Products Liability Law Daily Louisiana law, not maritime law, applied to $400 M damage claim involving defective wellhead tether
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Tuesday, March 8, 2016

Louisiana law, not maritime law, applied to $400 M damage claim involving defective wellhead tether

By Pamela C. Maloney, J.D.

Under the Outer Continental Shelf Lands Act (OCSLA), Louisiana law, not maritime law, applied to a products liability action to recover $400 million in damages caused by the rupture of a tether chain, a component of a free-standing hybrid riser (FSHR) system used to move crude oil from wellheads on the seabed to floating storage facilities on the surface, the U.S. Court of Appeals for the Firth Circuit ruled, reversing and remanding the district court’s decision which had incorrectly applied maritime law to the underlying lawsuit. The Fifth Circuit also rejected the tether chain manufacturer’s argument that the insurers under a construction all-risk policy that covered the FSHR had waived the choice-of-law argument because it had not been raised in a timely manner. According to the Fifth Circuit, the choice-of-law rule specified by the OCSLA is statutorily mandated and could not be waived (Petrobras America, Inc. v. Vicinay Cadenas, S.A., March 7, 2016, Jones, E.).

Petrobas America, Inc., an oil and natural gas company that had constructed five FSHR systems on the surface of the Gulf of Mexico, and Underwriters, the insurer of the FSHRs under a construction all-risks insurance policy, brought a products liability lawsuit against the manufacturer of underwater tether chains that were used to connect the upper risers to huge nitrogen-filled “buoyancy cans,” which are designed to keep tension in the risers so they will not kink and impede the flow of oil. The lawsuit sought $400 million in damages following an accident that occurred when a tether chain broke shortly after being installed. When the chain ruptured, it caused the pipeline riser and related equipment to collapse to the sea floor, severing the connection between the wellhead and the surface, thousands of feet above.

The manufacturer of the tether chain moved for summary judgment on the negligence, products liability, and failure-to-warn claims; the motion was granted and the insurers moved to amend the complaint, alleging that Louisiana law, not maritime law, applied to the dispute under OCSLA. A magistrate judge denied the motion for untimeliness and lack of good cause, and the district court affirmed. The insurer appealed.

Waiver. As an initial matter, the court addressed the manufacturer’s argument that the insurers had waived their choice-of-law argument by not raising it in the district court until after the insurers’ motion to amend had been filed, which occurred after the district court’s grant of summary judgment. The Fifth Circuit noted there was no dispute that OCSLA provided a basis for subject-matter jurisdiction, as originally pleaded by both the oil and gas company and its insurers, because the incident occurred on the Outer Continental Shelf. The court went on to explain that the manufacturer’s argument that OCSLA provisions could be waived ran contrary to Fifth Circuit precedent rejecting parties’ ability to make a “litigation choice” between maritime and adjacent state law. In enacting OCSLA, Congress had delineated among admiralty (maritime), federal law, and adjacent state law, and the parties could not avoid that statutory choice whether voluntarily or inadvertently.

Admiralty or state law choice. As noted, OCSLA prescribes the application of either maritime law or adjacent state law as surrogate federal law to govern the Outer Continental Shelf. The oil and gas company and its insurers argued that the district court was required to apply Louisiana law, the law of the adjacent state, while the manufacturer had argued that maritime law applied to the dispute. The court clarified that under the statute, adjacent state law applied if the following conditions were met: (1) the controversy must arise on a situs covered by OCSLA (i.e., the subsoil, seabed, or artificial structures permanently or temporarily attached thereto); (2) federal maritime law must not apply of its own force; and (3) the state law must not be inconsistent with federal law. The decisive question in this case was whether maritime law applied of its own force based on the twin tests of location and connection with maritime activity. Finding that the breaking of the tether chain failed the admiralty connection test, the court did not address the location test.

To meet the connection test, the manufacturer was required to show that maritime commerce was disrupted by the tether chain’s failure and that the failure was substantially related to traditional maritime commerce. Dispensing with the first prong—the disruption of maritime commerce—the Fifth Circuit said that a tether chain failure on an underwater structure in an offshore production installation, causing the structure to fall to the sea floor, was not the type of incident that had the potential to disrupt maritime commercial or navigation activities on or in the Gulf of Mexico. In addition, the disruption affected oil and gas production and development activities, not navigation or traditional maritime commerce.

With regard to the second prong, the Firth Circuit found that the tort claims were not substantially related to traditional maritime activity because they were inextricably connected with the development of the Outer Continental Shelf and an installation for production of resources there, which was not a traditional maritime activity. Furthermore, the development of resources on the Outer Continental Shelf was not transformed into a maritime activity because it involved the use of the Floating Production Storage and Offloading facility.

The case is No. 14-20589.

Attorneys: Ileana Margarita Blanco (DLA Piper, LLP) for Petrobras America, Inc. Karen Klaas Milhollin (Hall Maines Lugrin, PC) for Certain Underwriters at Lloyd's, London and Insurance Companies Subscribing to Policy No. B0576/JM12318. C. Mark Baker (Norton Rose Fulbright US, LLP) for Vicinay Cadenas, S.A.

Companies: Petrobras America, Inc.; Certain Underwriters at Lloyd's, London and Insurance Companies Subscribing to Policy No. B0576/JM12318; Vicinay Cadenas, S.A.

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