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Statement of the Honorable Delmond J. H. Won before the Committee on the Judiciary United States House of Representatives - March 22, 2000

March 22, 2000

STATEMENT OF
THE HONORABLE DELMOND J.H. WON
COMMISSIONER, FEDERAL MARITIME COMMISSION

800 NORTH CAPITOL ST., N.W.
WASHINGTON, D.C. 20573
(202)523-5721

BEFORE THE
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES

MARCH 22, 2000

 Mr. Chairman and distinguished Members of the Committee, I would like to thank you for inviting me to present my views on H.R. 3138, the "Free Market Antitrust Immunity Reform (FAIR) Act of 1999."

While I have been consistent in saying that I am not totally comfortable with the complete elimination of antitrust immunity for ocean common carriers, I fully support the need for reform with an eye towards limiting its use.

Let me begin by saying that I believe that the very essence of regulation is to implement a sense of fairness in the marketplace. I believe that regulation exists simply because we feel that absent regulation, the marketplace would bestow what we consider to be an unfair advantage to a market participant.

The House Committee on the Merchant Marine and Fisheries, in its Investigation of Shipping Combinations under House Resolution 587 during the Sixty-Third Congress in 1914, recognized this in recommending that antitrust immunity should apply to carrier agreements. In its Report, at p. 416, the Committee stated that:

[T]he prohibition of cooperative agreements between practically all the lines in nearly all the divisions of our foreign trade~would not only involve a wholesale disturbance of existing conditions in the shipping business but would deprive American exporters and importers of the advantages claimed as resulting from agreements and conferences if honestly and fairly conducted, such as greater regularity and frequency of service, stability and uniformity of rates, economy in the cost of service, better distribution of sailings, maintenance of American and European rates to foreign markets on a parity, and equal treatment of shippers through the elimination of secret arrangements and underhanded methods of discrimination.

That Committee continued to state, at p. 417, that:

While admitting their many advantages, the Committee is not disposed to recognize steamship agreements and conferences, unless the same are brought under some form of effective government supervision. To permit such agreements without government supervision would mean giving the parties thereto unrestricted right of action.

Since 1914, it's probably safe to say that the conditions for international trade have changed significantly. With the continuing globalization of the world economy, we see a greater recognition of interdependency among trading partners and consequently, a reduced threat of some country discriminating against American exporters and importers in favor of protecting and furthering its own national economy.

The key word here is a "reduced" threat, not a threat that has been eliminated. To the extent that antitrust immunity facilitates efficiency and service enhancing arrangements, ensures fair access to ocean transportation services for American exporters and importers, and contributes to the neutralizing of competing, national trade policies, I support the continuation of antitrust immunity.

However, I have serious concerns when antitrust immunity is used to provide the carriers with an unfair advantage over the same American exporters and importers.

I admit to experiencing some difficulty in trying to crystallize my personal position on the issue of antitrust immunity. I find my position constantly shifting as I notice subtle, but significant differences in how antitrust immunity is used by the carriers. The 1914 report by the House Committee on the Merchant Marine and Fisheries also sheds some light on this matter. It states, at p. 304:

While carriers by land are supervised and must conform to statutory requirements in the matter of rates and treatment of shippers, steamship companies, through private arrangements, have secured for themselves monopolistic powers as effective in many instances as though they were statutory...They exercise their powers as private combinations and are apt to abuse the same unless brought under effective governmental control.

Essentially, I believe that there is some merit in allowing carriers, under the grant of antitrust immunity, to exchange information which results in arrangements which facilitate fair and efficient trade between countries.

I do not believe, however, that the use of antitrust immunity by a group of carriers as leverage against shippers is a proper use of that privilege. One of the perspectives I developed as a result of the recent Fact Finding Investigation No. 23 is that, although individual carrier activity may be in compliance with the law, this fact does not automatically imply that the carriers' collective behavior is reasonable.

There is a distinct trend in our country to "deregulate" industries. OSRA, in fact, adds as a new purpose of our shipping laws, "to promote the growth and development of United States exports through competitive and efficient ocean transportation and by placing a greater reliance on the marketplace."

I don't think that any reasonable person would dispute that the term "marketplace" means the free marketplace subject to the kinds of antitrust laws we have in this country. That OSRA seeks to place a greater reliance on the marketplace while maintaining antitrust immunity places the FMC in the extremely difficult position of administering a law which contains philosophical and policy contradictions.

This difficulty was evident not only in the FMC's deliberations and vote on rules governing voluntary guidelines for service contracts, but also in our agency's failure to reach a majority to pursue the collective behavior described in Fact Finding Investigation No. 23, behavior which in my mind at least, was clearly market distorting.

In encouraging more "free market"-like competition, I believe and have often said that competition must apply to both the buyer and seller side of the business equation. My greatest concern lies in the potential for carriers to use antitrust immunity to eliminate competition on the seller side of the ocean transportation equation.

While there is no simple solution to these problems, there are options which should be considered.

1) Limit or eliminate OSRA's authority for carriers to agree on voluntary service contract guidelines.

I do not believe that allowing a group of carriers which would normally be competitors (especially a group which dominates a trade) to agree collectively on negotiating tactics and on contract terms and conditions, is consistent with OSRA's stated policy of placing greater reliance on the marketplace.

This subject was, in fact, considered by the FMC last year in the process of promulgating rules to implement OSRA. The FMC staff recommended to the Commission a rule which would have prohibited carriers from agreeing collectively on service contract terms and conditions.

However, the majority of the Commission at that time did not interpret OSRA to allow such a prohibition and decided to permit groups of carriers to agree on substantive guidelines for their individual service contracts. Amending OSRA either to prohibit such agreements or to convey authority to the FMC to do so would enhance carrier competition, consistent with the purpose of the statute.

2) Limiting antitrust immunity to permit only operational cooperation.

This option would appear to be the most direct approach to maintaining the benefits of antitrust immunity while eliminating the greatest potential for abuse. Under this scenario, efficiency and service enhancing agreements, such as vessel sharing and operational alliances would be permitted, while price collusion within carrier groups (including discussion agreements) would be prohibited.

3) Limiting antitrust immunity to small groupings of carriers not affiliated with other pricing agreements.

This option would retain the current scope of antitrust immunity (including price fixing), but limit its applicability to smaller groups of carriers to ensure greater competition. One means of accomplishing this could be through a market share test, such as that used by the European Commission to determine the acceptability of consortia agreements. This would preclude a situation like that of TSA today, whose members control approximately 90 percent of the Transpacific trade. Such limits could result in several small groupings of carriers in the same trade competing against one another, an oligopolistic situation which would appear to be no worse than, and may have some advantages over, a few megacarriers which seems to be the direction in which most people believe the industry is headed, particularly if antitrust immunity is completely removed.

4) Enhancing the ability of the FMC to curb unreasonably anticompetitive behavior.

The only authority provided to the FMC to address unreasonably anticompetitive behavior is contained in sections 6(g) and (h) of the 1984 Act. There are at least four problems with that part of the statute. First, the Commission has no direct authority to stop such behavior, but only the "authority" to seek an injunction in court. Second, the standards are so difficult to meet that the Commission has not sought to enjoin an agreement under these sections since their enactment in 1984. (Although, as the Chairman has indicated, the Commission has been successful on numerous occasions in "jawboning" carriers into backing away from certain agreements or activities under the threat of injunctive action). Third, shippers have no right to seek to challenge an unreasonably anticompetitive agreement and are prohibited from even participating in an injunction proceeding brought by the Commission. And fourth, there are no sanctions for unreasonably anticompetitive behavior, only the opportunity to convince a court to order it stopped. Establishing new, clear authority for the Commission itself to block and sanction such behavior, either on its own motion or upon shippers' complaints, would send a strong message that Congress expects the agency not only to be vigilant in protecting the shipping public against market distorting behavior, but also to be prompt and effective in ending such behavior.

It's my feeling that any of these options, or some combination of these options, would help prevent carrier abuse of antitrust immunity while preserving what I believe are the intended benefits. Since coming to the FMC, I have always felt that antitrust immunity was never intended to be used in an unfettered manner by the carriers. It was satisfying to have my feelings verified while reading the 1914 Congressional report on antitrust immunity. In my mind, the kinds of options raised here simply reinforce what Congress originally had in mind in allowing antitrust immunity in the first place.