Petronius To Petrobras – Fifth Circuit Reaffirms Test For Ocsla Versus Maritime Tort Jurisdiction

In 2006, the Fifth Circuit issued a landmark controversial opinion in Texaco Exploration & Production, Inc. v. AmClyde Engineered Products Co., 448 F.3d 760, 770 (5th Cir.) amended on reh’g, 453 F.3d 652 (5th Cir. 2006). The case concerned the loss of the 3,605 ton, $70 million South Deck Module of Texaco’s compliant tower Petronius platform (then the tallest man-made structure in the world, from seafloor to above-surface platform height) due to failure of a wire rope component during transfer of the module from a deck barge via a barge-mounted crane. Despite the fact that the operation involved the use of two vessels and the crane-assisted movement of the South Deck Module over water in the middle of the Gulf of Mexico, the Fifth Circuit held that admiralty tort jurisdiction did not apply, and that the incident fell within the exclusive jurisdiction of the Outer Continental Shelf Lands Act (“OCSLA”). Accordingly, the case was remanded for a jury trial (after a prior improvidently conducted bench trial in admiralty) pursuant to the law of Alabama (the state adjacent to the platform site), instead of general maritime law.

The Fifth Circuit has reaffirmed its controversial analysis from the Petronius case in its March 7, 2016 decision in Petrobras America, Inc. v. Vicinay Cadenas, S.A., 2016 WL 876577 14-20589. — F.3d (5th Cir. Mar. 7, 2016), an equally high-stakes matter involving the $400 million loss of certain support equipment for a Floating Production Storage and Offloading (“FPSO”) facility in the Gulf of Mexico. As in AmClyde, the incident at issue in Petrobras did not give rise to admiralty jurisdiction, notwithstanding that the incident actually occurred underwater in the Gulf of Mexico. While these two decisions denying admiralty jurisdiction would no doubt leave even the proverbial “three men in the tub” and Jonah in his whale perplexed (Lozman v. City of Riviera Beach, Fla., 133 S. Ct. 735, 740, 184 L. Ed. 2d 604 (2013)), the stark simplicity of the analysis is ultimately compelling, although it derives from a notoriously self-fulfilling, Goldilocks-like approach to defining the contours of the incident as part of the admiralty/OCSLA jurisdictional inquiry.

Petrobras involved the failure of an underwater tether chain that connected a buoyancy can to the riser system of the FPSO. These buoyancy cans sit roughly 660 feet below the surface, suspending mid-ocean via the tether chains, and provide support to the risers (which carry oil from seafloor wellheads up to the FPSO) to keep tension in the risers and prevent kinks that would impede the flow of oil. The chain had been manufactured by Vicinay, but included chains with welded-over cracks that failed shortly after installation, causing loss of the buoyancy can support, the ensuing collapse of one of the FPSO’s risers, and hundreds of millions of dollars in property damage and lost production.

The FPSO owners/subrogated insurers sued Vicinay in federal court for negligence, products liability, and breach of warranty, asserting admiralty jurisdiction, and alternatively OCSLA jurisdiction, but did not allege application of Louisiana law (which would apply in the event OCSLA jurisdiction obtained).

Vicinay moved for summary judgment (under admiralty jurisdiction) pursuant to the general maritime law economic loss doctrine established in East River Steamship Corp. v. Delaval, Inc., 476 U.S. 858 (1986) (prohibiting recovery in maritime products liability cases for damage to the product itself). The motion was granted, but owners/underwriters later moved to amend to add Louisiana law claims (which are not governed by the East River rule), asserting for the first time that Louisiana law under OCSLA, and not maritime law under admiralty jurisdiction, applied to the case. The district court denied the motion for leave to amend, and appeals were taken from the summary judgment and denial of the amendment on the basis that Louisiana law alone should apply because OCSLA jurisdiction existed to the exclusion of admiralty jurisdiction.

The Fifth Circuit initially rejected Vicinay’s argument that owners/underwriters had waived any argument for application of Louisiana law by failing to raise it until the eleventh hour after summary judgment under maritime law had already been granted. The court rejected this facially compelling argument on the basis that OCSLA jurisdiction, where it exists, is mandated by the statute, and cannot be waived (or contractually avoided) by the parties. Specifically, the court held that OCSLA jurisdiction, which is non-waivable, is concurrent with OCSLA choice-of-law, which is also non-waivable under long-standing Fifth Circuit jurisprudence.

After rejecting this waiver argument, the court moved on to its analysis of how an incident that occurred literally underwater in the middle of the ocean is not a maritime tort giving rise to admiralty jurisdiction under the dual location/maritime nexus test for maritime tort jurisdiction. See Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527 (1995). This test considers:

(1) location – whether the incident occurred on navigable waters; and

(2) maritime nexus – whether the incident,

(a) “analyzed at an intermediate level of generality” (a notoriously vague                                         formulation)

(b) affects maritime commerce and/or relates to traditional maritime activity.

The court first noted owners/underwriters argument that the “location” prong was not met because the riser, chain, and buoyancy can were all “fixed structures erected” on the OCS seabed, such that OCSLA (by its own terms) displaced admiralty law. The court recognized this “significant argument” but then noted the practical countervailing fact that the incident at issue occurred “deep in the waters of the Gulf of Mexico” and “took effect” in the navigable waters of the United States.

In any event, however, the court did not need to decide whether the “location” test was met because it held that the second “maritime nexus” prong was lacking. The court rejected Vicinay’s arguments for maritime nexus based on the proposition (1) that the incident disrupted maritime commerce (due to Petrobras’s shutdown of operations for investigation) and (2) that the riser/buoyancy can/chain system effectively aided the FPSO, which is a vessel, and thus “related to a traditional maritime activity.”

As to the first argument (“disruption of maritime commerce” prong of the maritime nexus test), the court noted the Supreme Court’s Goldilocks-like caveat that an incident cannot be “defined at too low or too high a level of generality” for the maritime nexus inquiry, with a focus on potential effects of the type of incident in general, not the specific effects of the actual incident at hand, and with a particular focus on the incident’s affect on navigability of the waterway. The court went on to provide the following not-too-cold, not-too-hot general description of the tether chain failure as follows: “a component failed on an underwater structure in an offshore production installation and caused the structure to fall to the sea floor.” Based on this generic description, the court held that the incident did not have the potential to disrupt maritime commerce/navigation. Vicinay’s focus on interruption of Petrobras’s operations in the area of the FPSO was too specific a focus for the “generality” aspect of the nexus test, and moreover those operations were exploration and production activities, not traditional maritime ones. And even though the FPSO is a vessel, for purposes of the “maritime nexus” test, it essentially was not functioning as a vessel insofar as it was simply a permanently moored floating storage depot.

As to the second argument (“traditional maritime activity” aspect of the maritime nexus prong) the court held that the AmClyde/Petronius decision squarely defeated maritime tort jurisdiction. The FPSO and its related support systems were used for exploration and production of oil, a non-maritime activity, and the fact that the FPSO is technically a vessel did not convert the otherwise non-maritime exploration and production activities into maritime ones. Just as the use of a barge-mounted crane for building a fixed OCS platform was non-maritime in nature, the use of the chain and buoyancy can to support the FPSO in its capacity as an oil gathering station “had nothing to do with any traditional maritime activities.”

The Petronius and Petrobas decisions are actually very simple at the end of the day, but only in light of the court’s unilaterally decreed, ends-justifying-means “intermediately general” description of the incidents, which the parties obviously could not have divined at the outset of the case (and likely several hundred thousands of dollars of wasted legal expenses later). And given the critical differences, particularly in the products liability area, between state law (adopted as surrogate federal law for OCSLA jurisdiction cases) and maritime law, the jurisdictional issue is absolutely critical. Likewise, as an equally critical procedural matter, state-law-via-OCSLA allows for jury trials, whereas admiralty cases are tried to the bench.

The Petrobras decision is a stark reminder that when problems (usually with high stakes) arise in OCS projects, the parties need to focus long and hard on getting the jurisdictional question right at the beginning, or risk litigating the case to an apparent conclusion, only to be sent back to re-litigate (likely with a jury) if jurisdiction was improperly determined.