LITIGATION CHALLENGES MENHADEN REDUCTION INDUSTRY

 

For many years, activists of various stripes have tried to shut down the menhaden reduction fishery in the waters of the Atlantic and Gulf of Mexico. 

While there is no question that the reduction fishery has a public relations problem—it is a highly visible fishery, which generally fishes fairly close to shore, removes large quantities of menhaden, an important forage species, from the ocean (in 2022, Virginia menhaden landings were very slightly under 300,000,000 pounds, about 90% of which are attributable to the reduction fleet), and is occasionally responsible for massive net spills that see thousands of dead and decaying menhaden wash ashore on public beaches and in people’s back yards—the most recent stock assessment update for Atlantic menhaden found that fecundity, which is used as a proxy for biomass, is well above the target level, while fishing mortality remains well below target.

In the Gulf of Mexico, a stock assessment update released in 2021 shows that Gulf menhaden are neither overfished nor subject to overfishing, that the fishing mortality rate in the terminal year is near the lowest values recorded in the entire 40-year time series, and that the biomass of age 1+ fish is not far from the high for such time series.

The fact that the stocks remain healthy despite the reduction fleet’s substantial removals cuts the legs out from under the fishery’s foes, who can find no scientific support for claims that the reduction industry is doing coastwide harm, although there remains the yet-unconfirmed possibility that it may be causing localized depletion in the Chesapeake Bay, and perhaps elsewhere.

Thus, deprived of any scientific arguments to support their efforts to reduce reduction landings, some anti-redution fleet activists have now opened a new front in the fight—litigation aimed at Alpha VesselCo, LLC, the only United States company still engaged in harvesting menhaden for the reduction fishery, as well as its owners, some employees, and its supposed foreign and domestic affiliates.  In particular, the lawsuit targets Cooke, Inc., the Canadian holding company that owns or controls all of the others, allegedly including Alpha VesselCo,

The lawsuit takes a unique approach.  The plaintiffs claim to act on behalf of the United States, pursuant to the provisions of the federal False Claims Act, arguing that the defendants knowingly and fraudulently failed to comply with federal laws that require fishing vessels operating in U.S. waters to be at least 75 percent owned by citizens of the United States.  

The first paragraph of the 57-page complaint alleges that

“This is a False Claims Act suit regarding ‘figurehead fraud.’  This case concerns the control of a large fleet of fishing vessels by a foreign seafood conglomerate called Cooke Inc. and its subsidiaries, affiliates, officers, and employees (‘Cooke’).  Under the American Fisheries Act of 1998 (the ‘AFA’ or the ‘Act’) foreign citizens like Cooke may not have de facto ‘control’ over any vessel that engages in commercial fishing in United States waters (the ‘AFA Citizenship Requirement’).  Defendants have been violating that ‘control’ prohibition since 2017.  Defendants created a supposedly independent domestic shell company to nominally own the vessels, but they installed a long-time Cooke employee—who also happens to be the nephew of the Cooke CEO—as a figurehead to ‘own’ that entity on the understanding that actual control would be exercised by Cooke.  Then, to fish in United States waters, Defendants falsely certified to the Maritime Administration (‘MARAD’)—an agency of the United States Department of Transportation (‘DOT’)—and the United States Coast Guard (‘Coast Guard’) that the vessels’ owner complied with the AFA Citizenship Requirement.  Defendants also concealed from MARAD multiple close connections between Cooke and the vessels’ nominal owner, including that he is a long-time Cooke employee and the Cooke CEO’s nephew.  As a result of their fraudulent scheme, Defendants have illegally harvested from United States waters many millions of dollars’ worth of fish to which they are not entitled.”

The plaintiffs are asking that the court award the United States damages that might, according to the plaintiffs, range somewhere between a few hundred million and two billion dollars.  

When a private citizen brings a claim on behalf of the government pursuant to the False Claims Act, the complaint is not immediately served on the defendants.  Instead, the law requires that

“A copy of the complaint and written disclosure of substantially all material evidence and information the [plaintiff] possesses shall be served on the Government…  The complaint shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.  The Government may elect to intervene and proceed with the action within 60 days after it receives both the complaint and the material evidence and information,”

although the law also gives the government the right to petition the court for additional time to evaluate the claim and respond.

If the government chooses to intervene and proceed with the action, it has the primary responsibility for prosecuting the matter, although the original claimant may remain a party.  In such case,  the original claimant is entitled to receive between 15 and 25 percent of any damages paid by the defendant,

“depending upon the extent to which the person substantially contributed to the prosecution of the action.”

In this case, the court granted the United States a substantial extension of time to evaluate the evidence and other information provided by the plaintiffs.  The complaint was originally filed with the federal District Court for the Southern District of New York in 2021, but it was not unsealed, and service on the defendants was not permitted, until April 2024, by which time the government, having reviewed the relevant evidence, decided that it would not intervene and would take no active role in the matter.

While that means that the plaintiffs will have to prosecute the case on their own, it also means that they would receive a larger award—between 25 and 30 percent of any judgment—should they ultimately prevail in the action.

So what are the chances that the plaintiffs will, in the end, prevail?

That’s impossible for a bystander to say.

On one hand, the fact that the government opted against intervening might suggest that a win was far from assured.  

To prevail, the plaintiffs must demonstrate that the Cooke violated the False Claims Act because it

“knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; conspires to commit a violation of [any provision of the False Claims Act]; has possession, custody, or control of money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property; is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true; knowingly buys, or receives as a pledge of an obligation or debt, public property from an official or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.  [formatting and internal numbering omitted]”

If the complaint is taken at face value, and the plaintiffs really did omit critical information from the documents submitted to MARAD and the Coast Guard when they claimed that their menhaden fishing vessels were at least 75% owned and controlled by United States citizens, did such omissions constitute a violation of the False Claims Act?

Ultimately, that’s what the court will have to decide, and it may well decide in the plaintiffs’ favor, but to do that, the plaintiffs will need to convince the jury—for they did request a jury trial—that such omissions were done “knowingly” and were “fraudulent.”  

That might not be too easy to do.

The complaint makes it clear that the documents filed with MARAD and the Coast Guard were not prepared and filed by the defendants themselves, but by a well-established law firm.  So long as defendants fully disclosed all relevant facts to their attorneys, made inquiry as to the legality of their actions, was advised that their conduct was legal, and relied in good faith on counsel’s advice, they could avail themselves of an “advice of counsel” defense.  Such defense, while only one consideration among others, would make allegations of knowingly and fraudulently omitting or misstating critical information significantly harder to prove.

Yet, while that may be true, it’s also important to note that plaintiff’s counsel, the New York City firm of Holwell Shuster & Goldberg LLP, seems to be a very capable firm, which specializes in complex commercial litigation, financial litigation, and similar matters.  While no one knows just how it is being compensated for its work in the menhaden case—which it may even have taken on as a “pro bono” matter, for little or no fee—its website notes that

“In order to manage client expenses, maximize efficiencies, and insure that HSG’s efficiencies interests are fully aligned with our clients’, HSG seeks whenever possible to implement fee arrangements based on agreed measures of value rather than on the billable hour.”

Such language strongly suggests that the firm prefers to take cases on a contingency basis—that is, by agreeing that the client only pays legal fees if they win the case, at which point the firm would receive a set percentage of the award—or, perhaps, by meeting a particular milestone (e.g., a settlement in which Cooke agrees to sell the vessels currently used to catch menhaden).

Under such circumstances, law firms rarely agree to take cases that they think they are likely to lose.

So, once again, without knowing what evidence the plaintiffs will reveal, and how the defendants’ counsel will argue their case, any predictions on which side might prevail are very premature.

Still, we can speculate about other matters, including just why the action was brought.

The plaintiffs, W. Benson Chiles, a consultant on fisheries issues, and Chris Manthey, a professional investigator who has worked with various conservation groups, have been down this road before, suing Omega Protein in 2010, about a decade before it was aquired by Cooke, but was already the largest company participating in the menhaden reduction fishery.  At that time, they alleged that some of the fish oil supplements marketed by Omega for human consumption contained unacceptable levels of PCBs.  That matter was ultimately settled before trial.

Based on that history, a general desire to undermine the menhaden reduction fishery can probably be assumed.

Beyond that, outside of possibly getting a piece of any jury award, it’s not particularly clear what the lawsuit will accomplish.

It will have no impact on the permissible size of the menhaden harvest; the fecundity/biomass and fishing mortality reference points will remain unchanged.

Anyone who believes that the suit would end the reduction fishery is almost certainly kidding themselves; somewhere between 250 million and 300 million pounds of potential product, swimming just off Virginia alone (Gulf landings are even higher) is going to draw interest and investors.  At best, plaintiffs winning the suit might force a change in the ownership of what was once Omega’s menhaden fleet.  The new owners would probably charge Cooke more for menhaden products than its allegedly captive fleet did, but that would only take things back to the status quo before Cooke acquired Omega; it would hardly be enough to kill the fishery.

And, while a big cash judgment might slow Cooke down for a while, it probably wouldn't be fatal.  With annual revenues of more than $4 billion, the company probably generates enough cash flow to absorb the hit, although it might need some financial help to ride out the storm.  It’s even possible that the judgment would be entered against a subsidiary, perhaps Omega, but not against the holding company itself, and so result in a less damage.

Given that Cooke is one of the largest seafood companies in the world, with operations that stretch from Japan and Australia east to central Europe, and from Alaska south to Chile, even if it was forced into insolvency, it would not just disappear.

It might be able to restructure its obligations, and remain an independent business.

It might be acquired for pennies on the dollar by another conglomerate that pays off any remaining debt, so that instead of dealing with a Canadian company and Canadian ownership, regulators and others would then have to deal with a company based somewhere else in the world, perhaps Norway, Japan, or China.  

Or maybe it would be sold off in parts, but even if that happened, each aquaculture facility would likely still need the same amount of fish meal that it needs today, so the market for menhaden products, at least for that use, probably will not change.

Yet whatever the possible outcome, it will take a while for the parties to get there.  The complaint was filed in 2021, and was just served this year.  Before the case can be tried, the litigants will have to go through the discovery process, taking depositions, serving interrogatories, and demanding the production of various documents, emails, etc., all of which will have to be analyzed and placed in proper context before they are used, or not used, at the trial.  Motions to dismiss and motions for summary judgement will almost certainly be filed, and each will take time to resolve.

When all is said and done, and the court’s backlog of cases is taken into account, the plaintiffs will be lucky to have the case heard in 2026—if it can begin that soon.  Should Cooke come out on the losing side, it will undoubtedly take an appeal to the U.S. Court of Appeals for the 2^nd Circuit, and if Cooke loses there, it might well take the final step of appealing the issue to the Supreme Court, although with that court able to hear only 100 or, at best, 150 cases each year, while receiving about 7,000 potential appeals, the odds don’t favor the high court ever agreeing to hear the case.

It's not inconceivable that the matter won't be resolved until 2028, or some later year.

Whenever the final judgment is rendered, the conservation benefits of the lawsuit are hard to discern.

While the litigation might well vex Cooke and ultimately cost it a lot of money, might clarify what a foreign entity must do (and not do) to access fish from United States waters, and might possibly put a big wad of cash in the plaintiffs’ pockets, it will do nothing to change the way Atlantic menhaden are managed, will do nothing to improve menhaden habitat, and will do nothing to increase the fecundity of the menhaden stock—although that’s already higher than it needs to be to maintain a healthy fishery at current harvest levels.

But it will still be an interesting thing to watch.