KERR-McGEE’S BRIEF IN RESPONSE/REPLY TO MAXWELL’S …

ORAL ARGUMENT IS REQUESTED April 18, 2011

Nos. 10-1474 and 10-1486_________________________________

IN THE UNITED STATES COURT OF APPEALSFOR THE TENTH CIRCUIT

__________________________________

BOBBY L. MAXWELL, United States of America, ex rel.,Plaintiff–Appellee/Cross Appellant,

v.

KERR-McGEE OIL & GAS CORPORATION, a Delaware Corporation,Defendant–Appellant/Cross Appellee.

__________________________________

On Appeal from the United States District Court for the District of ColoradoHonorable Marcia S. Krieger, Presiding

__________________________________

KERR-McGEE’S BRIEF IN RESPONSE/REPLY TOMAXWELL’S ANSWER/CROSS-APPEAL BRIEF

__________________________________

Gregory E. GoldbergHOLLAND & HART LLP555 Seventeenth Street, Suite 3200Post Office Box 8749Denver, Colorado [email protected]

Marie R. YeatesPenelope E. NicholsonVINSON & ELKINS L.L.P.1001 Fannin Street, Suite 2500Houston, TX [email protected]@velaw.com

Charles D. TetraultVINSON & ELKINS L.L.P.The Willard Office Building1455 Pennsylvania Ave. N.W.Washington, D.C. [email protected]

Attorneys for KERR-McGEE OIL & GAS CORPORATION

Appellate Case: 10-1486 Document: 01018624506 Date Filed: 04/18/2011 Page: 1

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ....................................................................................vi

RECORD REFERENCES ........................................................................................ix

SUMMARY OF ARGUMENT .................................................................................1

RESPONSE TO MAXWELL’S DISCUSSION OF THE FACTS...........................9

A. The Record Is Undisputed That Kerr-McGee Sold Almost Allthe Oil at Issue Offshore at or Near the Lease. .....................................9

B. The Record Is Likewise Undisputed That Most (If Not All) ofthe Services Provided by Texon Did Not Apply to Oil Sold ator Near the Lease.................................................................................10

C. Finally, the Record Is Undisputed That Texon’s Services HadMinimal Value.....................................................................................12

ARGUMENT ...........................................................................................................15

I. There Is No Evidence of “Knowing” Scienter Under Maxwell’sBreach of the Duty to Market Theory for the Oil Sold Offshore—Virtually All the Oil at Issue..........................................................................15

A. The MMS Regulations Govern the Basis on Which RoyaltiesMust Be Paid to the Government. .......................................................15

B. For Oil Sold Offshore Under an Arm’s-Length Contract, theMMS Regulations Provide for Royalties to Be Paid Based onthe Contract Price. ...............................................................................15

C. Kerr-McGee Accountants Kyle and Clem Believed That TheyHad Completed the 2014 Forms Correctly Based on TheirReasonable Interpretation of the MMS Regulations...........................17

1. Kyle and Clem completed Kerr-McGee’s 2014 Formsbased on their understanding of the MMS regulations.............17

2. Kyle and Clem understood that the Texon contracts werearm’s-length. .............................................................................18


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3. Kyle and Clem understood that almost all the oil wassold offshore at or near the lease...............................................20

4. Kyle and Clem did not knowingly make false statementsin the 2014 Forms. ....................................................................21

D. Maxwell Incorrectly Claims That It Is Irrelevant Whether Kerr-McGee Completed the 2014 Forms Based on a ReasonableInterpretation of the MMS Regulations. .............................................21

E. This Court Should Rule That Kerr-McGee’s Interpretation WasReasonable as a Matter of Law. ..........................................................23

1. Reliance on a reasonable interpretation of a regulationnegates scienter under the False Claims Act. ...........................24

2. The Government addresses issues not raised by thisappeal. .......................................................................................25

F. The Required “Knowing” Scienter Had to Reside in Kyleand/or Clem—the Kerr-McGee Employees Who Filled Out the2014 Forms..........................................................................................26

1. Maxwell has conceded, for purposes of this appeal, thatthe scienter must reside within a single Kerr-McGeeemployee. ..................................................................................26

2. The Government cites no cases that are on point. ....................27

3. The single Kerr-McGee employee with the requiredscienter could only have been Kyle or Clem. ...........................28

G. None of the Evidence Relied on by Maxwell Can EstablishKnowing Scienter Under Maxwell’s Breach of the Duty toMarket Theory. ....................................................................................29

1. Maxwell cannot prove knowing scienter under his breachof the duty to market theory based on scienter evidencerelating to his gross-up theory...................................................29

2. Maxwell’s theory that Kerr-McGee breached its duty tomarket by selling oil at a poor price is contrary to theMMS regulations.......................................................................29


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3. Even if the regulations could be disregarded, Maxwell’sevidence of knowing scienter—for breach of the duty tomarket—fails.............................................................................30

a. Evidence of onshore prices cannot prove thatoffshore prices were too low. .........................................30

b. Isolated instances of higher offshore prices cannotprove breach of the duty to market or scienter. ..............31

c. Nor can Maxwell prevail on his conclusoryassertion that Kerr-McGee “must have known”that it was selling oil at prices that were too low. ..........33

H. At Bottom, Maxwell Has Failed to Satisfy the KnowingScienter Standard for His Breach of the Duty to Market Theoryas to Virtually All of the Oil at Issue. .................................................34

II. The Scienter Requirement Cannot Be Satisfied by Evidence Relatingto Maxwell’s Gross-Up Theory. ....................................................................35

A. Maxwell Has Improperly Conflated His Gross-Up Theory withHis Breach of the Duty to Market Theory. .........................................35

B. Maxwell’s “Inextricably Intertwined” Theory Is Meritless................35

C. The $7,555,886.28 Damages Award Was Not Based onMaxwell’s Gross-Up Theory and Is Vastly Excessive UnderThat Theory. ........................................................................................36

1. The $7,555,886.28 award is excessive by more than$7 million. .................................................................................36

2. The $7,555,886.28 damages award cannot be sustainedbased on the ipse dixit of Maxwell’s expert. ............................37

3. Maxwell’s waiver argument is without merit. ..........................38

D. Scienter Evidence Relating to Maxwell’s Gross-up TheoryCannot Support the Damages Award..................................................39


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1. The Arnold memo cannot provide the necessary scienterevidence under Maxwell’s breach of the duty to markettheory.........................................................................................39

2. Evidence that Kerr-McGee failed to answer a questionpropounded by the MMS cannot prove knowing scienter........40

3. Arnold’s so-called “padding” of two oil valuationscannot establish knowing scienter. ...........................................41

III. A New Trial Should Also Be Granted Based on the Newly DiscoveredEvidence Reflected in the OIG Report. .........................................................43

A. Kerr-McGee Has Met All the Requirements of the NewlyDiscovered Evidence Test. ..................................................................43

B. Given That the Whole Case Turned on Application of the MMSRegulations, the Newly Discovered Evidence Was VitallyImportant. ............................................................................................44

C. The Government Lawyers’ Interpretations of the Regulations—Which Matched Kyle and Clem’s Interpretation—Were NotMerely Cumulative or Impeaching. ....................................................46

D. The Evidence Reflected in the OIG Report Is “NewlyDiscovered” Evidence That Existed at the Time of Trial. ..................47

E. Given the Government’s Repeated Assertion of the Attorney-Client Privilege, Maxwell’s Lack of Diligence Argument IsWithout Merit. .....................................................................................49

IV. Maxwell Cannot Avoid the Errors in the Jury Instructions...........................51

A. The District Court Should Have Sustained Kerr-McGee’sObjection to the Use of “Fair Market Value” in the JuryInstructions. .........................................................................................51

B. The District Court Should Have Sustained Kerr-McGee’sObjection to the Jury Instructions Regarding Arm’s-LengthContracts..............................................................................................53

V. Cross-Appeal: The District Court Correctly Rejected Maxwell’sRequest for 1,403 Penalties. ..........................................................................54


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A. The District Court Imposed Penalties Based on the Facts of theCase. ....................................................................................................55

B. The Imposition of 48 Penalties Was Correct Under theApplicable Law. ..................................................................................56

VI. Cross-Appeal: The District Court Properly Rejected Maxwell’sRequest for Prejudgment Interest. .................................................................58

CONCLUSION........................................................................................................60

STATEMENT CONCERNING ORAL ARGUMENT...........................................61

CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(a)(7)(B)............62

CERTIFICATE OF SERVICE ................................................................................63

CERTIFICATE OF DIGITAL SUBMISSION .......................................................64


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TABLE OF AUTHORITIES

Page(s)

Cases

Brooke Grp., Ltd. v. Brown & Williamson Tobacco Corp.,509 U.S. 209 (1993)...................................................................................... 38

Bueno v. City of Donna,714 F.2d 484 (5th Cir. 1983) ........................................................................ 52

Burlbaw v. Orenduff,548 F.3d 931 (10th Cir. 2008) ............................................................ 5, 21, 24

City of Wichita, Kan. v. U.S. Gypsum Co.,72 F.3d 1491 (10th Cir. 1996) ...................................................................... 52

Comm. for First Amendment v. Campbell,962 F.2d 1517 (10th Cir. 1992) .................................................................... 49

Cook County v. U.S. ex rel. Chandler,538 U.S. 119 (2003)................................................................................ 58, 59

Graham v. Wyeth Labs.,906 F.2d 1399 (10th Cir. 1990) .............................................................. 43, 44

Harrison v. Westinghouse Savannah River Co.,352 F.3d 908 (4th Cir. 2003) ........................................................................ 27

Heckler v. Cmty. Health Servs.,467 U.S. 51 (1984)........................................................................................ 26

Maint. Eng’rs, Inc. v. U.S.,21 Cl. Ct. 553 (U.S. Cl. Ct. 1990) ................................................................ 26

McBride v. Mkt. St. Mortg.,381 F.App’x 758 (10th Cir. 2010)................................................................ 38

Miller v. FEMA,57 F.3d 687 (8th Cir. 1995) .......................................................................... 58

Rivera v. M/T Fossarina,840 F.2d 152 (1st Cir. 1988)......................................................................... 47


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Scheufler v. Gen. Host Corp.,126 F.3d 1261 (10th Cir. 1997) .................................................................... 49

Swope v. Siegel-Robert, Inc.,243 F.3d 486 (8th Cir. 2001) ........................................................................ 47

U.S. ex rel. Koch v. Koch Industries, Inc.,57 F. Supp. 2d 1122 (N.D. Okla. 1999) ....................................................... 57

U.S. ex rel. Randy Little & Lanis Morris v. Eni Petroleum Co.,2007 WL 2407088 (W.D. Okla. Aug. 22, 2007).......................................... 50

U.S. v. Bornstein,423 U.S. 303 (1976)................................................................................ 56, 57

U.S. v. Conrad,448 F.2d 271 (9th Cir. 1971) ........................................................................ 49

U.S. v. Coop. Grain & Supply Co.,476 F.2d 47 (8th Cir. 1973) .......................................................................... 58

U.S. v. Foster Wheeler Corp.,447 F.2d 100 (2d Cir. 1971) ................................................................... 58, 59

U.S. v. Krizek,111 F.3d 934 (D.C. Cir. 1997)................................................................ 56, 57

U.S. v. Magnesium Corp.,616 F.3d 1129 (10th Cir. 2010) .................................................................... 23

U.S. v. McLeod,721 F.2d 282 (9th Cir. 1983) ........................................................................ 59

U.S. v. Muldrow,19 F.3d 1332 (10th Cir. 1994) ................................................................ 47, 48

U.S. v. Owen,500 F.3d 83 (2d Cir. 2007) ..................................................................... 47, 48

U.S. v. Sci. Applications Int’l Corp.,626 F.3d 1257 (D.C. Cir. 2010).............................................................. 26, 27


viii

U.S. v. Texas,507 U.S. 529 (1993)...................................................................................... 59

Rules and Statutes

30 Code of Federal Regulations,§ 206.101 .................................................................................................. 3, 16

§ 206.102(a) ........................................................................................ 3, 15, 16

§ 206.102(b)(1)(iii) (1988) ..............................................................................3

§ 206.102(c)(1) ............................................................................................. 16

§ 206.102(c)(2) ......................................................................................... 3, 16

§ 206.102(c)(2)(A).................................................................................. 16, 17

§ 206.102(c)(2)(B)........................................................................................ 17

§ 206.102(c)(5) ................................................................................................3

§ 206.103 .........................................................................................................3

Other Authorities

65 Federal Register,14022 (Mar. 15, 2000) ............................................................................ 16, 17


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RECORD REFERENCES

In this Brief, the following citation forms will be used:

Appellants’ Appendix [volume no.]App.[page](Volumes 1-15)

Appellee’s Supplemental Appendix [volume no.]Supp.App.[page](Volumes 1-2)

Joint Appendix [volume no.]Jt.App.[page](Volumes 1-10)

Opening Brief of Kerr-McGee Kerr-McGeeBr. [page]

Maxwell’s Answer/Cross-Appeal Brief MaxwellBr. [page]

Brief for the United States as Amicus Curiae AmicusBr. [page]

Throughout this Brief, all emphasis has been added unless otherwise indicated.


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SUMMARY OF ARGUMENT

Maxwell’s $23 million judgment—a judgment that he seeks to increase

dramatically through his cross-appeal—is based on a mismatch between Maxwell’s

liability theory and the damages that the jury awarded. Maxwell persuaded the jury

to award $7,555,886.28, i.e., to the penny, the amount that Maxwell calculated for

his “breach of the duty to market” theory. However, there is no evidence that

Kerr-McGee had “knowing” scienter for that “breach of the duty to market”

theory, as required for liability under the False Claims Act (“FCA”). There is no

evidence of the required knowing scienter because there is no evidence that Kerr-

McGee thought it was breaching its duty to market when Kerr-McGee paid

royalties based on Kerr-McGee’s reasonable reading of the MMS regulations,

which control how federal lessees (like Kerr-McGee) must value, and pay royalties

on, federal oil.

To prove knowing scienter under Maxwell’s breach of the duty to market

theory (and to sustain the $7,555,886.28 award), Maxwell had to prove that at least

one Kerr-McGee employee knew that Kerr-McGee made false statements to the

Government in its 2014 Forms because that employee (1) knew that Kerr-McGee

had breached its duty to market and also (2) knew that, as a result of the breach of

the duty to market, the MMS regulations required that the oil be valued, in the

2014 Forms, under the “net-back” method. The “net-back” method starts with


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onshore market center prices (i.e., prices that Kerr-McGee did not receive when it

sold the oil offshore) and nets out the cost of transporting the oil from offshore

wells to onshore market centers. There is no such evidence.

Faced with a lack of evidence of scienter for his “breach of the duty to

market” theory, Maxwell seeks to satisfy the FCA’s knowing scienter requirement

using his other theory—his “gross-up” theory, under which he argues that Kerr-

McGee failed to pay royalties on the value of additional, non-monetary

consideration (services) that Kerr-McGee received from Texon for the oil. But the

damages that the jury awarded, and that the judgment trebles, cannot possibly be

supported by the evidence of the relatively minimal value of the services that

Texon provided to Kerr-McGee.

Nor can Maxwell circumvent the mismatch between liability and damages

by claiming that the damages for his “gross-up” theory are really the same as the

damages for his “breach of the duty to market” theory. Maxwell’s attempt to

equate the damages for his two theories is negated by the MMS regulations, which

treat these two theories differently. Under the regulations, a breach of the duty to

market can trigger calculation of royalties under the net-back method, which is

based on onshore market center oil prices—even though the lessee (Kerr-McGee)


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did not actually receive onshore prices when it sold the oil offshore.1 On the other

hand, for a failure to gross up, MMS regulations call for royalties based on the sum

of (1) the price actually received for the oil from the lessee’s (Kerr-McGee’s) sale

of the oil, plus (2) the value of the additional, non-monetary consideration

provided to the lessee (Kerr-McGee).2 The damages for these two theories are not

the same.

No court has yet addressed the central issue in this appeal, which is whether

there is evidence of the required “knowing” scienter for Maxwell’s “breach of the

duty to market” theory. Judge Figa, who presided over the jury trial, did not

1 The MMS regulations provide that where there has been a “breach of [the] dutyto market,” royalties must be paid by valuing the oil based on the standards thatapply to “oil that is not sold under an arm’s-length contract,” which may includethe net-back standards that Maxwell used as the basis for calculating his damages.30 C.F.R. §§ 206.102(c)(2), 206.103; 30 C.F.R. § 206.102(b)(1)(iii), (c)(5) (1988).See 12App.3653, 3662. Over Kerr-McGee’s objection, the court instructed thejury that, if a lessee (Kerr-McGee) has undervalued oil “due to the lessee’s breachof its duty to market the oil,” royalties must be calculated based on the “fair marketvalue of the oil.” 14App.4493-4506; 4App.1454. See 51-53, infra. Because thejury awarded damages in the exact amount of Maxwell’s net-back calculations, it isclear that the jury answered the damages question about the fair market value ofthe oil based on Maxwell’s net-back calculations.

2 Based on the MMS regulations, the court instructed the jury: “If oil is sold bysuch a lessee under an arms-length contract, the value of oil on which royalties arecalculated generally is the gross proceeds accruing under the contract, lessapplicable transportation allowances. Gross proceeds means the total monies andother consideration accruing for the disposition of oil produced.” 4App.1454. See30 C.F.R. §§ 206.102(a), 206.101; 12App.3654, 3662.


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address this critical scienter issue because he dismissed the case for lack of

jurisdiction before post-verdict motions were filed. However, he expressed

concern, based on a post-trial statement on the MMS website, that “[MMS] still

[did not] believe . . . Kerr-McGee underpaid what it owed.” 15App.4604-05.

Judge Blackburn, who on remand overruled Kerr-McGee’s renewed motion for

judgment as a matter of law, mistakenly held that it was “irrelevant” whether there

was evidence of knowing scienter for Maxwell’s “breach of the duty to market”

theory. 5Jt.App.1552-53. Judge Krieger did not address the scienter issue either,

but in refusing to award Maxwell all the penalties that Maxwell sought, Judge

Krieger wrote that the evidence of Kerr-McGee’s wrongdoing was “far from

‘overwhelming.’” 6Jt.App.1667.

Through this appeal, Kerr-McGee asks this Court to answer the question that

no court has yet answered: is there evidence of “knowing” scienter under

Maxwell’s breach of the duty to market theory? In other words, is there evidence,

for the oil Kerr-McGee sold offshore (which was virtually all the oil at issue), that

Kerr-McGee knowingly breached its duty to market and knowingly underreported

royalties in the 2014 Forms it tendered to the Government?

Kerr-McGee submits that there is no such evidence of knowing scienter for

the oil sold offshore at or near the lease (virtually all the oil at issue) because Kerr-

McGee calculated its royalties based on its reasonable interpretation of the


5

applicable MMS regulations. Those regulations permit lessees to sell oil offshore

at the lease without breaching the duty to market, even though the price may be

lower than onshore prices. Additionally, those regulations provide that, for an

arm’s-length contract, a lessee can calculate royalties based on the price it actually

receives for oil, even if that price is lower than other measures of market price

(such as onshore market center prices). Kerr-McGee reasonably believed that, in

completing its 2014 Forms, it had properly reported royalties and valued the oil

(almost all of which was sold offshore at or near the lease) because Kerr-McGee

had valued the oil based on the price it received from Texon under arm’s-length

contracts.

In addressing scienter, this Court must interpret the applicable MMS

regulations because Kerr-McGee determined the amount of royalties that it

reported in its 2014 Forms based on those regulations. If Kerr-McGee paid

royalties based on a reasonable interpretation of the regulations, Kerr-McGee could

not have knowingly undervalued the oil or underreported the royalties as a matter

of law. See Burlbaw v. Orenduff, 548 F.3d 931, 949-51 (10th Cir. 2008).

Pointing to the fact that the government leases prohibited Kerr-McGee from

paying royalties on less than the fair market value of the oil, Maxwell wrongly

suggests that it is irrelevant whether Kerr-McGee paid royalties based on a

reasonable interpretation of MMS regulations. The leases, however, did not define


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“fair market value.” To decide the meaning of “fair market value” for government

leases—and thus to determine the basis on which royalties must be paid under

those federal leases—one must look to the MMS regulations. After all, it is the

MMS regulations that tell lessees, like Kerr-McGee, how the Government expects

oil to be valued in order to satisfy the lease requirement that royalties not be paid

on less than the fair market value of the oil.

The OIG Report—published after trial, but reflecting pre-trial opinions of

government attorneys regarding the interpretation of MMS regulations—shows

that the government attorneys interpreted the regulations exactly like Kerr-McGee

did. When this Court decides, as a question of law, whether Kerr-McGee’s

interpretation of the MMS regulations was reasonable, this Court can take judicial

notice of the interpretation of the regulations by the MMS’s government attorneys.

Given that Kerr-McGee’s interpretation was reasonable, there is no evidence

of knowing scienter for Maxwell’s breach of the duty to market theory as to the oil

that Kerr-McGee sold offshore at or near the lease. Because virtually all of the oil

at issue was sold offshore at or near the lease, the damages awarded in the

judgment—all necessarily flowing from the breach of the duty to market theory—

cannot be sustained. Even if there were evidence to support a knowing breach of

the duty to market as to the small percentage of the oil at issue that was sold

onshore, any such breach could not support the damages in the judgment, which


7

are based on a purported knowing breach of the duty to market for 100% of the oil

at issue, for all 57 leases issue, and for all 48 months at issue. A new trial is

required.

Additionally, the OIG Report is critical newly discovered evidence requiring

a new trial. If the jury had known that the government lawyers interpreted the

MMS regulations in the same way that Kerr-McGee did, the jury probably would

not have found that Kerr-McGee knowingly understated its royalties in its 2014

Forms. The interpretation of the regulations by the government lawyers could not

have been obtained in discovery because, in response to discovery requests and

even at trial, the MMS asserted its attorney-client privilege with respect to the

views of the government lawyers. This evidence, which was made a basis for

Kerr-McGee’s motion for new trial, was discovered only after the Government

voluntarily waived the attorney-client privilege in the OIG Report, which was

published after verdict.

The OIG Report is consistent with the remarkable statement that MMS

posted on its website immediately after trial: “[MMS] maintains its original

position that Kerr-McGee paid the royalties it owed to the U.S. Government.”

6App.2001. The website explained that MMS and other government agencies had

“investigated and analyzed Mr. Maxwell’s claim” and had concluded there was

“no regulatory basis for issuing an order [to pay]” Kerr-McGee. 6App.2001, 2003.


8

Even now, according to the Government’s amicus brief, “[T]he United

States takes no position on the ultimate question of liability in this case.”

AmicusBr. 2. Instead, the Government’s amicus brief addresses various discrete

legal issues that are discussed herein.

This Court should reverse the $23 million judgment, which includes trebling

of the $7,555,886.28 damages finding. Those damages are based on Maxwell’s

“breach of the duty to market” theory, for which there is no evidence of the

required knowing scienter as to the oil that Kerr-McGee sold offshore—virtually

all of the oil at issue in this case.

Maxwell is not entitled to relief on his cross-appeal. Disgruntled with his

$23 million judgment and 48 penalties, Maxwell wants more. But the district court

did not err in declining to award Maxwell’s proposed 1,403 penalties based on

“lease obligations,” instead of 48 penalties based on the number of 2014 Forms

Kerr-McGee submitted to the Government. As for Maxwell’s argument that he is

entitled to more than $4 million in prejudgment interest, that argument is contrary

to established authority that the FCA’s treble damages provision compensates

relators for any loss of interest before judgment. Maxwell’s cross-appeal should be

rejected.


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RESPONSE TO MAXWELL’S DISCUSSION OF THE FACTS

Maxwell’s brief contains significant factual errors. The most egregious

errors concern three related matters: (1) the fact that Kerr-McGee sold almost all

the oil at issue offshore at or near the lease, (2) the fact that most, if not all, of the

services provided by Texon did not apply to oil sold at the lease, and (3) the fact

that the services that Texon provided to Kerr-McGee had minimal value.

A. The Record Is Undisputed That Kerr-McGee Sold Almost All theOil at Issue Offshore at or Near the Lease.

By rubber-stamping Maxwell’s net-back damages calculations, the jury

found that Kerr-McGee had breached its duty to market with respect to 100% of

the oil at issue for all 57 leases at issue during the entire 48 months at issue. But

with respect to oil sold offshore at the lease, Kerr-McGee could not have breached

its duty to market because MMS regulations expressly allow lessees to sell oil

offshore at the lease without breaching the duty to market. Therefore, Maxwell

attempts to minimize the amount of oil sold at the lease, but the record is

undisputed that almost all the oil was sold offshore at or near the lease.

Maxwell complains that Texon’s general manager of crude oil marketing

used an estimate as the basis for his testimony that, as to about 90% of the oil that

Texon bought from Kerr-McGee, Texon acquired that oil offshore at the lease.

MaxwellBr.15-16. See 13App.4217-18, 4246. But who would have a better grasp

of the amount of oil sold to Texon offshore at the lease than the general manager of


10

crude oil marketing for Texon (the purchaser)?

Moreover, the manager’s testimony was consistent with all the other

evidence. See, e.g., 2Supp.App.806 (at least 85% of the oil was sold offshore, at or

near the lease). Kerr-McGee’s Bryan Clem testified, “We sold our oil [offshore] at

the lease . . . .” and “[t]he contract sales point was at the wellhead . . . .”

13App.4050, 4049. Kerr-McGee’s Terry Kyle testified that “the [Texon] contract

predominately provided for Kerr-McGee to sell its oil at the lease offshore at the

platform.” 13App.4099. Finally, Kerr-McGee employee Pennie Green testified,

“Most of the delivery points [under the Texon contract] were at the wellhead

[offshore].” 13App.3964.

Maxwell observes (and Kerr-McGee also pointed out, Kerr-McGeeBr. 7)

that 10 of the 57 Texon leases called for onshore delivery, while 12 of the leases

involved offshore delivery near (but not at) the lease. MaxwellBr. 16. However, it

is the quantity of oil sold at the lease, not the number of leases specifying delivery

at the lease, that matters. It is undisputed that virtually all the oil was sold

offshore, at or near the lease. There is no contrary evidence.

B. The Record Is Likewise Undisputed That Most (If Not All) of theServices Provided by Texon Did Not Apply to Oil Sold at or Nearthe Lease.

As an alternative to his breach of the duty to market theory, Maxwell argues

that the $7,555,886.28 award can be upheld under his gross-up theory based on the


11

value of the services that Texon provided to Kerr-McGee. But for that argument to

work, Maxwell must convince the Court that the services provided by Texon to

Kerr-McGee were vast and extensive.

Indeed, if the $7,555,886.28 damages award related to the gross-up theory,

then the value of the services provided by Texon would have to be six times that

amount (six times $7,555,886.28) because the gross-up damages would equal the

royalties due (for the Government’s one-sixth royalty) on the value of the services.

In other words, the services that Texon provided to Kerr-McGee would have to be

worth about $45 million. See Kerr-McGeeBr. 29. There is nothing in the record to

support that astronomical sum as the value of Texon’s services.

Once oil was sold (and title had passed) to Texon offshore at or near the

lease, any services provided by Texon with respect to that oil were necessarily for

Texon’s own benefit because, after the point of sale, the oil was then owned by

Texon. 13App.3910-12, 4061-62, 4099-4100, 4218. A review of the services

provided by Texon shows that most (if not all) of those services had no application

to oil sold at the lease and only limited application to oil sold near the lease:

Transportation services (moving oil downstream); Gathering services (gathering oil for measurement beyond the lease

platform); Scheduling and nominating services (coordinating movement of oil

downstream); Administrative and accounting services (account reconciliations

relating to downstream oil movement);


12

Pipeline coordination services (nominating and providing informationto pipelines to move oil downstream);

Line-fill services (ensuring oil consistently remained in pipelinesdownstream).

12App.3713; 13App.3896-98, 3910-12, 3973-76, 4121-22, 4128, 4147-48, 4218-

19, 4225-32; 15App.4745, 4786-88. With respect to oil sold at the lease, Texon

provided the services for its own benefit, not Kerr-McGee’s benefit. Of course, the

more oil that Kerr-McGee sold to Texon at or near the lease, the less extensive the

services that Texon provided to Kerr-McGee necessarily were.

As Maxwell notes, Texon did transport for Kerr-McGee the minor amount

of set-aside oil that Kerr-McGee was required to provide to small refiners, but

Kerr-McGee reimbursed Texon competely for Texon’s out-of-pocket

transportation charges. 13App.4232, 4249-50.

C. Finally, the Record Is Undisputed That Texon’s Services HadMinimal Value.

As part of Maxwell’s alternative effort to support the $7,555,886.28 award

under his gross-up theory, Maxwell tries to inflate the value of Texon’s services.

Although Maxwell now insists that Texon’s services were extremely valuable, at

trial Maxwell never even bothered to calculate the value of those services—

reflecting that Maxwell knew that, in fact, Texon’s services were of minimal


13

value.3 12App.3762.

The 1996 Arnold memo is the key evidence that Maxwell relies on to

support his contention that Texon provided highly valuable marketing services to

Kerr-McGee. 2Supp.App.633. In that memo, Kerr-McGee employee Mike Arnold

recommended that Kerr-McGee extend the original 1995 Texon contract. Id. He

wrote that the Texon contract “enable[d] [Kerr-McGee] to manage domestic

marketing with minimal staff” and that “[c]hanging to a piecemeal marketing

approach” might require additional staff. Id. Arnold indicated that Texon had

twelve full-time employees assigned to the Texon/Kerr-McGee contracts,

suggesting that Kerr-McGee might have to hire twelve new employees if it

terminated the Texon/Kerr-McGee contracts.

Kerr-McGee’s expert Tucker calculated the value of the services that Texon

allegedly provided to Kerr-McGee, accepting as true all the information contained

in the Arnold memo. Tucker determined that, for the 48 months at issue, royalties

would have increased by $36,000 for each additional staff person, and by $57,000

for each additional manager, that Kerr-McGee would have hired to handle services

3 The OIG Report confirms that Maxwell viewed Texon’s services as havingminimal value: when Maxwell urged MMS to issue an order to pay to Kerr-McGee, Maxwell’s MMS superiors offered to let Maxwell issue an order to paybased on the value of Texon’s services, but Maxwell rejected that offer as not being“fruitful”—undoubtedly because Maxwell knew that the services were of littlevalue. 4Jt.App.1038.


14

rendered by Texon. 10Jt.App.3003; 14App.4387-89. Even assuming that Kerr-

McGee would have hired twelve extra staff members (the number referenced in

Arnold’s memo), the total additional royalties would have been $432,000 (i.e., 12

times $36,000)—not the $7,555,886.28 found by the jury. This enormous disparity

is particularly significant given that the actual damages found by the jury were

trebled in the judgment.

But in reality, the evidence established that Arnold had an exaggerated view

of Texon’s services. Texon’s vice-president of marketing testified that Texon

never had more than six employees in Texon’s entire marketing department, and

most handled many matters other than Kerr-McGee contracts. 13App.4234;

15App.4728-31. When Kerr-McGee subsequently decided to terminate the Texon

contracts and take bids for its oil—bids not including marketing services—Kerr-

McGee did not have to hire any additional employees to handle those new

contracts. 14App.4306-11. The size of Kerr-McGee’s marketing department

remained unchanged. 14App.4311.

The record establishes that the value of the services provided by Texon for

Kerr-McGee’s benefit was indeed relatively minimal.


15

ARGUMENT

I. THERE IS NO EVIDENCE OF “KNOWING” SCIENTER UNDER MAXWELL’S

BREACH OF THE DUTY TO MARKET THEORY FOR THE OIL SOLD

OFFSHORE—VIRTUALLY ALL THE OIL AT ISSUE.

A. The MMS Regulations Govern the Basis on Which Royalties MustBe Paid to the Government.

The leases between Kerr-McGee and the Government contained guidelines

concerning the basis on which royalties should be paid to the Government,

including a provision that royalties should not be calculated on less than the fair

market value of the oil. 8Jt.App.2426. However, the leases did not contain a

definition of fair market value, and that term can mean different things under

different circumstances. The MMS regulations tell lessees, like Kerr-McGee, the

basis on which the Government expects to be paid royalties under various

circumstances—and thus what constitutes fair market value for the purposes of the

lease under those circumstances. Maxwell dismisses the regulations as largely

irrelevant, but in fact, the regulations are at the core of this lawsuit because they

determine the basis on which royalties should be paid to the Government.

B. For Oil Sold Offshore Under an Arm’s-Length Contract, theMMS Regulations Provide for Royalties to Be Paid Based on theContract Price.

MMS regulations are founded on the principle that, in an arm’s-length

contract situation, royalties should be paid based on the price that a lessee actually

receives for oil, and MMS generally will not second-guess that price. 30 C.F.R. §


16

206.102(a), (c)(2)(A). Under the regulations, royalties are based on “the gross

proceeds accruing to the seller under the arm’s-length contract, less applicable

[transportation] allowances.” See id. §206.102(a). “Gross proceeds” are “total

monies and other consideration accruing for the disposition of oil produced.”

4App.1454. An “arm’s-length contract” is one “between independent persons who

are not affiliates and who have opposing economic interests regarding that

contract.” 30 C.F.R. § 206.101; 4App.1454.

If MMS determines that, in calculating royalties, the lessee did not take into

account non-monetary consideration (such as services) received for oil, then MMS

can require the lessee to “gross up” value to include the non-monetary

consideration and to pay royalties on the value of any non-monetary consideration

received. 30 C.F.R. § 206.102(c)(1). By contrast, if MMS determines

undervaluation was the result of breach of the duty to market or other misconduct,

MMS must require additional royalties to be paid based on other standards

applicable to non-arm’s-length transactions. Id. § 206.102(c)(2). For purposes of

this lawsuit, the key “other standard” is the net-back valuation standard, which

starts with the onshore market center price for oil and nets out the cost to transport

the oil from offshore wells to onshore market centers.

Importantly for this case, under MMS regulations, selling oil offshore at the

lease is not a breach of the duty to market. 65 Fed. Reg. 14022, 14029 (Mar. 15,


17

2000). Comments to the MMS regulations stress that the regulations do “not imply

that lessees are somehow prohibited from marketing at the lease and must market

production ‘downstream.’ Lessees may market at the lease without breaching the

duty to market.” Id.

Furthermore, under MMS regulations, the “fact that the price received by the

seller under an arm’s-length contract is less than other measures of market price

[such as the net-back measure] . . . is insufficient to establish breach of the duty to

market unless MMS finds additional evidence that the seller acted unreasonably or

in bad faith. . . .” 30 C.F.R. § 206.102(c)(2)(B). Finally, MMS may not “simply

substitute its judgment” for that of the lessee as to value. Id. § 206.102(c)(2)(A).

Thus, under the MMS regulations, Kerr-McGee did not breach its duty to market

by selling the oil offshore, even if the price that Kerr-McGee received was less

than the price that could have been obtained by selling the oil at an onshore market

center.

C. Kerr-McGee Accountants Kyle and Clem Believed That TheyHad Completed the 2014 Forms Correctly Based on TheirReasonable Interpretation of the MMS Regulations.

1. Kyle and Clem completed Kerr-McGee’s 2014 Forms basedon their understanding of the MMS regulations.

Terry Kyle and Bryan Clem were the Kerr-McGee employees who prepared

Kerr-McGee’s 2014 Forms and submitted those forms to the Government.

13App.4027-28, 4033, 4110. To prove “knowing” scienter based on their


18

knowledge, Maxwell needed proof that (1) Kyle and Clem knew they were

including, in Kerr-McGee’s 2014 Forms, improper values for the oil sold to Texon,

and thus (2) knew they were understating, in those forms, the amount of the

royalties owed. Because Kyle and Clem completed the 2014 Forms based on a

reasonable (indeed, correct) interpretation of the MMS regulations, they did not

make “knowing” false statements in those forms as a matter of law. Kerr-

McGeeBr. 32-41. Significantly, neither Maxwell nor the Government has

challenged the interpretation of the MMS regulations that served as the basis for

the royalty calculations made by Kyle and Clem.

2. Kyle and Clem understood that the Texon contracts werearm’s-length.

Kyle and Clem decided what oil values and royalty amounts to include in the

2014 Forms against the backdrop of their knowledge of MMS regulations.

Applying those regulations, Kyle and Clem believed that, because the oil was sold

to Texon in an arm’s-length transaction, the price that Texon actually paid Kerr-

McGee for the oil was the proper value to report in the 2014 Forms. 13App.4036,

4062, 4111, 4116. It is undisputed that Kyle and Clem completed the 2014 Forms

using the cash price that Kerr-McGee received for its oil from Texon. Id.

The MMS regulations define an arm’s-length contract as one made between

two companies that are not affiliates and that have opposing economic interests

regarding the contract. Kyle and Clem knew that the contracts between Kerr-


19

McGee and Texon satisfied those standards because they knew that Kerr-McGee

and Texon (1) were not affiliates and (2) had opposing economic interests

regarding the contracts since they were on the opposite sides of those contracts.

13App.4094-95. Certainly, for purposes of knowing scienter, there was no

evidence (1) that Kyle and/or Clem thought the Texon contracts were not arm’s-

length, or (2) that Kyle and/or Clem were unreasonable in concluding that the

Texon contracts were arm’s-length.

Under the definition in the MMS regulations, Kerr-McGee’s contracts with

Texon were arm’s-length as a matter of law. Maxwell argues that those contracts

were not arm’s-length because Kerr-McGee received services from Texon in

addition to the monetary price that Texon paid for the oil. But Kerr-McGee and

Texon did not cease to have “opposing economic interests” with respect to the

contracts merely because Kerr-McGee received non-monetary consideration. The

MMS regulations reject Maxwell’s argument. Those regulations provide that

where a buyer gives a seller both non-monetary and monetary consideration for oil,

royalties must be paid on the non-monetary consideration as well as the monetary

consideration. See 16, supra. But the regulations do not provide that the receipt of

non-monetary consideration transforms an arm’s-length contract into a non-arm’s-

length contract.


20

Once again, the OIG Report shows that the government lawyers did not

interpret the MMS regulations like Maxwell does. The report reflects that the

government lawyers viewed the Texon contracts as arm’s-length even though the

government lawyers knew that Kerr-McGee had not “grossed-up” for the value of

the services. 4Jt.App.1034-40.4

3. Kyle and Clem understood that almost all the oil was soldoffshore at or near the lease.

Kyle and Clem knew that Kerr-McGee was selling almost all its oil at or

near the lease and was not marketing that oil beyond the lease. Kyle and Clem also

knew that MMS regulations allowed lessees to sell oil offshore at the lease without

breaching the duty to market.5 13App.4061-62, 4097-4100. Therefore, Kyle and

Clem did not believe that Kerr-McGee’s sale of the oil at or near the lease

constituted a breach of the duty to market requiring Kerr-McGee to value the oil

4 Kerr-McGee objected to the jury instructions because they erroneously allowedthe jury to decide whether the Texon contracts were arm’s-length when thosecontracts were arm’s-length as a matter of law. See 53-54, infra. There is noevidence that the Texon contracts were not arm’s-length and certainly no evidencethat Kyle and/or Clem understood the Texon contracts to be other than arm’s-length.

5 The $23 million judgment cannot be sustained based on the small amount of oilsold onshore. The jury’s damages finding matched to the penny Maxwell’s net-back calculations, which were based on 100% of the oil for all 57 leases at issuefor all 48 months at issue. Thus, the jury based damages on a breach of the duty tomarket as to 100% of the oil at issue, i.e., including the oil sold offshore at or nearthe lease (virtually all the oil at issue).


21

sold to Texon on a non-arm’s-length basis (such as on a net-back basis). Id. And,

of course, Kyle and Clem were familiar with the latitude that the MMS regulations

allowed lessees in valuing oil in arm’s-length transactions. 13App.4097, 4111-12.

4. Kyle and Clem did not knowingly make false statements inthe 2014 Forms.

Because Kyle and Clem completed the 2014 Forms based on a reasonable

interpretation of MMS regulations, they did not knowingly include false statements

in those forms as a matter of law. See Burlbaw, 548 F.3d at 949-51. See 24-25,

infra. Maxwell complains that Kerr-McGee should have conducted further

investigations and obtained additional information concerning various matters.

MaxwellBr. 19. However, at most, any failure to investigate or obtain additional

information constituted negligence, and mere negligence is not enough for FCA

liability. Burlbaw, 548 F.3d at 949.

D. Maxwell Incorrectly Claims That It Is Irrelevant Whether Kerr-McGee Completed the 2014 Forms Based on a ReasonableInterpretation of the MMS Regulations.

Maxwell dismisses Kerr-McGee’s arguments regarding its reasonable

interpretation of the MMS regulations in two sentences on page 21 of its brief. He

suggests that it does not matter whether Kerr-McGee based its valuation of the oil

on a reasonable interpretation of the MMS regulations because Kyle and Clem

both knew that the federal leases prohibited Kerr-McGee from paying royalties on


22

less than the fair market value of the oil.6

However, the leases themselves do not contain a definition of “fair market

value.” And as Maxwell has conceded, the regulations likewise do not contain any

specific definition of that term. 12App.3762. Instead, the regulations provide

multiple “measures” of market value, depending on how the lessee (Kerr-McGee)

sells the oil. For instance, if a lessee (Kerr-McGee) sells oil offshore pursuant to

an arm’s-length contract, then under the regulations, royalties are to be paid based

on the price that the lessee actually receives for the oil—a price that, as a matter of

law, satisfies the fair market value standard contained in the lease.

Maxwell creates a false dichotomy when he suggests there is a tension

between (1) the MMS regulations, and (2) the lease requirement that royalties not

be paid based on less than the fair market value of oil. Maxwell argues that the

lease provisions trump the regulations, but the federal leases and the federal

regulations work together, giving meaning to each other; neither trumps the other.

Indeed, at trial Maxwell admitted that the regulations are pertinent to determining

6 Maxwell misleadingly states that Clem “admitted” Kerr-McGee was required tosell federal oil “at the highest price.” MaxwellBr. 6. In reality, Clem “admitted”that “it was the position of the MMS that Kerr-McGee had a duty to market its oilat the highest price.” 13App.4047-48. Of course, at the time of Clem’s dealingswith MMS, Maxwell purported to speak for that agency, so it was really Maxwellwho—contrary to the plain language of the MMS regulations—insisted that Kerr-McGee had to sell its oil at the highest available price. See Kerr-McGeeBr. 17, 55-56.


23

the value on which royalties must be paid. 11App.3594.

E. This Court Should Rule That Kerr-McGee’s Interpretation WasReasonable as a Matter of Law.

Far from being irrelevant, the reasonableness of Kerr-McGee’s interpretation

of the MMS regulations is dispositive of this appeal. If Kerr-McGee completed the

2014 Forms based on a reasonable interpretation of the regulations, then

Kerr-McGee could not have made knowing false statements in those forms as a

matter of law.

Whether Kerr-McGee’s interpretation of the MMS regulations was

reasonable presents a legal question, which Kerr-McGee has asked this Court to

decide as a matter of law. Kerr-McGeeBr. 34-35. Kerr-McGee submits that, as a

matter of law, its interpretation of the regulations was at least reasonable,

especially given that (as reflected in the OIG Report, of which this Court can take

judicial notice) Kerr-McGee’s interpretation matched the contemporaneous

interpretation of the regulations by the MMS’s government attorneys. See U.S. v.

Magnesium Corp., 616 F.3d 1129, 1136 (10th Cir. 2010) (courts give deference to

agency’s interpretation of its own regulations).

Tellingly, neither Maxwell nor the Government has challenged Kerr-

McGee’s interpretation of the applicable MMS regulations. See 15-21, supra

(discussing the meaning of the MMS regulations at issue). Nor has Maxwell or the

Government claimed that Kerr-McGee’s interpretation of the MMS regulations


24

was unreasonable.

1. Reliance on a reasonable interpretation of a regulationnegates scienter under the False Claims Act.

In its amicus brief, the Government challenges Kerr-McGee’s argument that

reliance on a reasonable interpretation of a regulation precludes a finding of

knowing scienter. Contrary to the Government’s contentions, Burlbaw and the

other cases discussed in Kerr-McGee’s Opening Brief do stand for the proposition

that where someone has provided to the Government information believed to be

correct based on a reasonable interpretation of regulations, that person cannot

knowingly have supplied the Government with false information. Kerr-McGeeBr.

31-32. Reasonable reliance on a regulation necessarily negates the “knowing”

scienter required for liability under the FCA. Because Kyle and Clem filled out the

2014 Forms with information that they believed to be correct based on their

reasonable interpretation of the MMS regulations, the information included in the

reports could not have been knowingly false. Kerr-McGeeBr. 32-48.

The Government warns of various perceived dangers relating to the

interpretation of ambiguous regulations in the context of FCA claims.7 But courts

interpret regulations every day, and this Court must decide whether Kerr-McGee’s

7 Kerr-McGee believes its interpretation of the pertinent MMS regulations iscorrect as a matter of law, but Kerr-McGee only needs to establish that itsinterpretation was reasonable to preclude a finding of knowing scienter.


25

interpretation of the MMS regulations was reasonable in order to decide whether

there is evidence of knowing scienter. In any event, most of the concerns voiced

by the Government are not even involved in this appeal.

2. The Government addresses issues not raised by this appeal.

For example, the Government warns of the dangers of permitting a party to

negate scienter by coming up with a post-hoc interpretation of a regulation that

was plausible, yet known by the party to be wrong. AmicusBr. 11. But that

situation does not exist here. It is undisputed that Kyle and Clem completed the

2014 Forms based on their own straightforward reading of the regulations and that

their interpretation of the regulations never changed. 13App.4036, 4044, 4097-99,

4111-12. Maxwell does not argue otherwise. He just argues that Kerr-McGee’s

reliance on the regulations is not enough to negate scienter here. See 21-23, supra.

The Government also expresses concern about allowing an FCA defendant

to avoid liability by relying on an interpretation of an ambiguous regulation that

may be reasonable, but is contrary to a federal agency’s interpretation of that

regulation. See AmicusBr. 11-13. That situation, of course, is likewise not

involved here. As the OIG Report reflects, Kerr-McGee’s interpretation of the

MMS regulations exactly matched MMS’s own interpretation of those regulations.

The Government cites cases for the proposition that a party has a duty to

familiarize itself with the applicable legal standards and to seek clarification if


26

ambiguity would be apparent to a reasonably prudent person. AmicusBr. 10-11

(citing Heckler v. Cmty. Health Servs., 467 U.S. 51, 64 (1984); Maint. Eng’rs, Inc.

v. U.S., 21 Cl. Ct. 553, 559 (U.S. Cl. Ct. 1990)). But Kyle and Clem were familiar

with the MMS regulations and did not view them as ambiguous. 13App.4036,

4097-99, 4111-12. When MMS raised the issue of Kerr-McGee’s possible

underpayment of royalties, Kerr-McGee presented its interpretation of the

regulations to MMS in a letter from its law firm, Fulbright & Jaworski.

8Jt.App.2190-95. After reviewing the Fulbright letter, MMS decided not to issue

an order to pay. The situations in Heckler and Maintenance Engineers are not

involved here.

F. The Required “Knowing” Scienter Had to Reside in Kyle and/orClem—the Kerr-McGee Employees Who Filled Out the 2014Forms.

1. Maxwell has conceded, for purposes of this appeal, that thescienter must reside within a single Kerr-McGee employee.

The district court correctly instructed the jury that, in order to find knowing

scienter, the jury had to find that “at least one individual employee of Kerr-McGee

‘knew’ that Kerr-McGee was submitting or causing to be submitted a false record

or statement.” 4App.1451. See U.S. v. Sci. Applications Int’l Corp., 626 F.3d

1257, 1273-77 (D.C. Cir. 2010) (rejecting collective knowledge doctrine in FCA

context). In other words, knowing scienter could not be based on the collective

knowledge of multiple Kerr-McGee employees. In light of the jury instructions,


27

Maxwell has, in his brief, “assume[d] corporate scienter cannot be based upon

‘collective knowledge,’” and is not challenging the district court’s ruling regarding

the collective knowledge issue on appeal. MaxwellBr. 17.

The court’s refusal to give a collective knowledge instruction was correct for

the reasons set forth in Kerr-McGee’s Opening Brief (pages 35, 41-42), and in

such cases as Science Applications and Harrison v. Westinghouse Savannah River

Co., 352 F.3d 908, 918 n.9 (4th Cir. 2003). As the court in Science Applications

explained, where no one in a corporation realizes that the Government is being

shortchanged, FCA scienter cannot be established by “piecing together scraps” of

knowledge held by various employees to come up with “a type of loose

constructive knowledge that is inconsistent with the Act’s language, structure, and

purpose [fraud prevention].” 626 F.3d at 1274-75.

2. The Government cites no cases that are on point.

The Government disagrees with Science Applications and Harrison, but has

been unable to come up with a single case applying the collective knowledge

doctrine in the context of the FCA. AmicusBr. 19-24. Instead, the Government

relies on cases from other areas of the law. The FCA provides for treble damages

and penalties and contains a stringent scienter requirement. Thus, FCA cases

present different issues from those in the cases relied on by the Government.

In any event, the Government is not urging this Court to address the


28

collective knowledge issue, but rather is only asking the Court to adopt the

collective knowledge doctrine in the FCA context “[s]hould this Court choose to

reach the issue.” AmicusBr. 3, 19. In light of Maxwell’s concession, for purposes

of this appeal, that the collective knowledge doctrine does not apply, there is no

reason for this Court to reach the collective knowledge issue, which Maxwell has

not briefed and has voluntarily elected not to pursue.

3. The single Kerr-McGee employee with the required scientercould only have been Kyle or Clem.

Given that, under the jury instructions, “at least one individual employee”

had to know that “Kerr-McGee was submitting or causing to be submitted a false

record or statement,” that individual employee had to understand the 2014 Form

reporting requirements. The alleged false records or statements were contained in

Kerr-McGee’s 2014 Forms, and Kyle and Clem were the Kerr-McGee employees

who prepared and filed those forms. 13App.4027-28, 4033, 4110. They were the

ones who were familiar with the MMS regulations and who knew the oil values

that were supposed to be reported under those regulations. 13App.4044, 4090.

Thus, they were the only ones who could have known whether the values included

in the 2014 Forms were “false.” Because Kyle and Clem completed the 2014

Forms based on a reasonable interpretation of the MMS regulations, they did not

make knowing false statements in those forms as a matter of law.

Maxwell has argued that Arnold also could have been the single Kerr-


29

McGee employee with the requisite knowledge, but Arnold knew virtually nothing

about the MMS regulations and had nothing to do with preparing the 2014 Forms.

13App.3930-31. He had no idea what oil values were supposed to be put in those

forms. Therefore, Arnold could not have knowingly caused false information to be

included in the 2014 Forms.

G. None of the Evidence Relied on by Maxwell Can EstablishKnowing Scienter Under Maxwell’s Breach of the Duty to MarketTheory.

1. Maxwell cannot prove knowing scienter under his breach ofthe duty to market theory based on scienter evidencerelating to his gross-up theory.

Much of the scienter evidence discussed in Maxwell’s brief relates to

Maxwell’s gross-up theory—evidence that Kerr-McGee knew it was required to

pay royalties on the value of Texon’s services, but failed to do so. See 39-41,

infra. However, scienter evidence relating to Texon’s gross-up theory cannot

prove that Kerr-McGee knowingly breached its duty to market. Because the jury

found damages based on Maxwell’s breach of the duty to market theory, in order to

sustain the verdict, there must be scienter evidence that Kerr-McGee knowingly

breached its duty to market as to 100% of the oil at issue for which the jury

awarded $7,555,886.28 in damages. No such evidence exists.

2. Maxwell’s theory that Kerr-McGee breached its duty tomarket by selling oil at a poor price is contrary to the MMSregulations.

Maxwell’s complaint largely boils down to an assertion that Kerr-McGee


30

simply did not get a high enough price for the oil it sold to Texon offshore.

MaxwellBr. 18. But that complaint runs contrary to the MMS regulations that

establish the basis on which royalties must be paid. Under the regulations, Kerr-

McGee properly paid royalties based on the arm’s-length price that it received for

the oil it sold to Texon.

3. Even if the regulations could be disregarded, Maxwell’sevidence of knowing scienter—for breach of the duty tomarket—fails.

Even if one could simply disregard the MMS regulations (as Maxwell does),

the evidence relied on by Maxwell to prove that Kerr-McGee sold oil offshore for

poor prices either is not probative of offshore prices or is too sparse and tangential

to suggest that Kerr-McGee was breaching its duty to market, let alone that Kerr-

McGee knew it was breaching its duty to market. See Kerr-McGeeBr. 38-44.

a. Evidence of onshore prices cannot prove that offshoreprices were too low.

Maxwell argues that he proved that the Texon offshore prices were too low

through his net-back analysis. MaxwellBr. 21. However, his net-back analysis

was based on onshore market center prices, and under the MMS regulations, Kerr-

McGee had no obligation to sell its oil onshore, but rather was free to sell that oil

offshore. 12App.3631-32. See 15-17, supra. The net-back analysis deducts

transportation costs from the onshore price, but does not account for all the other

risks that a lessee avoids by selling offshore, such as risks resulting from natural


31

disasters (like earthquakes), pipeline ruptures, or acts of terrorism. 13App.3874-

76; 14App.4293-94, 4373. Indeed, Kerr-McGee actually avoided a substantial loss

(for itself and for the Government) by selling at the lease when the Poseidon

pipeline burst.8 13App.3874-76, 4213-15. All these other risks, not accounted for

in a “net-back” calculation, help explain why the offshore price is lower than the

onshore market center price. Thus, Maxwell’s net-back analysis does not establish

the offshore price of oil, but rather only establishes the onshore price, net of only

transportation costs, which is the price that a lessee must pay under a non-arm’s-

length contract or where it has breached the duty to market.

b. Isolated instances of higher offshore prices cannotprove breach of the duty to market or scienter.

Maxwell focuses on isolated instances of higher offshore prices—i.e., the

very instances that Kerr-McGee explained, in its Opening Brief, could not prove a

breach of the duty to market, let alone a knowing breach of the duty to market.9

8 In calculating damages, Maxwell, of course, did not include the value of thelosses that Kerr-McGee (and the Government) avoided by selling at the lease withrespect to the rupture of the Poseidon pipeline. 12App.3631-32.

9 The record does not support Maxwell’s hypothesis that Kerr-McGee sold federaloffshore oil at lower prices to get higher prices for onshore oil. Maxwell’s experttestified that his hypothesis related to Texon’s “basket approach” and was based ondeposition testimony, but Texon employee Shawnie Malone testified that the low-price leases were the ones that produced “sour” oil with “high sulfur” content.12App.3816-17; 15App.4766-69. Nor did Texon employee Gary Goodwinidentify the federal leases as low-price leases. 13App.4251-53. In any event,


32

Kerr-McGeeBr. 38-40. One of those instances related to sales to Gulfmark from

an adjoining lease, where there was no evidence that the quality of the oil was the

same as the oil from any of the 57 leases at issue. Kerr-McGeeBr. 39;

12App.3794-96.

The other instances involved higher prices for oil produced from two of the

57 leases at issue: (1) oil sold to Gulfmark from the Brazos A133 lease, and (2) oil

sold to Phillips from the SS32 lease. 12App.3699-3701, 3796-98. But the

amounts of oil involved were minuscule. The “damages” for the Brazos A133

totaled $15,446.73, which is roughly 1/500th of the $7,555,886.28 award.

2Supp.App.707. The alleged damages attributable to the SS32 totaled $37,702.48,

roughly 1/200th of the $7,555,886.28 damages award. 2Supp.App.759-61. Again,

the damages found by the jury were based, to the penny, on Maxwell’s calculations

that assumed a breach of the duty to market as to 100% of the oil at issue for all 57

leases at issue for all 48 months at issue.

With respect to evidence that Kerr-McGee obtained higher offshore prices

from other companies after the Texon contracts ended, those contracts covered a

Texon’s view of the Kerr-McGee contracts as a basket cannot establish knowingscienter on the part of Kerr-McGee. Kerr-McGeeBr. 40-41. Finally, becausevirtually all of the oil covered by the Texon contracts was sold offshore, it wouldhave made no sense, for Kerr-McGee to accept a too-low price for sales offshore inorder to get a high price for sales onshore.


33

later period of time after there had been an increase in market prices. 14App.4307-

11. Such evidence cannot prove that Kerr-McGee sold the oil at issue, during the

48 months at issue, for poor prices.

c. Nor can Maxwell prevail on his conclusory assertionthat Kerr-McGee “must have known” that it wasselling oil at prices that were too low.

Maxwell argues that the “jury logically could infer that sophisticated

employees of a large oil company would not unknowingly sell oil at so low a price

for so long a time.” MaxwellBr. 18. But the inference that Maxwell asserts the jury

could have drawn makes no sense. Why would Kerr-McGee—a for-profit

corporation—knowingly have drastically underpriced its oil?

Indeed, MMS concluded that the alleged underpricing was not itself

evidence of “intentional undervaluation of oil for royalty purposes” because “after

all Kerr[-McGee] themselves did not receive $60 million by accepting the prices

received from Texon.” 12App.3676. In other words, why would Kerr-McGee

knowingly have undervalued its oil in order to save at most $7.55 million with

respect to the Government’s 1/6th royalty interest when that “savings” on royalties

would cost Kerr-McGee $60 million in revenues with respect to its own 5/6th

interest in the oil? While there may be evidence that Kerr-McGee did not make the

best deals that it could have made, there is no evidence that Kerr-McGee


34

knowingly cheated itself out of $60 million so that it could knowingly cheat the

Government out of $7.55 million.

During closing arguments, Maxwell’s counsel told the jury that perhaps the

situation just “got away” from Kerr-McGee. 14App.4592. But this is a False

Claims Act case that requires proof of knowing scienter. Liability cannot be based

on negligence or incompetence. Kerr-McGee should not be cast in judgment for

$23 million simply because it made what turned out to be a poor business decision.

H. At Bottom, Maxwell Has Failed to Satisfy the Knowing ScienterStandard for His Breach of the Duty to Market Theory as toVirtually All of the Oil at Issue.

At the end of the day, the knowing scienter issue turns on Kyle and Clem’s

reasonable interpretation of the MMS regulations. Their reasonable interpretation

defeats knowing scienter for the breach of the duty to market theory as to the oil

that Kerr-McGee sold offshore at or near the lease. Because virtually all of the oil

at issue was sold offshore at or near the lease, the damages awarded in the

judgment—all necessarily flowing from the breach of the duty to market theory—

cannot be sustained. Even if some knowing breach of the duty to market could be

made out as to the small percentage of the oil at issue sold onshore, any such

breach could not support the damages, which are based on a purported knowing

breach of the duty to market for 100% of the oil at issue, for all 57 leases issue, and

for all 48 months at issue. A new trial is required.


35

II. THE SCIENTER REQUIREMENT CANNOT BE SATISFIED BY EVIDENCE

RELATING TO MAXWELL’S GROSS-UP THEORY.

A. Maxwell Has Improperly Conflated His Gross-Up Theory withHis Breach of the Duty to Market Theory.

At trial, Maxwell recognized that his breach of the duty to market theory and

his gross-up theory (based on the failure to pay royalties on services provided by

Texon) were “separate.”10 12App.3762, 3767. Nevertheless, Maxwell wrongly

tried to conflate the two theories in the trial court, and is still trying to conflate

those two theories on appeal. Maxwell urged the jury to find liability under his

gross-up theory by pointing to evidence that Kerr-McGee knew that it had not paid

royalties on certain services provided by Texon, but then Maxwell persuaded the

jury to award damages under his breach of the duty to market theory based on his

net-back calculations. The MMS regulations, however, contain different rules for

undervaluation resulting from breach of the duty to market and undervaluation

resulting from failure to gross-up. See 15-17, supra.

B. Maxwell’s “Inextricably Intertwined” Theory Is Meritless.

Maxwell argues that it is permissible for him to conflate his gross-up theory

and his breach of the duty to market theory because the two theories are

“inextricably intertwined.” MaxwellBr. 23. Maxwell contends that Kerr-McGee

10 The OIG Report also recognized the difference between a breach of the duty tomarket analysis and a gross-up analysis (as well as the fact that Maxwell himselfknew that Texon’s services had little value). 4Jt.App.1038. See 13 n.3, supra.


36

underpriced its oil “because Texon was providing unreported side consideration.”

MaxwellBr. 23. But of course every time a lessee undervalues its oil as a result of

failure to gross-up consideration, the oil has been underpriced “because [of]

unreported side consideration.”

Moreover, given the relatively minor value of the services Texon provided

for Kerr-McGee, it is illogical to assume that Kerr-McGee knowingly sold its oil

far too cheaply for the purpose of obtaining those minimal services. See 9-14,

supra. In any event, there is no basis in the law for Maxwell’s “inextricably

intertwined” theory. Neither the jury’s scienter finding nor the damages award can

be supported under that theory.

C. The $7,555,886.28 Damages Award Was Not Based on Maxwell’sGross-Up Theory and Is Vastly Excessive Under That Theory.

Because there is no evidence of the scienter required for liability under

Maxwell’s breach of the duty to market theory, the damages award can be

sustained only if there is evidence to support that award under Maxwell’s gross-up

theory. Kerr-McGeeBr. 27-30. But the jury’s $7,555,886.28 award is vastly

excessive under Maxwell’s gross-up theory.

1. The $7,555,886.28 award is excessive by more than$7 million.

Maxwell argues that the $7,555,886.28 damages award should be sustained

because courts “give leeway to reasonable jury estimates of damages where


37

‘defendant’s own misconduct has foreclosed any exact calculation.’” MaxwellBr.

24 (citations omitted). But that situation is not involved here. In fact, Kerr-

McGee’s expert Tucker calculated the value of the services allegedly provided by

Texon, accepting as true all the information contained in the Arnold memo.

Tucker calculated that, for the 48 months at issue, royalties would have

increased by $36,000 for each additional staff person, and by $57,000 for each

additional manager, that Kerr-McGee would have hired to handle services rendered

by Texon. 10Jt.App.3003; 14App.4387-89. Even assuming Kerr-McGee would

have hired twelve extra staff members (the number referenced in Arnold’s memo),

the total additional royalties would have been $432,000—not the $7,555,886.28

found by the jury.11 See 12-14, supra. Maxwell refused to calculate the value of

the services that Texon allegedly provided not because it was too difficult to

perform such a calculation, but rather because the calculation would have yielded

damages that were too small. See 12-14, supra.

2. The $7,555,886.28 damages award cannot be sustainedbased on the ipse dixit of Maxwell’s expert.

Maxwell also attempts to justify the jury’s $7,555,886.28 award under his

gross-up theory based on the ipse dixit of his expert Ashton. Ashton gave vague

11 The Arnold memo mistakenly stated that Texon had twelve full-time employeesassigned to the Texon contracts. See 14, supra.


38

and conclusory testimony suggesting that the value of Texon services just

automatically equals the difference between the Texon contract prices and onshore

market center prices. 12App.3821-22. But Ashton’s bare opinion is no evidence,

and is contrary to the MMS regulations, which make a clear distinction between

“gross-up” valuation and “net-back” valuation. Kerr-McGeeBr. 12-15. See

Brooke Grp., Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 242

(1993) (expert opinion must be properly supported).

Maxwell argues that the Court can sustain Kerr-McGee’s excessiveness

challenge only if the Court finds “a manifest abuse of discretion” by the district

court. MaxwellBr. 22. That standard is clearly met here by the district court’s

refusal to order remittitur or a new trial, given that the jury awarded $7,555,886.28

when the evidence justified, at most, an award of $432,000. A damages award that

is more than seventeen times the maximum amount justified by the evidence

should not be allowed to stand.

3. Maxwell’s waiver argument is without merit.

Maxwell argues that Kerr-McGee waived its challenge to the damages

award by not raising it in a timely manner. MaxwellBr. 22. However, Kerr-

McGee is challenging the $7,555,886.28 damages award as excessive. Kerr-

McGee properly included that challenge in its motion for new trial. 4Jt.App.1008-

09. See McBride v. Mkt. St. Mortg., 381 F.App’x 758, 769 (10th Cir. 2010). It


39

would, of course, be impossible to challenge an award of damages as excessive

before the jury awards damages. The district court ruled on Kerr-McGee’s

excessiveness challenge without finding any waiver.

D. Scienter Evidence Relating to Maxwell’s Gross-up Theory CannotSupport the Damages Award.

Most of the scienter evidence that Maxwell relies on to support his argument

that Kerr-McGee knowingly underreported its royalties relates to evidence (under

Maxwell’s gross-up theory) that Kerr-McGee knew about services provided by

Texon, but did not include the value of those services in its 2014 Forms. Scienter

evidence relating to Maxwell’s gross-up theory cannot support the judgment

because the $7,555,886.28 damages award is vastly excessive under Maxwell’s

gross-up theory. Because the jury did not award damages based on Maxwell’s

gross-up theory, scienter evidence relating to the gross-up theory is irrelevant.

1. The Arnold memo cannot provide the necessary scienterevidence under Maxwell’s breach of the duty to markettheory.

Maxwell focuses on the 1996 internal memo in which Kerr-McGee’s Mike

Arnold recommended that Kerr-McGee extend the original 1995 Texon contract

because terminating the contract might require Kerr-McGee to hire additional staff

to handle the services provided by Texon. 2Supp.App.633. Maxwell chides Kerr-

McGee for taking “heavy aim at its own internal document extolling the benefits of

the Texon arrangement.” MaxwellBr. 15. It is true that Kerr-McGee believes that


40

Arnold had an exaggerated view of the services provided by Texon. See 12-14,

supra. But even if everything in Arnold’s memo had been absolutely true and even

if Texon really had assigned twelve full time employees to Kerr-McGee’s

contracts, the additional royalties attributable to the value of the Texon services

would have been $432,000—not the $7,555,886.28 found by the jury. See 12-14,

supra. Thus, at most the Arnold memo could support a judgment of $432,000

under Maxwell’s gross-up theory, not a judgment for more than seventeen times

that amount under Maxwell’s breach of the duty to market theory.12

2. Evidence that Kerr-McGee failed to answer a questionpropounded by the MMS cannot prove knowing scienter.

In connection with the MMS audit, MMS sent Kerr-McGee a questionnaire

to obtain background information relating to the audit. 7Jt.App.2117-26;

12App.3636-38. Kerr-McGee neglected to answer a question asking whether

Kerr-McGee had received any incentives to allow various entities to market Kerr-

McGee’s production, which Maxwell explained at trial was intended to inquire

12 Nor can the inadvertent production of the Arnold memo during the MMS auditsupply the necessary scienter. MaxwellBr. 8, 19. Like the Arnold memo itself, theinadvertent production of the memo relates to Maxwell’s gross-up theory. (AsClem explained in a memo selectively quoted by Maxwell, MMS had notrequested internal memoranda, and it was Kerr-McGee’s policy not to produceunrequested materials. 13App.4015-19. Kerr-McGee accidentally provided theArnold memo to MMS because the memo was mixed in with a contract that MMShad requested. 8Jt.App.2176; 13App.4085-87.)


41

about any additional consideration that Kerr-McGee might have received for the

oil it sold. Id. Clem, who was responsible for filling out the questionnaire for

Kerr-McGee, was “stumped” by the question, and so consulted with his supervisor

Kyle. 13App.4019-24, 4057-59. Kyle told Clem that Kyle would handle the

matter, but never followed up on it.13 13App.4057-60. MMS never subsequently

requested that Kerr-McGee respond to the question that had been left blank.

13App.4024.

Kerr-McGee doubts that the failure to answer a question on a questionnaire

could establish FCA scienter under any circumstances. But in any event, because

the question related to additional consideration for Kerr-McGee’s oil, it once again

related to Maxwell’s gross-up theory, not to his breach of the duty to market

theory.

3. Arnold’s so-called “padding” of two oil valuations cannotestablish knowing scienter.

In a chart that Kerr-McGee’s Arnold provided to Kerr-McGee’s consultant

Strader, Arnold apparently “grossed-up” the Texon contract prices for three leases

13 Relying on an inflammatory sound bite, Maxwell asserts that Kyle told Clem,“don’t waste your time” answering the question. MaxwellBr. 19. A review ofMaxwell’s record cites shows that Clem denied that Kyle ever made that statement.13App.4019-24, 4057-60. Kyle likewise did not remember making the statement,but added that he would not deny having made the statement if Clem testified thathe had done so. 13App.4145-46.


42

(only two of which were among the 57 leases at issue) to include what Arnold

thought Texon’s services were worth. Kerr-McGeeBr. 43. Arnold’s apparent

valuation of Texon’s services was identified only by a cryptic “G&A savings”

notation next to the leases, where G&A savings were a lump sum, unsegregated

dollar amount included along with other traditional market adjustments like oil

quality adjustments. 7Jt.App.2137.

Because the so-called “padding” evidence relates to the perceived value of

Texon’s services and thus relates to Maxwell’s gross-up theory (not his breach of

the duty to market theory), that evidence cannot provide the scienter needed to

support the judgment under Maxwell’s breach of the duty to market theory. In any

event, the evidence is of minimal significance because the “G&A savings” notation

appeared next to only two of the 57 leases involved in this lawsuit. Moreover,

because “G&A savings” appeared as a lump sum, unsegregated dollar amount on

Arnold’s chart, there is no way to tell what portion of that amount represented

Arnold’s perception of how much Texon’s marketing services were worth as

opposed to his perception of how much the other items (e.g., oil quality

adjustments) in the lump sum, unsegregated dollar amount were worth.

The scienter evidence relating to Maxwell’s gross-up theory cannot support

the $7,555,886.28 award. The judgment cannot stand because there is no evidence

of knowing scienter under Maxwell’s breach of the duty to market theory as to the


43

oil sold offshore—virtually all the oil at issue. Again, the $7,555,886.28 damages

amount, which the judgment trebles, is based on 100% of the oil at issue, for all 57

leases at issue, for all 48 months at issue. A new trial is required.

III. A NEW TRIAL SHOULD ALSO BE GRANTED BASED ON THE NEWLY

DISCOVERED EVIDENCE REFLECTED IN THE OIG REPORT.

A. Kerr-McGee Has Met All the Requirements of the NewlyDiscovered Evidence Test.

To establish entitlement to a new trial based on newly-discovered evidence,

a party must show:

(1) the evidence is newly discovered since the trial;

(2) if the evidence was available at the time of trial, themovant exercised diligence in discovering the evidence;

(3) the evidence is not merely cumulative or impeaching;

(4) the evidence is material; and

(5) the evidence would probably produce a different result.

Graham v. Wyeth Labs., 906 F.2d 1399, 1416 (10th Cir. 1990).

The newly discovered evidence contained in the OIG Report consisted of

interpretations of the applicable MMS regulations by government attorneys

reflecting that those attorneys interpreted the regulations in exactly the same way

that Kyle and Clem did. If that evidence had been offered at trial, the jury

probably would not have found that Kerr-McGee knowingly underreported its

royalties or knowingly included false statements in its 2014 Forms. Because the


44

newly discovered evidence reflected in the OIG Report satisfies all the

requirements of the newly discovered evidence test, a new trial should be granted.

See id. at 1414-19 (reversing district court’s refusal to order new trial where all

requirements for obtaining new trial based on newly discovered evidence were

met).

B. Given That the Whole Case Turned on Application of the MMSRegulations, the Newly Discovered Evidence Was VitallyImportant.

Maxwell’s efforts to minimize the importance of the newly discovered

evidence cannot change the fact that the evidence was, in fact, critically important.

The key issue in this case was whether Kerr-McGee knowingly undervalued the oil

and knowingly underreported the royalties in the 2014 Forms that it submitted to

the Government and thus made false statements in those forms. Kerr-McGee’s

Kyle and Clem determined the values included in the 2014 Forms based on their

interpretation of the applicable MMS regulations. If the jury had known that the

government attorneys charged with interpreting the regulations had construed those

regulations exactly like Kyle and Clem construed them, the jury probably would

not have found that Kerr-McGee made knowing false statements in its 2014 Forms.

After all, if Kyle and Clem interpreted the regulations exactly like the government

attorneys did, how could Kyle and Clem have acted in a knowingly wrongful

manner in calculating the royalties owed under those regulations?


45

Maxwell attempts to diminish the importance of the OIG Report by

downplaying the role of the MMS regulations and focusing on the need to sell oil

at fair market value. MaxwellBr. 29. But Maxwell is once again ignoring the role

that the regulations play in determining what fair market value means and what

price a lessee must obtain for government oil. It would have been critically

important for the jury to know that MMS—with full knowledge of, and taking into

account, the price for which Kerr-McGee was selling oil to Texon and with full

knowledge of the price at which other government lessees were selling oil—did

not believe that the Texon price constituted a breach of the duty to market

requiring Kerr-McGee to pay royalties on a non-arm’s-length basis under the MMS

regulations.

Maxwell notes that the OIG Report reflects that there was dissension within

MMS concerning Kerr-McGee’s conduct and whether Kerr-McGee had underpaid

its royalties. However, that internal dissension does not change the fact that the

responsible government attorneys—the ones charged with interpreting the

regulations—construed those regulations exactly like Kyle and Clem did.

As for Maxwell’s contention that MMS did not have all the information that

the jury did, MMS had the key Arnold memo and all the documents disclosed in

the extensive audit. Thus, MMS had essentially the same information that was

provided to the jury. Maxwell never identifies what substantively different or


46

additional information the jury supposedly had.14

C. The Government Lawyers’ Interpretations of the Regulations—Which Matched Kyle and Clem’s Interpretation—Were NotMerely Cumulative or Impeaching.

Contrary to Maxwell’s arguments, the regulatory interpretations in the OIG

Report were not merely cumulative or impeaching. Those interpretations

constituted substantive evidence of the reasonableness of Kerr-McGee’s actions

because they showed that Kerr-McGee interpreted the MMS regulations exactly

like the government attorneys interpreted them—evidence that was not otherwise

before the jury.

Maxwell argues that the jury could have figured out the substance of the

government attorneys’ legal advice, but possible speculation by the jury is no

substitute for real evidence. See Kerr-McGeeBr. 59-60. Moreover, Maxwell’s

counsel suggested to the jury that the MMS refused to issue an order to pay to

Kerr-McGee because the MMS was corrupt or short-staffed. 11App.3526, 3539-

40; 12App.3676-77.

14 Nor should Kerr-McGee’s right to a new trial be affected by Kerr-McGee’smotion in limine urging the exclusion of “testimony which articulates and appliesthe relevant law” on the ground that such testimony “circumvents the jury’sdecision-making function by telling it how to decide the case.” MaxwellBr. 28. Ifa new trial is granted, Kerr-McGee will not offer the legal opinions in the OIGReport to tell the jury how to decide the qui tam case, but rather to show thatKerr-McGee’s interpretation of the MMS regulations exactly matched theinterpretation of the government attorneys and therefore was reasonable.


47

D. The Evidence Reflected in the OIG Report Is “Newly Discovered”Evidence That Existed at the Time of Trial.

Evidence must have existed at the time of trial in order to constitute newly

discovered evidence. See MaxwellBr. 26 (citing Swope v. Siegel-Robert, Inc., 243

F.3d 486, 498 (8th Cir. 2001); Rivera v. M/T Fossarina, 840 F.2d 152, 156-57 (1st

Cir. 1988)). Although the OIG Report itself did not exist at the time of trial, the

legal opinions and interpretations contained in that report did exist at that time, but

were unavailable because of their then-privileged nature. See Kerr-McGeeBr. 52-

54. The cases relied upon by Maxwell are of no help to him because they involve

situations where the new evidence actually did consist of reports created after trial.

See Swope, 243 F.3d at 498 (post-trial IRS report); Rivera, 840 F.2d at 156-57

(post-trial investigation). Here, the newly discovered evidence consists of the legal

opinions and interpretations reflected in the OIG Report, not the report itself.

Rivera and Swope are not on point.

Nor is Maxwell’s attempt to distinguish “newly available” evidence from

“newly discovered” evidence of any help to him. The criminal cases relied upon

by Maxwell involve situations where the evidence in question was “newly

available,” but not “newly discovered,” while the present situation involves

evidence that is both “newly discovered” and “newly available.” MaxwellBr. 26

(citing U.S. v. Muldrow, 19 F.3d 1332, 1339-40 (10th Cir. 1994); U.S. v. Owen,

500 F.3d 83, 89-92 (2d Cir. 2007)).


48

In Muldrow and Owen, a criminal defendant was unable to obtain the

testimony of a co-defendant at trial because of the co-defendant’s invocation of his

Fifth Amendment rights against self-incrimination. The co-defendant subsequently

waived his Fifth Amendment rights and the defendant sought a new trial based on

newly discovered evidence. In both cases, the courts held that the defendant was

not entitled to a new trial because the co-defendant’s testimony was not “newly

discovered,” but rather was merely “newly available.” The rationale underlying

Muldrow and Owen was that the co-defendant’s testimony could not have been

“newly discovered” evidence given that the defendant seeking a new trial was

aware of the substance of that testimony. Because federal law allows new trials

only based on “newly discovered evidence” and not based on “newly available”

evidence, the criminal defendants were not entitled to a new trial.

In this case, the privileged opinions in the OIG Report clearly were “newly

discovered” as well as “newly available.” MMS had repeatedly invoked the

attorney-client privilege to shield from discovery the legal advice provided to

MMS by government attorneys. See Kerr-McGeeBr. 52-54. As a result,

Kerr-McGee was unaware of the substance of that legal advice until the OIG

Report was published. Thus, the unknown opinions in the OIG Report constitute

newly discovered evidence, while the known (but unavailable) evidence in the

criminal cases did not.


49

E. Given the Government’s Repeated Assertion of the Attorney-Client Privilege, Maxwell’s Lack of Diligence Argument IsWithout Merit.

Maxwell argues that Kerr-McGee is not entitled to a new trial because

Kerr-McGee was not diligent in seeking the evidence in question. But Maxwell’s

argument ignores Tenth Circuit law that the diligence requirement applies only “if

the evidence was available” at the time of trial. Comm. for First Amendment v.

Campbell, 962 F.2d 1517, 1523 (10th Cir. 1992). As Kerr-McGee has explained,

the opinions contained in the OIG Report were not available until the Government

waived the attorney-client privilege by publishing the OIG Report after trial. No

amount of diligence would have enabled Kerr-McGee to gain access to the

Government’s legal advice before the publication of the report. Kerr-McGeeBr.

52-54.15

In fact, Kerr-McGee repeatedly tried to obtain the discovery it needed, but

was repeatedly rebuffed based on MMS’s exercise of the attorney-client privilege.

See Kerr-McGeeBr. 52-54. Maxwell claims that the federal magistrate

“excoriated” Kerr-McGee for not deposing Lanis Morris, the only MMS employee

that Kerr-McGee was granted permission to depose. But Morris was an MMS

15 Maxwell’s lack of diligence argument also ignores that the “law does not requirepeople to engage in futile acts,” such as seeking depositions concerning privilegedlegal advice. See Scheufler v. Gen. Host Corp., 126 F.3d 1261, 1268 (10th Cir.1997); see also U.S. v. Conrad, 448 F.2d 271, 276 (9th Cir. 1971).


50

auditor who worked on the Kerr-McGee audit under Maxwell and was a relator in

his own qui tam actions against various oil companies.16 The isolated deposition of

a qui tam plaintiff/underling of Maxwell would have been useless (and potentially

harmful) to Kerr-McGee, so Kerr-McGee declined the Government’s invitation to

depose Morris.

Most importantly, Kerr-McGee’s election not to depose Morris does not

change the fact that no amount of diligence would have enabled Kerr-McGee to

obtain the privileged legal opinions contained in the OIG Report. The Government

repeatedly claimed the attorney-client privilege as to those opinions, and those

opinions were unavailable until the Government waived the attorney-client

privilege by publishing the OIG Report.

Maxwell mistakenly states that the district court also gave Kerr-McGee the

option of either calling MMS employee Lucy Querques-Denett to testify or reading

her declaration to the jury. MaxwellBr. 27. In fact, the district court refused to

order Ms. Denett to testify, stating that he was “not going to overrule the

magistrate judge and compel Ms. Denett to testify.” 11App.3479. In any event,

whether Denett testified live or only through her affidavit, Kerr-McGee never

16 See U.S. ex rel. Randy Little & Lanis Morris v. Eni Petroleum Co., 2007 WL2407088 (W.D. Okla. Aug. 22, 2007). On August 22, 2007, Morris’s qui tamaction was dismissed for failure to state a claim. Id. at *3.


51

would have been able to obtain the privileged information subsequently revealed in

the OIG Report. The Denett’s declaration read at trial claimed the attorney-client

privilege.

IV. MAXWELL CANNOT AVOID THE ERRORS IN THE JURY INSTRUCTIONS.

A. The District Court Should Have Sustained Kerr-McGee’sObjection to the Use of “Fair Market Value” in the JuryInstructions.

The MMS regulations govern how royalties should be calculated. See

15-17, supra. Those regulations provide that, in an arm’s-length contract situation,

royalties should be based on gross proceeds. Id. In a non-arm’s-length contract

situation or where there has been a breach of the duty to market, royalties are based

on a series of benchmarks, including the net-back standard.17 Id. Nowhere do the

regulations use the term “fair market value.”

Kerr-McGee objected to the use of the term “fair market value” on the

ground that it was not the term used in the regulations and did not “accurately

represent [w]hat the regulations require in a royalty underpayment valuation case.”

14App.4495-98. In trying to defend the court’s jury instructions, Maxwell

criticizes the proposed instruction that Kerr-McGee tendered to the Court. Kerr-

McGee submits that its instruction tracked the MMS regulations and was correct

17 As explained in Kerr-McGee’s Opening Brief, the benchmarks were applicableunder the version of the MMS regulations that applied during the first seventeenmonths of the time covered by Maxwell’s claims. Kerr-McGeeBr. 14-15.


52

(see Kerr-McGeeBr. 60-63), but even if its proposed instruction was not entirely

correct, Kerr-McGee’s objection was valid and should have been sustained. See

City of Wichita, Kan. v. U.S. Gypsum Co., 72 F.3d 1491, 1495 n.1 (10th Cir. 1996)

(“An objection is adequate to preserve the issue on appeal if it identified the

objectionable instruction and denoted the legal grounds for the objection.”); Bueno

v. City of Donna, 714 F.2d 484, 490 (5th Cir. 1983) (defect in requested instruction

did not waive appellate complaint about the jury instructions).

Maxwell tries to salvage the court’s jury instructions by noting that the

leases provide—as one of various guidelines for pricing federal oil—that the

“value of production for purposes of computing royalty on production from this

lease shall never be less than the fair market value of the production.”

8Jt.App.2426. But the leases contain no definition of “fair market value,” and

reference to “fair market value” cannot supplant the specific standards in the MMS

regulations governing how oil must be valued for purposes of calculating royalties.

The prejudice that Kerr-McGee suffered from the court’s refusal to instruct

the jury concerning the MMS regulations is shown by the jury notes reflecting the

jury’s repeated requests for guidance concerning those regulations.18

18 Maxwell observes that Kerr-McGee objected to admitting the regulations as anexhibit. However, that evidentiary objection in no way waived Kerr-McGee’sright to have the jury properly instructed concerning the law.


53

Kerr-McGeeBr. 62. Without such guidance, the jury just rubber-stamped

Maxwell’s net-back calculations.

B. The District Court Should Have Sustained Kerr-McGee’sObjection to the Jury Instructions Regarding Arm’s-LengthContracts.

The parties agree that, under the MMS regulations, an arm’s-length contract

is one “between independent persons who are not affiliates and who have opposing

economic interests regarding that contract.” It is undisputed that Texon and Kerr-

McGee were not affiliates. The only purported evidence that the contracts were

not arm’s-length was the testimony of Maxwell’s expert Ashton. 12App.3826-28.

Ashton testified that, in his opinion, the contracts were not arms-length, but he did

not use the required “opposing economic interests” standard. Id. The fact that

Kerr-McGee and Texon were on opposite sides of the oil sales contract means that

they had opposing economic interests as a matter of law. Therefore, the district

court should have sustained Kerr-McGee’s objection to the jury instruction relating

to arm’s-length contracts (which permitted the jury to decide whether the Texon

contracts were arm’s-length), and should have instructed the jury that the Texon

contracts were arm’s-length as a matter of law.

Maxwell relies on a district court brief filed by the Government suggesting

that a variety of factors should be considered in determining whether parties have

opposing economic interests. However, the Government has not urged that


54

position in its amicus brief filed in this Court and, on appeal, has not disputed that

the Texon contracts were arm’s-length as a matter of law. Indeed, the OIG Report

reflects that the Government recognized that the Texon contracts were arm’s-

length. 4Jt.App.1034-40.

The district court’s refusal to instruct the jury that the Texon contracts were

arm’s-length was prejudicial. If such an instruction had been given, the jury would

have been limited to awarding damages based on gross proceeds unless the jury

also found breach of the duty to market or other misconduct by Kerr-McGee.

V. CROSS-APPEAL: THE DISTRICT COURT CORRECTLY REJECTED

MAXWELL’S REQUEST FOR 1,403 PENALTIES.19

Maxwell seeks to increase the amount of his $23 million judgment by

seeking to increase the number of penalties imposed against Kerr-McGee from 48

to 1,403. Although Maxwell does not say how large the new judgment would be,

his argument, if adopted, would yield a judgment of over $30 million.

The district court’s decision to impose 48 penalties was based on the number

of times that Kerr-McGee submitted 2014 Forms to MMS. In seeking to increase

the number of penalties by almost 30-fold, Maxwell argues that the district court

should have tied the number of penalties to the number of leases on the 2014

19 In Parts V and VI, Kerr-McGee responds to Maxwell’s cross-appeal subject toKerr-McGee’s contention that the judgment should be set aside for all the reasonsdiscussed above.


55

Forms. According to Maxwell, the district court should have assessed 1,403

penalties based on the number of “lease obligation[s]” encompassed within the 48

forms submitted to the Government. MaxwellBr. 40.

A. The District Court Imposed Penalties Based on the Facts of theCase.

Maxwell characterizes the district court’s decision to impose 48 penalties as

involving purely legal issues relating to statutory construction. MaxwellBr. 40.

And the Government states: “The district adopted an apparently categorical rule

that submission of a single fraudulent form can constitute only one violation of the

FCA.” AmicusBr. 27. But in reality, the court carefully considered the facts and

the conduct of the defendant in this case in deciding to assess 48 penalties. It did

not adopt any “categorical rule” relating to forms.

In concluding that one penalty should be imposed for each time Kerr-McGee

submitted a 2014 Form, the district court relied on the fact that “the consolidated

form submitted by the Defendant to the MMS aggregates a large volume of data,

but ultimately reduces down to a single ‘Net Payment’ field for each form, and the

Defendant tendered only a single payment to the MMS each month, encompassing

royalties owed for all 57 leases.” 6Jt.App.1665. Similarly, the court wrote that

“[i]n making its monthly payments to the MMS, the Defendant did not send 57

separate checks, one for each lease reported in the monthly form; it sent one check,

equivalent to one ‘claim,’ applicable to the aggregate of all of the leases.”


56

6Jt.App.1666. Based on those facts, the district court concluded that “the statutory

penalty should be imposed only with regard to the monthly report,” and not with

regard to the individual leases aggregated within the 2014 Form. 6Jt.App.1665-66.

B. The Imposition of 48 Penalties Was Correct Under the ApplicableLaw.

Maxwell and the Government argue that the number of penalties should

have been tied to the number of Kerr-McGee’s leases. But the Supreme Court has

rejected “the proposition that the number of forfeitures [penalties] is inevitably

measured by the number of contracts involved in a case. . . . The language of the

statute focuses on false claims, not on contracts.” U.S. v. Bornstein, 423 U.S. 303,

311 (1976). Instead of focusing on the number of contracts or leases, “the focus in

each case [must] be upon the specific conduct of the person from whom the

Government seeks to collect the statutory forfeitures.” Id. at 311, 313.

Based on Bornstein, the Krizek court concluded that the appropriate inquiry

in assessing penalties is: “‘With what act did the defendant submit his demand or

request and how many such acts were there?’” U.S. v. Krizek, 111 F.3d 934, 939

(D.C. Cir. 1997). Here, the district court correctly found that Kerr-McGee’s

“conduct” or “act” was its monthly submission of a 2014 Form (along with a single

payment for the royalties owed) and that there were 48 such acts.

There were no separate acts of alleged fraud by Kerr-McGee in connection

with the individual leases that could have justified the imposition of separate


57

penalties. Rather, for all leases, Kerr-McGee employees Kyle and Clem

interpreted the regulations and determined that royalties should be paid based on

the contract price. The Government argues that, where a single form relating to

multiple contracts is used, multiple penalties may be imposed if the defendant has

“engage[d] in a different type of wrong,” but here Kerr-McGee did not engage in

different types of wrongs. AmicusBr. 27. A single decision was made, and, based

on that decision, Kerr-McGee submitted one form.

Maxwell and the Government try to distinguish Krizek because it involved

an affirmative claim for payment, while this case involves a false statement

allegedly made to avoid or reduce an obligation to the Government. That

distinction is meaningless. A court looks at the what the defendant did,

irrespective of whether the act is the submission of a false claim or the making of a

false statement to reduce an obligation. The same analysis applies. Just as the

submission of the invoices in Bornstein and the health care forms in Krizek were

the appropriate acts for assessing penalties, submitting the 2014 Forms was the act

that dictated the assessment of penalties in this case.20 In each case, the focus was

on the conduct of the defendant and the submission containing the allegedly false

statement.

20 In following Krizek, the district court correctly rejected the contrary analysis inU.S. ex rel. Koch v. Koch Industries, Inc., 57 F. Supp. 2d 1122 (N.D. Okla. 1999).


58

VI. CROSS-APPEAL: THE DISTRICT COURT PROPERLY REJECTED MAXWELL’S

REQUEST FOR PREJUDGMENT INTEREST.

Maxwell seeks to add more than $4 million in prejudgment interest to his

$23 million judgment.21 MaxwellBr. 46. Noting that “most courts have concluded

that prejudgment interest is not properly awarded in a False Claims Act case,” the

district court correctly rejected Maxwell’s prejudgment interest request.

6Jt.App.1667-68. In doing so, the court relied on the Supreme Court’s decision in

Cook County v. U.S. ex rel. Chandler, 538 U.S. 119, 130 (2003) and other

appellate authority. See U.S. v. Foster Wheeler Corp., 447 F.2d 100, 102 (2d Cir.

1971). Those authorities make clear that the treble damages provision in the FCA

compensates for the loss of interest before judgment.

Maxwell states that there is “a split of authority” regarding whether

prejudgment interest is recoverable under the FCA. MaxwellBr. 44. But the cases

on which Maxwell relies contain no analysis and were decided before the Supreme

Court’s decision in Cook County. See Miller v. FEMA, 57 F.3d 687 (8th Cir.

1995); U.S. v. Coop. Grain & Supply Co., 476 F.2d 47 (8th Cir. 1973). The cases

rejecting prejudgment interest in the FCA context reason that, given the

21 There is no basis for Maxwell’s speculative assertion that Kerr-McGeeconverted the alleged underpayment of royalties into $39 million in shareholderequity. MaxwellBr. 47. Indeed, if Kerr-McGee underpaid the Government by$7.55 million, Kerr-McGee itself lost many times that amount in revenues. See 33-34, supra.


59

availability of treble damages, prejudgment interest “is not required to fulfill

Congress’ intent” of making the government whole. U.S. v. McLeod, 721 F.2d

282, 286 (9th Cir. 1983); Foster Wheeler, 447 F.2d at 102.

Citing U.S. v. Texas, 507 U.S. 529 (1993), Maxwell argues that prejudgment

interest must be awarded because there is no indication that Congress did not

intend for prejudgment interest to be available in FCA cases. However, Cook

County shows that the Supreme Court has read the FCA’s treble damages

provision as reflecting congressional intent to disallow prejudgment interest. 538

U.S. at 130. Importantly, Congress has amended the FCA several times and has

never added a provision requiring the award of prejudgment interest, even though

decades of authority have rejected the award of prejudgment interest in the FCA

context. See, e.g., Foster Wheeler, 447 F.2d at 102.

The Government stands silent on the issue before this Court, but in the

district court, the Government acknowledged that “[m]ost courts that have

considered the question have concluded that pre-judgment interest is not allowed in

calculating a False Claims Act award.” 6App.2019-20. In the district court, even

Maxwell acknowledged the “inability to recover prejudgment interest” in a FCA

case. 5App.1477.


60

CONCLUSION

For the foregoing reasons and the reasons set forth in its Opening Brief,

Kerr-McGee requests all relief sought in its Opening Brief.

Respectfully submitted,

Gregory E. GoldbergHOLLAND & HART LLP555 Seventeenth Street, Suite 3200Post Office Box 8749Denver, Colorado [email protected]

s/ Marie R. YeatesMarie R. YeatesPenelope E. NicholsonVINSON & ELKINS L.L.P.1001 Fannin Street, Suite 2500Houston, TX [email protected]@velaw.com

Charles D. TetraultVINSON & ELKINS L.L.P.The Willard Office Building1455 Pennsylvania Ave. N.W.Washington, D.C. [email protected]


61

STATEMENT CONCERNING ORAL ARGUMENT

Kerr-McGee requests oral argument for the reasons stated in Kerr-McGee’s

Opening Brief.


62

CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(a)(7)(B)

This brief complies with the type-volume limitation of FED. R. APP. P.

32(a)(7)(B) as enlarged by this Court’s November 6, 2007 Order, because this brief

contains 13,999 words, excluding the parts of the brief exempted by FED. R. APP.

P. 32(a)(7)(B)(iii).

This brief complies with the typeface requirements of FED. R. APP. P.

32(a)(5) and the type style requirements of FED. R. APP. P. 32(a)(6) because this

brief has been prepared in a proportionally spaced typeface using Microsoft Word

2003 in Times New Roman, 14-point font.

s/ Marie R. YeatesMarie R. YeatesAttorney for Appellant Kerr-McGee Oil &

Gas CorporationDated: April 18, 2011


63

CERTIFICATE OF SERVICE

I hereby certify that on April 18, 2011, the foregoing was electronically filedwith the Clerk of Court using the CM/ECF system, which will send notification ofsuch filing to the following e-mail addresses:

Richard LaFond: [email protected] Porter: [email protected] Norton: [email protected] Reilly: [email protected] Spohn: [email protected] Christian: [email protected] Edgar: [email protected] Deeny: [email protected] Volin: [email protected] Wechsler: [email protected] Zonies: [email protected] Swingle: [email protected] Connelly: [email protected]

s/ Marie R. YeatesMarie R. Yeates


64

CERTIFICATE OF DIGITAL SUBMISSION

No privacy redactions had to be made to this document. Every document

submitted in digital form is an exact copy of the written document filed with the

Clerk, and this document has been scanned for viruses with the most recent version

of a commercial virus scanning program (McAfee Virus Scan, Version 8.7) and,

according to the program, is free of viruses.

s/ Marie R. YeatesMarie R. YeatesAttorney for Appellant Kerr-McGee Oil &

Gas CorporationDated: April 18, 2011

US 836299v.1


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KERR-McGEE’S BRIEF IN RESPONSE/REPLY TO MAXWELL’S …