In an important case of first impression, the federal Fifth Circuit has just affirmed that contractors cannot be criminally prosecuted for violations of various safety regulations under the Outer Continental Shelf Lands Act (OCSLA). See United States v. Moss, No. 16-30561 (5th Cir. Sept. 27, 2017).  This decision has broad implications—both in the criminal and civil context and for both contractors working in the OCS and holders and operators of leases and rights-of-way on the OCS.

Black Elk Energy Offshore Operations, LLC owned and operated a federal oil and gas lease covering West Delta Block 32 on the OCS in the Gulf of Mexico and had a three-platform production facility on the block. Black Elk retained several contractors to provide various services on the platforms.

In 2012, while some contractors were performing welding work for Black Elk on one of the platforms, a fatal explosion occurred, killing three workers, injuring many others, and discharging pollutants into the Gulf of Mexico. Although the exact cause of the explosion is disputed, the federal government indicted Black Elk and many of these contractors for allegedly violating multiple OCSLA regulations administered by the Bureau of Safety and Environmental Enforcement (BSEE) by failing to obtain proper authorization to weld, failing to conduct appropriate pre-work inspections, and failing to ensure the construction area was safe for the welding work.

The government waited nearly three years to issue its indictments. The government charged the defendants with violating 43 U.S.C. § 1350(c), which provides that any person who willfully violates any OCSLA regulation may be criminally liable and punished by a fine of up to $100,000 and imprisonment of up to ten years.  Specifically, the government charged Black Elk and the contractors with violating various safety regulations under 30 C.F.R. §§ 250.113(c) and 250.146(c).

The contractors moved the district court to dismiss these OCSLA charges against them on grounds that none of the pertinent regulations applies to oilfield contractors. Central to their argument was that each of the pertinent regulations imposes requirements only on “You,” which another OCSLA regulation defines as follows:

        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.

The district court agreed and thus dismissed all OCSLA charges against the contractors. In the first appellate case to address this issue, the Fifth Circuit has now affirmed this dismissal.

On appeal, the contractors argued that OCSLA, read as a whole, precludes the government from criminally prosecuting anyone who is not a holder of OCS leases or permits for violating regulations under OCSLA. While finding “much to be said” for this argument, the Fifth Circuit stopped short of deciding it head on.  Instead, it affirmed the dismissal on the narrower grounds that the regulations at issue did not purport to regulate contractors.

The Fifth Circuit easily rejected the government’s argument that the OCSLA regulations apply not only to lessees and operators, but also to the person actually performing the activity at issue. The court dismissed this argument as contrary to “hornbook principles of interpretation,” namely, that two provisions in a statute or regulation cannot be read in isolation, but rather must be construed together.  The court emphasized that regulations at issue all applied only to “You,” but that BSEE’s definition of “You” does not cover contractors.  Indeed, BSEE itself had publicly stated that “you” “DOES NOT include a CONTRACTOR.”  The court also noted various earlier explanations by the agency that it intended to limit regulatory liability to just lessees and operators, that “it does not regulate contractors” and that it had rejected a proposal that “You” be defined more broadly to cover contractors.  Finally, the Fifth Circuit stressed that the “virtually non-existent past enforcement of OCSLA regulations against contractors confirms that the regulations never intended to apply to [contractors]” and that, in other, recently promulgated regulations (see 30 C.F.R. § 585.112), BSEE has “gone out of its way to specifically include contractors and subcontractors within the regulatory purview.”  For all these reasons, the Fifth Circuit affirmed the district court, holding that the OCSLA regulations at issue do not apply to contractors and therefore cannot provide a basis for criminal liability of contractors.

The Fifth Circuit’s legal reasoning is almost assuredly correct. The plain words of the OCSLA regulations at issue, coupled with the regulatory history and long practice thereafter, strongly support the conclusion that contractors are not governed by these regulations.  However, it is a separate issue whether BSEE should rethink the narrow reach of these regulations by amending them to cover contractors as well.  The criminal penalties available under § 1350(c) for violations of OCSLA’s regulations provide a powerful disincentive against potential violators.

But of course subjecting contractors to criminal penalties would not be cost-free. If BSEE amends these regulations to expressly cover contractors, then that would present squarely the issue whether BSEE in fact has the statutory power to promulgate regulations enforceable against contractors.  Indeed, the Fifth Circuit may soon be addressing that issue, as the government has recently appealed a ruling by another Louisiana federal court in Island Operating Co. v. Jewell that BSEE does not have the statutory authority under OCSLA to issue civil penalties or fines against contractors.  But even if the Fifth Circuit ultimately determines that BSEE has the statutory authority to regulate contractors, there may be practical reasons why it might not be wise for BSEE to do so.  As the Fifth Circuit astutely observed, “complex, overlapping cross-indemnity provisions are an inherent feature through the oil and gas industry.”  Thus, tinkering with a regulatory scheme that has been in place since OCSLA’s enactment over sixty years ago could cause unintended consequences that “could adversely impact multiple layers of contractors and subcontractors,” as it would upend the historical allocations of cost and risk among the numerous players on the OCS.  Among other things, any such change would necessitate lessees and operators to undertake a wholesale review of all their agreements with contractors and others.  So if you’re a contractor, lessee or operator on the OCS, stay tuned.