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Fifth Circuit Focuses on Manning Requirements and Charter Arrangements for Foreign Floating Rigs

Posted in Marine Services, Offshore Oil

The U.S. Fifth Circuit, in Brown v. Offshore Specialty Fabricators, Inc., No. 10-40936 (Nov. 23, 2011), recently addressed the confluence of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), the Outer Continental Shelf Lands Act (“OCSLA”), the Immigration and Nationality Act (“INA”), and “foreign control” exemptions from the OCSLA manning requirements that had been issued by the Coast Guard in affirming the district court’s dismissal of a lawsuit filed by U.S. citizens alleging, in part, violations of RICO arising from an alleged scheme to employ foreign workers on the Outer Continental Shelf thereby depressing wages and degrading working conditions.  The defendants were classified as belonging to two principal groups:  the Service Defendants, companies engaged in the offshore oil and gas exploration industry, and the Manning Defendants, companies engaged in providing contract labor services for offshore oil and gas projects.

All of Plaintiffs’ claims were ultimately dismissed by the district court.  The Plaintiffs appealed the dismissal of three of their claims, one of which involved the civil RICO claims against the Service Defendants.  The Fifth Circuit affirmed the dismissal of all claims.  The Court’s reasoning concerning the dismissal of the RICO claim is briefly discussed.

In order to prevail in a civil RICO claim against the Service Defendants, the Plaintiffs had to establish that the Service Defendants engaged in racketeering activity.  The Plaintiffs argued that the Service Defendants had violated the INA by employing foreign workers on their vessels.  The Plaintiffs further argued that the INA applied to the Service Defendants’ vessels by operation of the OCSLA, which extends federal law to installations that were permanently or temporarily attached to the seabed of the United States Outer Continental Shelf.  However, because the Service Defendants’ vessels were free floating and not attached to the seabed, as a matter of law, the OCSLA did not apply to those vessels where the alleged wrongful conduct occurred.

The Service Defendants alternatively argued that they received exemptions from the Coast Guard from the manning requirements of OCSLA, which exemptions allowed the Service Defendants to lawfully employ foreign workers on the Service Defendants’ vessels and thus shield them from potential RICO liability.  Under OCSLA, vessels, rigs, platforms and other structures must be “manned or crewed by” U.S. citizens or “aliens lawfully admitted to the United States for permanent residence.”  43 U.S.C. § 1356.  One of the statutory exemptions from OCSLA’s manning requirements are vessels “over 50 percent of which is owned by citizens of a foreign nation or with respect to which the citizens of a foreign nation have the right effectively to control.”  43 U.S.C. § 1356(c)(2).  The Coast Guard can determine whether the statutory standards for a foreign control exemption have been satisfied, and if so, whether to issue a exemption to a given vessel.

Two of the Service Defendants had obtained a foreign control exemption from the Coast Guard, which the Plaintiffs argued had been procured through alleged deceit by those Service Defendants.  Those Service Defendants bare boat chartered their vessels to a foreign controlled company, which in turn manned, equipped and operated the vessels on the U.S. Outer Continental Shelf.  The bare boat charter agreement permitted the operator to sub-charter the vessels to other companies.

The foreign controlled bare boat charterer / operator thereafter time chartered the vessels to the Service Defendants and other companies.  Those Service Defendants presented evidence that they had fully disclosed to the Coast Guard in the exemption application process the foregoing chartering arrangements, including the foreign bare boat charterer’s ownership, financial and organizational structure as well as the Service Defendants’ relationship to the foreign bare boat charterer.

The Fifth Circuit was “loath to second-guess the Coast Guard’s judgment in issuing foreign control exemptions,” and accorded judicial deference to the Coast Guard in those decisions.  Based on the full disclosure by the Service Defendants to the Coast Guard in the application process for the foreign control exemptions, the Fifth Circuit rejected the Plaintiffs arguments that the exemptions had been obtained through deceit.

The Fifth Circuit’s opinion underscores the need for full disclosure of all vessel interests seeking to obtain a foreign control exemption from the Coast Guard.  The information provided should include the applicable ownership breakdown of the vessel operator, the organizational and financial structure of the company, as well as the relationship of the vessel operator to the vessel owners and potential customers.