Served May 19, 1999

FEDERAL MARITIME COMMISSION

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PETITION NO. P1-99

PETITION OF DANIEL F. YOUNG, INC. FOR
INVESTIGATION OF PANALPINA, INC. AND
PANALPINA FMS, INC.

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ORDER DENYING PETITION

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On January 22, 1999, Daniel F. Young ("D.F. Young" or "Petitioner"), filed a Petition pursuant to 46 C.F.R. § 502.69, requesting that the Federal Maritime Commission ("FMC" or "Commission") initiate an investigation of the ocean freight forwarding practices of Panalpina, Inc. ("Panalpina") and Panalpina FMS, Inc. ("PFMS"). D.F. Young states that it is a licensed ocean freight forwarder that also holds a U.S. Department of Defense ("DOD") security clearance that allows it to act as a freight forwarder on certain DOD shipments requiring a security clearance. It contends that Panalpina does not possess a similar security clearance, but that PFMS does. However, Petitioner contends that PFMS does not hold an ocean freight forwarder's license. Nonetheless, D.F. Young asserts that PFMS has used Panalpina's ocean freight forwarder license number, with its consent, and has thus provided ocean freight forwarder services without a license or bond, in violation of section 19(a) of the Shipping Act of 1984 ("1984 Act"), 46 U.S.C. § 1718(a), and 46 C.F.R. § 510.3. Petitioner further alleges that Panalpina violated 46 C.F.R. §§ 510.18(c) and 510.21(c) by allowing PFMS to use its freight forwarder license number. Panalpina and PFMS filed a joint Reply in response.

THE PLEADINGS

D.F. Young states that Panalpina has a contract with the Government of Egypt to provide ocean freight forwarding services on DOD shipments, but, because Panalpina does not hold the requisite security clearance, has provided such services through PFMS, its wholly-owned affiliate. Petitioner further asserts that the Commission possesses bills of lading showing PFMS as the forwarder, while using Panalpina's license number. Petitioner also suggests that Panalpina and PFMS may have handled cargo from the U.S. to Kuwait in a similar manner.

D.F. Young notes that the licensing and bonding requirements for ocean freight forwarders have existed since 1961, and asserts that the Commission has strictly enforced these rules, citing several recent Commission proceedings against unlicensed forwarders. By way of relief, Petitioner requests that the Commission order Panalpina to show cause why its license should not be revoked or suspended; assess a civil penalty against Panalpina and PFMS; and issue a cease and desist order against both Panalpina and PFMS.

On February 16, 1999, Panalpina and PFMS submitted a joint Reply⁽¹⁾ to the Petition and a Motion for a Protective Order. The Motion requests that the Commission treat Panalpina's Reply as confidential pursuant to 46 C.F.R. § 503.35, based on Panalpina's assertion that the Reply "contains highly confidential information of a commercially sensitive nature that Panalpina would not customarily release publicly, let alone to a competitor." Panalpina has attached to the Motion a draft protective order⁽²⁾ and an "undertaking" to be signed by counsel for D.F. Young or by any consultant working for it on this matter.

In its Reply, Panalpina explains its role in providing forwarding services to foreign governments pursuant to the Foreign Military Sales ("FMS") program administered by DOD and the Department of State. It notes that PFMS is a separately incorporated, wholly-owned subsidiary of Panalpina, which itself is owned by Panalpina World Transport AG, a Swiss Corporation. PFMS was created in 1991 in response to a DOD amendment to its Industrial Security Regulations ("DDISR") which precluded "foreign-owned, controlled or influenced" ("FOCI") companies from holding a Facility Clearance License ("FCL"), thereby becoming eligible to take possession of classified material.

Although Panalpina was precluded from taking possession of classified material, the DDISR provided a "proxy agreement" mechanism, whereby a FOCI company could still provide certain services in connection with FMS shipments. Panalpina allegedly followed these procedures in creating PFMS, and PFMS received an FCL soon thereafter. Panalpina states that it had discussions with DOD's Defense Investigative Service (now Defense Security Service ("DSS")) concerning this arrangement, and that DSS did not object to Panalpina handling all non-security related functions for PFMS.

Panalpina notes that in 1996, it was awarded an FMS contract to provide freight forwarding service to the Egyptian Procurement Office ("EPO"), replacing D.F. Young. Panalpina claims that at that time it discussed with DSS an arrangement whereby Panalpina would be the prime contractor and PFMS would take physical possession of any classified material as its subcontractor. In reliance on DSS' approval of this arrangement, Panalpina subsequently was awarded FMS contracts with the Philippines Armed Forces ("AFP") and the Kuwait Ministry of Defense ("KMOD"), again replacing D.F. Young.

Panalpina asserts that DSS has since changed its policy and now takes the position that the FCL entity handling the classified material (PFMS) cannot function as a subcontractor. Panalpina reports that it is engaged in ongoing discussions with DSS over this matter.

Panalpina states that last summer, for the first time in PFMS' seven years, an employee may have directly booked and prepared ocean bills of lading for a small number of shipments moving to Egypt under the EPO contract. Panalpina maintains that previously all classified shipments handled by PFMS had moved by air. As soon as they learned of this situation, Panalpina and PFMS took steps to ensure that it would not be repeated. PFMS directed its employees to book no ocean shipments. In addition, to accommodate any need for ocean shipments, they entered into an agreement on June 12, 1998, whereby PFMS "appointed" Panalpina to provide ocean forwarding services for any classified material.

Panalpina notes that D.F. Young had complained to the Commission's Bureau of Enforcement ("BOE") about its conduct, but claims to have taken steps to prevent a reoccurrence before this time. It contends that it made a full disclosure to BOE and has kept BOE informed with respect to its pending negotiations with DSS. It submits that when BOE did not immediately initiate enforcement action against it, D.F. Young filed the instant Petition. Panalpina further advises that even though the companies believe that their agency agreement is sufficient, they have decided to follow BOE's advice and PFMS has applied for an ocean freight forwarder's license on its own behalf.

In light of the above, Panalpina submits that the circumstances do not warrant a Commission proceeding to investigate the freight forwarding practices of itself and PFMS. It notes that under the EDO contract, it handled thousands of shipments in compliance with all regulatory requirements. It contends that the innocent booking of a small number of classified ocean shipments by a PFMS employee was at most, a de minimis, technical breach of forwarder regulations. Moreover, upon learning of the problem, Panalpina and PFMS set up a mechanism whereby PFMS would not conduct ocean forwarding services. In addition, PFMS has followed BOE's recent advice and is applying for a forwarder's license on its own.

Panalpina submits that the Commission routinely finds investigations unwarranted under such circumstances. In addition, it submits that PFMS' conduct did not harm the shipping public, as it was conducted pursuant to an agreement between the Egyptian and U.S. governments. Panalpina also asserts that the Petition is part of a series of efforts by a disgruntled competitor who has lost business to Panalpina. In this regard, Panalpina points out that even though the AFP and KMOD contracts closed with Panalpina as the winning bidder, they have not been implemented due to D.F. Young's tactics. It fears that a Commission decision to investigate its conduct would further delay or preclude the implementation of these contracts.

Panalpina also questions D.F. Young's standing to petition for an investigation of PFMS' activities, given that D.F. Young has allegedly suffered no injury therefrom. The conduct complained of had not occurred when the EPO contract was awarded. Moreover, Panalpina points out that it holds a valid ocean freight forwarder's license and could have performed the services itself. It claims that D.F. Young's Petition is analagous to that in Cross-Sound Ferry Servs., Inc. v. Interstate Commerce Comm'n, 934 F.2d 327 (D.C. Cir. 1991), where the petitioner's only injury was being forced to compete for business. Panalpina also submits that the cases relied upon by D.F. Young all involved egregious ongoing conduct, numerous shipper complaints, and substantial harm to the shipping public. In light of the above, Panalpina suggests that the Commission should decline to initiate an investigation.

On February 25, 1999, D.F. Young filed a Reply to Panalpina's Motion for a Protective Order. D.F. Young notes that Panalpina did not serve it with a copy of its reply as required by 46 C.F.R. § 502.114, but instead requested that the reply be treated as confidential.

D.F. Young first asserts that Panalpina has not employed the confidentiality protections available under the Commission's Rules of Practice and Procedure, and, as a result, has waived any claims of confidentiality. It argues that Rule 119 requires anyone seeking a protective order to file both a confidential and a redacted public copy of its reply and to serve the redacted copy on the proper party. See 46 C.F.R. § 502.119. D.F. Young notes, however, that Panalpina did not file a redacted copy or make the requisite service upon it. D.F. Young further notes that the provision invoked by Panalpina for confidential treatment, 46 C.F.R. § 503.35, is the Commission's rule implementing the Freedom of Information Act ("FOIA"), and should not excuse non-compliance with the service requirements of Rule 114. It contends that the FOIA rule concerns public access to information in possession of the Commission, and is not a means for parties to avoid their responsibilities.

D.F. Young also submits that Panalpina's motion for protective order should be denied on its merits. It cites Anderson v. Cryrosac, 805 F.2d 1, 7 (1^st Cir. 1986), for the proposition that a party seeking a protective order has the burden of proving that there is good cause for the order "based on a particular factual demonstration of potential harm, not on conclusory statements." D.F. Young then concludes that Panalpina's one sentence justification is "highly conclusory" and lacking any particular factual demonstration of potential harm. D.F. Young suggests that the fact that the motion does not contain enough information about the nature of the information to be protected, by itself demonstrates that the motion lacks the required specificity. It argues that if Panalpina's position is adopted, all future Commission proceedings will be subject to secrecy at the request of any party. This, according to D.F. Young, may be a particular concern where the document is not an existing business record, but a pleading created by a party with knowledge that it would be publicly filed.

If the Commission finds that a protective order is warranted, D.F. Young argues that the order proposed by Panalpina should not be used. It finds the proposed order objectionable for four reasons: (1) it shifts the burden to D.F. Young to prove that the information has been improperly designated as "highly confidential"; (2) it requires outside counsel to sign a detailed "undertaking" contrary to Commission practice; (3) the undertaking entitles Panalpina to specific performance and injunctive or other equitable relief, without having to obtain a bond; and (4) it has no exemption for information that is already public or may have come into D.F. Young's possession by other lawful sources.

On March 4, 1999, Panalpina filed a Motion for Leave to File a Reply⁽³⁾ to the Reply of D.F. Young to Panalpina's Motion for Protective Order. It submits that D.F. Young has opposed the proposed protective order without proposing any alternative. Panalpina further argues that D.F. Young has misinterpreted the Commission's procedures and mischaracterized the Commission's past practices concerning protective orders. In this regard, Panalpina concedes that the Commission's procedures do not normally permit a reply to a reply.

Lastly, on March 16, 1999, D.F. Young filed a Reply to Panalpina's Motion for Leave to File Reply. It notes first that the Commission's Rules prohibit replies to replies, 46 C.F.R. § 502.74(a)(1), and submits that Panalpina has not shown good cause why the prohibition should be waived. D.F. Young further asserts that neither the motion nor the reply shed any new light on the appropriateness of a protective order for Panalpina's reply. D.F. Young concludes that Panalpina simply has not met the standard for justifying a request for a protective order.

DISCUSSION

The Commission currently has six items before it in this proceeding: 1) D.F. Young's Petition for an Investigation of the practices of Panalpina and PFMS; 2) Panalpina's Reply to the Petition; 3) Panalpina's Motion for a Protective Order to treat its Reply as confidential; 4) D.F. Young's Reply to Panalpina's Motion for a Protective Order; 5) Panalpina's Motion for Leave to File a Reply to D.F. Young's Reply, with attached Reply; and 6) D.F. Young's Reply to Panalpina's Motion for Leave to File a Reply. The latter two can be dealt with expeditiously and summarily. Rule 74 of the Commission's Rules of Practice and Procedure states in relevant part:

Except as provided under subpart V of this part, a reply to a reply is not permitted.

46 C.F.R. § 502.74(a)(1). There is nothing in either Panalpina's Motion for Leave to File a Reply to D.F. Young's Reply or D.F. Young's Reply to Panalpina's Motion that would justify any deviation from this clear-cut prohibition on replies to replies. Moreover, the prior pleadings appear to sufficiently address the various issues raised by the parties. Accordingly, these matters will be denied by the Commission.

for good cause shown, the presiding officer may make any order which justice requires to protect a party or person from annoyance, embarrassment, aggression, or undue burden or expense including . . .

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