In Sira Cruz v. National Steel and Shipbuilding Company; Peterson Industrial Scaffolding, Inc., Civil Action No. 17-55441 (December 19, 2018) (9th Cir.), a case that may only be noteworthy for practitioners in the Ninth Circuit, the Court applied a borrowed employee defense to a longshoreman’s claim against a third party. The defendant, in this personal injury case, was the borrowing employer of the plaintiff who was paid compensation under the LHWCA by her nominal employer. She then turned around to sue the defendant who then raised the borrowed employee defense. In a case of first impression for the Ninth Circuit, the summary judgment granted the defendant in the district court was affirmed specifically stating that the defense was applicable where the employee was covered by the LHWCA, allowing the Ninth Circuit to make the rare statement that “we join the Third, Fourth, Fifth, and Eleventh Circuits …” Id. at p. 3-4.
Under the Commercial Instruments and Maritime Liens Act (“CIMLA”), 46 U.S. Code § 31342 et. seq., “a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner – (1) has a maritime lien on the vessel; (2) may bring a civil action in rem to enforce the lien; and (3) is not required to allege or prove in the action that credit was given to the vessel.” This article is the first installment in a series examining the elements suppliers of maritime goods or services must prove to establish and enforce the supplier’s potential maritime lien.
The term “necessary” applies not only to goods and services that are required for the vessel to operate, but also “includes most goods or services that are useful to the vessel, keep her out of danger, and enable her to perform her particular function…. What is a ‘necessary’ is to be determined relative to the requirements of the ship.” Equilease Corp. v. M/V SAMPSON, 793 F.2d 598, 603 (5th Cir.) (en banc), cert. denied, 479 U.S. 984 (1986). Goods or services that are essential for the vessel to perform its mission should be considered necessaries. Items that courts have found to constitute necessaries under CIMLA include: fixed gas detection systems required for subsea pipe repair activities conducted from a vessel; bunkers/fuel; insurance; payments which stevedoring companies are required to make to longshore employees under collective bargaining agreements; services to secure, prepare, and file documents in connection with marine mortgages; and, transporting drilling equipment to a drilling vessel via supply boat.
Thus, if a supplier can establish that its goods or services were related to the purpose for which the vessel was operating, then they should qualify as necessaries. One cautionary note: once the vessel ceases operating for the purpose for which the supplies are provided, the supplies may no longer constitute necessaries. Similarly, superfluous or redundant pieces of equipment are not necessaries, even if the type of equipment is necessary for the vessel’s function. See Equilease, 793 F.2d at 604 (“Anchors and cables are generally considered to be necessaries, but if the vessel is fully supplied with them, the furnishing of another anchor or cable is not ‘necessary’.”).
In the upcoming installments, the authors will analyze the remaining substantive requirements for a necessaries lien under CIMLA as well as defenses to and priority of the maritime lien for necessaries.
Many physical suppliers of bunkers/marine fuel, who were unpaid by their contractual counterparties, have relied on a decision of the United States Court of Appeals for the Ninth Circuit, Marine Fuel Supply & Towing, Inc. v. M/V KEY LUCKY, 869 F.2d 473 (9th Cir. 1988), as jurisprudential support for the concept that the physical supplier has a maritime lien against the vessel supplied with the fuel, even though the physical supplier did not take the order for the fuel from the vessel’s owner, charterer or agent. A close reading of the KEN LUCKY decision indicated that the Ninth Circuit reached its conclusion based upon the vessel interests’ admission in the pleadings that Bulkferts, the subcharterer of the vessel, had ordered the fuel from Marine Fuel. Id. at 476-77. (The actual chain of contracts was Bulkferts ordered the fuel from Brook Oil, who then ordered the fuel from Marine Fuel.) Because the vessel interests had admitted that their subcharterer had ordered the fuel directly from the physical supplier, the physical supplier was entitled to a maritime lien. Since that time, KEN LUCKY has been routinely cited by physical suppliers as standing for the overly broad proposition that they have a maritime lien against the vessel, regardless of whether the vessel owner, charterer or agent order the necessaries from the physical supplier.
Recently, the Ninth Circuit revisited this issue in Bunker Holdings, Inc. v. Yang Ming Liberia Corp., No. 16-35539 (9th Cir. Oct. 11, 2018). The Ninth Circuit followed the prior decisions of the Eleventh, Second and Fifth Circuits in concluding that a physical supplier of fuel that received the fuel order from a bunker broker or bunker intermediary, and not the vessel owner or charterer, does not have a maritime lien against the vessel under the Commercial Instruments and Maritime Lien Act. Id. at 5.
Perhaps more significantly, the Ninth Circuit has expressly limited the KEN LUCKY decision to its unique procedural posture:
The defendant admitted that Marine Fuel sold the bunkers to Bulkferts, pursuant to an order originating from Bulkferts. Based on that admission, we treated the case as though Bulkferts had ordered the bunkers directly from Marine Fuel and hence assumed that Marine Fuel had supplied the bunkers “on the order of” Bulkferts. Since Bulkferts was one of the entities with presumed authority to bind the vessel, each of the statutory requirements for a maritime lien was satisfied. In ruling for Marine Fuel, we explicitly refused to consider whether Brook Oil was authorized to bind the ship as Bulkfert’s agent.
Id. at 6 (original italics, citations omitted).
Because that critical factual admission present in KEN LUCKY was not made by the vessel interests in Bunker Holdings, the physical supplier could derive no support from that decision. In other words, the Ninth Circuit has finally relegated the KEN LUCKY decision to its own procedural peculiarity. In the future, vessel interests can rebut the suggestion that KEN LUCKY provides a bunker sub-contractor with a maritime lien by citing Bunker Holdings and paraphrasing Judge Higginbotham’s observation in the ALMI SUN decision: “In determining the law of the [Ninth] Circuit, we prefer its own statement of the law.” ALMI SUN, 893 F.3d at 296.
Shipping regulators have concluded on a plan for reducing carbon dioxide emissions for ships. International Maritime Organization (IMO) regulators have agreed that the shipping industry should cut carbon emissions by a minimum of 50% by 2050 as part of the industry’s contribution to the Paris Agreement. There will also be a 40% improvement in ship efficiency by 2030 and a 50% to 70% improvement by 2050. In adopting this plan, the shipping industry will be able to phase out greenhouse gases and set a cap on emissions.
Current estimates show that shipping contributes approximately 3% of global carbon emissions. While the international shipping community has agreed to begin the transition to a low-emissions future, it still needs to address how and when the regulations will actually start being implemented. The IMO will now have to start exploring options such as a carbon tax on fuel to promote more fuel-efficient ships and the use of alternative fuels. The industry will require technological changes to help produce zero carbon fuels and propulsion systems. Vessels will be moving from fossil fuels to a combination of electricity, batteries, renewable fuels derived from hydrogen, and potentially bioenergy.
“If you were building a ship or planning to build a ship in the 2020s it will likely need to be able to switch to non-fossil fuels later in its life, a factor insurers and shipping financiers will need to consider in their business plans through the next decade,” the UCL Energy Institute said.
Stay tuned for further updates.
On September 11, 2018, the U.S. Court of Appeals for the Fifth Circuit, in the matter of McGill C. Parfait v. Director, OWCP, Performance Energy Services LLC and Signal Mutual Indemnity Association Ltd., No. 16-60662, granted the respondents’ motion to dismiss Mr. McGill’s Petition for Review based upon the petitioner’s non-compliance with 33 USC § 933(g). In doing so, the Court noted that neither knowledge of a mediation taking place nor publication of a judgment satisfied the requirement to provide notice of a settlement and a judgment against joint tortfeasors that arose out of his work-related injury.
The petitioner, McGill C. Parfait, was an employee of Performance Energy Services LLC (“employer”) who sustained injuries to his chest and back in an accident that occurred on June 30, 2013, while working for his employer on a site covered by the Longshore and Harbor Workers’ Compensation Act, 33 USC § 901 et. seq. (“LHWCA”). After a formal hearing on his claim under the LHWCA, the Administrative Law Judge (“ALJ”) awarded him $1,493.60 in temporary total and temporary partial disability benefits for his chest injury. The ALJ denied his claim for benefits related to his back injury. Mr. Parfait appealed the ALJ’s award to the Benefits Review Board (“BRB”), which affirmed. He then lodged his Petition for Review with the Fifth Circuit challenging the BRB’s ruling denying total permanent disability benefits for his back injury.
Mr. Parfait also filed a third-party action against Apache Corporation (“Apache”) and Wood Group PSN, Inc. (“Wood”) for the injuries for which he had sought compensation benefits under the LHWCA. While Mr. Parfait’s appeal to the BRB was under submission, the employer learned from counsel for Apache that petitioner had settled his claim against them. The employer also learned, after inquiring of Wood’s counsel, that after a jury trial a judgment had been entered in favor of Mr. Parfait against Wood. After the Petition for Review was lodged in the Fifth Circuit, the employer and its carrier moved to dismiss it, alleging that Mr. Parfait failed to obtain their approval of the third-party settlement or to notify them of it and the third-party judgment as required by § 33(g) of the LHWCA. In the absence of this notification all rights to benefits due an employee under the LHWCA are terminated and forever lost.
In an effort to address the motion to dismiss, the Fifth Circuit submitted questions to counsel for both parties. Based upon the response to these questions, the Fifth Circuit learned that:
- Parfait compromised his suit against Apache in the Southern District of Texas with petitioner receiving a net of $325,000.
- Following a jury trial, in April of 2017, Mr. Parfait received a favorable verdict against Wood and a judgment was entered under which Mr. Parfait enjoyed a net recovery of $41,542.17.
- Counsel for employer/carrier was specifically invited to attend a mediation session that was held on March 10, 2016, and was contacted during the mediation session by claimant’s counsel. (The content of that communication, however, was never divulged.)
- Parfait’s counsel asserted that the Judgment in the jury trial against Wood was published by the district court on June 2, 2017, and asserted that the employer/carrier would have been plainly aware of its existence.
Where an employee has sued third-party tortfeasors as a result of his employment-bred injury, he is required under § 33(g), at the risk of losing his benefits for failing to do so, to obtain the written approval of his employer for any settlement he enters into if it is in an amount less than what would be the total liability of the employer under the LHWCA. Additionally, where the employee either settles his case for any amount or obtains a judgment, the employee must provide notice to the employer of this fact. The seminal case applying § 933(g) of the LHWCA is Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469 (1992) in which the Supreme Court applied a strict interpretation of the language contained in § 933(g). The court stated,
An employee is required to provide notification to his employer, but is not required to obtain written approval, in two instances: 1) where the employee obtains a judgment, rather than a settlement, against a third-party; and 2) where the employee settles for an amount greater than or equal to the employer’s total liability. Under our construction, the written approval requirement of 33(g)(1) is inapplicable in those instances, but the notification requirement of 33(g)(2) remains in force. Id. at 475
In the instant case, the Fifth Circuit noted that whether the net result of the settlement with Apache satisfied the employer’s total liability or not, Mr. Parfait was still required to provide 933(g)(2) notice, which he did not give. Furthermore, Mr. Parfair failed to give his employer notice of the actual judgment against Wood. The fact that the employer/carrier were on notice of the mediation, were invited to attend it and that some alleged unknown discussion occurred between claimant’s counsel and employer’s counsel at the time of the mediation, was of no moment, as the actual results of the settlement were not made known by the claimant to his employer. The Fifth Circuit cited a number of unpublished decisions of the BRB, which had held to a strict interpretation to § 933(g)(2) describing the affirmative duty of the employee to notify the employer. The employer’s mere knowledge of settlements or the absence of prejudice to the employer was found not to suffice to prevent the absolute bar to compensation from being invoked in these instances.
This past January, the Fifth Circuit in In re: Larry Doiron, Inc., 879 F. 3d 568 (5th Cir. 2018), overruled the six-factor test it had distilled in Davis & Sons v. Gulf Oil Corp. to determine whether a contract is maritime or non-martime, and adopted a simplified two-part analysis, based on the United States Supreme Court’s ruling in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 125 S. Ct. 385 (2004). Noting that the much-maligned Davis & Sons inquiry had led to a line of Fifth Circuit cases that were inconsistent, confusing, and difficult to apply, the Court replaced the Davis & Sons analysis with a new two-pronged test which simply asks the following:
First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?
Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract? If so, the contract is maritime in nature.
In addition to providing greater clarity to the oil and gas industry on the question of whether any particular contract is maritime, it has also been anticipated that the new Doiron test would increase the number of contracts that would qualify as maritime. This analysis appears to be correct thus far, at least in the context of certain contracts for plug and abandonment (P&A) work.
In its first decision since Doiron, the Fifth Circuit, in In re: Crescent Energy Servs., LLC, 896 F.3d 350 (5th Cir. 2018), applied the new test to find that a contract to P&A three inland wells was maritime. In In re: Crescent, a contractor was hired to perform P&A work on the wells which were located on several small fixed platforms in coastal waters off Lafourche Parish. The work order bid submitted by the P&A contractor listed three vessels among the equipment to be used for the job. Importantly, one of these vessels was a spud barge specifically designed to P&A wells. Because of the small size of the fixed platforms, the barge served as a work platform outfitted with the equipment necessary to perform the P&A work, including a crane permanently attached to the barge. In re: Crescent Energy Servs., LLC, 2016 WL 6581285, at *3 (E.D. La. Nov. 7, 2016). Most of the P&A equipment was operated from the barge, including the wireline unit. The crew also lived and slept on the vessel during the project. Id. Applying the Davis & Sons test in effect at the time, the district court for the Eastern District of Louisiana held that the P&A was maritime. Id. at *5.
The contractor’s insurers appealed the ruling to the Fifth Circuit. In asserting that the first part of the test – whether the P&A contract was to provide services to facilitate the drilling or production of oil and gas on navigable waters – was not satisfied, the insurers advanced two arguments. First, the insurers claimed that the contract did not facilitate the drilling or production of oil and gas because decommissioning oil wells was more analogous to the non-maritime activity of construction of offshore platforms. In re: Crescent Energy Servs., LLC, 896 F. 3d at 356. The Fifth Circuit rejected this argument, reasoning that the life-cycle of oil and gas drilling includes site restoration when production ends and the well is abandoned. Id. Thus, like the processes of exploration and production, the P&A stage is also part of the overall drilling cycle, and therefore, “involved the drilling and production of oil and gas.” Id. Second, the insurers argued that the P&A work did not occur on “navigable waters” because the underlying injury occurred on the platform, rather than on one of the vessels supplied by the contractor. The Fifth Circuit rejected this position because, while the location of the worker’s injury may be relevant to determining situs for purposes of maritime tort law, the issue was completely “immaterial in determining whether the worker’s employer entered into a maritime contract” under the new Doiron test. Id at 356-357. (quoting Doiron, 879 F.3d at 573–74). Given that all parties conceded that the wells were located within the territorial inland waters of Louisiana and that that the vessels involved in this contract were able to navigate to them, the Court held that the P&A contract was to facilitate the drilling or production of oil and gas on navigable waters. Id. at 357.
Turning to the second question – whether the contract provides or do the parties expect that a vessel will play a substantial role in the completion of the contract – the Court concluded that the parties expected that the vessels, primarily the spud barge, would play a substantial role in the P&A work. Specifically, the Court noted that the work order identified the vessels as equipment that would be used to perform in the P&A job. Id. at 360. In addition, the spud barge, the key vessel used in the operations, contained the only crane used in the work which moved materials to and from the barge and the platforms. Id. Moreover, the testimony at trial established that much of the equipment used in the operations was kept on the barge, which served as a work platform and crew quarters because of the small size of the platforms. Id. The Court took particular note of the fact that the equipment remaining on the vessel included the wireline unit. Because the wireline unit’s “purpose [was] central to plugging and abandoning the well,” the Court reasoned that the unit “was central to the entire P&A contract.” In light of the foregoing, the Court concluded that the spud barge and the other vessels “were expected to perform an important role, indeed, a substantial one” in the P&A work, and therefore, the contract was maritime. Id. at 361.
In sum, while In re: Crescent cannot be said to stand for the proposition that all contracts between oil companies and contractors for P&A work of inland and offshore wells will qualify as maritime, the decision certainly provides helpful guidance on the issue. Based on the Court’s rationale, P&A work that takes place at wells located at small platforms, which necessarily requires a vessel to store equipment, serve as a workplace, and house the work crew, will qualify as maritime. The case that the contract is maritime may be particularly strong where critical P&A equipment, such as a wireline unit, is operated from the vessel because of a lack of space for the equipment on the platform. Another critical factor in the Crescent holding was that the work order bid identified vessels among the equipment that was to be used in the P&A work. Therefore, parties contracting for P&A work and seeking to have the contract classified as maritime would be prudent to include in the relevant work order a description of the vessel(s) to be used in the project to clearly reflect their intent and understanding that a vessel is to play a substantial role in the P&A work. Conversely, in P&A jobs where a vessel is primarily used to transport personnel to the worksite and most of the equipment is moved to the offshore platform and operated from the platform, then the vessel will likely not have the requisite degree of significance for the contract to qualify as maritime. More decisions applying the new Doiron standard will provide greater clarity on these issues in the future.
As anticipated previously, the en banc Fifth Circuit in In re Larry Doiron, Inc., jettisoned the two-tier, six-factor test of Davis & Sons, Inc. v. Gulf Oil Corp. in favor of a new “simplified” test to determine whether “a contract for the performance of specialty services to facilitate the drilling or production of oil and gas on navigable waters is maritime,” and thereby adopted a conceptual approach. Doiron at 2.
The new tests are as follows: “Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?” Doiron at 12. If so, “does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract”? Id. If so, then the contract is maritime in nature.
Under circumstances in which it is unclear as to the scope of the contract or the parties’ expectations as to whether vessels will be involved, the en banc Court indicated that the following factors of Davis & Sons may provide clarity: (1) the work actually performed under the contract; (2) the extent of vessel involvement in the job required by the contract at issue; and (3) the extent to which the vessel’s crewmembers (i.e., seamen) perform work under the contract at issue.
In the wake of this decision, it appears that contracts to perform well casing services from drilling vessels will remain maritime contracts. I anticipate that wireline and coiled tubing activities on a well that required the use of a vessel should now be viewed as maritime contracts. Accordingly, this decision has expanded the number of energy service contracts that will qualify as maritime in nature, and thus, the contract provisions concerning choice of law, indemnity and insurance will be determined under the general maritime law (absent a choice of law provision adopting state law).
On January 3, 2018, the United States Court of Appeals for the Fourth Circuit in Russell Moody v. Huntington Ingalls Incorporated, No. 16-1773 (4th Cir., 01/03/2018), reversed a ruling of the Benefit Review Board that had earlier overturned the finding of an Administrative Law Judge that granted benefits to a retired employee. Russell Moody, a shipyard employee, suffered a workplace injury, but did not undergo surgery until after he retired. He sought disability benefits for a two month, post-surgery recuperation during which he was not medically cleared for work.
Mr. Moody had worked for Huntington for 45 years when due to a change in his assignment to a different shift, he decided to retire. On August 1, 2011, he gave his requisite 90-notice of retirement to be effective October 31, 2011. On September 19, 2011, Mr. Moody injured his right shoulder while working in the shipyard. Even though the injury was going to require surgery, Mr. Moody continued to work for Huntington. It was not until after he retired, as scheduled, that he underwent shoulder surgery. According to his physician, he needed to remain “out of work” until February 16, 2012, and then had limitations effective through March 28, 2012, after which he would have no restrictions.
Huntington paid the cost of surgery but refused to pay Mr. Moody temporary total benefits asserting that because Mr. Moody had retired, the temporary recovery from the surgery had not caused him to lose any wages. The Administrative Law Judge nevertheless ruled in Mr. Moody’s favor and awarded temporary benefits. The judge concluded that Mr. Moody was totally incapacitated during the recovery period, noting that had Mr. Moody undergone surgery immediately after the accident, Huntington would have had to pay disability benefits to him.
The Benefits Review Board disagreed and concluded that Mr. Moody was not entitled to any disability benefits because he voluntarily retired before the onset of his workplace injury’s debilitating effects. The Board reasoned that the voluntary retirement resulted in a total loss of ability to earn wages, such that no injury would cause any further loss of economic capacity.
The Fourth Circuit reversed the Benefits Review Board’s decision indicating that while Mr. Moody’s injury did not cause him to lose any income during his recuperation, it did deprive him of the ability to work during that period. The fact that Mr. Moody had retired did not undermine the fact that but for the recuperation from surgery, he would have been capable of performing active employment, if he had chosen to do so. The Fourth Circuit stated, “to decide otherwise would not only deprive Moody of his rightful benefits, but would also confer a windfall on Huntington: it is undisputed that Moody would have received disability benefits had he undergone surgery immediately, rather than discharging his duties in good faith, and Huntington would have had to pay for another drive.” (p. 7.) The Court distinguished whether there was an actual economic loss from there being an incapacity to earn wages. In so doing, it stated, “because the LHWCA compensates workers for their inability to earn wages due to injury, workers are entitled to disability benefits when an injury is sufficient to preclude the possibility of working.” It felt that the LHWCA compensates the deprivation of economic choice when it is caused by workplace injury. As such, voluntary retirement is not a form of total incapacity.
Due to their increasing size, specialization and technological sophistication, today’s vessels present attractive “big-ticket” financing opportunities. However, commercial vessels, regardless of type, will inevitably incur maritime liens, which are priority claims that arise by operation of law, and are enforceable against the vessel in rem. Lenders therefore must be cognizant of, and account for, the special attributes of maritime liens in evaluating and documenting these types of transactions, whether structured as loans or leases.
This article discusses the characteristics of maritime liens, the priority of these liens in relation to the desired first-priority secured position of a lender or lessor, and prudent practices for assessing and mitigating the risks posed by such liens. The focus of this article is on transactions involving commercial (as opposed to recreational or fishing) vessels documented under the laws of the United States. Continue Reading Don’t Lien on Me: Identification and Mitigation of Maritime Lien Risks in Marine Lease/Loan Transactions
On September 27, 2017, the Fifth Circuit in U.S.A. v. Don Moss, Curtis Dantin, Grand Isle Shipyard, Incorporated, and Christopher Srubar, No. 16-30516 (5th Cir. September 27, 2017), issued a decision affirming the District Court’s dismissal of criminal charges against a number of oil field contractors resulting from a welding accident that occurred on an offshore oil platform located on the Outer Continental Shelf on November 16, 2012. The platform owner and leaseholder, Black Elk Energy Offshore Operations, LLC, in September of 2012, interrupted its oil and gas production on West Delta 32 to begin construction projects on its three-platform production facility. In pursuing these construction projects, it contracted with a number of different companies to provide workers connected with the project. On November 16, 2012, during welding operations, a fatal explosion occurred killing three men and injuring others.
Criminal indictments were issued three years later pursuant to Outer Continental Shelf Lands Act 43 USC §§ 1331, et. seq. (OCSLA) with the government contending that contractors were criminally liable because they failed to obtain proper authorization to weld, failed to conduct appropriate pre-work inspections and failed to ensure the construction area was safe for hot work as required by OCSLA safety regulations. The contractors moved for dismissal of the charges against them. The District Court Judge issued an Order dismissing the charges against the contractors based upon his analysis of each of the regulatory provisions cited in the indictments. He concluded that none of the OCSLA regulations applied to oilfield contractors. Central to this analysis, the Court pointed out that each of the three specific provisions of the OCSLA regulations underlying the charged criminal violations imposed regulations addressed to “You.” Under OCSLA regulations, “You” is a defined term:
You means a lessee, the owner or holder of operating rights, a designated operator or agent of the lessee(s), a pipeline right-of-way holder, or a State lessee granted a right-of-use and easement. 30 CFR § 250.105.
The District Court held this definition did not include contractors, subcontractors or service providers. The government timely appealed.
On appeal, the government relied on four main arguments. First, the government contended that a plain reading of OCSLA subjects any person, including contractors and their employees to criminal penalties for violating the regulations promulgated under the statute. 43 U.S.C. § 1350(c). Second, OCSLA regulations governed the appellees’ conduct because they were the “person[s] actually performing the activit[ies],” and are thus “jointly and severally responsible” under the 30 CFR § 250.146(e). Third, the Courts had upheld both civil and criminal penalties imposed under similar statutory and regulatory schemes. Fourth, OCSLA regulations supported civil and criminal penalties for any person “responsible for a violation” of the regulations. 30 CFR § 250.1402.
Under 43 U.S.C. § 1350(c), the government argued that the contractors were criminally liable as that provision stated that any person who knowingly or willfully violated a regulation that was designed to protect health, safety or the environment may be subject to criminal penalties under OCSLA. The government argued that under OCSLA’s definition of a “person” the contractors clearly fell within its ambit. In response, the contractors asserted that OCSLA precluded the government from criminally prosecuting them as they were not holders of OCSLA leases or permits. In citing 43 USC § 1348(b), the contractors argued that OCSLA identified those people who were required to comply with OCSLA regulations by stating “it shall be the duty of any holder of a lease or permit under this subchapter” to comply with regulations governing workplace safety and health for their own employees and those of any “contractor or subcontractor.” They argued that because Section 1348(b) specifically imposed the duty on lessees and permittees, and equally specifically referenced, but did not impose its regulatory duties on contractors and subcontractors, they were textually excluded from those duties. Ergo, if they were not parties given a duty to comply, criminal penalties should not be imposed.
The panel of the Fifth Circuit thought that the contractors’ arguments were well-stated, even more so given the government’s failure ever before to seek criminal penalties against a contractor in the 60 plus year history of the OCSLA. It was noted that the government’s past inactions spoke volumes about the scope of its regulatory authority. The court, however, stated that to resolve the appeal it did not need to decide whether OCSLA and its criminal liability provision could extend to contractors. Assuming arguendo that the provisions of OCSLA could apply to these contractors, it proceeded to determine whether the specific regulations would support the criminal indictments.
In addressing the specific regulations alleged to have been violated by the contractors, the Court indicated that the government ran up against the regulatory definition of “You.” It found that all of the welding regulations that formed the basis of the criminal indictment only referenced “You.” The government sought to circumvent the plain language of the definition of “You” by citing language in 30 CFR § 250.146(e) pertaining to joint and several responsibility for compliance with OCSLA regulations. The Fifth Circuit, however, indicated that “joint and several responsibility” was a term of art reserved for civil, rather than criminal liability, and noted that the government failed to cite any cases that demonstrated support for joint and several criminal liability.
The court further noted that the drafting history of the definition of “You” and the prior public statements of the regulating agencies responsible for OCSLA confirmed that the specific regulations did not apply to contractors. In addressing whether the regulations that were specifically directed at lessees could also extend penalties to contractors, the Court noted that the virtual non-existing past enforcement of OCSLA regulations against contractors confirmed that the regulations were never intended to apply to them, noting also that the government had not issued civil indictments for non-compliance against contractors prior to 2011.
In addressing the government’s more generalized argument that regulations may result in criminal liability for anyone who fails to comply with them, the Court indicated that the argument ignored the rule that a general provision of a comprehensive regulatory scheme must yield to more specific, conflicting provisions. It stated that “the appellees were indicted under three provisions of 30 CRF § 250.113, all of which are directed at “You,” not at just any person, and Section 250.146(c), which was previously addressed, does not impose criminal liability beyond the definition of “You.” It stated that because the applicable regulatory definitions unambiguously excluded contractors, more general liability provisions did not control.
Finally, the Court addressed the government’s position with regard to its prior non-enforcement of regulations against contractors where the government indicated that subcontractors always had fair notice of their potential exposure to civil penalties and criminal liability as an interpretation of its regulatory directives. The Court chose not to apply the Auer v. Robins deference standard as it appeared that the government’s interpretation conflicted with its earlier and consistently held view. It felt that there had not been fair notice to contractors of this potential liability and because this involved a criminal liability, as opposed to civil exposure, the enforcement of the governmental agency’s interpretation of its regulations in this instance, would be a violation of the contractors’ due process rights.
Whether this last part of the Fifth Circuit’s decision leaves open the possibility of subsequent acceptance of the governmental agencies’ interpretation of these existing regulations as applying to contractors, in light of its previous statements, appears to be speculative.