Free Post Trial Brief - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS ) ) ) Plaintiff, ) ) v. ) ) ) THE UNITED STATES OF AMERICA, ) ) Defendant. ) __________________________________________) THE OSAGE TRIBE OF INDIANS OF OKLAHOMA,

Electronically Filed: May 4, 2006 No. 99-550L (into which has been consolidated No. 00-169L) Judge Emily C. Hewitt

DEFENDANT'S POST-TRIAL BRIEF

SUE ELLEN WOOLDRIDGE Assistant Attorney General BRETT BURTON United States Department of Justice Environment & Natural Resources Division Natural Resources Section MARTIN J. LALONDE KEVIN S. WEBB KEVIN J. LARSEN United States Department of Justice Environment & Natural Resources Division Natural Resources Section 601 D Street, N.W., 3rd Floor Washington, DC 20004 TEL: (202) 305-0212 FAX: (202) 353-2021

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TABLE OF CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 I. II. III. TRANCHE ONE LEASES, MONTHS, AND PURCHASERS . . . . . . . . . . . . . . . . . . . . 2 CALCULATION OF ROYALTIES FOR THE TRANCHE ONE LEASES . . . . . . . . . . 3 DEPOSIT AND INVESTMENT OF OSAGE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 I. II. STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 PLAINTIFF HAS FAILED TO MEET ITS BURDEN TO PROVE THAT THE UNITED STATES BREACHED ITS TRUST DUTIES RELATED TO THE COLLECTION OF ROYALTIES FROM THE TRANCHE ONE LEASES FOR THE TRANCHE ONE TIME MONTHS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Interpretation of the Regulations Applicable to Plaintiff's Royalty Calculation and Collection Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1. The Contours of the Government's duties are defined by the pricing terms in the Osage regulations in effect from 1974 to 1990 . . . . . . . . . . . . . . . . 4 a. b. c. 2. "Actual selling price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Posted Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 "Offered price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A.

Plaintiff's proposed interpretation of 25 C.F.R. § 226.11 is contrary to both the plain meaning of the regulation and the best interest of the Osage Tribe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 a. Plaintiff's interpretation of "offered price" is contrary to the language of the regulations and is unworkable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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b.

Plaintiff's proposed interpretation of the pricing regulations is not in the Tribe's best interest and is contrary to the 1906 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

4.

The Ordinary Meaning of "Posted Price" Supports the Agency's Application of Gravity Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

B.

Federal Price Controls Set the Maximum Price for Purposes of Calculating Royalties in the First Three Tranche One Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1. 2. Application of MPPR to royalty interest owners . . . . . . . . . . . . . . . . . . . . . . . . 14 The use of unregulated prices as the basis for the calculation of Osage royalties was consistent with the 1906 Act and its implementing regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

C.

The Osage Agency Fulfilled its Duty to Verify That Proper Royalties Were Paid on the Tranche One Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1. Procedures Implemented by the Agency to Ensure Payment on the Volumes Produced from Osage Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Royalty Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Determination of royalty prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 a. b. c. Highest posted price of major purchasers . . . . . . . . . . . . . . . . . . . . . . . 23 Offered Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 The Interior Board of Indian Appeals reversed the Agency's application of actual and offered prices to, among other months, July 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2. 3.

4. 5.

Verification of oil royalties paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The correct royalties were paid on the Tranche One leases in the Tranche One months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

D.

Plaintiff Is Not Entitled to Late-Payment Penalties Against the Government . . . . . . . 34

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III.

PLAINTIFF HAS FAILED TO MEET ITS BURDEN IN PROVING THAT THE UNITED STATES BREACHED ITS INVESTMENT TRUST DUTIES TO THE OSAGE NATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Plaintiff Failed to Demonstrate That the Timing Associated with the United States' Deposit of Osage Oil and Gas Royalties was Unreasonable . . . . . . . . . . . . . . . . . . . . . 34 1. Defendant's Tranche One Deposit Practices Were Reasonable . . . . . . . . . . . . 35 a. b. Standard for determining whether deposits are timely . . . . . . . . . . . . . 35 BIA's Deposit Process for Tranche One Royalty Receipts . . . . . . . . . 36 i. ii. 2. Payments by check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Payments by EFT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

A.

Timing of Deposits of Royalty Receipts for the Tranche One Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

B.

The Government Properly Exercised its Discretion to Invest Under 25 U.S.C. §§ 161a and 162a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1. Relevant factors for determining whether the Government properly exercised its discretion in investing Osage funds . . . . . . . . . . . . . . . . . . . . . . . 42 The United States Prudently Invested Tranche One Royalties . . . . . . . . . . . . . 43 a. Interior's Tranche One Osage-Specific Investment Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 BIA's Investment of Tranche One Royalty Receipts . . . . . . . . . . . . . . 46

2.

b. C.

Plaintiff Failed to Provide Evidence That the United States Breached its Duty to Deposit and Invest Tranche One Oil and Gas Royalties in a Reasonable Manner . . . . 49

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

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TABLE OF AUTHORITIES FEDERAL CASES Advanta USA, Inc. v. Chao, 350 F.3d 726 (8th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Air Transp. Ass'n v. FEA, 382 F. Supp. 437 (D.D.C. 1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Demko v. United States, 44 Fed. Cl. 83 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 7 Dept. of Energy v. Osborn, 760 F.2d 282 (Temp. Emer. Ct. App. 1984) . . . . . . . . . . . . . . . . 6, 7 Exxon Corp. v. DOE, 802 F.2d 1400 (Temp. Emer. Ct. App. 1986) . . . . . . . . . . . . . . . . . . . . . 16 Exxon Corp. v. Jarvis Christian Coll., 1991 WL 771247 (E.D. Tex. Feb. 15, 1991) . . . . . . . . 17 Frey v. Amoco Production Co., 943 F.2d 578 (5th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Grigsby v. Dept. of Energy, 585 F.2d 1069 (Temp. Emer. Ct. App. 1978) . . . . . . . . . . . . . . . . . 6 In re Unisys Savings Plan Litig., 74 F.3d 420 (3d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Linda Newman Construction Co. v. United States, 48 Fed.Cl. 231 (2000) . . . . . . . . . . . . . . . . . 8 Marathon Oil Co. v. FEA, 547 F.2d 1140 (Temp. Emer. Ct. App. 1976) . . . . . . . . . . . . . . . . . 16 Mountain Fuel Supply Co. v. Dept. of Energy, 656 F.2d 690 (Temp. Emer. Ct. App. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 North Central Airlines, Inc. v. Continental Oil Co., 574 F.2d 582, 588 (D.C. Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7, 13 NVT Tech. Inc. v. United States, 370 F.3d 1153 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . 4 Osage Tribe of Indians v. Ickes, 45 F. Supp. 179 (D.D.C. 1942) . . . . . . . . . . . . . . . . . . . . . . . 44 Pawnee v. United States, 830 F.2d 187 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Perrin v. United States, 444 U.S. 37 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 R.L. Griffin v. United States, 537 F.2d 1130 (Temp. Emer. Ct. App. 1976) . . . . . . . . . . . . . . . 17 Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915 (8th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . 43 Ruben v. Secretary of DHHS, 22 Cl. Ct. 264 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 -iv-

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United States v. Borden, 308 U.S. 188 (1939) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 United States v. Cuomo, 525 F.2d 1285 (5th Cir. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 United States v. Mason, 412 U.S. 391 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 40 Warner-Lambert Co. v. Apotex Corp., 316 F.3d 1348 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . 5 Wesreco v. Dept. of Interior, 618 F. Supp. 562 (D.Ct. Utah 1985) . . . . . . . . . . . . . . . . . . . . . . 16 Wilshire Westwood Assocs. v. Atlantic Richfield Corp., 881 F.2d 801, 803-4 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 9

FEDERAL STATUTES 12 U.S.C. § 1904 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 25 U.S.C. § 161a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 42, 43, 44 25 U.S.C. § 162a(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 42, 43, 44 25 U.S.C. §§ 161a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 28 U.S.C. § 2501 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 30 U.S.C. § 226 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16 34 Stat. 539 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 3 41 Stat. 1249 (1921) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 46, 48 52 Stat. 1034 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 64 Stat. 215 (1950) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 24, 26, 28, 29 87 Stat. 628 (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 88 Stat. 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

FEDERAL REGULATIONS 10 C.F.R. Part 205 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 -v-

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10 C.F.R. Part 212 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10 C.F.R. § 205.55 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10 C.F.R. § 212.73(c) (1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10 C.F.R. § 212.74(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 10 C.F.R. §§ 212.72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 25 C.F.R. 226 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ibid 25 C.F.R. 226.11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ibid 25 C.F.R. § 115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42, 43 25 C.F.R. § 226.13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 C.F.R. § 150.4989-1 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7 30 C.F.R. Part 221 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6 C.F.R. Part 150 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

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APPENDIX TO DEFENDANT'S ATTACHMENTS FOR POSTTRIAL BRIEF Attachment No. 1 2 Description M.J. Mitchell, 3 FEA ¶ 83,146, p. 83,553 (case No. FEA-2199, April 2, 1976) United States Geological Survey, 5 FEA ¶ 80,537, at p. 80,675 (Case No. FEA-0850, January 26, 1977)

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INTRODUCTION This Court has tried Plaintiff Osage Tribe's claims that Defendant United States breached its duties to the Tribe with respect to the collection and verification of royalties from the Osage mineral estate, and to the investment of those royalties, in the context of four leases for five months between 1976 and 1989. As is clear from the trial, Plaintiff has failed to meet its burden of demonstrating that the United States has breached its duties and that Plaintiff has suffered damages as a result of the United States's actions. As to Plaintiff's royalty collection and verification claims, Defendant sets forth herein the appropriate interpretation of the sources of law ­ particularly, the Act of June 28, 1906, ch. 3572, 34 Stat. 539, as amended ("1906 Act") and its implementing regulations, 25 C.F.R. Part 226 (1982) ­ that provide the contours of the Government's duties. That interpretation requires that the Bureau of Indian Affairs ("BIA"), through the Osage Agency, collect royalties on the higher of either (1) the actual price paid to a particular lessee or (2) the highest posted or offered prices of major purchasers located in the Kansas-Oklahoma area, which posted or offered prices were available to the lessee. It also requires that, during the period when prices of oil were regulated, royalties be based on no more than the regulated prices. As shown at trial, in implementing these regulations, the Osage Agency followed practices and procedures that ensured that lessees paid royalties based on the correct volume of oil, royalty rate, and price. Through a comparison of the Tranche One royalties that the Osage Agency actually obtained and those that it should have obtained, Defendant demonstrated that the Osage Agency complied with these practices and procedures and with the 1906 Act and its implementing regulations. Further, this comparison showed that the Agency obtained the correct Tranche One royalties. -1-

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Also at trial, Defendant identified the purchasers that paid the royalties on the Tranche One leases and traced their royalty payments through the deposit process into the Osage royalty account. From there, Defendant showed how the funds associated with these purchasers were invested until they were disbursed as quarterly "headright" payments. The facts of this case show that the deposits of the royalty payments were timely. Further, the facts plainly show that the BIA followed a reasonable investment process for the Tranche One payments, and properly exercised its discretion in making investments, including complying with the prudent person standard. Plaintiff has entirely failed to meet its burden of showing otherwise. This Court should issue judgment in favor of Defendant on the Tranche One issues and claims. BACKGROUND I. TRANCHE ONE LEASES, MONTHS, AND PURCHASERS Tranche One encompasses Plaintiff's trust fund mismanagement claims for four oil leases for five sample months: January 1976, May 1979, November 1980, February 1986, and July 1989. See Osage Nation v. U.S., No. 00-169L, April 15, 2005 Order (Dkt. No. 194); Osage Tribe v. U.S., No. 99-169, February 22, 2006 Order (Dkt. No. 176). The Tranche One leases are the North Burbank Unit (I68 IND 25667), North Avant Unit (168 IND 7883), Osage Hominy Unit (168 IND 3618), and East Hardy Unit (14-20-G06-664). Id. The companies that were purchasers for the Tranche One leases during the Tranche One months are (1) North Burbank - Phillips; (2) East Hardy - Sun Oil;1 (3) North Avant - Bigheart, for the first four Tranche One months, and Koch, for the last Tranche One month; and (4) Osage Hominy - Sun Oil, for the first two Tranche One

1

Sun Ray was the purchaser for the first Tranche One month, but Sun Ray and Sun Oil were either the same company or successors in title. RT 991:10-16. -2-

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months, and Union Oil, for the last three Tranche One months.2 Record of Trial ("RT") 988-94, 1533-1534; Joint Exhibit ("JX") 16; JX32-1; Defendant's Exhibit ("DX") 2675-650. II. CALCULATION OF ROYALTIES FOR THE TRANCHE ONE LEASES The 1906 Act and its implementing regulations promulgated in 1974, as well as lease terms, establish in the Department of the Interior ("Interior") the duties to collect royalties on the Tranche One oil and gas leases for the Osage Tribe. Defendant's Pretrial Memorandum of Contentions of Fact and Law ("Def.'s Pretrial Mem.") at 21-24 of 127 (Dkt. No. 136) . The regulations required the lessee or purchaser to pay royalties on its gross proceeds by the 25th day of the month following the month of sale. 25 C.F.R. § 226.13. The royalties were calculated using the following formula: Royalty Due = Royalty Rate x Volume x Royalty Price. RT 1390:9-15. III. DEPOSIT AND INVESTMENT OF OSAGE FUNDS The Tribe's investment claims are based on the 1906 Act, as well as 25 U.S.C. sections 161a and 162a. The 1906 Act establishes the duty to deposit funds in the Treasury, where they are to be held in trust. 1906 Act § 4. During the first three Tranche One months, the funds in Treasury initially earned four-percent simple interest, 25 U.S.C. § 161a 91976), and, in the latter two months, the funds were initially invested in public debt securities with a one-day maturity (the so-called "Overnighter"), 25 U.S.C. § 161a(a) (1985). At the discretion of the Secretary of the Interior, the funds could be withdrawn from the Treasury and deposited in private banks or invested in Treasury securities. 25 U.S.C. § 162a(a). On a quarterly basis, the funds were disbursed to the "headright" owners. 1906 Act § 4.

In discussing Osage Hominy, Defendant's expert Ronnie Martin clarified that Union Oil was the entity that paid the royalty (i.e., the payor), while Koch was the purchaser. RT 1533:141534:7. Consequently, in Mr. Martin's Exhibit U (DX2675-650), the column "purchaser" should read "purchaser/payor." Id. -3-

2

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ARGUMENT I. STANDARD OF REVIEW The starting point for the Court's determination of the applicable standard of review to apply to Plaintiff's claims that the Government has breached its duties is the statutory and regulatory language that forms the basis of Plaintiff's claim. See, e.g., NVT Tech. Inc. v. United States, 370 F.3d 1153, 1159 (Fed. Cir. 2004); Pawnee v. United States, 830 F.2d 187, 191 (Fed. Cir. 1987). To the extent the statutory and regulatory language is silent as to the standard of review, the Court should apply a reasonableness standard to determine whether there has been a breach. For a more detailed discussion of the standard of review, see Def.'s Pretrial Mem. at 55-62 of 127 and Def.'s Brf. Pursuant to Feb. 17, 2006 Order (Dkt. No. 178). II. PLAINTIFF HAS FAILED TO MEET ITS BURDEN TO PROVE THAT THE UNITED STATES BREACHED ITS TRUST DUTIES RELATED TO THE COLLECTION OF ROYALTIES FROM THE TRANCHE ONE LEASES FOR THE TRANCHE ONE TIME MONTHS Interpretation of the Regulations Applicable to Plaintiff's Royalty Calculation and Collection Claims 1. The Contours of the Government's duties are defined by the pricing terms in the Osage regulations in effect from 1974 to 1990

A.

The applicable regulation at issue in this case, 25 C.F.R. § 226.11(a)(2), governs the manner in which the United States verified oil royalties paid by lessees to the Osage Tribe. The regulation states: "settlement shall be based on the actual selling price, or the highest posted or offered price by a major purchaser in the Kansas-Oklahoma area whichever is higher on the day of sale or removal." 25 C.F.R. 226.11(a)(2). a. "Actual selling price"

The phrase "actual selling price" is not defined in the regulations. Therefore, it must be

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given its contemporaneous and common meaning. An actual selling price is the price received by the lessee for the sale of its oil to a purchaser. RT 1220:25-1221:3, 1402:22-23. The regulations require that the actual selling price be used for determining the royalty owed from the lessee who actually received the selling price, but not for a lessee who did not receive that price. This is clear from the text of the regulation itself. To conclude otherwise, that is, to conclude that a lessee should base its royalty on the actual price paid to other lessees as Plaintiff has posited, would demand an interpretation of the regulatory language as requiring settlement to be based on "any actual selling price," as opposed to "the actual selling price." "The" is "[a]n article that particularizes the subject spoken of." BLACK'S LAW DICTIONARY 1324 (5th ed. 1981); see also Warner-Lambert Co. v. Apotex Corp., 316 F.3d 1348, 1356 (Fed. Cir. 2003) ("[I]t is a rule of law well established that the definite article `the' particularizes the subject which it precedes. It is a word of limitation as opposed to the indefinite or generalizing force of `a' or `an.'" (internal citation omitted)). Here, from the context of the regulation, it is plain that the word "the" limits "actual selling price" to the particular lessee receiving the actual price. The first sentence of the pricing provision ­ providing that the "[l]essee shall pay" the royalty ­ makes clear that the provision setting forth the basis for the royalty value relates to a singular lessee. 25 C.F.R. § 226.11(a)(1). The phrase "actual selling price" is followed in the regulations by a comma and an "or" and then by two "price offered" terms ­ "the highest posted or offered price. . . ." 25 C.F.R. § 226.11(a)(2). The use of punctuation and grammar play an important role in statutory and regulatory construction. See Demko v. United States, 44 Fed. Cl. 83, 87 (1999). Generally, the term "or" functions grammatically as a coordinating conjunction and joins two separate parts of a sentence. See id. at 88; see also Ruben v. Secretary of DHHS, 22 Cl. Ct. 264, 266 (1991). As a -5-

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disjunctive, the word "or" connects two parts of a sentence, but it also disconnects their meaning, so that the meaning in the second part excludes that in the first. Demko, 44 Fed. Cl. at 88-89. The text of 25 C.F.R. Part 226.11(a)(2) thus demonstrates that each lessee's actual sales price is to be considered separate and apart from the major purchaser's "highest posted or offered price" and that "major purchaser in the Kansas-Oklahoma area" does not modify "actual sales price."3 b. "Posted Price"

Although the phrase "posted price" is undefined in 25 C.F.R. Part 226, it is a term of art that should be interpreted according to its meaning in the oil industry. See United States v. Cuomo, 525 F.2d 1285, 1291 (5th Cir. 1976); see also Frey v. Amoco Production Co., 943 F.2d 578, 583 (5th Cir. 1991); Parties' Stip. of Fact ¶ 5 (Dkt. No. 220-1). A posted price has the following characteristics: it is (1) in writing; (2) publicly circulated; and (3) extended, generally, to all producers in a given field. See Dept. of Energy v. Osborn, 760 F.2d 282, 284 (Temp. Emer. Ct. App. 1984); Mountain Fuel Supply Co. v. Dept. of Energy, 656 F.2d 690, 692 (Temp. Emer. Ct. App. 1981); Grigsby v. Dept. of Energy, 585 F.2d 1069, 1078 (Temp. Emer. Ct. App. 1978); North Central Airlines, Inc. v. Continental Oil Co., 574 F.2d 582, 588 (D.C. Cir. 1978); 26 C.F.R. 150.4989-1 (1981) (Temporary Excise Tax Regulation); 38 Fed. Reg. 33,578 (Dec. 6, 1973) (codified at 6 C.F.R. Part 150) (definition adopted by the Federal Energy Administration). The most formal way in which posted prices are circulated publicly among sellers and buyers within a given field is by way of a monthly pricing bulletin. RT 865:18-861:19, 1370:9-18. Each bulletin announces the prices that the issuer (i.e., the oil company) will pay for particular

3

Moreover, if "major purchaser" was intended to modify the price actually received, the regulation would have stated that the value is to be determined on the "actual price paid" from the purchaser, rather than the "actual selling price" received by the lessee. -6-

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grades of crude oil set forth in the bulletin. RT 1430:20-1431:3; see also North Central Airlines, 574 F.2d at 588. Pricing bulletins usually come in the form of a chart. Typically, the charts are divided into columns, the left-hand column listing the various gravities,4 with the several columns along the top representing a type of crude oil, e.g.., Oklahoma Sweet, Oklahoma Sour, West Texas Intermediate, North Texas Intermediate. See DX423-1-2; see also North Central Airlines, 574 F.2d at 588. c. "Offered price"

The regulations do not contain a definition for the term "offered price." An undefined term in a statute or regulation is deemed to have its ordinarily understood meaning. See Perrin v. United States, 444 U.S. 37, 42 (1979); Demko 44 Fed. Cl. at 87; see also Wilshire Westwood Assocs. v. Atlantic Richfield Corp., 881 F.2d 801, 803-4 (9th Cir. 1989). In the context of 25 CFR Part 226, an "offered price" is the price presented to a producer by a willing buyer for a given quantity and quality of crude oil. See BLACK'S LAW DICTIONARY at 746 (6th ed. 1991); Restatement (Second) of Contracts, §§ 24, 52, 29 comment a (1981). It sets the basis for royalty only as to those lessees to whom the offer was extended. Okie Crude Co. v. Muskogee Area Director, BIA, 23 IBIA 174 (1993). In contrast to a "posted price," an "offered price" need not be made in writing or to all producers. See 26 C.F.R. § 150.4989-1 (1981) ("The requirement that the offer be in writing and publicly circulated eliminates oral offers and offers made only to specified producers."); Osborn, 760 F.2d at 284-85; Mountain Fuel, 656 F.2d at 693-94. If it were, it would be a "posted price," and the term "offered price" in the regulations would be rendered superfluous, which is a situation

4

Gravity is normally expressed in degrees on the American Petroleum Institute's ("API") scale and postings will usually include a deduction for oil that is less than 40 degree API. RT 995-96; Stip. Fact ¶ 4. -7-

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generally viewed with disfavor. See Wilshire Westwood Assoc., 881 F.2d at 804. Soon after the Osage regulations were amended in 1974 to include the "offered price" term, the Osage Agency construed the term "offered price" in a manner consistent with the foregoing definitions. For example, in 1976, the Agency notified purchasers of Osage oil that "Sun Oil Company, along with several other major oil purchasers, offered fifteen cents per barrel over their posting for `stripper oil' making the price being paid for `stripper oil,' $14.30 per barrel based on 40 degree gravity oil." DX2334-1. These offers were not in writing or broadly circulated, so they were not posted prices but, rather, were "offered prices." Id. Oil classified as "stripper" is oil from wells producing less than ten barrels per day; thus, any of the "majority" of oil producers on the Osage mineral estate that produced "stripper oil" could have received this offered price, and would have been required to pay royalty based on that available price if it was higher than the actual price they received. RT 1228:1-1230:11. This interpretation of "offered price," as applying to those lessees who could have taken advantage of the offer, was contemporaneous with the addition of the term "offered price" to the Osage regulations in 1974. As such, it should be granted deference. See Advanta USA, Inc. v. Chao, 350 F.3d 726, 728 (8th Cir. 2003); c.f. Linda Newman Construction Co. v. United States, 48 Fed.Cl. 231, 235 (2000) ("Contemporaneous statements construing a contract, made before the dispute arose, are entitled to great weight."). In summary, royalty payments to the Osage Tribe were based on the higher of either (1) the price the lessee actually received for its oil, or (2) the price(s) offered and available to the lessee from major purchasers located in the Kansas-Oklahoma area.

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2.

Plaintiff's proposed interpretation of 25 C.F.R. § 226.11 is contrary to both the plain meaning of the regulation and the best interest of the Osage Tribe a. Plaintiff's interpretation of "offered price" is contrary to the language of the regulations and is unworkable

Plaintiff contends that the Osage pricing regulations require the United States to consider any price that a major purchaser offered in the Kansas-Oklahoma area when computing the oil "floor" price for royalty payment purposes. See RT 107:13-24. Such a construction would require the phrase "in the Kansas-Oklahoma area" to modify "offered price" rather than the phrase "major purchaser." The construction would thus require that all offers in the Kansas-Oklahoma area by major purchasers be known to the purchasers, lessees, and the Osage Agency in order to apply properly the Osage regulations. The Court should reject such an unworkable construction.5 As the evidence has shown, it would have been impossible for the Osage Agency to obtain all of the prices that major purchasers offered in the Kansas-Oklahoma area. Companies simply would not have volunteered information on their offers. RT 1224:2-26. Further, there is no authority under which the Osage Agency could have compelled companies to produce such information. Plaintiff has identified no other direct source for information about offered prices in the Kansas-Oklahoma area. Instead, it suggests that prices major purchasers actually paid in the Kansas-Oklahoma area could have been used as a "proxy" for offered prices. RT 253, 1412:11-24. Plaintiff's proposal should be rejected as inconsistent with the regulation, which did not require the Osage Agency to use highest "actual prices" of major purchasers for determining royalty value. See Wilshire Westwood Assoc., 881 F.2d at 804.
5

In addition, Plaintiff's proposed "proxy" is contrary to the plain meaning of the term "offered price" referenced above. -9-

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In any event, each of Plaintiff's suggested methods for obtaining actual price information in the Kansas-Oklahoma area would have been unworkable. First, contrary to Plaintiff's suggestion (RT 107:13-24), the Osage Agency could not have obtained information regarding prices paid directly from major purchasers. RT 1412:25-1413:3, 108:1-16.6 Second, Plaintiff proposes that actual price information might have been obtained from other government agencies, such as the Minerals Management Service ("MMS"). RT 108:24-109. Again, Plaintiff provides this Court with no support for its proposal. Further, Plaintiff admits that, even if such agency information-sharing were possible, the price information would have been incomplete. See RT 109:2-3. Third, Plaintiff suggests that the Osage Agency might have obtained price information from state tax commissions. RT 109:13-16. This suggestion is unworkable. The state tax commission tracked prices on an average monthly, rather than daily, basis (RT 1222:1-6, 1411:18-19), and the Osage regulations require settlement to be based on the price "on the day of sale or removal." 25 C.F.R. 226.11(a)(2). Further, the Agency was entitled to obtain pricing information from state tax commissions only for Osage production, not all production in the Oklahoma-Kansas area. See RT 1413:4-13. Finally, the information was not available until several months after the lessees had paid their royalties (RT 1411:3-16), making the use of this data source impractical. Fourth, Plaintiff asserts that prices paid for the sale of crude oil at Cushing, Oklahoma might also serve as "proxy" for its "offered price" concept. See RT 109:21-110:7. Plaintiff's use
6

Aside from conjecture, Plaintiff offers no factual support for its supposition that major purchasers would have provided this type of information to the government, simply because the Government had asked. In response to the Court's question, "Why would they (the major purchasers) tell you?", Plaintiff's expert, Daniel Reineke, stated: "well, maybe they wouldn't tell you, I don't know. They should tell you, if you ask. I mean, they should tell you. But I think that at least an effort to ask would be appropriate." RT 108:1-8. -10-

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of "Cushing Prices" is problematic, however, because oil sold at Cushing is from locations other than Osage County, including Texas. RT 1409:12-1410:24. The so-called "Cushing Price" is artificially inflated due to inclusion of transportation and location adjustments, which prevents it from being truly representative of market price. RT 1409:12-1410:24. Instead of forcing unworkable proxies into the regulatory scheme, this Court should adopt the workable "plain language" interpretation of 25 C.F.R. section 226.11(a). The phrase "in the Kansas-Oklahoma area" should be read to modify the term "major purchaser," not "posted or offered price."7 Such an interpretation avoids the factual and legal "impossibility" problems that arise if the Osage Agency had to seek all offered and actual prices in the Kansas-Oklahoma area as discussed above.8 The applicable regulations do not require that offered or actual pricing data be gathered from the entire Kansas-Oklahoma area. Rather, Osage lessees must pay royalties based on the prices they actually received, or the highest posted or offered price available to them from a major purchaser in the Kansas-Oklahoma area. By definition, the relevant posted prices would have been

In its Motion to Dismiss, in Part, Plaintiff's Tranche One Claims filed June 14, 2005, pp. 1822 (Case No. 00-169, Dkt. No. 209), the United States suggested that the phrase "in the KansasOklahoma area" modified the posted and offered price terms. The United States now revises its position to reflect the additional information developed during the course of trial preparation and trial. The revised and more appropriate interpretation set forth herein resolves the impossibilities inherent in the alternative interpretation of the regulation, and takes into account the plain language and practical application of the price terms.
8

7

An interpretation whereby the phrase "in the Kansas-Oklahoma area" modifies "major purchaser," even though lessees are obligated to base royalties on prices paid or offered in Osage County, comports with the understanding that lessees should be obligated to pay royalties only on prices that they themselves could obtain. By looking to major purchasers in the broader area, the regulations ensured that prices on which royalties were to be based were those from purchasers with the resources to acquire the oil available from the Osage County lessees at the offered or posted prices. -11-

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available to all the lessees. Also, in certain situations, offered prices that did not constitute posted prices would have been available, as demonstrated in the 1976 letter related to the generally offered price for "stripper oil," discussed in Part II.A.1.c., supra. DX2334-1. b. Plaintiff's proposed interpretation of the pricing regulations is not in the Tribe's best interest and is contrary to the 1906 Act

Maintenance of production levels on the Osage mineral estate was an important aspect of the Government's duties. RT 1185:19-1186:6. Amendments to the 1906 Act expressly state that the regulations governing the leasing of Osage Reservation lands for oil and gas mining purposes should be drafted to secure "the highest percentage of ultimate recovery of both oil and gas." Pub. L. No. 75-711, 52 Stat. 1034, 1035 (1938) § 3, at DX2134-61. In fact, Congress requires the Osage Agency to offer not less than twenty-five thousand acres for oil and gas mining purposes during any one year. RT 1257:4-6; DX2134-61. Identifying the highest actual selling price and calling that price an "offered price," as Plaintiff's interpretation requires, would have resulted in some lessees paying royalty based upon a price that they could not have received themselves.9 This would have had a chilling effect on the Osage Agency's ability to promote continued production of the mineral estate and could have led to the decline of royalty proceeds. RT 1248:11-20, 1263:7-20, 1271:3-1273:11. Fewer lessees would have opted to remain in business, and, further, they would have suspended drilling and plugged marginally producing wells.10 RT 1262:18-1263:20, 1271:24-1272:2, 1272:20-1273:6.

This situation stands in stark contrast to that involving the offer by major purchasers for "stripper oil" discussed supra Argument Part II.A.1.c. There, the offered price for "stripper oil" was made by a major purchaser and available to all producers selling "stripper oil" in Osage County. DX2334-1. Thus, the offer was for a price that Osage producers could receive.
10

9

A marginally producing well produces less than ten barrels of oil per day. RT 1186:7-13. A majority of the wells in Osage County produced substantially less than ten barrels per day. Id. -12-

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Additionally, the Agency would have had difficulty attracting new business to Osage County.11 RT 1251:12-20. For these reasons, Plaintiff's proposed interpretation is contrary to the intent of the 1906 Act and its amendments. 4. The Ordinary Meaning of "Posted Price" Supports the Agency's Application of Gravity Adjustments

The use of gravity adjustments is implicit in the ordinary meaning of the term "posted price." By its very nature, a posted price bulletin is an instrument that communicates to producers in a given field the pricing information that an oil company will pay for particular grades of crude oil. See RT 1430:20-1431:3; see also North Central Airlines, 574 F.2d at 588. The grade or value of oil is directly related to its specific gravity. RT 1303:1-5. Thus, the Agency, in construing "posted price" in the regulations, properly allowed price adjustments to reflect degrees of gravity.12

The evidence further demonstrated that there was significant concern expressed by the Osage Tribal Council about loss of income that would result if lessees were forced to plug marginal wells because of being required to pay royalty on a price that they could not obtain. RT 1251:12-20, 1267:7-1273:11; DX2381-2, DX858-1. This concern was echoed in 1987 in a proposed amendment to 25 C.F.R. 226 suggesting a change in the regulation from the "KansasOklahoma area" to "Osage County" to "alleviate the necessity for many of the oil lessees to pay the Osage Tribe more for its royalty than paid by crude oil purchasers. . . and curtail the plugging of marginal wells." 52 Fed. Reg. 38608 (October 16, 1987), at DX2134-230. Moreover, requiring royalty payments to be based on the highest posted price for 40 degree API oil, regardless of the gravity-type of oil sold by the lessee, would have resulted in lessees (with less than 40 degree API oil) paying royalties on higher prices than they could receive from its sale. RT 1312:21-1313:20. As discussed above, requiring lessees to pay royalties based upon unattainable prices would have led to diminished royalty income in the long-term. -1312

11

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B.

Federal Price Controls Set the Maximum Price for Purposes of Calculating Royalties in the First Three Tranche One Months13 During the first three Tranche One months (January 1976, May 1979, and November 1980),

prices for oil in the United States were subject to price and allocation controls promulgated under the Emergency Petroleum Allocation Act ("EPAA") and subsequent amendments. EPAA, Pub. L. No. 93-159, 87 Stat. 628 (1973) (codified as amended at 15 U.S.C. § 751 et seq. (1976 and Supp. 1985)); Def.'s Pretrial Mem. at 75-79 of 127. The price control system applied to royalty interest owners, including Plaintiff. Pursuant to the EPAA, the Federal Energy Administration ("FEA") promulgated the mandatory petroleum price regulations ("MPPR"). 10 C.F.R. Part 212.14 These regulations provided a price control system for domestic crude oil, whereby sales of "old" oil (later termed "low-tier" oil) and "new" oil (later termed "upper-tier" oil) were subject to established ceiling prices. 10 C.F.R. §§ 212.72, 212.74, 212.76 (1976); 10 C.F.R. §§ 212.72(c)(2), 212.73, 212.74 (1978). Unregulated or "exempt" oil, such as "stripper oil," was not subject to the federal price controls, however, and could be sold at market prices. 10 C.F.R. § 212.73(c) (1976), § 212.54 (1978). 1. Application of MPPR to royalty interest owners

While the MPPR did not specifically indicate whether the price controls applied to royalty

Rather than reaching the substance of this issue, the Court should conclude that Plaintiff's challenge to the applicability of the price controls of the EPAA and its implementing regulations is barred by the statute of limitations. 28 U.S.C. § 2501. Plaintiff's claim falls outside of the application of the Appropriations Acts because an accounting is not necessary to show whether there had been a loss due to the application of price controls.
14

13

The pricing provisions adopted language that had been promulgated by the Cost of Living Council pursuant to the Economic Stabilization Act, 12 U.S.C. § 1904.

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interest owners, the agency charged with implementing the regulations applied them to such owners, as demonstrated in its consideration of the availability of exception relief to royalty interest owners. As part of the regulatory scheme under the EPAA, an affected entity could seek an exception from the price controls "as may be necessary to prevent special hardship, inequity, or unfair distribution of burdens." Pub. L. No. 93-275, § 7(i)(1)(D), 88 Stat. 102; see 10 C.F.R. Part 205 (1981). Specifically, an affected entity, such as a producer, had to show that: "(i) the firm ha[d] little incentive to continue production if it is required to sell its crude oil at controlled prices, (ii) the nation would be deprived of the crude oil unless the firm continue[d] its recovery operations, and (iii) the wells involved [we]re already part of a continuing extraction operation." M.J. Mitchell, 3 FEA ¶ 83,146, p. 83,553 (case No. FEA-2199, April 2, 1976) (citations omitted) (Attachment 1); see also Osro Cobb, 11 F.E.R.C. ¶ 62,240, 1980 FERC Lexis 37 (June 24, 1980); 10 C.F.R. § 205.55 (1981). Decisions and orders of the FEA consistently concluded that exception relief granted to producers did not extend to royalty interest owners. For example, in M.J. Mitchell, supra, which was the subject of the October 21, 1977 Memorandum of Law of Leo M. Krulitz, then-Solicitor of Interior ("Krulitz Memorandum") (PX682-2), the FEA granted an exception to the producer but did not extend the relief to the royalty interest owner, the United States Geological Survey ("USGS"). In denying the USGS appeal of the decision, the FEA noted that exception relief had not been granted to the royalty interest owner, because the USGS had not established that it was experiencing any hardship or inequity entitling it to such relief and because granting such relief would have reduced the producer's incentive to continue production through decreasing the producer's return. United States Geological Survey, 5 FEA ¶ 80,537, at p. 80,675 (Case No. FEA0850, January 26, 1977) (Attachment 2); see also Osro Cobb, supra. -15-

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The FEA also rejected the USGS's assertion that the FEA's decision allowing only the producer to obtain exception relief prohibited the USGS from collecting royalties on the producer's gross proceeds15 or value of production, as required by the USGS regulations and the Mineral Leasing Act, 30 U.S.C. § 226, and its implementing regulations, 30 C.F.R. Part 221. 5 FEA at p. 80,676. In fact, the FEA stated that USGS's regulations could be "superseded by an FEA

determination that the Federal interest will be furthered by requiring the royalty payment to the USGS to be limited to the pricing provisions of the EPAA, while the working interest share [i.e., producer's interest] is sold at higher price levels." Id. at pp. 80,676-77.16 The dispute about the availability of exception relief to royalty interest owners was resolved through the addition of new section 212.74(e) to the MPPR. 45 Fed. Reg. 9526, 9534 (February 12, 1980); see also S. Rep. No. 97-512, at 56-57 (1982), cited in Wesreco v. Dept. of Interior, 618 F. Supp. 562, 573 n.18 (D.Ct. Utah 1985). In the preamble to the final rule, the Department of Energy (the FEA successor) stated that [t]he Office of Hearings and Appeals of the Department of Energy has generally

15

Gross proceeds were "the total monies and other consideration accruing to an oil . . . lessee for the disposition of [oil]." 30 C.F.R. 206.151 (1989). Interior continued to object to the FEA's interpretation of the EPAA and the MPPR to the extent that it prevented the USGS from obtaining royalties based on the gross proceeds, or the value, received by lessees on federal leases. This objection was the subject of the Krulitz Memorandum (PX682). The Court need not resolve this inter-agency dispute. Tranche One does not involve a situation where the application of the FEA price control regulations prevented Interior from realizing royalty on the gross proceeds of the sale of Osage oil. Rather, Plaintiff here seeks to have royalty based on prices that far exceeded a producer's gross proceeds and were unavailable to the producers. Thus, the underlying dispute in M.J. Mitchell and the Krulitz Memorandum is inapposite to Tranche One. In any event, the FEA was given broad latitude to establish a regulatory scheme to achieve the objectives of the EPAA. See Exxon Corp. v. DOE, 802 F.2d 1400, 1403 (Temp. Emer. Ct. App. 1986); Marathon Oil Co. v. FEA, 547 F.2d 1140, 1145 (Temp. Emer. Ct. App. 1976); Air Transp. Ass'n v. FEA, 382 F. Supp. 437, 447 (D.D.C. 1974). -1616

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permitted working interest owners to sell a higher percentage of their production at upper tier or market clearing prices than the regulations would otherwise have permitted where such exception relief has been found necessary to keep the property in production. This relief has not been extended to the owners of royalty interests on the basis that they have not incurred increased costs that impair economic incentive to maintain production. 45 Fed. Reg. at 9528. The amendment explicitly permitted non-operating interest owners, including royalty interest owners, to obtain exception relief. 10 C.F.R. § 212.74(e). The FEA decisions and the subsequent amendment to the MPPR plainly demonstrate that royalty interest owners, including the United States, were subject to price controls of the EPAA and its implementing regulations. See also Husky Oil Company, 11 F.E.R.C. ¶ 61,218, 1980 FERC Lexis 33 (May 30, 1980).17 Moreover, contrary to Plaintiff's assertion (RT 227:4-14), the availability of exception relief under the EPAA does not support Plaintiff's position that royalties on Osage oil were not subject to the ceiling prices set by the EPAA and MPPR. 2. The use of unregulated prices as the basis for the calculation of Osage royalties was consistent with the 1906 Act and its implementing regulations

There is no authority in the 1906 Act or the Osage regulations to support Plaintiff's proposition that, as a royalty interest owner, it was not subject to the MPPR. Nothing in the Osage Act permitted Interior to ignore ceiling prices under the EPAA and MPPR for purposes of determining royalties due from Osage lessees. Nor did the Osage Act set forth a minimum value

For further support for the proposition that royalty interests were subject to price controls, see also R.L. Griffin v. United States, 537 F.2d 1130, 1139-40 (Temp. Emer. Ct. App. 1976) (finding that royalty owners whose oil was subject to ceiling prices have not had their property taken such that they are entitled to compensation from the United States); Exxon Corp. v. Jarvis Christian Coll., No. TY-80-432-CA, 1991 WL 771247 *1 (E.D. Tex. Feb. 15, 1991) (finding that producer that was found liable for overcharges from sale of oil that it improperly classified as "new" rather than "old" oil was entitled to restitution of the overcharges received by royalty interest owners on the misclassified oil); RT 1314:9-1316:20, 1415:12-1418:20; JX1 Dial Depo. at 146-47. -17-

17

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basis for purpose of determining royalties. Thus, requiring royalties to be based on prices set forth in the MPPR would not conflict with the Osage Act. In fact, ignoring ceiling prices in calculating royalties would have been contrary to the 1906 Act. Allowing royalties for regulated low-tier oil to be based on unregulated "stripper oil" prices, as Plaintiff asserts should have occurred, would have required lessees to pay royalties based upon a purchase price that they were precluded from charging. This would have resulted in Tranche One lessees paying a royalty rate far in excess of the 1/6 or 1/8 rate called for in their leases. For example, using the unregulated price as the basis for royalty payments on oil subject to the low-tier maximum price would have resulted in an effective royalty rate of 88 percent for the production on the Osage Hominy lease in the 1980 Tranche One month. RT 261:18-264:7. Had Interior required lessees to pay such a high percentage of their oil revenue as royalties based on prices they could not receive, the lessees' incentive to continue their production operations or to acquire Osage leases would have been reduced or removed. See RT 1262:15-1263:20, 1317:7-1318:13.

Accordingly, such a requirement would have conflicted with the amendments to the Osage Act, requiring the Osage Tribe and the BIA to make the mineral estate productive through annual leasing of a certain minimum acreage. E.g., Pub. L. No. 75-711, 52 Stat. at 1035 (1938) § 3, at DX2134-61. In short, to give effect to the purposes of both the Osage Act and the EPAA required royalties to be based on the prices established in the MPPR. See Def.'s Pretrial Mem. at 83-85 of 127 (Plaintiff's construction of Osage Act would undermine purposes of the EPAA); United States v. Borden, 308 U.S. 188, 198 (1939). Further support for the applicability of regulated prices to Osage royalty determinations is found in the Osage regulations, which provide that "[l]essee shall pay or cause to be paid to the Superintendent, as royalty, the sum of not less than 16 2/3 percent of the gross proceeds from sales -18-

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. . . ." 25 C.F.R. § 226.11(a) (emphasis added). Gross proceeds is the total value or consideration that a lessee receives for the sale of its oil. See HOWARD WILLIAMS & CHARLES MEYERS, OIL AND GAS TERMS at 263-64 (4th ed. 1976) (defining "gross value."); 30 C.F.R. 206.151 (1989). Requiring royalties to be based on an unregulated price for oil subject to a regulated price (e.g., requiring payment on the basis of prices for "stripper oil" for "old" or "low-tier" oil) would require payment on far more than the gross proceeds received by the lessee. In contrast, basing royalties on the legal prices that the lessees could have charged would be consistent with basing royalty on gross proceeds. C. The Osage Agency Fulfilled its Duty to Verify That Proper Royalties Were Paid on the Tranche One Leases The evidence demonstrates that the Osage Agency collected the correct royalties for each Tranche One Lease in each Tranche One month. It followed procedures designed to ensure that lessees paid royalties based on the correct volume, at the correct royalty rate, and for the appropriate royalty price. The following explains these procedures for each element of the royalty formula. It next explains the verification procedures that the Agency implemented at the time of royalty payment. Finally, it demonstrates that the Agency collected the correct royalty amounts. 1. Procedures Implemented by the Agency to Ensure Payment on the Volumes Produced from Osage Leases

In the first instance, volumes were measured and reported by the purchasers and lessees. When a purchaser picked up oil from storage tanks at the lease, it would measure the volume purchased through a process called gauging. RT 1049:1-21. A run ticket prepared by the

purchaser's gauger provided the volume, temperature, and "quality"18 of oil purchased from a tank.
18

The gauger determined the API gravity and the basic sediment and water ("BS&W") content of the oil. RT 998:1-18. -19-

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RT 997:1-998:18, 1133:22-1134:1. A gauger would measure the level of oil in a tank before and after a withdrawal and the difference between the two measurements indicated the volume of oil sold. RT 997:3-7. From these measurements, the purchaser's gauger determined the volume of API quality barrels of oil in any given tank. The measurements were subsequently entered on a run ticket (also referred to as a gauge ticket), typically indicating information such as the date and time of the sale, the top gauge, the bottom gauge, temperature in the tank, gravity of the oil, the name of the lessee, the number and location of the lease, and the number and size of the oil tank. RT 1135:18-25. A copy of the run ticket was distributed to the purchaser, the lessee, and the Osage Agency. RT 999:11-16. In other circumstances, the volume of crude oil sold was measured by a Lease Automated Custody Transfer ("LACT") unit. RT 1007:17-1008:6, 1134:19-25.19 A LACT unit is used to measure volume (flow) through a meter and quality of oil through sampling. RT 1007:19-22, 1134:17. LACT units were typically calibrated for accuracy by an independent third party, such as Meter Check, on a periodic basis. RT 1008:7-15, 1135:1-8. The Osage Agency actively monitored the volume determination process of the purchasers and lessees. In the 1983-1989 time period, there were generally two gaugers and six field inspectors. RT 999:24-1000:5. Starting in the late 1970's, Agency gaugers conducted random back-gauging (also referred to as "spot-gauging"), see RT 1162:4-6, which consisted of measuring the following prior to the sale of oil: height of the oil ("top gauge"), the gravity, the temperature of the oil, and the BS&W,20 and then measuring the height of the oil after the sale of oil ("bottom

19

LACT units were used at the Osage Hominy and North Burbank units. RT 1008:16-24.

20

Gaugers took a sample of oil to determine the BS&W, which is the volume of a sample that is not oil. RT 998:1-999:4. If the sample of oil contained more than one percent BS&W, then the -20-

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gauge"). RT 1000:16-1001:1, 1005:13-1006:7, 1125:25-1126:22, 1160; DX37-10. On a monthly basis, gaugers typically recorded these measurements for two to three percent of wells on the Osage mineral estate (RT 1156:15-1157:2), and typically did not find discrepancies between the Agency's volume measurements and the purchaser's volume measurements. RT 1157:12-1158:6. The Agency randomly rotated purchasers in connection with its spot-checking efforts, and this process was well-known among all the purchasers. RT 1160:1-24. Based on their measurements, the Osage Agency gaugers would record the information on an Agency run ticket and compare their results to the oil purchaser's statement (RT 1005:111006:7, 1126:6-13), and the oil purchaser's run ticket (RT 1136:14-17). See also RT 1147-55; DX982-1-3.21 In the event of a discrepancy (greater than a barrel), the gaugers would contact the purchasing company to resolve the disagreement. RT 1006:10-1007:10. If the purchasing company could not provide a satisfactory explanation for the discrepancy, then the lessee was obligated to pay royalty on the difference in the amount removed from the lease. RT 1126:14-17; DX37-10.22 The random nature of the Osage Agency's spot-checking process encouraged accurate reporting by purchaser's gaugers. Gaugers who failed to meet the Agency's exacting standards would not be permitted to continue conducting business in Osage County. RT 1158:20-1159:7.

oil was no longer considered of merchantable quality. Id.
21

Gaugers also checked tanks to ensure that they had proper locking and sealing devices. RT 1126; DX37-10. The Agency field inspectors also conducted periodic random inspections and checked for, among other things, production, maintenance, and landowner complaints. RT 1001:5-20, 1004:6-7. Although field inspectors could not do full gauging (height, temperature, and BS&W), they could record basic information on the top gauge and they would notify gaugers of full tanks for possible measurement. RT 1003:15-1004:11; DX2393-6. -2122

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The efficacy of the procedure is demonstrated by the fact that the Agency found few discrepancies. RT 1157:12-1158:6. In short, the Agency's processes to ensure recording of proper volumes were reasonable. The Osage Agency also took steps to prevent oil theft. In order to transport crude oil from the Osage mineral estate, the Agency required that the transportation company register with the Agency, use trip tickets, and appropriately mark vehicles with the name of the transporting company. RT 1182; DX2392-5, 0007. If there was any indication of oil theft, the lease was immediately sealed off, and the Federal Bureau of Investigation and the Osage County Sheriff's Office were contacted. RT 1129:21-1130:5, 1349:7-26; DX37-7. Most reports of alleged theft of oil turned out instead to be the result of poor communication between pumpers, truckers, and the Agency. RT 1130:6-10. In short, Plaintiff failed to present any probative evidence that any oil from Tranche One Leases during Tranche One Months was indeed stolen. 2. Royalty Rates

The royalty rate, which is in the leases, was determined by either the United States or, after 1950, by the Tribe. 1906 Act § 3; Pub. L. No. 548, 64 Stat. 215 (1950) at DX2134-80. The rate is either 1/8 (12 ½ percent) or 1/6 (16 2/3 percent) of the value of production, as defined in each lease. RT 863:16-864:11. Particular Tranche One leases, such as North Burbank, provide for royalty rate reductions after lessees meet certain production thresholds. RT 983:7-12, 984:14-19. All of the production thresholds for the Tranche One leases were reached prior to the Tranche One period. RT 985:8-14. 3. Determination of royalty prices

To determine the prices on which a lessee should pay, the Osage Agency identified the major purchasers in the Kansas-Oklahoma area and the highest posted prices offered by them. -22-

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During certain time periods when offers may have exceeded the price postings, the Agency also obtained the highest prices offered to Osage lessees by the major purchasers. a. Highest posted price of major purchasers

During the Tranche One period, the Osage Agency would obtain the most recent available listings of crude oil purchasers from the Kansas and Oklahoma Corporation Commissions, which indicated the amount of oil each purchaser bought in that state (see RT 1013:10-15, 1019:161020:11, 1027:21-25, 1194:13-19, 1436:18-19, 1459:7-13, 1474:13-17; DX886). The lists would be used to rank each purchaser in descending order according to the total amount of oil they purchased in both states during the subject month, both as an absolute volume and as a percentage of the volume purchased in the Kansas and Oklahoma area. RT 1016:8-1019:3, 1207:24-1208:3, 1456; DX886-1, DX2675-60*.23 The Agency also calculated the cumulative total percent of volume purchased in order to determine the major (top 80%) purchasers. RT 1016:8-1019:3, see also RT 1436:17-1437:7, 1456:3-1457:10; DX 2345-1-2*, DX2675-43-44, DX2675-60*. The Osage Agency simultaneously obtained crude oil posted prices (also known as pricing bulletins) from companies that published crude oil price bulletins (postings) for the subject month. RT 1436:6-12, 1462-64, 1477-78; DX2675-46, 0063. These postings delineated different prices for different qualities and types of crude oil. RT 865:18-866:10. The postings typically provided a price for 40 degree API crude oil and a gravity schedule showing how much the company would reduce the price for oil that was lower than 40 degree API. See RT 865:21-24. Based on this data, the Agency calculated the highest posted price paid by major purchasers at all degrees (or portions

23

Pursuant to the stipulation of the parties regarding duplicate exhibits, filed on May 4, 2006, Defendant has identified with an asterisk any exhibits for which there is a duplicate. The Court should refer to the attachment to the stipulation for a list of the duplicate exhibit numbers. -23-

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thereof) of API gravity oil for each day or periods of days during the production month. RT 1204, 1215:24-1216:19, 1439:14-1441:5. During the first three Tranche One months (January 1976, May 1979, and November 1980), prices for oil were subject to price and allocation controls. See supra at Argument Part II.B. During this era, companies would submit to the Osage Agency pricing bulletins, which delineated different posted prices for categories of regulated oil, such as upper and lower tier oil. RT 869:7-7, 871:5-872:2; DX423-1. The Agency would then consider and select the highest posted prices for the categories of oil. RT 868:21-869:1, 871:13-19. In determining the highest posted price, the Agency essentially used the maximum price that could be legally obtained for each category of oil. RT 1316-17. Fur