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BP Business Economic Loss Claim Appeal 2017-162: Engineering Firm Not Excluded As Oil & Gas Industry and “Pass-Through Labor” Not “Revenue”

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms


BP appeals Claimant’s BEL award on two grounds. First, BP argues that Claimant falls under the Oil & Gas Exclusion. Second, BP contends that the Settlement Program misclassified Claimant’s “Pass-Through Labor” expenses.
Oil & Gas Exclusion
Claims Administrator Policy 480 v.2, Section II (B) sets forth the criteria for determining the most appropriate NAICS Code for an Entity:
“The NAICS Code that most accurately describes the Entity’s primary
business activities, which are the activities in which the Entity was
primarily engaged during the operative Benchmark, Compensation, and
Class Periods.”
In making this determination, Policy 480 v.2, Section II (C) provides that the Settlement Program should “review an Entity’s 2010 tax return and 2010 business permit(s) (if available) and all other evidence of the business activities of the Entity necessary to determine the NAICS Code that describes the Entity’s primary business activity.”
Presumably complying with the above, the Settlement Program assigned NAICS Code 541330 to the Claimant. This code is described as follows:
“This industry comprises establishments primarily engaged in applying
physical laws and principles of engineering in the design, development,
and utilization of machines, materials, instruments, structures,
processes, and systems. The assignments undertaken by these
establishments may involve any of the following activities: provision of
advice, preparation of feasibility studies, preparation of preliminary
and final plans and designs, provision of technical services during the
construction or installation phase, inspection and evaluation of
engineering projects, and related services.”
Because NAICS Code 541330 is not listed on Exhibit 17 of the Settlement Agreement, the Program concluded that the Claimant did not fall under the Oil & Gas Exclusion.
In support of the Program’s conclusion, Claimant offers the following:
1. Claimant’s 2010 tax returns list NAICS Code 541330;
2. Claimant’s website states that Claimant is a “ VVV.” The website details the various engineering services provided by the Claimant.
3. Claimant’s principal owner submitted an Affidavit stating in part that Claimant “provides various engineering services.” The Affidavit goes on to expound upon the
types of engineering services offered by Claimant.
BP opposes the assignment of NAICS Code 541330. BP argues that Exhibit 17 states that the Oil & Gas Exclusion expressly applies to businesses “primarily engaged in performing support activities on a contract or fee basis for oil and gas operations” as well as businesses “primarily engaged in the construction of oil and gas lines, mains, refineries, and storage tanks.” BP argues that these are the primary activities of Claimant. As such, BP contends that Claimant should have been assigned either NAICS Code 213112 (Support Activities for Oil and Gas Operations) or NAICS Code 237120 (Oil and Gas Pipeline and Related Structures Construction). Both of
these codes are listed in Exhibit 17. Consequently, BP argues that Claimant should be excluded from the Settlement Class. Additionally, and secondarily, BP points to Claimant’s website as evidence that Claimant’s customers are overwhelmingly oil and gas companies.
Claimant’s counter argument is that neither of the two NAICS codes put forth by BP describe Claimant’s primary business activities. For instance, the description
for NAICS Code 213112 reads as follows:
“This U.S. industry comprises establishments primarily engaged in performing support activities on a contract or fee basis for oil and gas operations (except site preparation and related construction activities). Services included are exploration (except geophysical surveying and mapping); excavating slush pits and cellars, well surveying; running, cutting, and pulling casings, tubes, and rods; cementing wells; and cleaning out, bailing, and swabbing wells.”
Claimant points to the examples of “[s]ervices” and notes that Claimant doesn’t perform any of those activities. Likewise, the description for NAICS Code 237120 reads as follows:
“This industry comprises establishments primarily engaged in the construction of oil and gas lines, mains, refineries, and storage tanks.
The work performed may include new work, reconstruction, rehabilitation, and repairs. Specialty contractors are included in this
group if they are engaged in activities primarily related to oil and gas pipeline and related structures construction. All structures (including
buildings) that are integral parts of oil and gas networks (e.g., storagetanks, pumping stations, and refineries) are included in this industry.”
Claimant points out that it doesn’t construct any of the items listed in this NAICS code.
Based on the “totality of circumstances,” this Panel agrees with the Program that NAICS Code 541330 best describes Claimant’s primary business activity. As to BP’s secondary argument that Claimant’s customers are primarily oil and gas companies, this Panel rejects the notion that a claimant’s customer list determines a claimant’s primary business activity. To rule otherwise would lead to incongruous results. For instance, a catering company whose customer list includes primarily off shore drilling companies is engaged in the catering business, not the oiland gas business.
Following a de novo review of the record, this Panel finds that Claimant does not fall under the Oil & Gas Exclusion.
Treatment of “Pass-Through Labor”
BP contends that the Settlement Program misclassified “Pass-Through Labor” expenses as “contra-revenue” rather than as a variable expense. BP puts forth two
principal arguments is support of its position: First, Claimant listed these labor charges on its tax returns as an expense. Second, Exhibit 4D explicitly classifies
“Contract Labor” as a variable expense.
According to the Program, Claimant’s “Pass-Through Labor” account records labor expenses when one of Claimant’s sub-contractors performs work on a project for Claimant. The sub-contractor is paid at the same rate that Claimant is paid by the customer for the sub-contractor’s work. As such, the Program considered payments
made by customers for this sub-contractor’s work to be an expense reimbursement. Consequently, the payments made by customers to Claimant for the   sub-contractor’s work were deemed not to be revenue. Claimant’s argues that Policy 361 v.5 supports the Program’s position.
However, this Panel finds that Claimant’s reliance upon this policy may be misplaced. Policy 361 v.5 provides that
“[i]f an expense does not fit [in] the . . . expense categories in Exhibit 4D
. . . the accountants will use discretion to apply the classification that
best conforms to delineations made by the Parties, as reflected in Ex. 4D.”
Claimant argues that Policy 361 v.5 gives the Program the discretion to declare an item as “not an expense.” This Panel disagrees with Claimant’s interpretation. Rather, this Panel reads this policy as follows: Once the Program has deemed an item an expense, the Program has discretion to classify the item as either variable or fixed if the item does not exactly fit into one of the expenses listed in Exhibit 4D. Here, the Program did not deem the payments to the sub-contractor as an expense. “As the account is not an expense generated by the Claimant and only a pass-through to the Claimant’s clients, DWH Accountant classified the account as Other – N/A and created adjustment 1 for the purposes of reducing the revenue by the same balance.” Thus, in this Panel’s opinion, Policy 361 v.5 is inapplicable.  That said, the Program does have the discretion to exclude revenue that is pass-through in nature. This discretion has been affirmed by the District Court. See Appeal Decision 2014-1042 (“expense reimbursement . . . not considered revenue in accord with Policy 328 v.2”); also see Appeal Decision 2015-871 (“clear and direct expense reimbursement pass-through in nature . . . properly excluded from revenue pursuant to Policy 328 v.2”).
After a de novo review of the record, this Panel agrees with the Program that payments made by Claimant’s customers that equaled the sub-contractor’s charges were not revenue, but rather “expense reimbursement” that was “pass-through in nature.”
Conclusion
This three-member Panel unanimously finds the following: that Claimant doesn’t fall under the Oil & Gas Exclusion; that the Program’s treatment of Claimant’s
“Pass-Through Labor” was appropriate. As such, BP’s appeal is denied and Claimant’s Final Proposal is adopted.

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