By Blake Crohan

In Griffin v. Hess Corporation, 2017 WL 5125657 (5th Cir. Nov. 3, 2017) (unpublished) the U.S. 5th Circuit reaffirmed the difficult burden of proving that prescription should be excused under the Louisiana jurisprudential exception of contra non valentem non currit preaescriptio. Contra non valentem “means that prescription does not run against a person who could not bring his suit.”

The Plaintiffs in Griffin filed suit seeking unpaid royalties allegedly owed to their father pursuant to an oil, gas, and mineral lease that their great-grandfather and several other members of the Griffin family granted in 1935. The Plaintiffs alleged that production occurred on the property between 1940 and 1969, during which time several members of the Griffin family received royalty payments, except their father. Between 1983 and 1984 the Plaintiffs began researching the history of the oil wells located on the property. Their research discovered documents identifying the Defendants’ corporate predecessors, an abstract of title that was commissioned in connection with potential oil company operations, and documents and pay stubs from previous royalty payments related to the Plaintiffs’ property. Around that same time, the Plaintiffs hired an attorney to represent them with respect to these claims. The Plaintiffs continued their investigation of the allegedly unpaid royalties over the next two decades, and in 2008 reached out to ExxonMobil directly regarding their unpaid royalty claims. Ultimately, ExxonMobil informed the Plaintiffs that it had no sales under the referenced lease after July 1954, found no outstanding royalty payments held in suspense, and that the property listed was not under lease to ExxonMobil. The Plaintiffs disagreed and filed suit on October 14, 2014 in federal court in the Western District of Louisiana against Hess Corporation and ExxonMobil (“Defendants”).

In the district court, the Defendants filed a motion for summary judgment arguing that the Plaintiffs’ claims for unpaid royalties were prescribed and barred under Louisiana Civil Code article 3494(5), which provides that the prescriptive period for unpaid royalties is three years. The Defendants asserted that the Plaintiffs acknowledged that they first became aware of their claims for the unpaid royalties between 1983 and 1984—more than thirty years prior to filing suit.

In order to survive Defendant’s motion, the Plaintiffs had to prove that contra non valentem applied to excuse them for not filing suit earlier. The district court explained that “[s]uit need not be filed when there is a mere apprehension that something might be wrong,” but that prescription commences when “the plaintiff has actual or constructive knowledge of the” wrongful act. The Plaintiffs argued that “many circumstances [justified Plaintiffs’] delay in filing this lawsuit.” Specifically, they argued that between 1983 and 1984 they were merely seeking out who was responsible for the payment of royalties and that many members of their family were uneducated.  The district court was not persuaded. The district court held that “[b]y at least 2008, Plaintiffs had received the assistance of an attorney and had collected information, both documentary and oral, sufficient to excite attention and prompt further inquiry as to the unpaid royalties alleged owed to their father.” Thus, the Plaintiffs claims were dismissed as prescribed.

On appeal to the U.S. 5th Circuit, the Plaintiff-Appellants argued that “it was impossible to bring this lawsuit prior to . . . filing the [2014] complaint in federal court, because in light of the uncertainty of circumstances surrounding their father’s claim, they had no basis to file any claim on behalf of their father.” While the 5th Circuit noted that “their level of education may, by itself, support application of [contra non valentem], the court cannot disregard the substance of their actions which do not indicate any inability to bring this claim.” The Court explained that Appellants were adults when they were informed that they may be entitled to unpaid royalties, they investigated their ownership rights extensively, and knew that Hess Corporation had a past ownership interest in the property. Further, the Court found it compelling that Appellants received advice and meaningful information from three different lawyers on various occasions through their investigation. Nevertheless, Appellants waited until 2008 to contact ExxonMobil and then waited until 2014 to file suit. Finally, the Court noted that the appropriate focus on the commencement of prescription “is not when a plaintiff develops a strong legal case but when he has sufficiently reasonable knowledge of his legal options.” The Court affirmed the district court’s granting of summary judgment in favor of the Defendant-Appellees.

The 5th Circuit’s opinion in Griffin highlights two important aspects of Louisiana law. First, plaintiffs must be diligent in their efforts to initiate a lawsuit in order to preserve their claims. While courts are cognizant of the lay persons’ knowledge of legal claims, plaintiffs cannot wait until they have a “strong legal case” or know all of the facts necessary to prove their claim. Second, prescription is a strong defense mechanism for defendants. While the exception of contra non valentem remains a viable option to defeat prescription, courts applying Louisiana law will strictly construe the doctrine to ensure that its use is not abused.

By Troy Charpentier and Matthew Smith

After contesting the construction of the Dakota Access pipeline, environmental advocacy groups have turned their attention to the proposed Bayou Bridge pipeline in South Louisiana. The Bayou Bridge pipeline is a 162-mile-long, 24-inch-wide proposed pipeline which will cross the Atchafalaya Basin to connect facilities in Lake Charles, Louisiana to crude oil refineries in St. James Parish, Louisiana.

Earthjustice attorneys filed suit on January 11, 2018 on behalf of Atchafalaya Basinkeeper, Louisiana Crawfish Producers Association-West, Gulf Restoration Network, Waterkeeper Alliance, the Sierra Club, and the Delta Chapter of the Sierra Club against the U.S. Army Corps of Engineers challenging permits and authorizations issued by the Corps under § 404 of the Clean Water Act (“CWA”) and under the Rivers and Harbors Act (“RHA”) for construction and operation of the pipeline. The environmental groups contend that the Corps did not conduct a sufficient environmental assessment under the National Environmental Policy Act (“NEPA”) or consider various factors required by the CWA, RHA, and NEPA, including reasonable alternatives to the project, public interest, environmental impact, cumulative effects, and adequacy of mitigation.

Shortly after filing suit, the environmental groups filed Motions seeking a Temporary Restraining Order and Preliminary Injunction to halt construction of the Bayou Bridge pipeline. On January 30, 2018, Judge Shelly Dick of the Middle District of Louisiana denied the environmental groups’ Motion for Temporary Restraining Order, finding that, based on the current record, the groups could not demonstrate a substantial likelihood of success on the merits of their challenge to the issuance of the permits.

In doing so, the court noted the “significant deference” afforded to the Corps’ decision to issue the permits, and that “the existence of opposing views does not render the Corps’ decision arbitrary and capricious.” Despite the contentions of the environmental groups, the court found that it is “undisputed that the Corps held a public hearing and allowed for public comments in accordance with the law.” The court further reviewed a 92 page Environmental Assessment (“EA”) performed by the Corps prior to issuing the relevant permits and found that it “clearly addresses the specific complaints of several Plaintiffs, albeit obviously not to Plaintiffs’ satisfaction.” Specifically, the court found that (i) the EA “reflects that several alternatives were addressed and considered,” (ii) a significant portion of the EA is devoted to consideration of the CWA permit guidelines which the groups contend were not adequately considered, and (iii) the EA included consideration of public interest factors. Accordingly, the court found that “Simply having an opposing opinion, or disagreeing with the mitigation plans imposed, is insufficient to establish a substantial likelihood of success on the merits, especially in light of the high deference that the law requires the Court to afford the Corps.”

The next step in the environmental groups’ attempt to halt construction of the Bayou Bridge pipeline will be the hearing on their Motion for Preliminary Injunction, which is currently set for February 8, 2018.

By Michael O’Brien

In Voces v. Energy Resource Technology, GOM, LLC, et al. the United States Court of Appeals for the Fifth Circuit reviewed the longstanding general rule in Louisiana known as the independent contractor defense, which provides that a principal is not liable for the negligent acts of an independent contractor acting pursuant to the contract.

The facts in Voces are similar to what occur in the oil field on a daily basis. Defendant Energy Resource Technology GOM, LLC, (“ERT”) hired independent contractor Offshore Specialty Fabricators, LLC (“OSF”) to remove an oil and gas platform. The contract between ERT and OSF provided that OSF would perform all work as an independent contractor and that OSF was responsible for providing all necessary services, equipment, materials, personnel, and engineering to safely remove the platform. The contract also spelled out OSF’s duties and responsibilities, which included written operating procedures, the performance of all work in accordance with the written operating procedures, the review of operating procedures, and the performance of work with personnel trained to do so in a safe manner. During the removal process, ERT maintained a Company Man aboard the platform to monitor OSF’s work for compliance with the contract.

The decommissioning of the platform proceeded without incident until a tragic accident claimed the life of Peter Voces, a welder employed by OSF. Following Mr. Voces’ death and a Bureau of Safety and Environmental Enforcement (BSEE) panel investigation, the decedent’s wife filed suit.  Mrs. Voces claimed that ERT was vicariously liable for the negligence of its contractor OSF and independently liable for its own negligence.  Her claims against ERT were based on the presence of the ERT Company Man aboard the platform.

As stated above, the independent contractor defense is a general Louisiana rule that a principal is not liable for the negligent acts of an independent contractor; there are exceptions to this rule. Specifically, the “operational control” exception applies when the principal retains or exercises operational control over the independent contractor’s acts or expressly or impliedly authorizes an unsafe practice. This exception is routinely satisfied in situations where a Company Man is present.

ERT moved to dismiss Ms. Voces’s claims based on the independent contractor defense. The District Court agreed and determined that Mrs. Voces could not prevail on her vicarious liability claim because she could not prove that ERT maintained the requisite operational control over OSF’s acts or that ERT expressly or impliedly authorized OSF’s unsafe practices. On review, the U.S. Fifth Circuit reiterated that determining operational control depends in great measure upon whether and to what degree the right to control the work has been contractually reserved by the principal.  Operational control exists only if the principal has direct supervision of the step-by-step process of accomplishing the work such that the contractor is not entirely free to do the work in his own way.  The Fifth Circuit also held that a principal may demand in its contract that an independent contractor develop safe work practices without triggering the operational control exception.

Further, it is critical to note that a principal may monitor (via a Company Man) its independent contractor’s work for compliance with contractual demands without triggering the operational control exception. As such, the mere fact that a principal takes an interest in the safety of the employees of its independent contractors and stations a Company Man on the platform does not, in and of itself, constitute operational control. Here, the Fifth Circuit found that ERT’s Company Man never dictated the work methods or operative details of the platform removal procedure. Instead, the ERT Company Man merely inspected OSF’s procedures and work to ensure OSF’s contractual compliance. Accordingly, the 5th Circuit included that ERT did not exercise operational control.

Last, the Court considered whether ERT could be held liability for its own negligent acts. Again, Mrs. Voces placed great emphasis on the presence of ERT’s Company Man aboard the platform.  However, the Court was not persuaded. Indeed, the Court advised that it has not located any Louisiana authority holding that a principal assumes a duty to ensure the safety of an independent contractor’s employees by merely stationing a Company Man on an oil platform for the purpose of overseeing a contractor’s compliance with his contractual obligations. A Company Man does not affirmatively assume any duty to provide an independent contractor’s employees with a safe workplace simply by observing their unsafe work habits. Accordingly, the Judgment of the District Court dismissing the claims of the Voces Plaintiffs against ERT was affirmed.

By Alex Rossi

The 5th U.S. Circuit Court of Appeals “adopt[ed] a bright-line rule [on January 11, 2018]: Section 1446(b)(3)’s removal clock begins ticking upon receipt of the deposition transcript” as opposed to running from the date of the deposition testimony. The decision in Morgan v. Huntington Ingalls, Inc., et al, No. 17-30523, __ F.3d __ (5th Cir. 1/11/18) was one of first impression for the court.

Plaintiff, Curtis Morgan filed the original lawsuit alleging he contracted mesothelioma as a result of asbestos exposure at various industrial facilities in Louisiana. Morgan specifically alleged that he was exposed to asbestos through his employment at Avondale Shipyard in New Orleans as a sheet metal tacker in the 1960s. Seventy-eight (78) defendants were originally named in the lawsuit.

Morgan was deposed over eight days from March 9 to April 13, 2017. On the second day of testimony, Morgan testified that he worked on unspecified vessels at Avondale Shipyard. On March 20, Morgan agreed with medical records presented by counsel for Avondale Shipyard that one of the vessels on which he worked was the USS Huntsville, a vessel Avondale refurbished on behalf of officers of the U.S. government.

Based on the testimony regarding Morgan’s work on the USS Huntsville for the U.S. Government, Avondale removed the case to the U.S. District Court for the Eastern District of Louisiana on April 28, 2017 under the federal officer removal statute and claimed that removal was timely filed 30 days after receipt of Morgan’s deposition transcript. Morgan opposed the removal as untimely, claiming that the removal clock began from Morgan’s testimony regarding the USS Huntsville, which took place 38 days prior to removal. Morgan further argued that the district court lacked subject matter jurisdiction under 28 U.S.C. § 1442.

In finding the removal untimely, the district court determined that the removal clock for “other paper” under § 1446 began running on the date of the oral deposition testimony, and not the later date of receipt of the deposition transcript. The district court did not address whether the substantive requirements of § 1442 had been met for federal officer jurisdiction.

Citing the plain meaning and purpose of § 1446(b), as well as policy considerations, the 5th Circuit found that oral testimony at a deposition does not constitute an “other paper.” Instead, the court found the removal clock begins upon receipt of the deposition transcript as the “other paper” providing the basis for the removal. In adopting this bright light rule, the 5th Circuit balanced the competing goals of removal: encouraging prompt and proper removal and preventing, hasty, improper removals. The court declined to follow the “notice” standard adopted by the 10th Circuit, finding it counterintuitive to start the clock for removal before the objective evidence is received by the defendant.

The 5th Circuit remanded the case to the district court to address whether the substantive requirements of federal officer removal have been met.

 

 

By Lou Grossman

On January 9, 2018, a split panel of the United States Fifth Circuit Court of Appeals affirmed an order from the district court, denying a motion to remand a matter removed under the Class Action Fairness Act (“CAFA”). The 2-1 decision In Warren Lester, et. al. v. Exxon Mobil Corp., et. al., No. 14-31383, __F3d___ (5th Cir. 1/9/2018) addressed two issues of first impression for the Fifth Circuit: (1) whether a motion to transfer and consolidate can effectively create a “mass action” removable under CAFA; and (2) if so, whether CAFA may be invoked as a basis for removal when one of the underlying suits comprising the new “mass action” commenced well before the 2005 effective date of CAFA. In affirming the action of the district court below, the Fifth Circuit answered both questions in the affirmative. A full copy of the opinion can be found here.  

The removed actions included two separate matters filed in the Civil District Court for the Parish of Orleans, State of Louisiana – Warren Lester, et. al. v. Exxon Mobil Corporation, et. al. and Shirely Bottley, et. al. v. Exxon Mobil Corporation, et. al. The Lester matter was filed by over 600 plaintiffs for personal injuries and property damages allegedly resulting from Naturally Occurring Radioactive Materials (“NORM”) in 2002. The Bottley matter, on the other hand, was filed in 2013 as a wrongful death and survival suit filed on behalf of Cornelius Bottley, a decedent-plaintiff in Lester, by his three remaining heirs. Following the selection of a trial flight in the Lester matter, which was to include the claims of Mr. Cornelius Bottley, the Bottley Plaintiffs moved to transfer and consolidate their suit with Lester. The matter was promptly removed by a defendant named only in the Bottley matter.

The Fifth Circuit rejected Plaintiffs’ argument that the consolidation was meant to attach the Bottley matter only to the pending trial flight such that it did not, as CAFA requires, propose a single trial with more than 100 individual plaintiffs. Rather, the Fifth Circuit held that the focus under CAFA is on the consolidation proposed, which in the case of the Bottley plaintiffs, was a consolidation of cases involving “overlapping liabilities, damages and questions of law and fact…the determination [of which] in either case will have great bearing on the other….” Plaintiffs’ Motion did not and, as a matter of law could not, limit consolidation to only the claims set for trial. As such, the Fifth Circuit found that it proposed a “mass action,” i.e. a joint trial of 100 or more plaintiffs’ claims, under CAFA.

More importantly, the Fifth Circuit examined the date of the proposed consolidation as determining the applicability of CAFA. Though Lester had been filed before CAFA’s enactment, the proposed consolidation was proposed years later. The Fifth Circuit found that the proposed consolidation created a new “mass action.” The Fifth Circuit reasoned that a civil action may commence before it becomes a “mass action,” and that the Bottley suit became a “mass action” when Plaintiffs proposed that the claims be tried jointly with those in the Lester matter. Bottley was a “civil action” commenced after CAFA’s effective date that subsequently became a mass action subject to CAFA’s removal provisions.

In affirming the denial of Plaintiffs’ Motion to Remand below, the Fifth Circuit established two compelling rules: (1) that a consolidation is effective to create a “mass action” under CAFA; and (2) that CAFA’s Section 9 requirements are met if one of the two consolidated actions was commenced after CAFA’s effective date.  In addition to providing guidance and interpretation regarding the commencement of a mass action, this opinion demonstrates a broad approach to CAFA.

By Sonny Chastain

In its recent campaign, Bud Light recognizes true friends of the Crown by raising a cold adult malted beverage and chanting Dilly Dilly.  The marketing slogan was created apparently coming out of nonsense and fun.  In its campaign, Bud Light seems to want people to celebrate with a lighthearted toast of Dilly Dilly and escape the Pit of Misery.

On December 1, Modest Brewing Company in Minneapolis introduced Dilly Dilly Mosaic IIPA into the market place.  Instead of the typical “stop it or else” demand letter, Bud Light turned an infringement situation into a marketing opportunity.  Bud Light sent an actor into the Modest Brewery dressed in medieval garb to read a pronouncement from the Crown.   The Town Crier proceeded to read from a scroll, requesting Modest’s latest brew be put on a limited edition run.  The Town Crier stated that the Crown was flattered by the loyal tribute, but noted that Dilly Dilly is a motto of the Crown and disobedience would be met with additional scrolls, formal warning, and a private tour of the Pit of Misery.  As a peace offering, the Town Crier also offered two employees a free trip to the Super Bowl which is being held in Minneapolis.

The unusual cease and desist demand is achieving rave reviews on social media.   Instead of dilly dallying around in the typical strong-arm legal maneuvering, Bud Light raised a Dilly Dilly to the Modest Brewing Company.  In a creative manner, Bud Light made its point of protecting its trademark from further infringement, while generating some laughs and likely some goodwill among consumers. So, to Bud Light, Dilly Dilly!

By Sonny Chastain

General Mills filed an application to register the color yellow appearing as the uniform background on a box of Cheerios.   It contended that consumers have come to identify the color yellow specifically with Cheerios, when used in connection with the goods.  It submitted survey evidence and expert reports to support the claim of acquired distinctiveness.  However, the trademark examiner concluded that General Mills failed to prove acquired distinctiveness and that the mark fails to function as a mark.  An appeal was submitted to the Trademark Trial and Appeal Board (“TTAB”).

General Mills argued that the purchasing public recognizes the color yellow on a package of toroidal (ring or doughnut-shaped) oat-based breakfast cereal as an indicator that it is the source of the cereal.  The record showed that General Mills has sold Cheerios since 1945.  In the decade prior to 2015, General Mills spent over $1 billion in marketing yellow-box Cheerios with sales exceeding $4 billion.  However, the question was not whether consumers recognized the term Cheerios as a source indicator but whether the color yellow identifies origin.

The TTAB agreed with the examiner’s conclusion citing lack of exclusive use of the color yellow.  The Board noted that the examiner pointed to 23 cereal products that offered packaging in a similar color.  Several of the products are even offered by companies which are recognized as General Mills’ biggest competitors:  Kellogg, Post, and Quaker.  Some of General Mills’ survey subjects showed their awareness of several of the products, especially Honeycomb and Corn Pops.  Additional cereal boxes cited included Joe’s O’s, Honey O’s, Tasteeos, Honey Bunches of Oats, Crispix, and Life.  The Board concluded that General Mills is not alone in offering oat-based cereals or even toroidal shaped, oat-based cereal in a yellow package.  Thus, customers are unlikely to perceive yellow packaging as an indicator of a unique source.  While the color may be attractive and eye-catching ornamentation, it alone did not connect to a potential source.   The Board noted that while customers are familiar with the yellow color of the Cheerio’s box, the color yellow is only one aspect of the complex trade dress that includes many other features that perform as a distinguishing and source-indicating function.   It was not persuaded that customers perceive the proposed mark, the color yellow alone, as indicating the source these goods.  The Board found the yellow background did not acquire distinctiveness and does not function as a trademark.

The case teaches that it is important to recognize what mark or components thereof function to identify a source. A question to ponder is, with what features do consumers identify to connect a particular good or service with a source of origin? General Mills took an aggressive view of the source identifying capability of this color which the Board concluded was not correct.  It is possible that if additional features had been included in connection with the overall trade dress, that registration may have been possible.

By Stephen C. Hanemann

The Carriage of Goods by Sea Act (“COGSA”) provides that it shall “apply to all contracts for carriage of goods by sea to or from ports of the United States in foreign trade.” In matters involving international trade, contracts for carriage – involving goods shipped to or from the United States via a foreign seaport – are those covered by a bill of lading or any similar document of title. In GIC Services, LLC v. Freightplus (USA), Inc., 120 F. Supp. 3d 572 (E.D. La. July 29, 2015); rev’d in part 866 F. 3d 649 (5th Cir. August 8, 2017), the EDLA recently held that a shipment of cargo from Texas to Nigeria, covered by a bill of lading, constituted a contract of carriage subject to COGSA.

GIC Services, LLC contracted with Freightplus (USA), Inc. to ship a tugboat, the M/V REBEL, to Lagos, Nigeria. Freightplus contracted with Industrial Maritime Carriers to provide a vessel on which the REBEL was to be carried. When GIC learned that the REBEL was actually delivered to Warri, Nigeria rather than Lagos, it instituted an action for damages against Freightplus.

In addition to the myriad of disputed issues arising out of the shipment of the tugboat, the carrier and shipper disputed the carrier’s right under COGSA to limit its liability to the $500 per package limitation. Freightplus maintained that its actions did not cause GIC’s losses, but even if they did, the carriage was governed by COGSA and Freightplus’ liability should be capped at $500, the COGSA per-package-damages limitation.

Freightplus filed a third-party complaint against IMC claiming that IMC was liable for losses and damages sustained by GIC. Although GIC paid Freightplus the full amount for freight, the payment was never remitted to IMC. Consequently, IMC claimed entitlement to a maritime lien against the REBEL, in rem, for unpaid freight charges for its carriage.

Evaluating the COGSA limitation issue first, the district court ruled that the per-package limitation under COGSA is rendered ineffective if the carrier is responsible for an unreasonable deviation from the contract of carriage. Finding that Freightplus did, in fact, cause or contribute to an unreasonable deviation from the contract of carriage, the Court held that Freightplus was not entitled to the COGSA per package limitation, and that it would answer in damages for all losses incurred by GIC due to the transportation errors. The Court considered, among other factors, Freightplus’ failure to deliver the goods at the port named in the Bill of Lading. The Court found that GIC made a prima facie case against Freightplus for committing an unreasonable deviation under COGSA not only because the tugboat was delivered to the wrong destination port, Warri, Nigeria, and not Lagos, but also secondary to Freightplus issuing an erroneous bill of lading.

The district court assessed $1,860,985 in damages against Freightplus in favor of GIC, but also found that IMC was responsible to pay 30% of that amount due to its contributory fault. But the trial court denied IMC’s claim of lien against the REBEL, in rem. The U.S. 5th Circuit affirmed the amount of damages awarded to GIC, as well as the allocation of fault between IMC and Freightplus.  However the 5th Circuit disagreed with the district court’s finding that IMC was not entitled to assert a maritime lien against the REBEL, in rem.

The 5th Circuit set out the well-settled maritime legal principal that that a maritime lien exists in favor of a ship owner over cargo for charges incurred during the course of that cargo’s carriage. Further, the 5th Circuit explained that maritime law permits an action in rem against the cargo itself and, therefore, IMC was entitled to obtain a maritime lien against the REBEL. Despite arguments to the contrary, the lien remained valid because the ocean carrier (IMC) took no action to release any source liable for unpaid freight from liability. The district court indicated that a different standard might apply concerning a carrier’s intent to release a liable source for unpaid freight from liability in the context of an in personam action and an in rem action, but the 5th Circuit disagreed and concluded that the district court erred in barring IMC’s maritime lien against the REBEL.

By Tod J. Everage

For nearly 30 years, district courts within the US 5th Circuit have evaluated whether maritime or state law applies to oil and gas service contracts using the 6-factor test from Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990). The Davis factors focused mainly on the nature of the work being performed and included the following questions: (1) what does the specific work order in effect at the time of the injury provide? (2) what work did the crew assigned under the work order actually do? (3) was the crew assigned to work aboard a vessel in navigable waters? (4) to what extent did the work being done relate to the mission of that vessel? (5) what was the principal work of the injured worker? and (6) what work was the injured worker actually doing at the time of injury? The arduous test has repeatedly been a subject of criticism in the 5th Circuit.

Seizing the opportunity, the 5th Circuit in In re Larry Doiron, Inc., voted to rehear the case en banc to finally rid itself of the Davis-inducing headaches. We previously wrote about this case after its first panel decision here. Upon initial consideration, the 5th Circuit applied Davis to a flow-back services contract, finding it to be a maritime contract. The Circuit Court’s decision fell in line with many other Davis cases that – even after weighing the 6 factors – seemed to primarily turn on the use of a vessel for the work. See here for example. Seeing that factor as gaining primacy, the 5th Circuit simplified the test down to two factors focusing more on the maritime nature of the contract rather than the work itself.

Indeed, the 5th Circuit noted that “most of the prongs of the Davis & Sons test are unnecessary and unduly complicate the determination of whether a contract is maritime.” And, the evaluation of those factors often required the Court to parse through minute factual details to determine what was going on. Take this case for example. The 5th Circuit had never evaluated a flow-back contract before. Thus, to answer the 2nd factor, the Court was forced to analogize flow-back services to casing, wireline, and welding services. The en banc panel found that exercise did nothing more than add “to the many pages dedicated to similar painstaking analyses in the Federal Reporter.” The Court also found the 3rd, 4th, and 6th factors equally irrelevant to finding whether a contract was maritime or not.

Though its own Davis-based jurisprudence had been leading the Court towards a test focused on the necessity of a vessel, the 5th Circuit looked to the U.S. Supreme Court for affirmation. In Norfolk So. Railway Co. v. Kirby, 543 US 14 (2004), the Supreme Court held that a claim for money damages for cargo damaged in a train wreck (on land) was governed by maritime law. Its analysis was based on a finding that the two bills of lading covering the transport of the cargo from Australia to Alabama were maritime contracts. Even though the train crashed on land, the Court found dispositive that the “primary objective” of these bills was “to accomplish the transportation of goods by sea from Australia to the eastern coast of the United States.” It was the nature of the contract that persuaded the Court, which was maritime commerce.

With that guidance in mind, the 5th Circuit set out a “simpler, more straightforward test.” The first question to ask is whether the contract is one to provide services to facilitate the drilling or production of oil and gas on navigable waters? This question will avoid having to delve into the actual services performed and more into the location of those services. If the services are intended to be provided on the water, the next question is whether the contract provides or whether the parties expect that a vessel will play a substantial role in the completion of the contract. If the answer is “yes” to both questions, the contract is maritime. Paring the test from 6 to 2 allows reviewing courts to “focus on the contract and the expectations of the parties.”

Though the other four Davis factors were tossed aside, they were not tossed away. The 5th Circuit left open the possibility of using those factors when dealing with an unclear contract. However, by doing so, it seems inevitable that all parties who face an unfavorable application of state or maritime law will claim the contract is unclear and find ways to evaluate the discarded factors anyway; especially those involving disputed oral work orders. We shall see.

Lawyers are notorious for mucking up the works and over complicating seemingly straightforward issues. Try finding a one-page contract for any services nowadays that isn’t written in 6 point font. The 5th Circuit’s en banc decision is a breath of fresh air. After years of debating why wireline work is not inherently maritime but why casing work is, maritime lawyers now have a much simpler (in theory) test to aid in predicting the applicable law to a contract, which can have serious ramifications depending on the outcome.

By Jaye Calhoun, Jason Brown, Willie Kolarik, Phyllis Sims, and Angela Adolph

The Louisiana Department of Revenue (the “Department”) has joined the ranks of cash-strapped states looking to raise additional corporate tax revenue through scrutinizing transfer pricing and proposing adjustments.  In transfer pricing audits, the Department looks at transactions between related parties (having common ownership) and seek to determine whether the transactions are priced as they would be if the parties were unrelated – i.e., whether the related-party transactions were made based on arm’s length standards. The current wave of arm’s-length transfer pricing audit activity in Louisiana is unusual, because Louisiana recently enacted an add-back statute and because the Department has been seemingly more active recently in attempting to assert the discretionary adjustment authority provided in La. R.S. 47: 287.480 to force related taxpayers to file combined returns.

During the past few years, the Department has worked with the Multistate Tax Commission’s (the “MTC”) transfer pricing initiative and Department personnel have received transfer pricing training from both the MTC and outside consultants.  The Department is also sharing information with other states and the Service.  The extent to which the Department is relying on outside consultants during the preparation of its quasi-transfer pricing study is not clear.

The Department’s recent arm’s-length transfer pricing adjustments rely on Louisiana’s transfer pricing statute (La. R.S. 47:287.480(2)), which tracks, verbatim, Internal Revenue Code Section 482 and permits the Secretary of Revenue to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among related businesses, if the Secretary determines that such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or clearly to reflect the income of any of those businesses.  Historically, the Internal Revenue Service (the “Service”) relied on Code Section 482 to make a wide variety of adjustments to the federal tax returns of related taxpayers.  However, since the mid-1980s the Service has generally limited its application of Code Section 482 to arm’s-length transfer pricing adjustments for international transactions between related taxpayers. For its part, the Department appears to be targeting Louisiana taxpayers with intercompany royalty expenses for transfer pricing audits. But other intercompany transactions may trigger examinations as well.

The Department’s current arm’s-length transfer pricing audit approach relies on the comparable profits method,  In essence, Louisiana auditors are coming up with their own “transfer pricing studies” for targeted taxpayers.  The Department appears to be using the Compustat Global Database to identify comparable companies that engage in activities similar to the auditor’s understanding of the taxpayer’s activities and then attempts to locate those same companies in a proprietary third-party database that purports to compile royalty rates extracted from unredacted license agreements filed with the Securities and Exchange Commission. The Department also relies on largely undisclosed subjective and objective criteria to narrow the list of comparable entities, such as excluding any comparable entity with losses.

The Department’s arm’s-length transfer pricing adjustments contain two other significant flaws.  First, if the Department’s own audit adjustment determines that a taxpayer’s operating profit margin is within the arm’s-length interquartile range, the Department still creates an adjustment to increase the taxpayer’s operating profit to the median operating profit margin.  Second, the Department has attempted to apply its audit adjustments to one hundred percent (100%) of a taxpayer’s operating income, even if only a small portion of the taxpayer’s operating income relates to controlled transactions.

Implications

The current wave of Louisiana arm’s-length transfer pricing adjustments is cause for concern.  Indeed, not only have the obvious flaws in the Department’s transfer pricing methodology already resulted in significant inappropriate adjustments, but there is reason to believe the Department will refuse to correct those errors, preferring to litigate one or more test cases that will set a favorable precedent for its methodology.  Such a precedent could be damaging to any taxpayer that engages in related-party transactions and does business in Louisiana.

The Department’s recent approach to proposing arm’s-length transfer pricing audit adjustments reflect an attempt to apply a novel understanding of Code Section 482 transfer pricing concepts to Louisiana taxpayers.  The Department’s proposed audit adjustments also suggest that the Department will not accept a taxpayer’s third-party transfer pricing study, even if the Service accepted that study and agreed that the taxpayer’s federal taxable income was correctly reported.

Properly documenting intercompany transactions is key to achieving a good result in a transfer pricing audit.  Related taxpayers that engage in multi-state or international intercompany transactions should review their intercompany agreements and carefully document any intercompany transactions.  That documentation should include a determination of the functions performed and assets employed by each party to the transaction as well as any risks assumed related to the transaction.  Taxpayer’s should also regularly review and update their transfer pricing studies and internal transfer pricing methodology.

Because the Department is intent on pressing this issue, a taxpayer that has received an indication or a proposed assessment suggesting that the Department intends to raise a transfer pricing issue, should handle any response carefully. Once a proposed or formal assessment is issued taxpayers should take care to calendar all deadlines and strictly follow all procedural formalities for challenging/appealing disputed adjustments.  It is important not to miss any opportunity to contest a proposed transfer pricing adjustment, because, until the Department refines its approach, many of the adjustments we have seen do not appear to correctly reflect income and are subject to challenge.

For additional information, please contact: Jaye A. Calhoun at (504) 293-5936; Jason Brown at (225) 389-3733; Willie Kolarik at (225) 382-3441; Phyllis Sims at (225) 389-3717; or Angela  Adolph at (225) 382-3437