Phathong v. Tesco Corporation (US)

FILED
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS May 6, 2014
Elisabeth A. Shumaker
TENTH CIRCUIT Clerk of Court
VON J. PHATHONG; JENNIFER D.
PHATHONG,
Plaintiffs - Appellees,
No. 12-1455
v. (D.C. No. 1:10-CV-00780-WJM-MJW)
(D. Colo.)
TESCO CORPORATION (US),
Defendant - Appellant.
ORDER AND JUDGMENT *
Before LUCERO, MURPHY, and BACHARACH, Circuit Judges.
I. INTRODUCTION
Von J. Phathong was seriously injured while working on a drilling rig in
Garfield County, Colorado. Phathong sued Tesco Corporation (“Tesco”), the
operator of the drilling rig, alleging a Colorado state-law claim for negligence. 1
*
This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
1
Phathong’s wife, Jennifer Phathong, brought a claim for loss of consortium
in the same complaint. In Colorado, “[l]oss of consortium is a derivative claim.
Derivative claims are unique in that they depend entirely upon the right of the
(continued...)
Prior to trial, Tesco sought summary judgment on the ground it was immune from
common-law negligence liability because, inter alia, it was Phathong’s statutory
employer under the provisions of Colorado’s Workers’ Compensation Act. See
Colo. Rev. Stat. § 8-41-401. The district court denied Tesco’s motion,
concluding the existence of disputed issues of material fact precluded summary
judgment. The matter proceeded to trial. After the parties rested their cases, but
before the matter was submitted to the jury, the district court, on its own motion,
granted judgment as a matter or law to Phathong on the question of immunity. In
so doing, it concluded “the only reasonable interpretation of the evidence in this
case is that [Tesco] is not a statutory employer” under § 8-41-401. The district
court thereafter submitted Phathong’s negligence claim to the jury; the jury found
in Phathong’s favor and granted him a substantial award of damages. 2 Tesco
appeals, raising multiple challenges to both the district court’s legal rulings and
the jury’s award of damages. This court concludes the record conclusively
demonstrates Tesco was Phathong’s statutory employer and, therefore, immune
1
(...continued)
injured person to recover.” Colo. Comp. Ins. Auth. v. Jorgensen, 992 P.2d 1156,
1164 (Colo. 2000) (citation omitted). “The effect of being a derivative claim is
that loss of consortium claims are subject to the same defenses available to the
underlying personal injury claim.” Id. at 1164 n.6. Accordingly, the analysis set
out in this opinion as to Phathong’s negligence claim applies equally to Jennifer
Phathong’s claim for loss of consortium.
2
The jury likewise found in favor of Jennifer Phathong on her loss-of-
consortium claim and awarded her $75,000 in damages.
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from Phathong’s negligence claims. This ruling obviates the need to address any
of the other issues raised by Tesco on appeal. Accordingly, exercising
jurisdiction pursuant to 28 U.S.C. § 1291, this court remands this case to the
district court to vacate its judgment in favor of the Phathongs and, instead, enter
judgment in favor of Tesco.
II. BACKGROUND
A. Factual Background
Phathong began working for Tesco as a “floor hand” on a particular drilling
rig, the DTC2 rig, in October of 2005. At 3:30 a.m. on the morning of December
13, 2005, 3 Phathong was seriously injured while working on DTC2. For purposes
of resolving this appeal, it is unnecessary to set out the facts surrounding
Phathong’s injury. Instead, it is sufficient to note the jury found Tesco’s
negligence in the operation of DTC2 was ninety-percent responsible for
Phathong’s injuries and awarded him a substantial amount of damages.
Tesco develops, manufactures, and services oil and gas rigs. As part of its
normal business practices, Tesco would, at the time of the events at issue in this
case, sign drilling contracts with owners of natural gas wells to provide drilling
services, including the provision of drilling rigs and the personnel necessary to
operate those rigs (the “casing drilling services business”). In April 2003, Tesco
3
As will quickly become apparent, the date and time of this accident plays a
critical part in this appeal.
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entered into a Master Service Agreement with EnCana Oil & Gas (USA), Inc.
(“EnCana”). This Master Service Agreement governed all subsequent contracts
between Tesco and EnCana. Thereafter, in June 2005, Tesco and EnCana entered
into a drilling contract (the “EnCana Drilling Contract”) covering Tesco’s natural
gas casing drilling services operations on behalf of EnCana in Garfield County,
Colorado. The EnCana Drilling Contract obligated Tesco, as the driller, to
furnish all equipment, labor, and services necessary to dig wells to the depth of
no less than 9500 feet, and no more than 10,000 feet. In particular, it mandated
that Tesco use DTC2, a drilling rig leased by Tesco from Drillers Technology
Corporation, for all work covered by the contract. The EnCana Drilling Contract
also made Tesco responsible for making sure work on the rig was performed
safely and obligated Tesco to carry adequate workers’ compensation insurance.
During the summer of 2005 (i.e., before Phathong was hired by Tesco and
before the accident giving rise to Phathong’s injuries), Tesco entered into
negotiations to sell the casing drilling services portion of its business to Turnkey
E&P Corporation (“Turnkey”). At approximately 7:30 a.m. on the morning of
December 13, 2005, Tesco and Turnkey closed on their Revised and Restated
Acquisition Agreement (the “Acquisition Agreement”) and related Rig Personnel
Supply Agreement (the “Rig Personnel Agreement”). Pursuant to the terms of the
Acquisition Agreement, the deal became effective at 12:01 a.m. on the closing
date (i.e., 12:01 a.m. on December 13, 2005, which is approximately three and
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one-half hours before the accident giving rise to Phathong’s injuries). 4 Turnkey
acquired only the casing drilling services division of Tesco and, after the sale,
Tesco remained in business. Specifically, Turnkey acquired four Tesco-owned
drilling rigs and the drilling contracts associated with those rigs. Turnkey also
acquired all employees who worked in Tesco’s casing drilling services division,
including Phathong and the other DTC2 crew members. 5 Importantly, however,
Turnkey did not acquire the Master Service Agreement or EnCana Drilling
Contract. Nor did Turnkey acquire Tesco’s lease of DTC2 or of the other two
rigs Tesco leased from Drillers Technology Corporation. Thus, as of 12:01 a.m.
on December 13, 2005, Tesco remained obligated to perform under its remaining
4
This provision of the Acquisition Agreement underpins Phathong’s
arguments regarding the unavailability of immunity to Tesco under Colorado’s
Workers’ Compensation Act. That is, if the agreement had become effective upon
closing, rather than at 12:01 a.m. on the day of closing, there would be no doubt
but that Tesco was Phathong’s actual employer at the time of the accident and,
thus, entitled to immunity under the provisions of Colorado’s Workers’
Compensation Act. Because Tesco does not raise the argument on appeal, and
because the record makes clear Tesco was Phathong’s statutory employer, this
court need not address whether the arbitrary time frame for assigning corporate
liabilities in the contract between Tesco and Turnkey served to strip Tesco of its
status as an actual employer under Colorado law. See infra n.5.
5
The Acquisition Agreement provided that Tesco would be responsible for
all “liability, costs[,] and expenses” for employment claims, including workers’
compensation claims, “any employment-related tort claim,” or “other claims or
charges of or by” a former Tesco employee that accrued prior to the effective time
of the agreement. Likewise, the agreement provided Turnkey would be
responsible for the same accruing after the effective time.
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contracts with, inter alia, EnCana and its drilling rig leases with Drillers
Technology Corporation.
To fulfil its contractual obligations to EnCana and others, Tesco entered
into the Rig Personnel Agreement with Turnkey. The Rig Personnel Agreement
first recited that Tesco (1) remained contractually obligated to perform under its
agreements with EnCana and others, (2) continued to hold leases on drilling rigs
owned by Drillers Technology Corporation, but (3) lacked the manpower to
manage the rigs because of the sale of its casing drilling services business to
Turnkey. In light of these facts, the parties agreed that “while [Tesco] provides
services to its third party customers, [Turnkey] shall provide personnel services
with respect to the” leased rigs. Tesco paid Turnkey every two weeks pursuant to
the following formula: “[Turnkey] will be compensated for the Services at the
rate of one hundred and fifteen percent (115%) of the total of the actual and
reasonably documented costs to [Turnkey] of salary and employment benefits and
related [workers’] compensation paid to (or on behalf of) those individual
employees of [Turnkey] who provide Services to [Tesco] under this
Agreement . . . .” 6 The Rig Personnel Agreement imposed upon Tesco the
6
This billing arrangement stands in stark contrast to the billing arrangement
Turnkey and Tesco reached as to drilling contracts assigned to Turnkey under the
Acquisition Agreement. As to the assigned contracts, the Acquisition Agreement
obligated Tesco to use its best efforts to secure consent from all its customers to
the assignments. Until such consent was secured, Tesco was obligated to
(continued...)
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responsibility for designating to Turnkey the drilling locations for the rigs, the
drilling schedule, and providing a safe workplace environment for the
performance of the services under the agreement. Turnkey was responsible for
ensuring its personnel acted in a “commercially reasonable, industry standard
manner and endeavor in good faith to perform its responsibilities . . . with
operational expertise” in accordance with Tesco’s direction, unless Turnkey
“reasonably believes that such directions will cause the well to be drilled in an
imprudent or unsafe manner, in which case [Turnkey] shall have the right to
refuse to conduct the requested operation.” Finally, the Rig Personnel Agreement
defined the relationship of the parties as “independent contractor[s],” with neither
party “deemed for any purpose to be, the agent, servant[,] or representative” of
the other party.
B. Procedural Background
The Phathongs filed suit against Tesco in the United States District Court
for the District of Colorado claiming, inter alia, that Tesco’s negligence in
operating the DTC2 drilling rig led to their injuries. Tesco eventually filed a
motion for summary judgment, asserting the Phathongs’ common-law damages
claims were barred by, inter alia, the immunity afforded to statutory employers by
6
(...continued)
continue invoicing customers for all services performed by Turnkey and to remit
any payments it received to Turnkey. Ultimately, however, Tesco was not liable
to Turnkey for any amounts a customer refused to pay on an invoice.
-7-
the Colorado Workers’ Compensation Act. See Colo. Rev. Stat. § 8-41-401. The
district court denied Tesco’s motion and the case proceeded to trial. Prior to
submission of the case to the jury, the district court sua sponte granted judgment
as a matter or law to Phathong on the question of Tesco’s entitlement to immunity
as a statutory employer. In so doing, it concluded “the only reasonable
interpretation of the evidence in this case is that [Tesco] is not a statutory
employer” under § 8-41-401. In that regard, the district court reasoned as
follows:
The relationship [between Tesco] and Turnkey pursuant to that sale
was not one of a general contractor and subcontractor . . . as
envisioned by the Colorado Supreme Court in [Finlay v. Storage
Technology Corp., 764 P.2d 62 (Colo. 1988)]. This was a sale of
drilling operations, such that EnCana remained a general contractor,
and Turnkey took over the subcontractor duties of running the
drilling operations.
In these circumstances, [Tesco] is not the “statutory employer”
entitled to immunity under the Colorado Workers’ Compensation
Act.
III. ANALYSIS
A. Legal Background
“The primary purpose of [Colorado’s] workers’ compensation act is to
provide a remedy for job-related injuries, without regard to fault. The statutory
scheme grants an injured employee compensation from the employer without
regard to negligence and, in return, the responsible employer is granted immunity
from common-law negligence liability.” Finlay, 764 P.2d at 63 (citations
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omitted). “Although a given company might not be [an injured party’s] employer
as understood in the ordinary nomenclature of the common law, it nevertheless
might be a statutory employer for workers’ compensation coverage and immunity
purposes.” Id. at 64. The term “statutory employer” is defined in Colorado’s
Workers’ Compensation Act as follows:
Any person, company, or corporation operating or engaged in
or conducting any business by leasing or contracting out any part or
all of the work thereof to any lessee, sublessee, contractor, or
subcontractor, irrespective of the number of employees engaged in
such work, shall be construed to be an employer as defined in articles
40 to 47 of this title and shall be liable as provided in said articles to
pay compensation for injury or death resulting therefrom to said
lessees, sublessees, contractors, and subcontractors and their
employees or employees’ dependents . . . .
Colo. Rev. Stat. § 8-41-401(1)(a)(I). Section 8-41-401(1)’s “purpose is to prevent
employers from avoiding responsibility under the workers’ compensation act by
contracting out their regular work to uninsured independent contractors.” Finlay,
764 P.2d at 64. 7 Thus, § 8-41-401(1) “makes general contractors ultimately
responsible for injuries to employees of subcontractors.” Id. Along with this
burden comes a corresponding benefit. Under the Colorado scheme, “[s]tatutory
immunity goes hand in hand with statutory liability.” Buzard v. Super Walls,
7
In Finlay, the Colorado Supreme Court was considering a predecessor
version of the “statutory employer” provisions of the Workers’ Compensation
Act, specifically Colo. Rev. Stat. § 8-48-101(1) (1986). Finlay v. Storage Tech.
Corp., 764 P.2d 62, 64 (Colo. 1988). For all purposes relevant to this appeal, the
current version of the Workers’ Compensation Act is identical to the version at
issue in Finlay.
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Inc., 681 P.2d 520, 523 (Colo. 1984). To qualify for the immunity afforded a
statutory employer, § 8-41-401(1) imposes an obligation on general contractors to
carry workers’ compensation insurance. Id. at 522.
Section 8-41-401(1) does not permit injured employees to obtain a double
recovery. Finlay, 764 P.2d at 64. Instead, under Colorado’s Workers’
Compensation Act, “if a subcontractor has obtained insurance[,] its employee
cannot reach upstream to the general contractor to establish tort liability; the
general contractor is immune from suit as any insured employer would be.” Id.
(quotations and alterations omitted). This aspect of Colorado law “encourages
those contracting out work to require that contractors and subcontractors obtain
workers’ compensation insurance.” 8 Buzard, 681 P.2d at 523.
8
It is undisputed Tesco and Turnkey both carried workers compensation
policies at the time of Phathong’s injuries. Phathong nevertheless argues Tesco is
not entitled to the immunity ordinarily afforded a statutory employer under
Colorado law because it “divested itself of any liability for workers’
compensation claims” in the Acquisition Agreement. This assertion is not
persuasive. As the cases cited above make clear, Tesco had a statutory obligation
to provide workers’ compensation insurance under Colorado’s Workers’
Compensation Act. Tesco was unable, as a matter of law, to contract away its
workers’ compensation liability. See Peterman v. State Farm Mut. Auto. Ins. Co.,
961 P.2d 487, 492 (Colo. 1998) (en banc) (holding that parties may not privately
contract to abrogate statutory requirements or contravene public policy of
Colorado). Contrary to Phathong’s suggestion, Tesco’s obligation to provide
workers’ compensation insurance was not “divested by contract” simply because
Tesco elected to allocate ultimate payment responsibility between itself and
Turnkey for any future claims for workers’ compensation benefits.
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Whether a corporation like Tesco is a statutory employer under the terms of
§ 8-41-401 is dependent upon the nature of the “work contracted out.” Finlay,
764 P.2d at 64. Colorado employs the “regular business test” to determine
whether the party contracting out work is a statutory employee; the test is
satisfied “where the disputed services are such a regular part of the statutory
employer’s business that absent the contractor’s services, they would of necessity
be provided by the employer’s own employees.” Id. at 66. The Colorado
Supreme Court has described its “regular business test” as intentionally broad and
has justified an inclusive test as necessary “to accommodate more fully the
purposes of the workers’ compensation act.” Id. 9 In applying the regular
9
In this regard, the Finlay court noted as follows:
From [more recent Colorado] cases there emerges a broader
standard that takes into account the constructive employer’s total
business operation, including the elements of routineness, regularity,
and the importance of the contracted service to the regular business
of the employer. This broader standard ensures that an important
purpose of section [8–41–101(1)]—that of making general
contractors ultimately responsible for injuries to employees of
subcontractors—will be fulfilled. That purpose, as well as the more
general purpose of the workers’ compensation act to compensate
injured employees for job-related injuries regardless of fault, would
be frustrated were we to revert to the narrow standard applied in [an
earlier Colorado case], and focus exclusively on whether the
subcontracted activity directly relates to the alleged employer’s
primary business. Such a narrow interpretation of the “regular
business” test could potentially bar the recovery of an injured worker
who is unable to show negligence and whose primary employer is
uninsured and financially irresponsible. This result would clearly
(continued...)
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business test, courts should consider “the constructive employer’s total business
operation, including the elements of routineness, regularity, and the importance of
the contracted service to the regular business of the employer.” Id. The
importance of the contracted service to the employer’s total business operation is
demonstrated where, absent the contractor’s services, the employer would have to
provide its own employees rather than forgo having the work performed. Id. at
67. In other words, where the work is so essential to the day-to-day business
operations of the employer that it cannot continue to function without the task
being performed, its importance to the total business operation is demonstrated.
B. Standard of Review
This court reviews de novo the district court’s sua sponte grant of judgment
as a matter of law in favor of Phathong on the question of Tesco’s status as a
statutory employer. Myklatun v. Flotek Indus., Inc., 734 F.3d 1230, 1233-34
(10th Cir. 2013); cf. Humphrey v. Whole Foods Mkt. Rocky Mountain/S.W., L.P.,
250 P.3d 706, 708 (Colo. App. 2010) (holding that when the facts supporting an
entity’s status as a statutory employer are undisputed, the trial court’s
determination of that status from the undisputed facts is a question of law).
9
(...continued)
contravene the long-recognized rule that the workers’ compensation
act is to be liberally construed to accomplish its humanitarian
purpose of assisting injured workers and their families.
Finlay, 764 P.2d at 66-67 (quotations and alteration omitted).
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Under this standard, the question is whether “a reasonable jury would . . . have a
legally sufficient evidentiary basis to find for” Tesco on the question of its status
as a statutory employer. Fed. R. Civ. P. 50 (a)(1). The resolution of this case
turns heavily on questions of contract interpretation, which are also questions of
law subject to de novo review. Level 3 Commc'ns, LLC v. Liebert Corp., 535
F.3d 1146, 1154 (10th Cir. 2008).
C. Analysis
The district court concluded that after the closing of the Acquisition
Agreement, the relationship between Tesco and Turnkey was not one of a general
contractor and subcontractor as envisioned in Finlay. Instead, according to the
district court, Tesco completely exited the casing drilling services business,
EnCana remained the general contractor, and Turnkey took over the subcontractor
duties of running the drilling operations. The uncontested facts in the record do
not bear out the district court’s conclusions. Tesco remained an active participant
in the casing drilling services business after the closing of the Acquisition
Agreement and, absent the labor provided by Turnkey, would have had to train or
hire its own workers to conduct that business. See Finlay, 764 P.2d at 67. Thus,
because the work performed by Turnkey for Tesco satisfies Colorado’s regular
business test, the district court erred in ruling Tesco was not Phathong’s statutory
employer.
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At the moment of the closing of the Acquisition Agreement, Tesco
continued to be engaged in the casing drilling services business. Taken together,
the Acquisition Agreement and the Rig Personnel Agreement demonstrate Tesco
remained obligated to perform its duties to EnCana under the terms of the Master
Service Agreement and the EnCana Drilling Contract. There is no evidence in the
record indicating Turnkey succeeded in any way to Tesco’s relationship with
EnCana. 10 Likewise, the Acquisition Agreement and the Rig Personnel
10
In contrast, the Acquisition Agreement makes quite clear that Turnkey did
succeed to Tesco’s contractual relationships with those entities holding drilling
contracts associated with the drilling rigs transferred by Tesco to Turnkey. See
supra n.6 (noting Acquisition Agreement obligated Tesco to operate like a pass-
through entity for the benefit of Turnkey for those drilling contracts associated
with the rigs Turnkey acquired). All this demonstrates, however, is that after the
parties closed on the Acquisition Agreement, Tesco’s footprint in the casing
drilling services business was smaller than it was before the closing. To the
extent Phathong argues the lack of an intent on the part of Tesco to continue
operations in this sector of its business indefinitely prevents it from being a
statutory employer, we note the argument is wrong as both a matter of law and
fact. Phathong has not cited, and this court has not found, any indication in
Colorado law that the definition of statutory employer set out in the Colorado
Code is limited to employers that continue to operate indefinitely under their
current business models. Furthermore, such a counterintuitive assertion is at odds
with Finlay’s statement that the regular business test should focus broadly on a
potential statutory employer’s regular business operations, not on some narrow
notion of its core or primary business. Even if the law were as Phathong
imagines it, the record does not demonstrate Tesco intended to exit the casing
drilling services business at the scheduled expiration of those drilling contracts
associated with the Drillers Technology Corporation rigs. The Rig Personnel
Agreement specifically provides as follows:
The term of this Agreement shall be coterminous with the
longest term of the Equipment Leases with [Drillers Technology
(continued...)
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Agreement make clear it was Tesco, not Turnkey, that was obligated to continue
making lease payments to Drillers Technology Corporation on the three drilling
rigs not transferred to Turnkey under the agreements. Tesco maintained the same
role with regard to its business operations on DTC2 as it had prior to the effective
date of the Acquisition Agreement: it was still responsible for safety on the rig,
providing the labor and equipment necessary to operate the rig, and designating
the drilling locations and schedule. The only salient difference flowing from the
closing of the Acquisition Agreement was that Tesco no longer had sufficient
staff to manage the operation of DTC2 and contracted with Turnkey, who became
the crew’s direct employer and Tesco’s subcontractor, to provide those services.
See Finlay, 764 P.2d at 67-68 (holding a janitor for a cleaning service was a
statutory employee of a computer company because absent the provision of
cleaning services by the janitorial company, the computer company would have
had to hire new employees or trained its existing employees to do the job).
10
(...continued)
Corporation]. If [Tesco] wishes to renew or extend the terms of one
or more such Equipment Leases, it shall provide [Turnkey] with not
less than 45 days prior written notice thereof and [Turnkey] shall
advise [Tesco] in writing within 15 days of its receipt of such notice,
whether it has elected to (i) terminate this Agreement at the end of
the last initial term of the Lease Agreements, or (ii) extend the term
of this Agreement, subject to the same terms and conditions, to
coincide with the extended term or terms of the Lease Agreements.
Such determination shall be made by [Turnkey] in its sole discretion
and, if it elects not to extend the term of this Agreement, it shall have
no further obligations to Tesco hereunder at the end of such term.
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The nature of the billing process between Tesco and Turnkey also belies the
district court’s suggestion Turnkey simply took Tesco’s place in the employment
chain between EnCana and Phathong. Tesco paid Turnkey pursuant to a
contractual rate that was not tied in any regard to the rate EnCana paid Tesco
under the EnCana Drilling Contract. Likewise, under the Rig Personnel
Agreement, Tesco retained the responsibility for designating to Turnkey the
drilling locations for the rigs, setting the drilling schedule, and providing a safe
workplace environment for the performance of the services under the agreement.
See id. at 67 n.4 (recognizing this type of control by a statutory employer over the
work to be performed is indicative of, but not a necessary predicate to a statutory
employment relationship). Finally, the Rig Personnel Agreement defined the
relationship of the parties as “independent contractor[s],” with neither party
“deemed for any purpose to be, the agent, servant[,] or representative” of the
other party. There is absolutely no indication in the record that Tesco and
Turnkey acted in derogation of this contractual provision.
IV. CONCLUSION
The record in this case conclusively demonstrates the work contracted out
by Tesco to Turnkey was an important, routine, and regular part of Tesco’s casing
drilling services business. That being the case, the district court erred in sua
sponte granting judgment in Phathong’s favor on the immunity question and in
denying Tesco’s post-trial motion pursuant to Fed. R. Civ. P. 50. Thus, we
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remand to the district court to vacate the jury’s verdict in favor of the Phathongs
and to, instead, enter judgment in favor of Tesco.
ENTERED FOR THE COURT
Michael R. Murphy
Circuit Judge
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