U.S. Court of Appeals Holds Government Was Not Required to Establish Intervening Cause in Lost Profits Case

NYCAL Offshore Development Corporation v. United States, 743 F.3d 837 (2014)
United States Court of Appeals, Federal Circuit: Decided February 20, 2014

In 1982, the federal government developed a program of selling oil and gas leases to oil companies and issued leases for oil fields off the Southern California coast. ARCO, the original owner of the leases, drilled an exploratory well on one of the leased properties, but the well produced only a small amount of oil flow. Rather than conduct further exploration, ARCO sold the leases to a group of oil companies led by Samedan Oil Corporation (“Samedan”). Nycal Offshore Development Corporation (“Nycal”) acquired a 4.25% share of the leases. Samedan drilled a well which produced a greater flow of oil than ARCO’s, but the oil was of low quality. Samedan made plans to drill another exploratory well, but before it could do so, a federal district court ruled that the government’s actions in providing the oil and gas leases were illegal. The Ninth Circuit Court of Appeals affirmed the district court’s ruling in 2002. The effect of the ruling was to terminate the ability of the lease owners to conduct drilling on the leased properties.

Samedan and the other oil companies filed suit asserting the government breached its lease agreements with them. The Court of Federal Appeals held that the government breached the lease agreements and all of the plaintiffs, except Nycal, accepted restitution as a remedy. Nycal sought a greater recovery of damages by seeking to establish lost profits as part owner of the leases.

The Court of Federal Claims denied Nycal’s claim for lost profits. The court held that, in a lost profits case, the plaintiff must prove that the profits were: (i) foreseeable to the breaching party at the time of contract formation; (ii) actually caused by the breach, and; (iii) reasonably certain. The court held that lost profits were foreseeable to the government at the time of contract formation stating that the government assumed the risk that if it interfered with the oil companies’ option to explore “it was on the hook for whatever profits could be established with meaningful certainty.”

As for causation, Nycal’s experts asserted that the leases would have proved highly profitable and that Nycal’s share of those profits would have amounted to approximately $72 million. The government’s experts, on the other hand, testified that the amount of recoverable oil and gas in the two leases was insufficient to make production more than “marginally profitable.” The government also argued that Nycal could not establish causation because: (i) Nycal could not have obtained necessary funding to participate in the development of the leases; (ii) it failed to show the lease owners would have gone forward with production; and (iii) further exploration and development of the leased properties would have been barred by environmental permitting requirements unrelated to the government’s breach. The court disagreed it was necessary for Nycal to demonstrate it would have obtained sufficent funding, and it also rejected the government’s argument that Nycal failed to show the lease owners would have gone forward with production. The court’s basis was that the government’s breach prevented the drilling of another exploratory well and “it would be unfair to burden plaintiff with the obligation to prove it more likely than not that the owners would have gone forward with production when the reason we will never know the outcome was the government’s breach.”

As for environmental permits preventing further exploration and development of the leased properties, the court held that those impediments, which were unrelated to the government’s breach, were an intervening cause of the lease owners’ lost opportunity to further explore and develop the properties, breaking the chain of causation. In rejecting Nycal’s response that “time and money would eventually provide a solution to the permitting dilemma,” the court stated that “conjecture that a solution would have been found, but without knowing when, or what it would have cost, injects an intolerable level of uncertainty into calculating damages.” The court held that, without setting a timeline, the lease owners’ costs would not be reasonably certain, and thus, Nycal’s calculation of lost profits is not reasonably certain.

On appeal before the United States Court of Appeals, Federal Circuit, Nycal asserted that the trial court improperly failed to shift the burden of proof to the government to establish that the permitting requirements was the intervening cause of Nycal’s lost opportunity to further explore and develop the properties. The Court of Appeals disagreed and sustained the trial court’s ruling.

The Court of Appeals held that the burden of proof on the issue of causation in a lost profits case rests on the plaintiff without regard to the nature of the impediment the plaintiff had to overcome to earn the profits. The Court of Appeals reasoned that in some instances the impediment will be obvious, and in other cases, “there might be less obvious – but equally fatal – impediments to the plaintiff’s ability to show that it would have been able to earn a profit in the absence of a breach, such as it lacked sufficient financing or technical expertise to complete the project.” The Court of Appeals held that the burden of proof does not shift to the defendant to establish an intervening cause.

At Rosenfarb LLC we produce well-supported, well-reasoned and well-communicated damage calculations that withstand the rigors of litigation. We are a firm of forensic accounting and valuation experts. We understand business – which is an amalgamation of events and transactions with often complex and nuanced underlying economic purposes. We have keen insights and always connect the dots. We understand the litigation process. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional, and credible.  We are accounting experts with legal acumen.

Rosenfarb LLC
Phone: (855) 415-1100
Info@Rosenfarb.com
www.rosenfarb.com