Applicability of Anti-Lottery Laws to Simultaneous Oil and Gas Leasing Procedures

Applicability of Anti-Lottery Laws to

Simultaneous Oil and Gas Leasing Procedures

T h e U n ited S tates an d its o fficers are not g e n e ra lly exem pt from th e a n ti-lo tte ry

law s, 18 U .S .C . §§ 1302 an d 1304.

A lth o u g h th e q u estio n is n o t free fro m d o u b t, th e legislativ e h isto ry an d ju d ic ia l c o n s tru c ­

tion o f th e a n ti-lo tte ry sta tu te s lead to th e c o n c lu sio n th a t th o se sta tu te s a re aim ed at

lo tte rie s d esig n ed to e n ric h th e ir p ro m o te rs at th e ex pense o f th e gam bling public, and

th e re fo re d o n o t ex ten d to " lo tte rie s ” stru c tu re d n o t to e n ric h federal co ffers b ut for

th e so le p u rp o se o f d istrib u tin g pu b lic leases fairly an d efficiently.

L o n g -stan d in g co n g ressio n al a c q u iescen ce in th e In te rio r D e p a rtm e n t’s S im u ltan eo u s Oil

an d G a s L easin g P ro c e d u re s is a fa c to r th at m ust be co n sid e re d in d eterm in in g w h e th e r

th o se p ro c e d u re s c o n stitu te an illegal lo tte ry u n d e r §§ 1302 an d 1304.

April 7, 1980

M EM ORANDUM OPINION FOR

T H E SOLICITOR O F T H E INTERIO R

This responds to your request for our opinion as to the applicability

of the anti-lottery laws, 18 U.S.C. §§ 1302, 1304, to the Department of

the Interior’s Simultaneous Oil and Gas (SOG) Leasing Procedures. In

our view, although the question is a close one, the SOG leasing pro­

gram is not a “lottery” within the scope of §§ 1302 and 1304.

The SOG program is administered by the Department of the Interior

pursuant to 30 U.S.C § 226(c), which provides that public lands not

within any known geologic structure of a producing oil or gas field

(commonly called “wildcat” lands) are subject to leasing to the first

qualified person making application for a lease.1 These leases are

termed “noncompetitive” because the successful applicants obtain the

leases without competitive bidding. Most federal oil and gas leases are

obtained through noncompetitive leasing procedures.

To eliminate the chaos that sometimes resulted from competition

among applicants seeking to be the “first qualified person making appli­

cation,” the Department of the Interior in 1960 promulgated a regula­

1 Section 226(c) of title 30 reads as follows:

If the lands to be leased are not within any known geological structure of a

producing oil or gas field, the person first making application for the lease who is

qualified to hold a lease under this chapter shall be entitled to a lease of such lands

without competitive bidding. Such leases shall be conditioned upon the payment by the

lessee of a royalty of 12Vfe per centum in amount or value of the production removed

o r sold from the lease.

558

tion providing that all applications received by a specified filing dead­

line would be considered to have been submitted simultaneously.2 If

more than one qualifying application is received for a given tract, the

priority of filing is determined by a public drawing.3 To be considered,

the entry card must be completed, signed, and accompanied by a filing

fee of $10.00.4 An applicant is permitted to file only one entry card for

each parcel on the list, though there appears to be no bar to an

applicant’s filing on as many parcels as he or she wishes.5 After the

drawing is held, unsuccessful applicants are notified by the return of

their entry cards in the mail.6 The first qualified drawee is issued the

lease upon payment of the first year’s rental of $1.00 per acre. Tract

sizes range from under 40 acres to a maximum of 2,560 acres. This

procedure is often referred to as the government oil and gas “lottery.” 7

The regulation was challenged in Thor-Westcliffe Development, Inc. v.

Udall, 314 F.2d 257, 258 (D.C. Cir.) cert, denied, 373 U.S. 951 (1963).

The plaintiff argued that in providing for simultaneous filings, the

regulation was unresponsive to the statutory command that the lease be

given to the “persqn first making application.” The court upheld the

regulation after finding that, considering the language and purpose of

the statute, as well as the experience of the Secretary in implementing

it, the regulation was neither unreasonable nor inconsistent with the

plain language of the statute. Id. at 260. The court explained:

It must be owned that the procedure outlined in [the

regulation], on superficial examination, bears little resem­

blance to the “person first making application” language

of the statute. But Congress could hardly have supposed

that granting $.50 per acre mineral leases can be accom­

plished as simply as the statutory language seems to indi­

cate. . . . It is the Secretary’s job to manage the crowd

while complying with the requirement of the Act. [The

regulation] is the Secretary’s effort in this direction. We

cannot say that it is an impermissible implementation of

the statutory purpose.

2 The regulation, 43 C.F.R. § 3112.2-1, provides:

On the third Monday of each month, or the first working day thereafter, if the proper

office is not officially open on the third Monday, there will be posted on the bulletin

board in each proper office a list of the lands in leases which expired, were cancelled,

were relinquished in whole or in part, or which terminated, together with a notice

stating that such lands will become subject to the simultaneous filings of lease offers,

from the time o f such posting until 10 a.m. on the fifth working day thereafter. . . .

3 43 C.F.R. § 3112.2—1(a)(3).]

4 43 C.F.R. §3112,2—1(a).

8 43 C.F.R. § 3 1 12.2-l(aX2).

e 43 C.F.R. §3112.2-1(4).

7 See Nagdeman, Land-Office Business; Public Participation in Oil Lease Lotteries Is Mounting Fast,

Barron’s Feb. 14, 1977, at 11.

559

Id. Other cases have ruled on questions involving the simultaneous

leasing procedure without discussing its legality.8

The question posed here is whether the drawing process constitutes a

lottery within the scope of 18 U.S.C. §§ 1302 9 and 1304.10 By these

enactments, Congress sought to curb both legal and illegal lotteries. See

4 Cong. Rec. 4061-64 (1876); 120 Cong. Rec. 41,827-29 (1974). We do

not believe that the United States and its officers are generally ex­

empted from the operation of these sections. See generally Nardone v.

United States, 302 U.S. 379, 383-84 (1937); United States v. Arizona, 295

U.S. 174, 183-84 (1935).11

Both the Federal Communications Commission (FCC) and the Postal

Service have received inquiries concerning this issue. In response to

one such inquiry, the Postal Service wrote:

As we have noted in response to occasional inquiries

which we have received, we do not believe that Congress

intended to include that type of activity by a federal

agency within Section 1302’s prohibitions. However, we

would not purport to “determine” the applicablity of Sec­

tion 1302, which is a criminal statute administered by the

Department of Justice.12

The FCC staff expressed the view that § 1304 and FCC rules pursuant

thereto 13 apply to the leasing program. A letter dated May 3, 1979,

8 See, e.g., Udall v. Tollman, 380 U.S. 1, 3 n. 1 (1965); Ballard E. Spencer Trust, Inc. v. Morton. 544

F.2d 1067 (10th Cir. 1976); Burg/in v. Morton. 527 F.2d 486 (9th Cir. 1975), cert, denied, 425 U.S. 973

(1976).

9 Section 1302 provides:

W hoever knowingly deposits in the mail, or sends or delivers by mail:

Any letter, package, postal card, or circular concerning any lottery, gift enter­

prise, or similar scheme offering prizes dependent in whole or in part upon lot or

chance; . . .

Any check, draft, bill, money, postal note, or money order, for the purchase of any

ticket or part thereof, or o f any share or chance in any such lottery, gift enterprise, or

scheme;

Any newspaper, circular, pamphlet, or publication of any kind containing any

advertisement o f any lottery, gift enterprise, or scheme of any kind offering prizes

dependent in whole or in part upon lot or chance, or containing any list of the prizes

drawn or awarded by means of any such iottery, gift enterprise, or scheme, whether

said list contains any part or all of such prizes; . . .

Shall be fined not more than $1,000 or imprisoned not more than two years, or both;

and for any subsequent offense shall be imprisoned not more than five years.

10 Section 1304 provides:

Whoever broadcasts by means of any radio station for which a license is required by

any law o f the United States, or whoever, operating any such station, knowingly

permits the broadcasting of, any advertisement of or information concerning any

lottery, gift enterprise, or similar scheme, offering prizes dependent in whole or in part

upon lot or chance, or any list of the prizes drawn or awarded by means of any such

lottery, gift enterprise, or scheme, whether said list contains any part or all of such

prizes, shall be fined not more than SI,000 or imprisoned not more than one year, or

both.

11 Generally, if acting in good faith and within the scope of their authority, federal officials are not

subject to criminal liability for official acts. See Clifton v. Cox. 549 F.2d 722, 727 (9th Cir. 1977).

12 Letter from George Davis, Assistant General Counsel, Consumer Protection Office, United

States Postal Service, to Herbert Miller, Koteen & Burt (March 5, 1979).

13 47 C.F.R. §73.1211.

560

from the Chief, Complaints and Compliance Division, Broadcast

Bureau, FCC, to a law firm, quoted from a December 16, 1976. FCC

staff letter to an inquirer as follows:

Based upon precedent developed in the application- of

the foregoing statutes [18 U.S.C. § 1304 and 503(b)(1)] it is

our opinion that the method used by the Bureau of Land

Management constitutes a lottery.14

The term “lottery” is not defined statutorily. The Supreme Court

identified the elements of a “lottery” in the context of §§ 1302 and 1304

in FCC v. American Broadcasting Co., 347 U.S. 284 (1954). The Ameri­

can Broadcasting Company was broadcasting advertisements for “give­

away” programs which the FCC determined were lotteries, the broad­

casting of which was prohibited by § 1304 and the FCC rules adopted

pursuant thereto.15 Finding the legislative history of the sections

“unilluminating,” the Court looked for guidance primarily to judicial

and administrative decisions construing comparable anti-lottery legisla­

tion. Id. at 291-92. It wrote that there are three essential elements of a

“lottery, gift enterprise, or similar scheme”: (1) the distribution of

prizes; (2) according to chance; (3) for a consideration. Id. at 290. In

the “give-away” program considered in American Broadcasting, listeners

selected on the basis of chance at home or in studio audiences received

prizes as awards for correctly solving a given problem. Contestants

were not required to purchase a product, pay an admission price or

visit the promoter’s place of business to be eligible to win. The Court

stated:

. . . So varied have been the techniques used by pro­

moters to conceal the joint factors of price, chance, and

consideration, and so clever have they been in applying

these techniques to feigned as well as legitimate business

activities, that it has often been difficult to apply the

decision of one case to the facts of another.

. . . The courts have defined consideration in various

ways, but so far as we are aware none has ever held that

a contestant’s listening at home to a radio or television

program satisfies the consideration requirement. . . .

We believe that it would be stretching the statute to the

breaking point to give it an interpretation that would

make such programs a crime. Particularly is this true

when through the years the Post Office Department and

14 The citation to **503(bXl)” refers to 47 U .S.C § 503(b)(lXD), which provides:

(b) Any person who is determined by the Commission . . . to have—

* * * * *

(D) violated any provision of section 1304 . . . of Title 18;

shall be liable to the United States for a forfeiture penalty.

15 47 C.F.R. §73.1211.

561

the Department of Justice have consistently given the

. words “lottery, gift enterprise, or similar scheme” a con­

trary administrative interpretation.

Id. at 293-94. This decision was carried another step in Copies Co. v.

United States, 243 F.2d 232 (D.C. Cir. 1957), in which the court ruled

that there was no consideration, and thus no lottery, in a television

give-away program even though the program did require participants

to visit stores handling the sponsor’s products.

If measured by the three-element definition identified by the Supreme

Court in American Broadcasting, it would seem that the SOG program

is a lottery. There is a distribution of “prizes.” “Prize” in lottery

contexts has been defined as a “thing of value” (State v. Wassick, 156

W. Va. 128, 191 S.E.2d 283 (1972)), and as “something offered or

striven for in a contest of chance—something which may be won by

chance” (State v. Pinball Machines, 404 P.2d 923, 926 (Alaska 1965)). A

lease awarded by the drawing system grants the lessee the exclusive

right to explore and drill for, extract, and dispose of oil and gas

deposits (except helium gas) that may be found in the leased lands.

These leases are issued for a 10-year term and so long thereafter as oil

or gas is produced in paying quantities. The lessee is required to pay an

annual rental fee, but the potential value of the lease in most cases far

exceeds the fee paid.16 Although wildcat lands may have no oil or gas

deposits, the leases are “prizes” in that they provide the lessees an

opportunity to realize substantial profits by selling the leases to a

company capable of conducting the drilling operations, or by them­

selves conduct drilling operations with the hope of reaping even greater

profits. It is suggested that the prize element is lacking because the

Secretary is not bound to grant the lease to the person whose card is

first drawn. We fail to see how this affects the presence of the prize

element, in that the program is based on the assumption that the lease

will be awarded. The regulations provide that a “lease will be issued to

the first drawee qualified to receive a lease upon payment of the first

year’s rental.” 43 C.F.R. § 3112.4-1 (emphasis added).

The second element is “chance.” Because the “winner” is determined

by a public drawing, chance undeniably is part of the program.

The final element is consideration. Standard rules of contract law

hold that consideration is either benefit to the promisor or detriment to

the promisee. Corbin on Contracts, § 121 (1963). Money paid for the

opportunity to participate, of course, generally would qualify as consid­

eration. It could be argued that the term “consideration” as applied to a

lottery requires that some financial benefit be sought by the operator of

16 In one reported case, a retired stockbroker sold his lease to an oil company for a net profit of

approximately $142,000. A Monthly Oil Lease Raffle A t $10.00 A Shot. N.Y. Times, January 1, 1978,

§ 3, at 3, col. 1. In another, a successful applicant netted approximately $69,000, plus a 4 percent share

of production payments should oil or gas be discovered on the land. Nagdeman, supra, note 7.

562

the lottery. The “classic” lottery involves a scheme in which tickets are

sold by persons who look to the advance cash payments as a source of

profit. According to the Department of the Interior, the filing fee is

designed to cover only administrative costs; it does not go into a pool

from which prizes are paid. In our opinion, however, this interpretation

impermissibly stretches the term “consideration.” Consideration is not

determined by examining the purposes for which the money is col­

lected. See generally Dabbs v. International Minerals & Chemical Corp.,

339 F. Supp. 654, 664 (N.D. Miss. 1972), a ffd , 474 F.2d 1344 (1973),

AM P Inc., v. United States, 389 F.2d 448, 454 (Ct. Cl.), cert, denied, 391

U.S. 964 (1968).

Although the SOG program appears to satisfy the three-element

definition of “lottery” set forth in American Broadcasting, we neverthe­

less believe that §§ 1302 and 1304 should not be construed to cover the

SOG program. The question is difficult, however, and any conclusion

cannot be free from doubt. We rest our conclusion on the legislative

history of the statutes, judicial approval of this and similar programs,

and long-standing congressional acquiescence.

We note at the outset that the anti-lottery sections are penal statutes

and therefore must be strictly construed. United States v. Resnick, 299

U.S. 207, 209 (1936); United States v. Hartwell, 6 Wall. 385, 395 (1867).

General descriptions of classes of persons made subject to a criminal

statute should be limited where literal application of the statute would

lead to extreme results, and where the legislative purpose would be

satisfied by a more limited application. United States v. Katz, 271 U.S.

354, 362 (1926); United States v. Palmer, 3 Wheat. 610, 631 (1818). See

also, FMC v. Seatrain Lines, Inc., 411 U.S. 726, 731-32 (1973). In United

States ex rel. Marcus v. Hess, 317 U.S. 537, 542 (1943), the Court

emphasized that criminal statutes must be given “careful scrutiny lest

those be brought within its reach who are not clearly included. . . .”

After carefully reviewing the anti-lottery statutes, we conclude, on

balance, that the statutes do not clearly include “lotteries” structured

by government officials for the sole purpose of awarding public leases,

and that the legislative purpose of the statutes is satisfied by this

interpretation.

The legislative history of the first federal anti-lottery statutes, albeit

scant, reveals congressional intent to suppress often fraudulent schemes

to make money by means of lotteries. The first statute prohibiting use

of the mails to promote lotteries was passed in 1872. Act of June 8,

1872, 17 Stat. 302. It read:

That it shall not be lawful to convey by mail, nor to

deposit in a post-office to be sent by mail, any letters or

circulars concerning illegal lotteries, so-called gift-con-

certs, or other similar enterprises offering prizes, or con­

cerning schemes devised and intended to deceive and

563

defraud the public for the purpose of obtaining money

under false pretences, and a penalty of not more than five

hundred dollars nor less than one hundred dollars, with

costs of prosecution, is hereby imposed upon conviction,

in any Federal court, of the violation of this section.

In 1876, this statute was amended by deletion of the word “illegal”

before “lotteries,” thus including even those lotteries declared legal

under state law. Act of July 12, 1876, 19 Stat. 90. It is clear from the

Senate debate of the amendment that the intent was to limit use of the

mail for all lottery purposes. 4 Cong. Rec. 4262-64 (1876). One Senator

pointed out that a lottery “fosters and encourages gambling and vice

. . . ruining many of the poorer portions of the community.” Id. at

4262-63. Other Senators opined that lotteries were “demoralizing” and

“immoral.” Id .17 A definition of the term “lottery” appears neither in

the statute nor in the legislative history, but it is apparent from the

content of the debate that the type of lottery at which the statute was

aimed was a lottery designed to enrich its promoters at the expense of

the gambling public.18 You have informed us that the SOG program is

designed not to enrich federal coffers, but to distribute the leases fairly

and efficiently. In addition, the SOG program differs from a traditional

lottery in that an individual may make only one application per lease,

thus minimizing the risk of “encouraging gambling.”

As noted above, the program has been judicially approved as a

proper administrative interpretation of the enabling statute, 30 U.S.C.

§ 226(c). Thor- Westcliffe Development, Inc. v. Udall, supra.19 Other

courts have approved selection by lot when the number of qualified

applicants for government licenses or othef benefits far exceeds the

available number of such perquisites. See Holmes v. New York City

Housing Authority, 398 F.2d 262, 265 (2d Cir. 1968) (admission of

tenants to low-rent public housing projects); Hornsby v. Allen, 330 F.2d

55, 56 (5th Cir. 1964) (distribution o f liquor licenses).20 In Hornsby, the

court held: “If there are more applicants than licenses and all applicants

17 The prohibition against broadcasting information concerning lotteries was added by the Commu­

nications Act of 1934, 48 Stat. 1088. The brief references to this section in the committee reports

provide no guidance as to the scope of the section. See S. Rep. No. 781, 73d Cong., 2d Sess. 8 (1934);

H.R. Rep. No. 1918, 73d Cong., 2d Sess. 49 (1934).

18 In a different context, approximately twenty years after enactment of this statute, the Attorney

General-defined a “lottery” as “an event which is merely contrived for the occasion.” 21 Op. A tt’y

Gen. 313, 317 (1896). The question arose in the context of a Postmaster General's request for the

Attorney General’s opinion whether certain schemes of bond and investment companies were within

the scope of the statute. The Attorney General concluded that the schemes were in the nature o f the

lottery covered by the statute, a predecessor of §§ 1302 and 1304. The SOG program, on the other

hand, is not merely contrived for the occasion. It is a means of awarding the leases in a nondiscrimina-

tory manner.

19 Application of the penal anti-lottery statutes to the judicially approved and presumably statuto­

rily authorized program would contravene the general rule that, where possible, statutes are to be

construed harmoniously. See generally Hyrup v. Kleppe, 406 F. Supp. 214, 217 (D. Colo. 1976);

Sutherland, Statutory Construction §53.01 (4th Ed. 1973 and Supp. 1979).

20 In neither Holmes nor Hornsby was there any indication that the application had to be accompa­

nied by a filing fee.

564

are equally qualified to serve the general welfare, perhaps an unlikely

event, then selection among them by lot or on the basis o f the chrono­

logical order of application would meet constitutional requirements.”

Id. In none of these cases was the program in question challenged as a

lottery within the meaning of §§ 1302 and 1304. Nonetheless, judicial

approval of these programs provides persuasive authority for the posi­

tion that, absent an indication to the contrary, selection by lot of

government grantees or licensees should not be considered a lottery

within the scope of those sections.

Congressional attention has focused generally on the oil and gas

simultaneous leasing program at various times since its inception in

I960.21 Although the SOG program has been labeled by some Mem­

bers of Congress as a “lottery” or “gamble,” 22 it does not appear that

attention has focused specifically on the issue of the legality of the

lottery. Despite repeated congressional review of the program, how­

ever, the structure of the system remains unchanged. Although legisla­

tive inaction alone generally is insufficient evidence of congressional

ratification, tacit acceptance of an administrative interpretation is a

factor that must be considered when there is evidence that the adminis­

trative interpretation has been called to the attention of Congress. See

Blau v. Lehman, 368 U.S. 403, 412-13 (1962); United States v. Midwest

Oil Co., 236 U.S. 459, 481; Sutherland, Statutory Construction §49.10

(1973 and Supp. 1978).

In sum, we conclude that §§ 1302 and 1304 should not be construed

to prohibit operation of the program. We again caution, however, that

the issue is a close one and that persuasive arguments can reasonably be

made on the other side. We note that the SOG program, as it now is

administered, is not required by the enabling statute and that it may

indirectly engender the type of activity at which the anti-lottery laws

were aimed. Under these circumstances, you may wish to consider

requesting specific congressional authorization for the program.

L eon U lm an

Deputy Assistant Attorney General

Office o f Legal Counsel

21 See. e.g.. Bureau o f Land Management Quadriennial Authorizations For Fiscal Years 1979-82:

Hearings on S. 2234 Before the Senate Comm on Energy and Natural Resources, 95th Cong., 2d Sess.

150-52 (1978); Bureau o f Land Management Budget Request: Hearings Before the Interior Subcomm. o f

the House Appropriations Comm.. 95th Cong., 2d Sess. 533-40 (1978); Mineral Development on Federal

Lands: Hearings on S. 1040 Before the Subcomm. on Minerals, Material, and Fuels o f the Senate Comm,

on Interior and Insular Affairs, 93d Cong., 2d Sess. 2 (1974); Federal Leasing and Disposal Policies:

Hearings on S R . 45 Before the Senate Comm, on Interior and Insular Affairs, 92d Cong., 2d Sess. 23, 86

(1972); Establishment o f a National Mining and Minerals Policy: Hearings on S. 719 Before the Subcomm.

on Mines and Mining o f the House Comm, on Interior and Insular Affairs, 91st Cong., 2d Sess. 93 (1970);

Reinstatement o f Oil and Gas Leases: Hearings on H.R. 7915 and H.R. 7940 Before the Subcomm. on

Mines and Mining o f the House Comm, on Interior and Insular Affairs, 90th Cong., 1st Sess. 27 (1967).

22 See, e.g.. Department o f the Interior and Related Agencies Appropriations for 1979, Part 6, Hearings

before the Subcomm. on Interior Appropriations o f the House Comm, on Appropriations, 95th Cong., 2d

Sess. 533-40(1978).

565