In a significant decision issued February 24, 2014, the Fifth U.S. Circuit Court of Appeals ruled that federal laws preempt state laws in the case of the 2010 Gulf of Mexico oil spill, because the event occurred in federal waters. That means states and local governments cannot collect penalties from BP and its drilling partners.

The decision also has greater repercussions by effectively limiting the ability of states and local governments to regulate operations on the Outer Continental Shelf (OCS). The result should reassure offshore oil companies as to their liability.

The long-awaited ruling was issued in Appeal No. 12-30012, regarding the Macondo MDL District Court’s denial of remand and subsequent dismissal of various state law claims of various Parishes, rulings 747 F. Supp. 2d 704 (remand) and 2011 WL 5520295 and 2011 WL 6140857 (dismissal).

Federal jurisdiction proper
The suits were filed in Louisiana state court, asserting claims only under Louisiana law and expressly disavowing any present or future claims arising under federal law. Defendants nonetheless removed the case, and the Parishes filed a motion to remand. In denying remand, the District Court in the Eastern District of Louisiana found it possessed original jurisdiction over the claims because the operator’s activities in exploring for and producing minerals from the Gulf of Mexico qualified as an “operation conducted on the outer Continental Shelf” within meaning of the Outer Continental Shelf Lands Act (OCSLA). Insofar as the dismissal of the state claims, the appeal also presented, for the first time before the Fifth Circuit, fundamental choice of law and preemption issues, namely whether the Oil Pollution Act (OPA), OCSLA, and maritime law preempt state law. These issues also relate to the question of whether maritime law claims for punitive damages are preempted by OPA. When confronted with these choices of law and preemption issues, the District Court in the Eastern District of Louisiana held that state law claims were barred because of the primacy of federal law on the OCS, even when an OCS incident causes damage in state waters or to state lands.

State claims allowed only in state waters
The District Court ruling minimized the impact of savings clauses in OPA that purported to preserve rights under state law and maritime law. The District Court held that, insofar as state law claims were involved, the savings clauses apply only to incidents that occur in state waters, not incidents on the OCS that impact state waters.

On appeal, the Fifth Circuit affirmed the District Court’s assertion of jurisdiction under OCSLA and ultimate dismissal of the state law claims, rejecting attempts to utilize state statutory fine and penalty schemes against operators and contractors for pollution events with point sources on the OCS or otherwise in federal waters notwithstanding resulting damages in the states.

The Court upheld removal of the suits, relying on the broad jurisdictional grant of OCSLA, which required that the activities causing the injury constitute an “operation” conducted on the OCS that involved the exploration and production of minerals and the matter “arises out of, or in connection with,” the operation. The Fifth Circuit deemed the latter inquiry to require only a “but for” connection. Having found that OCSLA authorizes the federal court to adjudicate the dispute, the choice of law provisions of OCSLA then determine whether state, federal, or maritime law should govern.

No conflict between federal laws
With respect to choice of law, the Court noted that OCSLA and maritime law constitute alternative, not overlapping, regimes of federal law; however, in the inquiry before the court, the distinction was one without a difference, as either regime included federal statutes regulating water and oil pollution. The Court relied upon the Supreme Court’s decision in International Paper Co. v. Oulette, 479 U.S. 481 (1987), in determining that “states’ ability to apply local law to out-of-state point sources of alleged water pollution was in conflict with the CWA [Clean Water Act].” Like Oulette, the Court held that the law of the state in which the point source is located should apply and recognized that:

if entities engaged in developing the OCS were subjected to a multiplicity of state laws in addition to federal regulations, they could be forced to adopt entirely different operational plans or in the worst case be deterred by the redundancy and lack of regulatory clarity from even pursuing their OCS plans. The reasons for avoiding redundant or conflicting legal regimes are equally potent whether the point source is located in a state or a federal enclave.
As to OPA, the Court concluded that “OPA applies as the law of the OCSLA point source and, along with the CWA penalties, furnishes a comprehensive remedial regime for affected states’ governmental and private claims.”

In conclusion, this decision significantly limits the abilities of states and other governmental bodies to implement statutory schemes impacting operations on the OCS. Additionally, the decision should bring some certainty to exposure from operations conducted on the OCS and the limited risks being insured when coverage includes fines and penalties.