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1999 Term, Number 7 / November 15, 1999

Today the Supreme Court granted certiorari in three cases, one of which is of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, December 30, 1999, and amicus briefs in support of the respondents are due on Monday, January 31, 2000. Any questions about this case should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office.

Government contracts Nonperformance by United States because of subsequent legislation Remedies. The Supreme Court granted certiorari and consolidated Mobil Oil Exploration & Producing Southeast, Inc. v. United States, No. 99-244, and Marathon Oil Co. v. United States, No. 99-253, to decide whether the government must pay restitution of the consideration paid by a government contractor when subsequent legislation precludes the United States from performing its contractual obligations.

The Outer Continental Shelf Lands Act of 1953 ("OCSLA") authorizes the Secretary of the Interior to sell leases ("OCS leases") to private parties "to explore, develop, and produce the oil and gas contained" on the seabed and subsoil of the continental shelf off the coast of the United States. See 43 U.S.C. 1333(b)(4), 1337. In exchange, lessees pay the government advance cash bonuses and annual lease payments. In 1981, Mobil Oil Exploration and Producing Southeast, Inc. ("Mobil") and Marathon Oil Company ("Marathon") purchased rights in five OCS leases off the coast of North Carolina. In consideration for those rights, Mobil and Marathon paid a total of approximately $156 million in advance cash bonuses. In 1990, Congress enacted the Outer Banks Protection Act ("OBPA"), placing a moratorium on the exploration and development of the North Carolina Outer Continental Shelf for at least 13 months. See Pub. L. No. 101-380, 6003, 104 Stat. 484, 555-58 (1990). The moratorium remained in effect until the OBPA was repealed in 1996.

In October 1992, Mobil and Marathon sued the United States for breaching the OCS leases. The Court of Federal Claims held that the failure of the United States to perform its contractual obligations because of the moratorium imposed by the OBPA constituted a material breach, and awarded Mobil and Marathon restitution of the cash bonuses.

A divided Federal Circuit reversed. 177 F.3d 1331 (1999). The court of appeals held that the restraints imposed by the OBPA were not the proximate cause of the lessees' inability to proceed with exploration as envisioned by the OCS leases. Rather, in the court's view, the proximate cause was the lessees' failure to satisfy a condition precedent of the leases obtaining the approval of the State of North Carolina under the Coastal Zone Management Act (see 16 U.S.C. 1456(c)(2)). The majority concluded that there had been no material breach of the contract.

Judge Newman dissented. In her view, by enacting the OBPA, the government had rendered performance of the leases impossible. Thus, under ordinary principles of contract law, the lessees were entitled to restitution of the consideration they had paid even if they could not prove their entitlement to contract damages. 177 F.3d at 1342.

This case is significant to any business that contracts with the United States. The Court will have an opportunity to delineate the scope of its decision in United States v. Winstar Corp., 518 U.S. 839 (1996), holding that the law of contracts between private parties generally applies to contracts with the United States. The application of Winstar to the remedial context presented in this case may alter the balance of risks and benefits for businesses that contract with the federal government in any area that is a likely subject of supervening legislation.

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Mayer, Brown & Platt is counsel of record in one of the other cases granted today. That criminal case, Jones v. United States, No. 99-5739, may be of some limited interest to the business community. In Jones, the Court will decide whether the Federal Anti-Arson Act, 18 U.S.C. 844(i), applies and whether it constitutionally may apply to the arson of a private residence. The Court may address more broadly the constitutional limits on jurisdictional elements that, like the jurisdictional clause in Section 844(i), explicitly require a link to interstate commerce in order to bring an activity within the realm of federal regulation. Accordingly, the Court's decision may indirectly affect the scope of other federal regulatory schemes.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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