into with eleven other shippers of natural gas, to determine if approval of the pipeline project was in the public interest. After reviewing the precedent agreements, the commission found that construction of the pipeline was in the public interest and treated all the precedent agreements as binding.

Section 8(a) of the Precedent Agreement obligated Interior to enter into Firm Transportation Service Agreements (FTSA) and Negotiated Rate Agreements, which would govern the shipment of gas over each segment of the pipeline:

Shipper agrees that it will execute a minimum of three ³ Firm Transportation Service Agreements consistent with the form of Service Agreement as contained in Appendix B hereto, as finally approved by [the Federal Energy Regulatory Commission] which, if Shipper shall have elected the Negotiated Reservation Rate Option, shall reflect the fixed nature of the reservation rate as described in Section 4, within five (5) business days after tender by Transporter.

Joint App'x 277. Pursuant to Section 8(a), an unexecuted, but agreed-upon, FTSA for Rockies Express West and Rockies Express East was attached as Appendix B to the Precedent Agreement.

Based on the foregoing contracts, construction on the Rockies Express West pipeline commenced in 2006. Once construction concluded, Interior executed an FTSA on April 24, 2007, and the Rockies Express West pipeline went into service. Interior shipped gas on Rockies Express West for over a year without incident, including during the time construction was progressing on Rockies Express East. On May 16, 2008, shortly before Rockies Express East was completed, Rockies Express sent Interior the FTSAs for Rockies Express East, which had been drawn up from Appendix B of the Precedent Agreement. Rather than executing the FTSAs as required under the Precedent Agreement, Interior decided that the FTSA required Federal Acquisition Regulations (FAR) provisions, basing that decision on a non-binding memorandum from Interior's Office of Solicitor.⁴ The parties negotiated FAR provisions, but failed to reach an agreement, and Interior ultimately refused to sign the Rockies Express East FTSA that Rockies Express tendered on November 25, 2008. On December 11, 2008, Rockies Express terminated the Precedent Agreement on the grounds that Interior was in material breach. Interior also stopped shipping gas on Rockies Express West on March 31, 2009, even though the Precedent Agreement obligated it to do so until Rockies Express East entered service. When Rockies Express East entered interim service on June 29, 2009, Interior refused to ship gas on it based on the parties' failure to execute an FTSA for Rockies Express East.

On June 30, 2009, Rockies Express filed claims with the contracting officer for Interior's breach, citing Interior's refusal to execute the Rockies Express East FTSA and its failure to pay reservation charges on Rockies Express West from April 1 through June 28, 2009. On September 16, 2009, the Secretary of the Interior announced the agency's intention to phase-out RIK contracts and, on December 8, 2009, issued a memorandum instructing the Assistant Secretary of Land and Minerals Management to “proceed with the termination of the RIK program.” Joint App'x 1268. Termination was to proceed according to a list of “guiding principles,” including honoring all existing RIK sales contracts. Consequently, Interior allowed its RIK sales contract related to natural gas from Wyoming to expire on October 31, 2009, when the Rockies Express West FTSA was scheduled to conclude.

On November 30, 2009, Interior's contracting officer issued a Final Decision, concluding that Interior was not in breach for failing to enter into the Rockies Express East FTSA because the Precedent Agreement was not a binding contract and, in any event, Rockies Express committed the first material breach by terminating the agreement without a five-day notice.

Rockies Express appealed the decision of the contracting officer to the Board and argued that the Precedent Agreement was a binding contract that Interior breached by not signing the Rockies Express East FTSA. The Board held that the Precedent Agreement was a contract for procurement of services, thereby vesting it with jurisdiction, and that Interior breached the agreement by refusing to pay reservation charges on Rockies Express West and refusing to execute the Rockies Express East FTSA. The Board also found that Interior would have exercised the termination option pursuant to the agency's announced policy decision to stop taking RIK payments. As a result, the Board concluded that Interior was only liable for the reservation charges on Rockies Express West ($3,542,121) and reservation charges on Rockies Express East through October 2009 ($3,319,104), not the ten-years-worth of reservation charges ($173,230,601)...