"A Contract is a Contract"--Why Settlement Negotiation Documents Need to be Thought Through

Back in 1997, R.J. Reynolds Tobacco (“Reynolds”) joined a handful of competitors in signing an historic $11.3 billion settlement agreement with the state of Florida to relieve itself from liability and health costs stemming from smoking-related illnesses in exchange for reduced advertising and 25 years worth of settlement payments to the state. However, Reynolds tried to renege on that agreement, arguing that wasn’t its problem anymore, as its parent company sold the cigarette brands in question—Salem, Winston, Kool and Maverick—to ITG Brands in 2015.

Since then, neither Reynolds or ITG has paid the government under the settlement agreement. ITG paid $7 billion for the brands but wasn’t part of the historic settlement, which took place years earlier. ITG did agree to use “reasonable best efforts” to negotiate with the government to join it, but those talks were reportedly futile.

To quote the appellate court, the Fourth District Court of Appeals, “ a contract is a contract, and…Reynolds continues to be liable under the contract it signed with the state of Florida,” the opinion said. The court simply was not swayed by Reynolds’ arguments, finding that its purchase agreement with ITG ”did not in any way vitiate the responsibilities and obligations of Reynolds under the first contract.” The appellate panel said it was compelled to affirm the settlement as it was clear, unambiguous, included no provisions for brand transfers and required all parties to approve amendments in writing.

Quoting former U.S. Supreme Court Justice Oliver Wendell Holmes, the opinion said the “duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it—and nothing else.” The opinion went further and stated that “one contract did not alter the obligations of the other contract” as the purchase agreement was separate and involved different parties, and pointed to case law that says, “a corporation that acquires the assets of another business entity does not as a matter of law assume the liabilities of the prior business.” It did not help Reynolds that it had tried these same arguments in Texas and Minnesota, where the courts there snubbed the same argument.

The Fourth DCA also knocked down claims from Philip Morris USA, another party to the settlement, that ITG should be liable for the payments, finding that did not comport with the plain language in its purchase agreement with Reynolds.

Florida’s Fourth District Court of Appeal declined to rehear the case last week and said it would not certify the case to the state Supreme Court. This latest ruling means Reynolds must hold up its end of a historic $11.3 billion settlement struck with the state in 1997. The state has reported that the ruling will result in a one-time $92 million payment and roughly $30 million per year for the state.

This decision should not be a surprise. Because the contract between ITG and Reynolds was not a purchase of Reynolds’ liabilities, it is surprising that Reynolds thought it could walk away from a settlement reached with the state and that somehow, that left ITG holding the proverbial “bag.” However this case is a stark reminder that if a company reaches settlements such as this, it must consider them in any subsequent reorganization, sale or material change to the company.

If you are interested in receiving a copy of the initial decision or wish to reach out to me, you may do so by calling me at 305.377.3700 or by email at blog@miamimaritimelaw.co.

My Prediction Comes True--Mitsui O.S.K. Lines Pays $250K California Port Air Pollution Fine

On June 26, 2019, I presented before the Florida Bar Admiralty Law Committee my presentation titled “IMO2020 Enactment and Enforcement in the United States.” At that time, I predicted (which was admittedly a pretty easy prediction) that violations would result in criminal or civil liability. The Maritime Executive has now reported that Japanese shipping line Mitsui O.S.K. Lines (MOL) has agreed to pay a significant penalty for violations of California’s air quality regulations while docked in the Port of Oakland, California. Now while I recognize that the MOL case is a violation of state law and not directly related to the federal regulation, the point of my presentation is that enforcement of NOx and SOx regulations would begin increasing exponentially in 2020 in the U.S.

MOL has agreed to pay $253,300 in penalties to the California Air Resources Board (CARB) for violating the Ocean-Going Vessel At-Berth Regulation imposed by California. During 2017 and 2018, CARB reports that MOL’s Oakland fleet did not meet the three-hour diesel engine operational time limits. CARB says that the MOL ships failed to meet the requirement to reduce by 70 percent auxiliary engine power generation. The settlement will be paid to California’s Air Pollution Control Fund and MOL has agreed to comply with all applicable CARB regulations.

The regulations, which were phased in over time since 2007, requires vessels to reduce their diesel engine power generation while docked. The purpose of the regulations (as expressed by CARB) is to have vessels turn off their diesel engines and connect to grid-based shore power, or use alternative technologies to achieve equivalent emission reductions while in port. Approved alternatives to shore power include capture-and-control technology that employs a bonnet that contains and treats emissions from a ship’s stacks.

The CARB power reduction requirements were further increased from 70 to 80 percent in 2020. In addition, at the end of August, California adopted a new At-Berth Regulation that further increases the rules and adds additional categories of vessels to the restrictions. Starting in 2023, containerships, reefers and cruise ships covered by the current regulations, will transition to the new rules. In addition, ro-ro vehicle carriers and tankers docked at the ports of Long Beach and Los Angeles will be required to comply starting in 2025 and tankers docked in Northern California starting in 2027.  Once fully implemented, the updated regulations are intended by CARB to deliver a 90 percent reduction in pollution.

Emissions regulations will continue to be at the forefront of U.S. and state government regulation. It behooves our industry to be sensitive to and aware of the ever-evolving landscape in this sphere. This includes having  good policies and procedures in place regarding the various emissions regulations, proper and frequent training of shore-side and shipboard personnel on emissions requirements, management oversight and audits of shipboard operations and non-retaliation and open reporting policies for personnel on emissions issues.

If you are interested in receiving a copy of my Power Point presentation or wish to reach out to me, you may do so at blog@miamimaritimelaw.co or 305.377.3700.

Initial Hopes of Sinking Helms-Burton Litigation Early May Die by Another Fate

Almost one year ago in the cases of Havana Docks Corp. v. Carnival Corp., 19-cv-21724-BB and Garcia-Bengochea v. Carnival Corp., 19-cv-21725-JLK, U.S. District Judges Beth Bloom and Senior U.S. District Judge James Lawrence King denied Carnival’s motions to dismiss both complaints filed in the Southern District of Florida by the plaintiffs, Havana Docks Corp. and Miami surgeon Javier Garcia-Bengochea. So initially, this meant that Carnival was stuck litigating both claims over its use of property seized by the Cuban government.

Both cases concerned Carnival’s use of the Port of Santiago, where the plaintiffs claim to have owned commercial property that was expropriated by the state of Cuba following the island’s communist revolution. The lawsuits were filed after the Trump administration allowed the suspension of Title III of the Helms-Burton Act to lapse on May 2. The move empowered U.S. citizens to pursue litigation against entities who purportedly traffic in Cuban property that had been privately owned prior to the revolution.

Carnival argued for the dismissal of the complaints on the grounds that its use of the waterfront property constituted “lawful travel,” thus immunizing the company from Helms-Burton claims. The cruise line also argued that the passage of its ships through the port was “incident to lawful travel to Cuba” and “necessary to the conduct of such travel.” The company also challenged the plaintiffs’ ”direct interest” and claims of ownership over the properties in question.

Both federal judges rejected Carnival’s arguments for dismissal, finding that the lawful travel exception is an affirmative defense to trafficking that must be established by Carnival, and that Helms-Burton does not expressly make any distinction as to whether such trafficking needs to occur while a party holds a property interest in the property at issue. The courts found that Carnival “incorrectly conflates a claim to a property and a property interest.” As a result, the courts found that the complaints sufficiently alleged that the plaintiffs own a claim to the property at issue.

Fast forward almost one year later and 26 Helms-Burton lawsuits have been filed. That is pretty incredible given the barriers to bring claims—the filing fee is $7,000 and the possibility of being countersued if the claimant seeks compensation from Canadian or EU companies. The U.S. Justice Department’s Foreign Claims Settlement Commission has certified nearly 6,000 claim on property confiscated by Cub with a principal value of $1.9 billion.

Judge King ultimately ruled in favor of Carnival, citing the dismissal of another Helms-Burton claim against Amazon and Susshi International. In that case, the plaintiff inherited the property less than 4 years ago. The statute only accommodates inheritances to 1996. Establishing jurisdiction has been the biggest struggle for claimants, as the claimant must prove that the defendants are “at home” in the Southern District of Florida. In a class action case against hotel booking sites including Expedia and Trivago, the plaintiffs argued the case was appropriate here because customers in the state can access the websites to make reservations at hotels on properties once owned by their families. U.S. District Judge Robert Scola disagreed and ruled that the plaintiffs failed to establish that the companies conducted enough activity in Florida to keep the case in Miami.

If you are interested in receiving a copy of any of these decisions or wish to discuss these cases further, please contact us at blog@miamimaritimelaw.co or 305.377.3700.

Cruise Pax Must Not Leave the Castle Walls and Must Bring Case in Fed Court

Another cruise passenger tries, but fails to get out from federal court jurisdiction in DeRoy v. Carnival Corp., No. 18-12619 (June 30, 2020), appealing the decision at No. 1:18-cv-20653-UU. After injuring her foot on a rug while onboard a Carnival ship, the plaintiff filed suit against Carnival in both state and federal court, seeking damages for the injuries she allegedly suffered onboard the ship. In this case, the plaintiff entered into a contract with Carnival that contained a forum-selection clause.

Under the forum-selection clause's plain language, when jurisdiction for a claim could lie in federal district court, federal court is the only option for a plaintiff under the contract. The court held that plaintiff's claim for negligence at sea falls well within the walls of the federal court's admiralty jurisdiction. Even without explicitly invoking admiralty jurisdiction, the court held that plaintiff's complaint is subject to Federal Rule of Civil Procedure 9(h)'s provision rendering her claim an admiralty or maritime claim.

The case is amusing in that it starts off explaining the background of the “loophole” and the fact that the plaintiff could not assert a loophole in the contract, allowing her to “get through the castle walls” to allege she could bring her claim in state court. It is a well written decision that explains why the court retains subject matter jurisdiction in these circumstances.

If you are interested in obtaining a copy of this decision or wish to discuss it further, please feel free to reach out to us at blog@miamimaritimelaw.co.