Immunity challenge
Battle to end antitrust protection for liner companies could be long.
By Chris Dupin
A bill that would remove antitrust immunity for liner shipping companies and expand the role of the U.S. Federal Maritime Commission is given little chance of advancing during Congress' 'lame duck' session.
The odds of H.R. 6167, the Shipping Act of 2010, by Rep. James L. Oberstar, D-Minn., and Rep. Elijah Cummings, D-Md., 'moving forward this year are essentially zero. But what it does do is begins a debate on the end of discussion agreements as we know them today,' said Ashley Craig, an attorney at the Venable law firm in Washington.
| Craig |
Craig is one of many observers who believe the bill, introduced just days before the House of Representatives recessed at the end of September, will have to be reintroduced in Congress next year, because Congress will have appropriation bills and other high priority legislation to deal with when it returns after Election Day.
Duncan Smith, an attorney at Blank Rome, said since companies 'are organized and do business around the current law,' there is going to be a strong desire to vet all the issues raised by the legislation in both congressional hearings and at other forums.
Smith also noted there is a tendency for maritime legislation to get aggregated into omnibus legislation ' this year's Coast Guard bill was six years in the making. So unless there is strong support for the Shipping Act, it may get rolled together with other maritime issues.
With a possible change in political control of the House or Senate, Craig found it surprising the bill did not have Republican co-sponsors at the time of introduction, especially since the Republicans had introduced similar legislation to eliminate antitrust immunity in Congress a decade ago.
For example, Rep. F. James Sensenbrenner, R-Wis., a member and former chairman of the House Judiciary Committee, was a sponsor of the Free Market Antitrust Immunity Reform (FAIR) Act of 2001, one of several attempts by him and late Illinois Congressman Henry Hyde to eliminate antitrust immunity about a decade ago.
(Oberstar, an 18-term congressman, is facing a tough race for re-election from Republican Chip Cravaack.)
Craig called the Oberstar and Cummings bill 'truly revolutionary' and 'a very aggressive piece of legislation,' under which carriers would no longer be able to formalize discussion agreements and talk about rates in any way, shape or form. He said terminal operators would be able to continue to operate as they have in the past.
'It refines immunity down to efficiency enhancement,' such as vessel sharing agreements. There would be strict prohibitions against being able to discuss anything related to service contracting, Craig said, in contrast to today's discussion agreements, which 'allow shipping lines to talk about specific contracting and rate levels, even though lines don't specifically agree to rate levels or adhere to them like they did in old conference systems.'
But the World Shipping Council (WSC), the liner industry's primary trade association, said the bill would actually 'make the vessel sharing agreements that underlie most services to and from the United States today virtually impossible to continue to operate,' and claimed it would 'destabilize the industry at a time when the U.S. economy requires the continued investment in liner shipping assets, supported by a predictable and efficient regulatory regime.'
The bill also calls for an increased role for the FMC ' one WSC says is overly intrusive ' in resolving disputes between carriers and shippers, and in oversight of the agreements between carriers that would still be permitted.
Oberstar's bill appears to have strong support from the shipper community.
The National Industrial Transportation League was one of 32 organizations representing importers, exporters and third-party logistics companies that urged Oberstar to introduce the bill. The NIT League said exemption from U.S. antitrust laws 'may have made sense some 100 years ago, but in today's fully integrated global marketplace, competition, rather than joint carrier discussions, should be the determining factor which governs the price for moving freight.'
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| Gatti |
'It's really trying to bring to bear the type of systems that all other industries must operate ' determining pricing and services based on what is that industry's or company's individual cost, plus a reasonable return on investment,' said Peter Gatti, NIT League's executive vice president.
Carriers 'should not get together and decide issues related to price and service. That should be based on a company's individual determination of what their suppliers charge. It's what their customers do every day in terms of not sitting down with competitors, not developing within their own industries what pricing they need, but doing that individually,' Gatti said. 'That is how they would expect to be treated by their ocean liner suppliers.'
While it did not give unqualified support to the bill, NIT League expressed support for its 'underlying reforms and purposes,' calling it 'an appropriate first step toward achieving a more robust, competitive and efficient maritime industry.'
'We look forward to working with Congress, the Federal Maritime Commission (whose chairman, Richard Lidinsky, has offered a list of separate statutory reforms) and interested stakeholders in achieving the necessary improvements to U.S. shipping laws that will be beneficial to the U.S. economy,' said NIT League President Bruce Carlton.
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| Carlton |
'This legislation will help address serious service issues, unreasonable surcharges, and contract breaches impacting the shipper community that serves both U.S. and overseas markets,' said Rosario Palmieri of the National Association of Manufacturers The bill would aid President Obama's goal of doubling exports in the next five years, he added.
Shipper advocates from Europe and Asia have also endorsed the legislation.
Nicolette van der Jagt, secretary general of the European Shippers' Council, called it 'a very positive step forward ' More and more people see that anticompetitive collaboration is not the way to address industry's problems. Competitive collaboration is required: working closer with customers is the way to tackle the pressures of rising costs and to protect one's investment.'
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Asian Shippers' Council Chairman John Lu said the proposed bill was 'music to his ears.' The ASC has been fighting to end liner antitrust immunity in Asia, and last month lost a battle to keep Singapore from extending its antitrust immunity until 2015.
Prohibitions. Craig said the bill would prohibit carriers from:
' Refusing or threatening to refuse cargo space accommodations when available.
' Discriminating against a shipper for supplying its own equipment.
' Engaging in unfair or deceptive practices or unfair methods of competition in ocean transportation or the sale of ocean transportation.
' Engaging in deceptive or fraudulent practices including unreasonable failure to provide transportation services as agreed to in the contract.
' Taking any action that may have the effect of unreasonably and substantially lessening competition in a trade.
' Discriminating against shippers on the basis of nationality or association with another common carrier.
' Refusing to deliver or release a shipment.
' Imposing a surcharge that is unreasonable or does not comply with the Shipping Act.
When Oberstar introduced the bill with these prohibitions, he cited testimony at a March hearing held by the Subcommittee on the Coast Guard and Maritime Transportation that Cummings heads, where importers and exporters complained about rates and difficulty securing space on ships for their products in late 2009 and earlier this year.
'Many believe that these rate increases reflect the desire of carriers to recoup their losses of the past year,' Oberstar said. 'Moreover, these shippers expressed concern that there is no willingness on the part of conference agreement participants to negotiate rates. This has significantly increased the costs of U.S. exports and made it difficult for U.S. importers to price their products.'
But the WSC said in a statement that 'capacity shortages in late 2009 and early 2010 were brief, market-driven and unforeseen by shippers and carriers,' and 'none of these market swings were the result of or related to the U.S. regulatory system for shipping.'
The council argued that the proposed legislation 'would not and could not prevent difficulties if such extreme economic conditions recur in the future' and that in fact, instead of causing the problems, the regulatory structure provided 'a predictable base from which carriers could efficiently and quickly respond to improved market conditions.'
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Brian Conrad, executive administrator for both the Transpacific Stabilization Agreement covering eastbound transpacific carriers, and the Westbound Transpacific Stabilization Agreement made the same argument, saying that at minimum the legislation was premature and saying that the agreements he oversees were able to hold meetings with customers to get direct feedback on contract, service, operations and pricing issues. The agreements explored ways to cooperate more closely with customers and created shipper advisory boards for ongoing consultations.
FMC Role. The bill would give the FMC a bigger role in reviewing and approving liner agreements like vessel sharing agreements (VSAs) that would still be permitted under the law.
Today, when liner companies enter into VSAs or even discussion agreements, the commission does not actively approve them. Instead agreements are reviewed by the FMC's staff and unless an objection is raised and the FMC seeks an injunction, it goes into effect in 45 days. (Indeed, the FMC has only sought an injunction once, in 2008, over the plan by the Ports of Los Angeles and Long Beach clean truck plan, and it failed to get the injunction.)
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| Lidinsky |
FMC Chairman Lidinsky said the agency is 'studying the bill with great interest, and the FMC will focus on providing Congress reliable, objective facts and data to assist their proceedings.'
He noted the U.S. shippers' problems have been the subject of an ongoing FMC investigation, which has been headed by Commissioner Rebecca Dye.
The FMC 'will be watching these issues like a hawk during the coming months. We want to ensure supply chain issues don't threaten President Obama's National Export Initiative or the economic recovery.'
Also under scrutiny will be how the shipping lines treat U.S. exporters, he said. 'For the upcoming harvest season, American farmers are predicting bumper crops and strong overseas demand, just as the pre-holiday import season begins to wind down. If the shipping lines don't provide the ships or containers for American farmers to get their crops to their customers reliably at their contractual rates, the calls to pass this bill will grow even louder.'
Excessive Regulation? The WSC said current shipping regulations have been justified as a balance to discussion agreements.
But the WSC complained that while the Oberstar and Cummings bill would eliminate the discussion agreements, it would 'interject the FMC into a far more intrusive regulatory role with respect to what are today market-based commercial business-to-business relationships between shippers and carriers.'
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| Rep. James L. Oberstar D-Minn |
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| 'Shippers expressed concern that there is no willingness on the part of conference agreement participants to negotiate rates. This has significantly increased the cost of U.S. exports and made it difficult for U.S. importers to price their products.' | |
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Oberstar said when he introduced the bill that it would 'preserve some antitrust immunity for ocean carriers so that they can enter into vessel sharing agreements.'
But the WSC said, 'it is simply incorrect to state that the bill would continue to allow them to operate as they do today under the Shipping Act, or that the bill's proposed changes resemble the approach taken by the European Union toward such agreements.'
It contends the law would be 'wholly out of alignment with every other nation's treatment of such agreements. Impairing carrier operating agreements is not an agenda that has been advocated by shippers, nor is it supported by any findings or recommendations from the FMC.'
In a 16-page report the carrier group raised numerous concerns about the bill, saying it was 'not a sound proposal for the redesign of America's international maritime commerce regulatory system.'
For example, it said a provision that would make it a violation of the Shipping Act for a common carrier to 'refuse or threaten to refuse cargo space accommodations when available' is unclear. Would it be improper, for a service calling on multiple ports, say from Hong Kong to Tokyo to the United States, to limit the space made available in Hong Kong in order to provide space for the Tokyo to U.S. leg of the voyage?
Also, it noted carriers commonly book more cargo than they have space for because 'no-show cargo' can amount to 20 percent to 35 percent of the space on a ship. If Congress wants space to be guaranteed, then it needs to obligate shippers to purchase that vessel space upon making the booking, on a take or pay basis, WSC suggested.
A requirement making it illegal for carriers to discriminate against customers supplying their own equipment, would, under the traditional definition of discrimination be a 'bizarre and unworkable provision.'
Craig noted that the bill would preserve publication requirements for vessel-operating common carrier and non-vessel-operating common carrier tariffs, and require maintenance of tariffs in an automated tariff system that the public could access for free over the Internet instead of having to pay a fee as is common today.
It would add more requirements to the contents of tariffs, with a focus on surcharges, accessorial charges and add-ons.
The bill seems to move in the opposite direction from a rulemaking being sought by the National Customs Brokers and Forwarders Association of America currently before the FMC that seeks to end mandatory tariff-filing requirements for NVOCCs.
The Oberstar bill proposes to establish an Office of Dispute Resolution and Customer Advocate in the FMC, and eliminate the requirement that the exclusive remedy for a breach of a service contract is an action in an appropriate court. It allows mediation before the FMC at the request of any party to the service contract or arbitration, and establishes an arbitration process for disputes regarding common carrier services.
In doing so, the bill incorporates what Lidinsky said was 'the heart' of legislative recommendations he made to Cummings in August, 'to reform the service contract dispute resolution process to allow more timely and inexpensive assistance' from the FMC.
'While the FMC has not taken a position on the antitrust exemption issue, I'm pleased that other parts of the bill dovetail with proposals that I recently submitted to Chairman Cummings,' Lidinsky said in a statement to American Shipper. 'These include an efficient process for resolving service contract disputes, prohibitions on unfair or deceptive practices in 'bumping' cargo or imposing surcharges, protections against Internet scams that target consumers moving household goods, and stronger penalties for violations.'
The WSC also argued that carriers see the current regulatory system as 'providing some level of market stability and predictability, with a minimum of competitive impact. If the Congress is to consider this change in the law, we believe it should make sure that it is comfortable with the market effects that would result from this change.'
It noted that ocean carriers 'have invested many billions of dollars years in advance to meet container trade growth that was three to four times GDP growth over the past 20 years,' and that 'investments of this scale and duration need some measure of assurance and predictability.'
In 1998, when similar legislation to eliminate antitrust immunity was under construction, then-FMC commissioner Hal Creel argued that limited antitrust immunity slows consolidations and mergers and thereby avoids further market concentration. And he also argued that without antitrust immunity, government-owned companies would have an advantage over privately held firms.
Paul Bingham, of Wilbur Smith Associates, said that while consolidation of carriers has continued during the past decade, some economists argue that the trend would be more pronounced if carriers were not able to participate in consortia and other space sharing agreements.
The WSC argued that 'repeal of rate discussion authority would lead to greater rate volatility and less predictable and less stable markets.' However, Bingham said that while some shippers might dislike that, others might be happy to contract for shorter periods of time, as is common in the Asia/Europe trade, and some might feel they could hedge risk using the new shipping derivatives that are being developed based on the Shanghai Shipping Exchange's container Freight Index.
The continuing decline of the U.S.-flag merchant marine could play a role in the debate over the Oberstar-Cummings bill in the months or years ahead.
Advocates for the elimination of antitrust immunity point to the fact that the government grants an extraordinary privilege to companies that are no longer based in the United States.
However, Craig said a number of foreign shipping companies, including Maersk and APL, have substantial U.S.-flag subsidiaries that continue to employ U.S. seafarers.
In September, four unions representing seafarers and the two principal unions for dockworkers, the International Longshoremen's Association and International Longshore and Warehouse Union, expressed concern about legislation that would 'alter the existing regulatory framework' stating that the changes might have adverse impacts on the remaining U.S.-flag fleet.