Remarks of Acting Chairman Khouri at the Pacific Admiralty Seminar

Thank you and first, I offer condolences to all who suffered the losses and tragedies that resulted in the delay of this meeting in October. Thank you for your kind invitation to join you today and share some of my thoughts concerning the Federal Maritime Commission. Last, thanks to all who worked so hard to pull today’s conference together. As standard disclaimer, my remarks are my own, I do not speak on behalf of the Commission or the U.S. Government.

Close to forty years ago, when I took my basic admiralty class in law school we used the honored hornbook by Gilmore and Black, an exhaustive almost 1,000 pages. It covered all subjects of maritime law: cargo damage, marine insurance, recovery for injury or death of seaman, maritime liens, bills of lading and contracts of carriage and so on. I still have my copy and it is heavily annotated and highlighted – all except the very last chapter which starts on page 958, Chapter XI on Governmental Activity. It is pristine. Given the areas of law I am now involved with on a daily basis, I wish the professor had spent a bit of class time on the chapter – but perhaps I have made up for some of that deficit.

The Commission began its mission 101 years ago with the passage of the Shipping Act of 1916 and was then named the United States Shipping Board. The Board had very broad powers to regulate all ocean shipping including rates and commercial terms used by the many shipping conferences that were utilized by virtually all ocean carriers.

With the introduction of containerized cargo in the Fifties came rapid changes in the ocean shipping industry and a major rewriting of the Shipping Act in 1984. That Act provided for substantial deregulation of the industry, quite similar to the deregulatory initiatives that were changing rail, trucking and ultimately air transport. More deregulation followed with the significant 1998 Shipping Act amendments that fully endorsed the concepts of reliance on free market principals such as private individual contracts of carriage. However, there remains a number of regulatory responsibilities for the Commission which I will address.

The Commission is the competition and commercial practices regulator for an industry that is vital to our Nation’s economy – namely all containerized ocean cargo moving in the United States import and export trades. Of the $3.64 trillion dollars in total U.S. trade in real goods – almost $1.5 trillion dollars of cargo is transported by water. Of that second category, almost $1 trillion dollars of cargo moves via ocean container – so 27 % of all U.S. import and export goods is regulated by the FMC.

The entities regulated by the Shipping Act are the 165 vessel common carriers, the 6,300 ocean transportation intermediaries which includes non-vessel operating common carriers and freight forwarders, and the over 250 marine terminal operators that engage in these trades. Congress has charged the FMC with a number of oversight responsibilities designed to ensure competitive and efficient ocean transportation services for the shipping public and to protect the public from unfair and deceptive practices. The motto the Commission adopted is:

Competition and Integrity for America’s Ocean Supply Chain

On the competition side, the Act allows competing vessel operators to enter into a joint association to discuss commercial issues in a manner that would be prohibited to most businesses under the antitrust laws, including discussion of freight rates, provided there is no mechanism to require loyalty or adherence to any discussed rates. They may also enter into joint operating agreements – some as simple as agreement to swap a fixed number of container slots on each other’s vessels to the highly structured joint operations we now see with the top ten carriers aligned in three alliances that serve the Asia to US and Europe to US trades. Marine terminal operators may also request authority for joint discussion and joint operations.

Each such association must first file the proposed agreement with the Commission for review under the Act’s competition standard. That statute section provides that an agreement will become effective 45 days after filing unless the Commission finds that the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service OR an unreasonable increase in transportation costs. This standard is quite analogous to section 7 of the Clayton Act that is employed by the Department of Justice and Federal Trade Commission in their merger review duties.

In making this competition decision, each agreement is evaluated on a trade-by-trade basis and using the relevant markets. The Commission stays current on the major east-west lanes – the Trans-Pacific and Trans-Atlantic and 36 sub-trade lanes. A large trade-lane with many participants and with many potential entrants may not be concentrated and thus not problematic. However, a small or “thin” trade-lane with limited participants and few potential entrants may be concentrated and a competitive concern. As a third example, a trade lane may be concentrated for certain reasons; however, there may be other factors, such as viable potential market entrants that satisfy such first level concerns. That is why it is important to have an agency with up-to-date knowledge and particular expertise in this industry.

Following publication of the proposed agreement and the public comment period, the FMC reviews confidential data filed by carriers and NVOs at the agency together with public industry data to determine whether ocean liners are competing on both price and service parameters. If such market competition is evident, then we can have confidence that each dollar saved by the ocean carriers in these cooperative alliances will likely be passed along to the ultimate consumer.

Because these are continuing cooperative agreements rather than final mergers, the Act requires the Commission to conduct continuous monitoring after the initial review and effective date of the agreements. The Commission may also challenge an agreement at any time after the effective date. Note that our current monitoring program is overseeing 350 vessel carrier agreements and 150 marine terminal agreements.

As everyone in this room is no doubt well aware, the last few years have seen tremendous fundamental and structural changes to the ocean transportation services marketplace. Just three notables:

• We have gone from numerous minor alliances with low market shares to the proposed alignment of ten large vessel carriers in three major alliances in the east – west trades.
• The top twenty carriers will be down to twelve carriers by early 2018 by virtue of mergers and corporate consolidations. These dozen carriers own / operate 87 per cent of the world’s container ship capacity.
• The bankruptcy of a top ten carrier that created months of chaos and disruption for shippers, marine terminal operators and many vessel operators who had various sharing arrangements with Hanjin.

Given the significant amount of change that has taken place over the past few years, shippers are viewing the new commercial environment with many questions, and perhaps, some trepidation. Put simply, shippers are concerned that fewer carriers, operating in fewer, yet larger alliances, will not only equate to less service choices, but to a commercial environment where shipping lines enjoy an advantage of leverage in contract negotiations. These apprehensions are not limited to cargo owners and ocean transportation intermediaries. We have heard similar sentiments voiced by terminal operators, equipment lessors, and various service providers.

The industry is entering a new era and it is not surprising that there may be questions about whether carriers will be in a position to dictate rates. The Commission has strengthened the economic review process of new alliance agreements filed with us. More specifically, we have required tighter limits on the scope of each agreement’s authority, as well as expanded quarterly reporting requirements to be filed with the Commission. Monitoring of these alliances remains a central function of the Commission and all of this is done to ensure our ability to detect and respond to any indications of anticompetitive rate or service behavior or abusive business practices.

The Commission has, on an occasion or two, been criticized for not seeking court injunctive relief more often so as to prevent agreements from going into effect. By and large, this remedy is seldom necessary because of the agreement changes the Commission obtains before – and sometimes after – an agreement goes into effect. Note that the Department of Justice and the Federal Trade Commission likewise seldom need to take mergers to court – instead they use the negotiation process to obtain needed changes in the subject transaction.

Back to the Commission motto – Competition and Integrity for America’s Ocean Supply Chain – so now on the Integrity side, the Commission has several tools and programs. The Shipping Act sets forth a number of “prohibited acts” – that is business behaviors or actions that are banned because they are inherently anticompetitive. Those familiar with the general antitrust laws would recognize these Shipping Act prohibitions – such as unreasonable refusal to deal, concerted boycotts, concerted predatory practices, allocating customer shippers, or negotiating as a monopsony. Our Bureau of

Enforcement monitors and brings actions on these and other provisions of the Act. In addition the Commission reviews applications and licenses for over 6,300 ocean transportation intermediaries and oversees the financial responsibility bonding program for these OTIs. The Commission also provides ombudsmen and mediation services to assist in resolving disputes. With all of these programs, the FMC is protecting the integrity of our ocean supply chain.

Issues of seaport efficiency and port congestion continue to occupy the Commission’s attention. The Supply Chain Innovation Teams led by Commissioner Rebecca Dye continue to develop information sharing protocols that should prove extremely beneficial in integrating the global supply chain and providing a boost to the American economy.

Port congestion has led to shipper and drayage frustrations with demurrage, detention, and per diem fees being assessed at various ports around the country by marine terminal operators and vessel ocean carriers. The Commission currently is considering a petition filed by the Coalition for Fair Port Practices asking for a new Commission issued general and nationally applicable rule that would prescribe allowable business practices in the assessment of demurrage, detention and per diem business practices and charges. Given the multiple causes of port congestion, the divergent array of demurrage, detention and per diem assessment practices by different marine terminals and vessel common carriers, the Commission voted to hold public hearings on the petition. Those hearings will take place on January 16 and 17 of next year in Washington.

As an independent and bipartisan commission, we perform our regulatory mission by way of such traditional rule making processes via the Administrative Procedures Act. Further however; the FMC is one of the few federal commissions that also entertains private party complaints. A private party allegation of a violation of the Shipping Act is heard by a Commission Administrative Law Judge who gives an Initial Decision. That decision is then reviewed by the full Commission and we either affirm the ALJ decision or issue a new separate opinion that interprets the Shipping Act provision in question. Our decision may then be taken up to the Federal Circuit Courts for review.

In the 2013 MLA Puerto Rico conference, I expressed my concern about an adjudication development that expanded the jurisdictional reach of the Commission beyond the proper scope of the Shipping Act. As mentioned earlier, Section 10 of the Act sets out numerous “do’s” and “don’ts” for regulated entities. Section 10(d)(1), now 46 U.S.C. §41102(c), requires that “a common carrier, marine terminal operator or ocean transportation intermediary, may not fail to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property.”

For some 90 years, the Commission’s jurisprudence required that the alleged unjust or unfair activity had to also be the normal and regular “practice” of the offending party. A single infraction or isolated or episodic breach simply did not fit within the proscription of the Shipping Act’s statutory language or intent. As I noted in my 2013 remarks, over a number of years, the Commission departed from this well-traveled fairway and issued a series of cases leading to the holding that a single failure or breach of any common law duty or breach of a contract of carriage or breach of a duty established by a statute could form the basis of a Section 10(d)(1) violation. In my view, this makes the Commission a court of common pleas for virtually all maritime transportation issues, something Congress surely never intended in the Shipping Act.

I am sorry to report that, to date, no court of appeals has yet directly addressed the issue and overturned this interpretation of Section 10(d)(1). Time will tell whether an appellate court, the Commission itself, or Congress will make a much needed course correction and return Section 10(d)(1) to its proper navigation channel.

Thank you for your attention and the opportunity to share my thoughts with this distinguished group of maritime law practitioners. If we have time, I would be happy to entertain questions and hear your comments.