On September 13, 2013, the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) held that the Department of Interior (“Interior”) breached its 2006 precedent agreement (“Precedent Agreement”) with Rockies Express Pipeline LLC (“Rockies Express”) after the Interior refused to sign a related transportation agreement with Rockies Express.  The case involved a series of contracts between Rockies Express and a unit of the Interior – Minerals Management Service – that included Royalty-in-Kind (“RIK”) provisions, all of which allowed the Interior to ship natural gas that Rockies Express extracted from nearby federal land. The Federal Circuit also reversed a prior decision limiting the Interior’s liability for damages under the Precedent Agreement, and remanded the case to the Civilian Board of Contract Appeals (“Board”) to calculate such damages.

In 2005, Rockies Express began planning to build a pipeline from Wyoming to Eastern Ohio.  The planned pipeline would be built in two segments: Rockies Express West and Rockies Express East.  Before construction on the projects began, Rockies Express and the Interior entered into the Precedent Agreement whereby the Interior agreed to pay reservation charges for at least ten years.  Additionally, the Interior would receive gas Rockies Express extracted from federal land as a RIK.  Notably, the Precedent Agreement stated that the 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 . . . .”  Meanwhile, Rockies Express had the right to terminate the agreement without liability by giving five days’ notice after a breach by the Interior.  The Precedent Agreement also required the Interior to enter into separate Firm Transportation Service Agreements (“FTSAs”) for both Rockies Express West and East.

In April of 2007, the Interior executed an FTSA for Rockies Express West and began shipping gas on the pipeline.  In May 2008, the Interior refused to sign an FTSA for Rockies Express East because it did not include certain Federal Acquisition Regulations (“FARs”) that the Interior argued were necessary.  In December 2008, Rockies Express terminated the Precedent Agreement, arguing that the Interior committed a material breach by failing to sign the FTSA.  In March of 2009, the Interior stopped shipping gas on Rockies Express West.  Additionally, when Rockies Express East commenced interim service, the Interior refused to ship gas on the pipeline because the parties did not have an effective FTSA in place.  Eventually, Rockies Express appealed an initial decision from the Interior’s contracting officer with the Board, which held that the Interior did materially breach the Precedent Agreement.  However, the Board determined that Rockies Express was entitled only to damages that had accrued up until the Interior announced the phasing out of its RIK program, which occurred in December 2009.  Rockies Express appealed the amount of damages to the Federal Circuit, and the Interior cross-appealed its liability under the Precedent Agreement.

In its decision, the Federal Circuit held that the Precedent Agreement was a legally binding procurement agreement.  In doing so, the Federal Circuit ruled that the ten-year term in the Precedent Agreement was legal because the RIK provisions from the Energy Policy Act of 2005 override other procurement regulations, and that the Interior failed to show that the Rockies Express East FTSA required the Federal Acquisition Regulations.  The Federal Circuit thus held that Interior breached the Precedent Agreement upon refusing to execute the Rockies East FTSA.  The Federal Circuit also held that Rockies Express did not breach the Precedent Agreement by failing to provide five days’ notice before terminating because that particular notice requirement governed Rockies Express’ liability under such a scenario, not its ability to terminate the Precedent Agreement in general.

Finally, the Federal Circuit reasoned that Interior was liable for damages throughout the ten-year reservation term.  Specifically, the Federal Circuit stated that although the Interior could terminate the Precedent Agreement when required by a change in federal policy, the Interior’s announcement that it was phasing out its RIK included an announcement that it would honor all existing RIK contracts.  Accordingly, the Federal Circuit remanded the case to the Board to determine whether Rockies Express was entitled to the full contract price of $173 million or whether the Board should deduct costs avoided.

A copy of the opinion is available here.