On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). Through the DTSA, claims for trade secret misappropriation will now have a basis in Federal law and Federal Courts will have jurisdiction over such claims. In addition to the new federal cause of action, the DTSA adds in several tools that trade secret holders can use to protect their trade secrets, making this Act one of the most broad-sweeping changes to American intellectual property law since the Leahy-Smith America Invents Act in 2011. Given these changes and the Supreme Court’s recent decisions on the patentability of software and business methods, it is important that trade secret holders understand the new tools available for protecting their intellectual property rights and their new responsibilities.

Generally, a trade secret is information, including patterns, plans, compilations, formulas, design, processes, procedures, and more, where the holder has taken reasonable measures to keep the information secret, the information is not readily ascertainable or reverse-engineered, and the information gives that owner some kind of economic value or competitive edge.[1] Famous examples of trade secrets include the recipe for Coca-Cola, Google’s proprietary search algorithm, and the formula for WD-40.[2] However, trade secrets do not extend to just these highly-valuable examples. A majority of businesses have at least some trade secrets including, but not limited to, customer lists, marketing strategies and analyses, manufacturing techniques, pricing and purchasing information, business methods, business forecasts, and product information.

A trade secret is valuable for as long as the information remains a secret. Trade secrets can be lawfully learned through reverse engineering. What becomes more concerning for trade secret holders is unlawful use through commercial or industrial espionage, breach of contract, or employee poaching while non-compete agreements are in place. The unauthorized use or misappropriation of a trade secret by a person other than the holder is considered unfair competition and an unfair trade practice.

Before the DTSA, trade secrets were the only major form of intellectual property that that is not backed by U.S. federal civil remedies. Trade secret holders whose secrets were publicized typically only had state-level remedies available. The DTSA extends the current Economic Espionage Act of 1996, which criminalized certain trade secret misappropriations, to now permit civil lawsuits for trade secret appropriation. This new law will have significant impacts on holders of trade secrets.

First, this new law provides a federal remedy for trade secret misappropriation, but does not eliminate the remedies previously available in state court. Accordingly, litigation costs may increase since claimants may bring their claims in federal court alone or in both state and federal court. However, the federal claim will provide federal jurisdiction, which may reduce jurisdiction battles that were are common in trade secret litigation where the trade secret had crossed state lines. International companies will now also be able to bring suit in federal court where their United States office is located, which may help improve foreign companies’ ability to enforce judgments.[3] Further, having a federal remedy will create a nationwide body of trade secret law, which will provide a greater degree of predictability to trade secret litigation.

Second, in addition to allowing damages for wrongful takings of trade secrets, the DTSA includes a seizure provision, wherein a trade secret owner can obtain, on an ex parte basis, an order to seize “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This provision is intended to apply in cases where a trade secret thief who receives notice of the court action would leave the country or disseminate the secret before a court could stop them. For a seizure order to issue, the claimant must establish the standards necessary for a state civil injunction and show specific evidence demonstrating that the injunction would be insufficient because the thief would violate the order or would make the secret inaccessible to the court for seizure.

Third, the DSTA also has provisions that impact employee mobility. Employers can seek an injunction to prevent actual or threatened misappropriation of a trade secret by an employee, provided it does not prevent that person from entering into an employment relationship. For this injunction to be granted, there must be evidence of threatened misappropriation of the trade secret. An employer will not be awarded an injunction “merely on the information that the person knows.” Also important for Louisiana—a state that strongly disfavors non-compete agreements—the injunction cannot be used to circumvent state laws regarding restraints on employment and non-compete agreements.

Last, the DTSA provides immunity for whistleblowers. Under this provision, an individual cannot be held criminally or civilly liable under any federal or state trade secrets laws for revealing the disclosure of a trade secret in confidence to a federal, state, or local government official or an attorney for the purpose of reporting or investigating a suspected violation of the law. Employees may also disclose the trade secrets of their employer in court documents filed under seal as part of a lawsuit for retaliation by his employer.

In order to take full advantage of the DTSA, the Act requires employers make some changes to employee contracts, confidentiality agreements, and nondisclosure agreements. As part of the immunity provision, employers are now required to “provide notice of the immunity” created by the DTSA “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Failure to include this notice will strip the employer of certain remedies available in an action against an employee. The DTSA allows for exemplary damages when the trade secret has been willfully and maliciously misappropriated. Attorney fees can be awarded when the misappropriation is made in bad faith or when the trade secret was willfully and maliciously misappropriated. Attorney fees and exemplary damages are not recoverable unless the employer has provided the defendant employee, consultant, or contractor with notice of the immunity from criminal and civil prosecution granted by the DTSA to whistleblowing persons. Therefore, if an employer is to recover exemplary damages or attorney fees against an employee who unlawfully disclosed its trade secrets, the employee must have been notified of the immunity provisions. Therefore, if a company has employees, or employs consultants or contractors who have access to the company’s trade secrets, the company should consider consulting an attorney to ensure that their employment agreements include the proper DTSA immunity notifications.

While the DTSA presents new opportunities for a trade secret holder to enforce its rights, it is important to note that the DTSA did not alter the holder’s need to make efforts to keep the secret confidential. Trade secret holders must still make efforts to maintain the secrecy of their trade secrets and confidential information. An attorney can assist with ensuring that the proper steps are taken to maintain this confidentiality.

[1] 18 U.S.C. § 1839.

[2] Melanie Radzicki McManus, 10 Trade Secrets We Wish We Knew, HowStuffWorks.com (last accessed May 4, 2016) (available at http://money.howstuffworks.com/10-trade-secrets.htm)

[3] Monika Gonzalez Mesa, Latin American Companies Back New US Trade Secrets Law, Daily Business Review (May 3, 2016) (available at http://www.dailybusinessreview.com/id=1202756520297/Latin-American-Companies-Back-New-US-Trade-Secrets-Law?slreturn=20160404115326).

Today, the Occupational Safety and Health Administration (“OSHA”) announced a final rule that will make information regarding workplace injuries and illnesses available online.  OSHA already requires many employers to keep a record of injuries and illnesses, but little or no information about worker injuries and illnesses at individual employers is made public.  The new regulation requires workplaces with 20-249 employees in high hazard industries (such as agriculture, forestry, construction and manufacturing) and workplaces with more than 250 employees to upload injury and illness data or summaries to OSHA on an annual basis.  OSHA will, in turn, post data from these submissions on a publicly accessible website.  The new regulation also incorporates OSHA’s existing statutory prohibition on retaliating against employees for reporting work-related injuries or illnesses.  Most parts of the final rule becomes effective August 10, 2016.  To access the final rule, click here.

The May 4, 2016, Federal Register contains a notice of the Environmental Protection Agency’s (“EPA’s”) final decision that the Baton Rouge ozone nonattainment area has attained the 2008 8-hour ozone National Ambient Air Quality Standard (“NAAQS”). 81 Fed. Reg. 26,697. (The Baton Rouge nonattainment area consists of the parishes of Ascension, East Baton Rouge, Iberville, Livingston, and West Baton Rouge.) EPA found that the ambient monitoring data for 2012-2014 demonstrated attainment with the 2008 8-hour ozone standard. Although this 8-hour ozone standard was revoked in 2015 and replaced with a more stringent standard, some of the State Implementation Plan (“SIP”) requirements associated with the old 8-hour standard have been continued under the Clean Air Act’s “anti-backsliding” provisions. The EPA action, known as a “Clean Data Policy Determination,” formally suspends several requirements associated with the Louisiana Department of Environmental Quality’s (“LDEQ’s”) SIP, so long as the Baton Rouge Area continues to achieve the 2008 8-hour ozone standard. These suspended requirements include reasonable further progress (“RFP”) requirements, attainment demonstrations, reasonable available control measures (“RACM”), contingency measures, and other state planning requirements related to attainment of the 2008 8-hour ozone standard.

A Clean Data Determination is not equivalent to a redesignation, and the state must still meet the statutory requirements for redesignation in order to be redesignated to attainment. The full redesignation requires not only a Clean Data determination, but also approval of a maintenance plan to ensure continued attainment of the standard. In the March 20, 2016, Louisiana Register, LDEQ provided notice that it would submit to EPA a proposed redesignation request and ozone maintenance plan for the 2008 8-hour ozone NAAQS for the Baton Rouge Area. See LR 42:496. The deadline to submit comments was April 29, 2016. It is expected that LDEQ will soon submit its redesignation submittal, formally requesting that EPA redesignate the Baton Rouge Area to full attainment with the 2008 8-hour ozone standard.

It should be noted that the determination of attainment for the Baton Rouge Area applies to the 2008 8-hour ozone standard, not to the more stringent 2015 8-hour ozone standard. On October 1, 2015, EPA lowered the 8-hour ozone standard from 75 parts per billion (“ppb”) to 70 ppb. 80 Fed. Reg. 65,292 (Oct. 26, 2015). Based on current design values (“DVs”), the only area of the state that does not comply with the new standard is the Baton Rouge Area (DV = 71 ppb). However, final designations under the new ozone standard will be based on 2014 – 2016 air quality data. Designations will not be effective until on or about October 1, 2017.

The EPA Federal Register notice of the Clean Data Policy Determination for Baton Rouge is available here.

On April 14, 2016, the U.S. Department of Health and Human Services (HHS), Office for Civil Rights (OCR), entered into a $750,000 settlement with a North Carolina orthopaedic clinic arising from the clinic’s disclosure of x-ray films and related protected health information of 17,300 patients to an entity that was engaged by the clinic to transfer x-ray images to electronic media. According to an OCR press release, the clinic released the information to the outside entity without executing a HIPAA business associate agreement, leaving the information “without safeguards and vulnerable to misuse or improper disclosure.” The OCR investigation arose as a result of the clinic’s breach self-report, which was submitted to OCR in 2013.

In addition to payment of the $750,000 fine, the resolution agreement and accompanying corrective action plan entered into between the clinic and OCR also requires the clinic to take the following corrective action steps:

  • provide HHS the names of all of its business associates and copies of the corresponding business associate agreements;
  • revise its policies and procedures regarding business associate to better track its business associate relationships and appoint a responsible individual or individuals to coordinate its business associate arrangements;
  • train all of its workforce members who use or disclose PHI within sixty (60) days following HHS’s approval of its revised business associate policies and procedures and related training materials, and annually thereafter;
  • train all new workforce members on its revised and approved business associate policies and procedures within fifteen (15) days after beginning work for the clinic;
  • for a period of two years, notify HHS within thirty (30) days of any failure by a clinic workforce member to comply with its HIPAA policies and procedures, including the actions taken to address the matter, to mitigate any harm, and to prevent it from recurring, including appropriate sanctions taken against such workforce member;
  • for a period of two years, submit an annual report to HHS regarding its compliance with the terms of the corrective action plan, with an accompanying attestation by an owner or officer of the clinic.

This latest enforcement action reinforces the need for covered entities to accurately identify their business associates and execute HIPAA-compliance business associate agreements prior to disclosure of protected health information to these outside entities.

Employers are not the only ones frustrated with the National Labor Relations Board’s ever-growing scrutiny of common employer work rules and policies.  A member of the NLRB is, too.

As many employers are aware, the NLRB’s scrutiny of work rules has gone well beyond social media policies.  In recent years, the NLRB has taken issue with many seemingly routine work rules and policies and found those polices to be unlawful.  The policies found to be unlawful include policies regarding: confidentiality; conduct toward the employer and supervisors; conduct toward fellow employees; communications with third parties (including the media and government agencies); use of employer logos, copyrights, and trademarks; photographs, recordings, and personal electronic devices; leaving work; and conflicts of interest.

In particular, where the prohibitions and rules were not “properly” and/or “clearly” limited to unprotected activity, the NLRB has found otherwise facially-neutral rules unlawful if employees would reasonably understand them as prohibiting employees from engaging in protected activities or discussions regarding wages, benefits, or other terms and conditions of employment.

Recently, the NLRB issued yet another decision condemning an employer’s work rules.  Specifically, the NLRB majority found that a hospital violated the National Labor Relations Act by maintaining rules in its Code of Conduct that: (1) prohibit conduct that “impedes harmonious interactions and relationships,” and (2) prohibit “negative or disparaging comments about the . . . professional capability of an employee or physician to employees, physicians, patients, or visitors.”  The Board majority’s findings are consistent with the Board’s recent pattern of invalidating facially-neutral work rules on the premise that an employee would “reasonably construe” the rule to restrict the employee’s ability to engage in protected activities under the Act.

However, what is novel about the decision lies in the dissent.  Commentators are buzzing about the dissenting opinion authored by Board member Philip Miscimarra, which called for a change in the way the Board evaluates employer policies and work rules.

Miscimarra identified multiple “defects” in the NLRB’s current test and called for a “more even-handed evaluation of employment policies, work rules and handbooks.”  Rather than continue to apply the current test, he “believe[s] the Board must evaluate at least two things: (1) the potential adverse impact of the rule on NLRA-protected activity, and (ii) the legitimate justifications an employer may have for maintaining the rule,” and he called on his colleagues to “engage in a meaningful balancing of these competing interests.”

Of course, Miscimarra’s opinion is still the minority opinion.  Employers should remain vigilant when drafting and enforcing their work rules to ensure they cannot reasonably be understood to infringe upon employees’ rights to engage in protected concerted activity.   However, employers may take some comfort in knowing one member of the NLRB is sympathetic to their plight.

Storm-And-Blue-Lightining-At-Sea

Last December, we posted an article addressing the recent conflicted decisions out of the Eastern District of Louisiana on the remaining availability of punitive damages against third parties under general maritime law. You can find that article here. In 2016, the conflict continues…

As we mentioned, Judge Fallon allowed a claim for punitive damages against a third party under general maritime law to proceed against a third party on the basis that the prohibition against such damages set forth in Scarborough v. Clemenco Indus., 391 F.3d 660 (5th Cir. 2004) was indirectly abrogated by Atlantic Sounding v. Townsend, 557 U.S. 407 (2009). See Collins v. A.B.C. Marine Towing, LLC, 2015 WL 5254710 (E.D. La. 9/9/2015). Therein, Judge Fallon held that a seaman can recover punitive damages under general maritime law if the Jones Act is not implicated. A few months later, Judge Morgan twice held the opposite view. See Howard v. Offshore Liftboats, LLC, 2015 WL 7428581 (E.D. La. 11/20/15); Lee v. Offshore Logistical and Transports, LLC, 2015 WL 7459734 (E.D. La. 11/24/15). In Judge Morgan’s opinion, Scarborough remains precedent in the Fifth Circuit.

Last month, Judge Zainey joined the fray in Hume v. Consolidated Grain & Barge, Inc., 2016 WL 1089349 (E.D. La. 3/21/16). That case involved personal injury claims of two workers, working for Consolidated Grain & Barge (“CGB”) aboard the M/V BAYOU SPECIAL. At the time of the incident, the M/V BAYOU SPECIAL was being pushed by the M/V MR. LEWIS, which was owned and operated by Quality Marine. Plaintiffs sued CGB and Quality Marine, asserting the usual array of claims under the Jones Act and general maritime law, including a demand for punitive damages. In response to a Motion to Dismiss filed by Quality Marine, Plaintiffs conceded that their punitive damages claims were unavailable against Quality Marine for Jones Act negligence and unseaworthiness; however, they contested Quality Marine’s argument that punitive damages were unavailable under the general maritime law.

Not surprisingly, Quality Marine relied upon McBride and Scarborough to argue that punitive damages are not available to the Plaintiffs. In Opposition, Plaintiffs relied on Judge Fallon’s decision in Collins. Judge Zainey found Judge Fallon’s reasoning in Collins persuasive and denied Quality Marine’s motion. Judge Zainey agreed that “there is no need for uniform treatment of an employer and a third party tortfeasor where there is no statutory remedy that is different than the general maritime law remedy.” Because the Jones Act is not implicated by Plaintiffs’ punitive damages claims against Quality Marine, the prohibition of such claims under the Jones Act has no bearing. Accordingly, Plaintiffs’ claims for punitive damages against Quality Marine were allowed to proceed.

The current score sits at 2-1 in favor of punitive damages against a third party under general maritime law. Until the U.S. 5th Circuit weighs in to settle this issue, the availability of such claims appears to be guided by the judicial lottery.

The Louisiana state and local sales tax laws have historically included an isolated or occasional sale rule. In general, the rule looks at the characteristics of a seller to determine if a sales taxable transaction has occurred. If the seller is not engaged in the business of selling the type of property being sold and does not hold itself out as being engaged in such business (La. R.S. 47:301(1)), the transaction is not subject to sales/use tax regardless of the nature of the buyer. La. R.S. 47:301(10)(c)(ii)(bb)(the “Occasional Sale Rule”). It was the Occasional Sale Rule that not only allowed yard and garage sales without state or local sales tax, but allowed a grocer to sell used computers, a retailer to sell used display cases, and a vessel operator to sell used vessels without sales tax.

In the most recent Special Session that ended in March, the Louisiana Legislature limited the Occasional Sale Rule. Under the revisions, sales qualifying as isolated or occasional sales will be subject to state sales tax at the following rates:

  • 4/1/2016 – 6/30/2016 – 4% state sales tax
  • 7/1/2016 – 6/30/2018 – 2% state sales tax
  • 7/1/2018 and after – 0% state sales tax

The new 5th penny of the state sales tax effective April 1, 2016, recognizes the Occasional Sale Rule. Thus, only a 4% state sales tax from April 1, 2016 through June 30, 2016 and the reduced rate of 2% from July 1, 2016 through June 30, 2018 will apply.

The loss of the Occasional Sale Rule affects transactions far beyond yard and garage sales. The Occasional Sale Rule has been used to avoid sales tax (and collection responsibility) in connection with transfers of industrial facilities, even among related parties, and to avoid sales tax in connection with capital contributions of tangible personal property on entity formation. Titled vehicles have not had the benefit of the Occasional Sale Rule and have always been subject to state and local sales tax on the registration of the vehicles, but under the new law transfers of all sorts of corporeal movable (tangible personal) property will be subject to state sales tax. Incorporeal (intangible) and immovable property continue to be excluded from both state and local sales/use tax; however, there will be occasional sales issues related to property identified as movable “other constructions” (tanks, towers, pipelines, etc.) on leased or right of way land. The sales tax provision protecting “other constructions” on leased or right of way land from being subject to sales/use tax, La. R.S. 47:301(l6)(l), has also been limited as follows:

  • 4/1/2016 – 6/30/2016 – 4% state sales tax
  • 7/1/2016 – 6/30/2018 – 2% state sales tax
  • 7/1/2018 and after – 0% state sales tax

The Louisiana Department of Revenue (the “LDR”) is reviewing whether “other constructions” should be treated as taxable.

Under the new law limiting the Occasional Sale Rule, sellers of property are required to register with the LDR, collect state sales tax and remit collected tax on a proper LDR sales tax return. Failure to collect and remit can lead to personal liability for the tax, interest and penalties for the seller. While the LDR may be lenient for lawn and garage sales, it may be less so in connection with facility transfers, capital contributions and when a large non-profit conducts a silent auction or similar event involving the transfer of property.

Kean Miller Industrial Strength Law

The Louisiana Corporation Franchise Tax (“CFT”) has historically been imposed only on corporations. Thus, LLCs and partnerships have not been subject to the CFT. In the Special Session that ended last March, the Louisiana Legislature expanded the companies subject to the CFT to include non-corporate entities that elect to be taxed as corporations for federal income tax purposes. See, La. Acts 2016 (1st Ex. Sess.), No. 12 (“Act 12”).  The new law provides a safe harbor for LLC’s “qualified and eligible to make an election to be taxed” as an S-Corporation. Yet, while Act 12’s plain language does not appear to require that an LLC actually make the S-Corporation election to qualify for the safe harbor, the Louisiana Department of Revenue (“LDR”) has informed Kean Miller that LDR policy may require that an LLC actually make the election to avoid the CFT.

The expanded CFT law also legislatively overrules the taxpayer-favorable UTELCOM case. UTELCOM, Inc. v. Bridges, 2010-0654 (La. App. 1 Cir. 9/12/11), 77 So.3d 39. Under UTELCOM, a corporation was found not to be doing business in the state of Louisiana so as to be subject to the CFT, when its only activity in Louisiana was as a limited partner in a partnership doing business in Louisiana. The court found that the law did not extend to corporations that were not directly (and only passively, through ownership) engaged in business in Louisiana. The new law expands the activities that will subject an entity to the CFT by including the following as one of the taxable incidents in Louisiana:

“The owning or using any part or all of its capital, plant, or other property in this state whether owned directly or indirectly by or through a partnership, joint venture, or any other business organization of which the domestic or foreign corporation is a related party as defined in R.S. 47:605.1.”

Thus, owning an interest in an entity with operations in Louisiana may subject the owner to the CFT. Unfortunately, the CFT may end up being tiered under these circumstances. The entity operating directly in Louisiana may be subject to the CFT depending on how it is taxed for federal income tax purposes and its ability to elect S-Corporation treatment; and the interest owner may also be subject to CFT based on its investment in the entity with Louisiana operations.

For example: If Alligator Energy Corporation has no operations in Louisiana, but holds a 60% ownership interest in Alligator Pipeline, LLC, a Louisiana LLC that operates exclusively in Louisiana, Alligator Pipeline, LLC will be subject to the CFT if it is taxed as a corporation for federal tax purposes and is not eligible to be taxed as an S-Corporation. Alligator Energy Corporation will also pay CFT based on its investment in Alligator Pipeline, LLC. In essence, the activities of Alligator Pipeline, LLC will be taxed twice – once at the operating entity level and once at the parent level.

Act 12 does add a new holding company deduction; however, the deduction is only available if the parent has at least 80% of the voting and nonvoting power of all classes of stock, membership, partnership, or other ownership interests in the “subsidiary.”

Act 12 is applicable to tax periods beginning on or after January 1, 2017; however, this effective date could be misleading. Historically, a corporation subject to the CFT paid an initial CFT of $10 for its first year of operation. Under Act 12, an existing entity that becomes subject to the CFT because it is taxed as a corporation for federal income tax purposes (and cannot use the S-Corporation safe harbor) will be subject to full CFT liability based upon its books and records for the prior year.

The Environmental Protection Agency (EPA) announced in March that it is in the process of developing new regulations to curb methane emissions from existing oil and gas facilities.  The EPA will formally require companies operating existing oil and gas sources to provide information to assist in the development of comprehensive regulations to reduce methane emissions.  Methane is a potent greenhouse gas with a higher global warming potential than carbon dioxide.  As a preliminary step in the process of developing methane regulations for already-existing oil and gas facilities, EPA plans to present an Information Collection Request (ICR) for public comment (via notice in the Federal Register) by the end of April 2016.

An ICR is a formal records request that requires the recipient(s) to provide reporting, records, or other specified information directly to the EPA.  Such ICRs are authorized by Section 114(a) of the Clean Air Act (CAA), which provides EPA broad authority to request information, provided the requested information is for one of three approved purposes: (1) to assist the Agency in developing rules or regulations; (2) to determine whether “any person is in violation” of any CAA requirement; or (3) to carry out “any provision of this chapter[.]” The EPA is in the process of developing an ICR that will help it identify and target significant sources of methane emissions at existing facilities.  The ICR will likely call for mandatory record-sharing, equipment surveys, and/or emissions monitoring.  Recipients of the ICR will generally be required to provide the requested information to EPA and will be required to attest that their responses are accurate.  Members of the oil and gas industry can expect to receive this ICR later this year, after public comment and final administrative approval.

EPA’s recently-announced plan is the latest in a series of moves to limit methane emissions from oil and gas facilities; however, this is the first significant proposal to target already-installed wells and other existing oil and gas equipment.  In 2012, EPA adopted regulations that limit methane and other emissions from new hydraulically fractured and re-fractured natural gas wells. EPA proposed rules for reduction of methane and volatile organic carbon emissions from new oil and gas facilities on September 18, 2015.  80 Fed. Reg. 56593.  The proposed rules for new facilities imposed methane reduction measures on oil and natural gas well sites, natural gas gathering and boosting stations, gas processing plants and natural gas transmission compressor stations.  The March 2016 announcement for existing facilities indicates that the ICR will apply to these same types of sources “as well as additional sources.”  This latest announcement has fueled concerns that the forthcoming regulations could, as a practical matter, require the industry to retrofit or replace existing production and processing equipment to achieve compliance.

For more information, see EPA Administrator, Gina McCarthy’s blog post on this topic here.

Providing much needed clarity to an ambiguous and precedent-sparse arena of federal admiralty law, the U.S. Fifth Circuit Court of Appeal relied on Texas common law when recently upholding a district court’s denial of a Motion to Vacate Attachment under Supplemental Admiralty Rule B. In Malin v. Int’l Ship Repair & Drydock, Inc. v. Oceanografia, 2016 WL 1161215 (5th Cir. March 23, 2016), the principal dispute involved a Texas-based shipyard, Malin, suing a Mexican corporation, Oceanografia, for the balance of unpaid work invoices. To obtain jurisdiction for its claim against Oceanografia under Supplemental Admiralty Rule B, Malin attached fuel bunkers aboard the M/V KESTREL, a vessel chartered by Oceanografia. Oceanografia took delivery of the vessel on October 15, 2012, under a Bareboat Charter Agreement with the vessel’s owner. Malin attached the vessel’s fuel bunkers only two weeks later on October 29, 2012.

Supplemental Admiralty Rule B permits attachment of a defendant’s “tangible or intangible personal property – up to the amount sued for – in the hands of garnishees named in the process.” The validity of a Rule B attachment depends entirely on the determination that the thing attached be the property of the named defendant at the moment it is attached. See Shipping Corp. of India, Ltd. v. Jaldhi Overseas Pte., Ltd., 585 F.3d 58, 69 (2d Cir. 2009). But neither Rule B, nor federal maritime jurisprudence provide guidance as to what specific type of property interest is attachable. And, federal admiralty jurisprudence is equivocal as to whether a mere possessory interest is attachable under Rule B.

The Fifth Circuit needed only to decide whether the fuel bunkers constituted Oceanografia’s tangible or intangible personal property at the time of the attachment. The Court entertained, but was not persuaded by, Oceanografia’s argument that the attachment of the bunkers was improper under Supplemental Rule B because the bunkers were not its property. Oceanografia claimed that it had neither paid nor received an invoice for the bunkers at the time of their attachment. Affirming the district court’s holding that Oceanografia’s possessory interests in the bunkers constituted an attachable interest under Rule B, the Fifth Circuit offered a logically-premised conclusion: title to property unquestionably serves as an attachable interest under Supplemental Rule B. The next issue then was whether title for the bunkers passed to Oceanografia by the time of the attachment.

Finding the legal precedent so thin, the Court exercised its option to consider state law more directly on point. The charter party between the vessel’s owner and Oceanografia specified that Texas law should apply when federal maritime law was silent. Thus, the Court looked to Texas law for guidance. The charter party further provided that Oceanografia “shall purchase the bunkers at the time of delivery.” But the charter party, which created Oceanografia’s obligation to purchase the vessel’s bunkers, did not specifically condition passage of title on payment. The agreement was actually silent as to when payment was due or when title to the bunkers would pass to Oceanografia.

Since the charter party evidenced that Oceanografia was not expected to pay for the bunkers at the time of delivery, Texas law classified the sale as a credit transaction and title passed to Oceanografia on delivery of the “goods.” Because delivery of the vessel occurred before Malin attached the bunkers, Oceanografia held title to the bunkers at the time of the attachment. Consequently, Malin’s attachment was legally valid.

This decision confirms a heightened responsibility of charterers, vessel operators, and owners pro hac vice to be mindful of the proposition that even a contemplated sale, or credit-sale transaction, may suffice to give rise to an attachable possessory interest under Supplemental Rule B, especially if a federal court decides that Texas common law governs the otherwise maritime action.