Legality Under Anti-Lottery Laws of Amendments to Simultaneous Oil and Gas Leasing Procedures

Legality Under Anti-Lottery Laws of Amendments to

Simultaneous Oil and Gas Leasing Procedures

The amendment of the Simultaneous Oil and Gas (SOG) Leasing Procedures to clarify

the discretion of the Secretary o f the Interior to decline to award leases to applicants

whose names are drawn under the SOG procedures, provides some additional support

for the conclusion in the April 7, 1980, O LC memorandum that the SOG program is

not a prohibited lottery within the scope of 18 U.S.C. §§ 1302 and 1304.

Serious legal difficulties would arise if the SOG regulations were amended to establish a

multiple filing system which would give preference to those willing and able to pay the

most for lease opportunities, because of the statutory requirement that oil and gas leases

be awarded not to the highest bidder but to the first qualified person making applica­

tion to hold a lease. Moreover, insofar as a multiple Tiling system would tax lease

applicants by making their chances depend on the size o f their payments, and poten­

tially enrich the government, it might be considered a violation of the anti-lottery laws.

In the absence of a specific statutory limitation on the amount which may be charged

each applicant for a lease, the Secretary is authorized to increase the present fee to a

level that more accurately reflects the actual cost of administering the system.

June 8, 1981

MEMORANDUM OPINION FOR THE DEPUTY SOLICITOR,

DEPARTM ENT OF THE INTERIOR

You have requested the views of this Office on two legal questions

that involve the Simultaneous Oil and Gas (SOG) Leasing Procedures.

Both of these questions were prompted in part by a memorandum

issued by this Office on April 7, 1980, Applicability o f Anti-Lottery Laws

to Simultaneous O il and Gas Leasing Procedures, 4 Op. O.L.C. 557

(1980). In that memorandum we expressed the view that the random

lease allocation system established by these procedures is not a prohib­

ited “lottery” within the meaning of 18 U.S.C. §§ 1302 and 1304. Those

statutes are discussed in detail in that memorandum.

Your first question concerns a recent change in the SOG regulations.

Although it has always been the law that the Secretary of the Interior

has discretion to decline to award leases to applicants whose names are

drawn under the SOG procedures, some portions of the old regulations

did not expressly recognize that discretion. See, e.g., 43 C.F.R.

§ 3112.4-1 (1979) (a lease “will be issued to the first drawee qualified to

receive a lease”). The regulations have now been amended to establish

an offer and acceptance procedure that is more clearly in harmony with

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the Secretary’s discretionary power.1 You ask whether this change in

the regulation alters our previous conclusion that the SOG program

falls within the usual legal definition of a lottery 2 but is not a prohib­

ited lottery within the meaning of §§ 1302 and 1304.

In our previous memorandum we took note of the argument that the

Secretary’s residual discretion distinguishes the SOG program from

some kinds of lotteries. See 4 Op. O.L.C. at 561. We concluded, how­

ever, that the existence of discretion in the Secretary does not in itself

make a decisive legal difference in the interpretation of the criminal

statutes. The purpose of the SOG procedures is to “manage the crowd”

while implementing the Secretary’s responsibility to award leases to the

first qualified persons making application. The system operates by allot­

ting things of value (oil and gas leases) among multiple qualified appli­

cants on the basis of chance. That is the effect of the procedures

whenever the Secretary, in his discretion, awards a lease to a randomly

selected applicant. Whenever that occurs, the SOG procedures so

clearly resemble a “lottery” that there would be a substantial question

concerning their legality if Congress had intended in the relevant crimi­

nal statutes to suppress lotteries of every kind. As you know, we

concluded in our previous memorandum that Congress did not intend

to suppress certain “lotteries” employed by officers of the United States

in the due administration of their statutory powers, if such lotteries are

not designed to enrich the “promoters.”

The change in the old regulation to reflect more clearly the scope of

the Secretary’s discretion does not affect our previous analysis or the

conclusion articulated in the April 7, 1980, opinion. If anything, the

clarification of the regulation with respect to the Secretary’s discretion

provides a small measure of additional support for our conclusion that

the SOG program, in its present form, is a reasonable attempt by the

Secretary to carry out a function assigned to him by statute and is not

therefore a prohibited lottery within the scope of §§ 1302 and 1304.

Your second question concerns a proposal that has been made for

further modification of the SOG procedures. Under the present system,

each lease applicant is permitted, for a nominal fee, to file a single

application for a given lease; and all qualified applicants have an equal

chance of being selected under the random selection process. It has

been suggested that this system could be changed to permit applicants

to make an unlimited number of applications. The application fee could

remain the same ($10 for each application), or it could be raised. In

either case, the amended system would permit each applicant to pur­

chase as many chances for a lease as he desired, while requiring him to

1T he new regulations are set o u t in 45 Fed. Reg. 35,164 (M ay 1980). In general, they provide that

an applicant whose name is draw n under the SO G procedures may execute and tender a lease

agreem ent, together with a year’s rent, which the Secretary may then accept or reject in his

discretion.

2 See F C C v. American Broadcasting Co., 347 U.S. 284 (1954).

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pay proportionately for that privilege. Thus, if an applicant wished to

purchase 1,000 chances, he would pay the Department $10,000, assum­

ing the application fee remained $10; he would pay $10,000 for 500

chances if the fee were increased to $20 per application.

You note that in our previous memorandum we attributed some

significance to the fact that the present SOG “lottery” does not enrich

federal coffers and does not encourage “gambling” by permitting appli­

cants to purchase more than one chance for a lease. In light of that

position, you ask whether we would take a different view of the

“lottery” issue if the SOG regulations were amended to permit multiple

filings either at the present $10 fee or at an increased fee. You also ask

whether our views would be altered if the present single filing system

were retained but the application fee were increased to generate greater

revenues for the government. We will address those questions in turn.

1. Multiple filing. We have carefully reviewed with appropriate offi­

cials within your Department the policy reasons behind your consider­

ation of a multiple filing system. We understand that the SOG program

is not entirely satisfactory from a policy standpoint. As presently ad­

ministered, it is inefficient economically, for it does not allocate leases

to the applicants who are most qualified to explore for oil and gas. It

has produced a private assignment market in which leases obtained by

applicants who have no intention of exploring for oil or gas are sold to

bona fide exploration companies for impressive profits. It encourages

fraud by creating an economic incentive for violation of the single

application rule. The suggestion has been made that these problems

could be ameliorated, or perhaps even cured, if applicants were permit­

ted to register the strength of their desires for a given lease by purchas­

ing multiple chances at an aggregate price that would approximate the

“true” value of the exploration opportunity represented by the lease.

We do not question the merit of the policy argument, but we think

that serious legal difficulties would arise if the SOG program were

amended to establish a multiple filing system. We could not recommend

that such a change be made without further statutory authorization.

The primary problem is that the change would make it more difficult

to argue that the SOG system is an otherwise lawful and reasonable

means of carrying forward the underlying statutory mandate—the re­

quirement that the Secretary award these leases, not to the highest

bidders, but to the persons “first making application” who are “quali­

fied to hold a lease.” See 30 U.S.C. § 226(c). The random selection

process was sustained in Thor-Westcliffe Development, Inc. v. Udall, 314

F.2d 257 (D.C. Cir. 1963), as a reasonable means of “managing the

crowd” while complying with that mandate; but if the system were

changed to authorize multiple filings at prices that would depend on

the number of filings made by each applicant, the Secretary would be

“managing the crowd” by giving an advantage to those applicants who

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are willing and able to pay the most for lease opportunities. We think it

would be difficult to reconcile that preference with the legislative

intention that appears on the face of the leasing statute. Among other­

wise qualified applicants,3 the willingness of one applicant to pay more

than the others for a chance at a lease may be some indication of the

relative strength of his desire to exploit the exploration opportunity; it

may also be nothing more than an indication of his willingness to risk

more money to obtain a lease that can be sold on the assignment

market. In any case, there is no suggestion in the statute that an

applicant’s willingness to pay more should entitle him to priority over

the other qualified applicants, all o f whom seek a place in line.4 Con­

gress has mandated that the lease should be awarded not to the person

who is willing to pay the most, but to the person “first making applica­

tion.” In complying with that mandate the Department has long taken

the position that all applicants should be given an “equal chance” for a

lease. The single application rule was adopted for that very reason.

That interpretation of the statute has been approved by the courts, see

M cK ay v. Wahlenmaier, 226 F.2d 35 (D.C. Cir. 1955); and it has been

tacitly accepted by Congress, a fact noted in our previous memoran­

dum.

Without further legislation, the question of authorization is made

more problematic by the statutory prohibition against “lotteries.” We

must construe the Acts of Congress harmoniously where such a con­

struction is possible. Implied amendments or repeals are disfavored, and

that principle is relevant here. It is one thing to conclude, as the court

concluded in Thor-Westcliffe Development, Inc. v. Udall, supra, that

Congress has impliedly authorized the Secretary to pick randomly

among a crowd of applicants when he has no more effective means of

determining who is “first” while maintaining order in the queue; but it

is quite another to conclude that Congress has impliedly authorized a

system to multiple filings that would bear not only a formal, but also a

substantive resemblance to devices that Congress has condemned in

other legislation. Through the criminal statutes Congress has sought to

suppress lotteries designed to tax the public and to enrich the “promot­

ers.” A multiple filing system would tax lease applicants by making

their chances depend on the size of their payments; and it could enrich

the government, depending on the actual cost of administrative system

3T he statute suggests that virtually any citizen o f the United States is “qualified” to hold a lease,

subject to certain statutory ceilings on aggregate lease holdings. See 30 U.S.C. §§ 181 and 184. The

relevant regulations reflect that interpretation of the statute. See 43 C.F.R. § 3102 1 et seq.

4T he legislative history of th e leasing statute is consistent with the view that the size of an

applicant's payments should not entitle him to priority T he lease system replaced the old system of

prospecting permits for land containing no known deposits o f oil and gas; yet in replacing the old

system. Congress ultimately declined to subject the new prospecting leases to competitive bidding.

Congress thereby preserved the central feature o f the prospecting system—the preference given to the

“ first” claimant, whatever his financial resources. See Act o f August 21, 1935, ch. 599, 49 Stat. 674; see

also 79 Cong Rec. S12075 (July 30, 1935) (remarks of Senator Pittman); see also Act of August 8,

1946, ch 916, § 3, 60 Stat. 951; see also S. Rep. No. 1392, 79th Cong., 2d Sess. (1946).

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and the number of chances purchased by the applicants in a particular

case. Since, as we noted in our earlier memorandum, Congress was

concerned with the moral issues presented by schemes in which persons

are encouraged to risk their resources on the chance of a windfall, we

are concerned that a multiple filing system would appear to do pre­

cisely that and might therefore be considered a violation of the anti­

lottery laws. In general, the more closely the leasing system resembles

otherwise prohibited lotteries, the more difficult it becomes to sustain

the system under the leasing statute, for the leasing statute cannot

authorize an otherwise prohibited lottery without impliedly amending

the criminal statutes pro tanto.

2. Single filing, increased fee. You have asked whether any legal

difficulty would be presented by a simple increase in the $10 filing fee.

We understand from conversations with officials in your Department

that under the options now being considered, the increase would be

justified by the increased cost of administering the SOG procedures.

Congress has declared generally that any “privilege, authority, use,

franchise, license, permit, certificate, registration or similar thing of

value” issued by a federal agency shall be “self-sustaining to the full

extent possible”; and to that end Congress has authorized the head of

each federal agency to prescribe uniform fees to be charged in connec­

tion with the issuance of “things of value.” See 131 U.S.C. § 483a. In

fixing the amount of such a fee, the agency head is entitled to take into

account a number of factors, including the direct and indirect cost to

the government, the value of the thing to the recipient, and the public

policy or interest to be served in charging the fee. Id.

We are unaware of any specific statutory limitation that would super­

sede this general authority in the case of fees charged for SOG applica­

tions. In the absence of a specific statutory limitation, we believe the

Secretary is authorized by 31 U.S.C. § 483a to increase the present $10

fee to a level that more adequately reflects the actual cost of adminis­

tering the SOG system, a system which, in its present form, is author­

ized by the leasing statute. We do not believe that an increase would be

held to violate the anti-lottery laws if it is rationally related to the

administrative costs by the system and to the purpose of finding quali­

fied applicants, and is not adopted for the purpose of enriching the

federal government.

T h e o d o r e B. O l s o n

Assistant Attorney General

Office o f Legal Counsel

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