United States: Ocean Transportation Intermediaries: How Three and a Half Years of "Deregulation" Have Impacted Ocean Freight Forwarders and Non-Vessel Operating Common Carriers

This paper addresses recent legal developments in the ocean transportation intermediary industry, focusing on the impact of legislation which redefined administrative and regulatory parameters governing this sector. It also speaks

to liability and other topics which are at least indirectly connected to these regulatory issues.

The Ocean Shipping Reform Act of 1998, amending the Shipping Act of 1984 ("OSRA")¹, was implemented on May 1, 1999. OSRA combined ocean freight forwarders and non-vessel operating common carriers ("NVOCCs") for most purposes under one administrative category labeled "ocean transportation intermediaries" ("OTIs").

Because the Transportation Lawyers Association and the Association for Transportation Law, Logistics and Policy traditionally have focused primarily on the rail and trucking transportation modes, attention is given at the outset to OTI nomenclature as compared to that of surface intermediaries. An ocean freight forwarder is roughly the equivalent of a surface transportation broker, in that these entities do not issue bills of lading taking responsibility for the safe transportation of cargo.² Rather, brokers and ocean freight forwarders serve primarily as conduits, matching their shippers’ needs with appropriate carrier and other transportation services.

NVOCCs are largely the equivalent of surface freight forwarders.³ Both of these entities are "carriers to shippers and shippers to carriers." They consolidate cargo, issue bills of lading to their customers taking responsibility for safe delivery, and are subject to cargo liability regimes in the event of a loss.

Complicating this semantic incongruity is the fact that many transportation intermediaries operate in several capacities with regard to both ocean and surface transportation, often within a single through movement. It is crucial to those in this segment of the transportation industry, as well as to practitioners who represent or are adverse to them, to be cognizant of each variety of intermediary’s legal particulars.⁴

Background

Common carriage’s genesis was during the Roman Empire. The perceived dangers of collusion between carriers and selected shippers, whereby carriers would agree with certain shippers not to transport their competitors’ freight, prompted a regulatory regime that would allow commerce to expand.

Similarly, as America’s industrial revolution materialized during the nineteenth century, the indispensability of transportation freely available to all U.S. enterprises that require it became evident. Unfettered access to transportation, it was deemed, was essential to nurture the competitive industrial economy which eventually would support our country’s foundation. Common carriage, with its legally enforced system of tariffs mandating that ocean carriers offer their services to the public at large without favor toward any consumer, therefore became a precept of the American transportation system. This system was appropriate at the time of the Shipping Act of 1916⁵, and for decades thereafter.

However, its fundamental flaws surfaced as our industrial economy developed into its present-day status. Common carriage fails to take into account economies of scale; the impacts of uniform pricing and service options on allocation of carrier resources; the economic reality that the small account is expensive and difficult to service; modern business practices; and human nature as it pervades the business process.

Designed and urged upon Congress by American-owned international water carriers (when there still were two) and larger shippers represented by the National Industrial Transportation League ("NITL"), OSRA’s adoption in October 1998 was hailed as "deregulation" of the ocean shipping industry. The legislation, by and large, sounded the death knell of ocean common carriage as the predominant mechanism by which international water carriage is accomplished. It achieved this by incentivizing shippers and ocean carriers to contract freely with each other.⁶ The Shipping Act of 1984 had allowed shippers and carriers to enter into service contracts, but subject to two significant provisos (there also were numerous less significant ones) that created tremendous business obstacles to mutually beneficial and profitable contractual relationships.

First, a carrier could offer shippers freight rates which were not included in the carrier’s tariff (filed with and enforced by the U.S. Federal Maritime Commission ("FMC")), but only if the carrier agreed to offer those same rates to "similarly situated" shippers. This condition became less-than-affectionately known as "me-too rights" on the part of the similarly situated shippers who sought comparable rates. Second, essential terms of all service contracts carriers and shippers entered into were made publicly accessible, so that non-tariff rates were known to other shippers who might want to exercise their me-too rights accordingly.⁷

OSRA eradicated these two provisos as a part of its goal of promoting service contracting over common carriage.⁸ Now, carriers are not even able to file tariffs with the FMC.⁹ Service contracts still have to be filed, but the FMC keeps their pricing terms confidential. Similarly situated shippers are not even supposed to know the freight rates agreed to in their competitors’ service contracts, and they can no longer demand the same rates.

OSRA, per its preamble, is designed to "place a greater reliance on the market place" in shipping economics than was allowed by common carriage.¹⁰ A full explanation of how OSRA accomplishes this is beyond this paper’s scope, but the consequences of merchants having to offer the same terms to every customer, regardless of circumstances, are readily apparent. Numerous other modifications to the prior shipping law further encourage contractual relationships based on market conditions.

OSRA was touted by many as "deregulation" of the ocean shipping industry, given the tremendous decrease in federal regulatory provisions resulting from the move away from common carriage. The FMC’s role in ensuring compliance with rate enforcement issues is a fraction of its task pre-OSRA. But "deregulation" is a misnomer, most especially in the context of OTIs. Extensive regulations still govern shipping economics and the relationships that realize them. The FMC, though its activities have been curtailed, remains a significant force in devising, implementing and enforcing shipping policy.

OTIs find themselves ironically more regulated under OSRA than they were before. Filing, bonding and licensing requirements actually became more stringent with passage of the statute and FMC regulations.¹¹ More importantly, OTIs suffer an enormous business disadvantage under OSRA that sets the stage for most of the substantive points discussed in this paper.

OTIs Under OSRA

As presented above, OSRA is designed to foster and promote market forces as the driving force of shipping economics, replacing the more regulated and economically burdensome scheme of common carriage. The OTI industry simply is not included in the economic interests OSRA furthers.

Several statutory and regulatory points demonstrate this, but one is at the heart of the post-OSRA OTI debacle (a word used advisedly amidst the resonance of OSRA’s economic and legal repercussions in intermediary circles over the past few years). OTIs are still prohibited from entering into the same confidential service contracts with their shipper customers unfettered by me-too rights asserted by their customers’ competitors. To the contrary, OTIs still have to function subject to strict compliance with published tariffs.¹² This circumstance dissuades long-term relationships with established shippers who have larger volumes of international freight. The costs and administrative burdens of operating pursuant to tariff exacerbate the situation.

Adding to OTI woes is the rise of shippers associations. A hallmark of the environment OSRA created is carrier preference for contractual relationships with larger shippers. The economy of scale created by larger volume commitments produces preferential freight rates and other advantages. This has prompted numerous shippers associations to form throughout the country and worldwide for the purpose of cargo transportation into and out of the U.S. The smaller and medium size members of these shippers associations agree to ship their cargo through the association’s contracts with one or more carriers, thereby leveraging their resources to obtain lower freight rates.

Independent OTIs, especially the NVOCCs, have suffered by volumes lost to shippers associations. Shippers associations can attract OTI customers largely because they are able to contract confidentially, without the negative ramifications of me-too rights, and with other advantages OSRA confers. Indeed, many shippers associations are administered by former OTI principals who left to pursue opportunities as part of a less encumbered business model.

How did these unfortunate circumstances befall the OTI industry? That question is the source of continued, politically charged debate accented by finger pointing and disagreement over proposed reform. Many believe the OTI industry is itself at least indirectly responsible for the negative circumstances OSRA created. "Deregulation" of the shipping industry was the subject of years of economic analysis, congressional lobbying and inter-industry negotiations during the mid 1990s. Many participants in the ocean shipping industry, from shippers and carriers to warehousemen and stevedores, eagerly promoted their positions, evolving and compromising them so as to obtain the most important concessions in exchange for flexibility regarding lesser concerns.

Many feel the OTI industry was conspicuously absent during that process, losing valuable opportunities to preserve its interests. These observers opine that intermediaries had concluded OSRA would never pass congressional muster, and that the time and expense of participation in negotiations was unwarranted. Also of note is the poor membership statistics, at least in the mid 1990s, of intermediary trade groups. The largest and most prominent such organization, the National Customs Brokers and Forwarders Association of America ("NCBFAA"), was comprised of only 600 out of America’s 2000 freight forwarders in 1998. Consequently, the NCBFAA was at a disadvantage in trying to protect its industry.

Regardless of the industry’s own fault in promoting its interests, it cannot be disputed that OSRA’s very premise is not conducive to intermediaries. As described above, the deregulated shipping environment is designed to foster direct, confidential relationships between shippers and carriers based on volume and time commitments peculiar to the parties. A "middleman’s" involvement in the rate-setting process simply is not in keeping with OSRA’s spirit. In light of the lobbying capacities of NITL and international steamship lines; a national and international trend toward deregulation; a fiscally challenged U.S. government; and the general desirability for international uniformity in ocean shipping practices, it is questionable how effectively NCBFAA or anyone else could have defended the OTI industry during OSRA’s negotiations.

OTI Response to OSRA

With OSRA’s passage in October 1998, the FMC was directed to draft and implement interpretative regulations. While an FMC ruling prohibited ocean freight forwarders from purchasing transportation services as shippers of record,¹³ other intermediary issues have been scrutinized without further detriment to the OTI industry. There appears to be no FMC impediment to OTIs forming and operating shippers associations, so long as they comply with applicable regulations.¹⁴ This eases some of the burden OTIs suffered by their inability to enter into confidential service contracts directly.

Perhaps the most important pending OTI effort in response to OSRA’s passage is in response to the NVOCC tariff publication requirement. While the FMC has broad authority to draft and implement appropriate regulations applying its industry and shipping law expertise, the agency still, of course, is subject to OSRA’s stated parameters and legislative intent. Thus, while OTIs have contemplated asking the FMC to promulgate a regulation eradicating the tariff-filing requirement, the FMC probably is prohibited from doing so. The Senate rejected an early draft of OSRA containing such a provision, indicating that tariff publication is a specific legislative intent.

But the FMC could grant NVOCCs leeway in the rates and service options offered in their tariffs. For example, tariffs might include "range rates" which would provide flexibility to intermediaries arranging transit for similarly, but not identically, situated shippers. This has not received attention in recent months, perhaps because of a currently pending FMC commissioner appointment.

One feature of OSRA that has prompted much controversy is its preservation of carrier antitrust immunity. Carriers understandably would like to continue their rate setting practices without fear of repercussion pursuant to the Sherman Act. Indeed, carrier agreement to support OSRA’s passage was contingent on shipper support for antitrust immunity. However, some argue that antitrust immunity is antithetical to the very principles OSRA is designed to further. Moreover, since OSRA’s passage, foreign concerns have acquired America’s last two major carriers. This means that U.S. shippers, despite their unparalleled economic power, may be suffering disadvantages as a result of foreign carriers operating under the cloak of immunity. Some argue U.S. law should not be designed to support foreign business interests by granting them antitrust immunity.

Last year, Congress debated eradication of this hallmark of shipping economics by way of Congressman Henry J. Hyde (R- Ill.), who submitted his Free Market Antitrust Immunity Reform Act ("FAIR").¹⁵ OTIs have taken inconsistent positions with regard to FAIR. The intermediary industry benefits tremendously from inter-carrier vessel sharing agreements, and other such products of antitrust immunity. These agreements produce a stable and predictable wholesale market for OTIs to operate in, as well as more diverse service options carriers can offer based on their uninhibited discussions.

Moreover, antitrust immunity lends stability and predictability to the ocean shipping industry. OTIs find this environment operationally easier and more comfortable. The rates NVOCCs can offer their customers - long and short term - depend largely on what carriers will offer their own shippers of record, i.e., the NVOCCs. With antitrust immunity preserved, OTIs can operate with the security that wholesale cost of the product they retail won’t fluctuate unexpectedly based on unforeseeable and uncontrollable factors.

Nonetheless, the NCBFAA and the International Association of NVOCCs ("IANVOCC") have joined with shipper interests in promoting FAIR’s passage. While there are clear business advantages to a stable carrier market, OTIs perceive severe disadvantages as well. With carriers conversing and transacting business under the cloak of immunity, they can more easily disenfranchise intermediaries from the process. This issue recently resulted in a dispute before the FMC which is addressed in detail below.

When Rep. Hyde’s position changed in Congress, Rep. James Sensenbrenner (R-WI) took charge of FAIR, but the bill apparently is not receiving Congress’ active attention. Still, when global economic conditions improve and security legislation has been finalized, the issue may be revisited.

Recent OTI Issues

The past year has seen a number of developments affecting OTIs. Many of these are directly or indirectly connected with the tragic events of September 11, 2001; others are simply the longer-term consequences of OSRA’s treatment of OTIs.

1) OTI Action against the Transpacific Stabilization Agreement ¹⁶

On May 10, 2002, the NCBFAA and IANVOCC filed a petition with the FMC which took the following position against the Transpacific Stabilization Agreement ("TSA")¹⁷, an alliance of carriers operating in the Pacific trades which undertakes antitrust-immune discussions:

NCBFAA and IANVOCC (hereafter occasionally "the Petitioners") alleged that TSA members had violated sections 10(c)(7) and 10(c)(8) of the Shipping Act of 1984 ("1984 Act"), 46 U.S.C. app. §§ 1709(c)(7) and 1709(c)(8), by engaging in a concerted practice of discrimination against NVOCCs regarding the negotiation of, and rates implemented pursuant to, their service contracts. Specifically, the Petitioners have alleged that TSA members made an internal agreement, which they subsequently executed, to complete the negotiation and signing of contracts with proprietary shippers prior to commencing negotiations with NVOCCs. The Petitioners further alleged that TSA members effected a collusive agreement to charge NVOCCs significantly higher rates than assessed against proprietary shippers for the same services. The manner in which TSA members allegedly implemented this agreement was through the discriminatory assessment of general rate increases ("GRI") and a peak season surcharge ("PSS") against NVOCCs.¹⁸

TSA has denied the OTIs’ allegations and moved to dismiss the petition for lack of evidence, but the FMC is undertaking an investigation. An obstacle the intermediaries claim they face is potential TSA retaliation against any individual OTI which presents evidence or testimony in favor of the petition. NCBFAA and IANOVCC claim they brought the petition in the trade organizations’ names to prevent TSA and its members from imposing prohibitive terms on any single OTI.

TSA also has countered the intermediaries’ allegations by objecting to their self-portrayal as a powerless and vulnerable sub-group of the shipping industry. Thus, the carriers believe OTIs’ request for special government treatment and protection is unwarranted.

Another point which surfaced as part of the petition, but which has been the subject of controversy for some two years, is the increasing practice of carriers forming and operating NVOCC and freight forwarder subsidiaries which compete with established OTIs. These subsidiaries allegedly conduct their affairs assuming they enjoy the same antitrust immunity their owners do, creating a business advantage over independent OTIs. Of course, carrier-owned intermediaries virtually always consign cargo to their owners when the latter offer a needed service option, rendering them virtual extensions of their carrier owners. How the FMC will address this as part of the petition, if at all, is unclear.

Currently pending is an order by an FMC fact-finding officer to TSA members directing the carriers to submit information and documentation to the FMC by October 14, 2002. After analysis of the submissions, further investigative efforts likely will follow.

2) The Trade Act of 2002 ¹⁹

Signed into law on August 7, 2002, the Trade Act of 2002 (the "Act") is significant in relevant regard because of its incorporation of shipping security issues into U.S. trade policy. Many of the Act’s shipping provisions impose new guidelines on OTIs.

The Act imposes security requirements on shippers and/or intermediaries (whichever are "most likely to have direct knowledge. . .") of both import and export cargo. Per the Act, export cargo documentation should be submitted at least 24 hours after delivery to a marine terminal operator, but under no circumstances later than 24 hours before the transporting vessel’s departure. The documentation must include a shipper’s export declaration transmitted electronically in Customs’ Automated Export System (or an exemption statement), an Internal Transaction Number, and copies of the bill of lading and shipping instructions.

Regarding imported cargo, the Secretary of the Treasury must draft regulations facilitating electronic cargo data transmissions to U.S. Customs. The Act also directs the Treasury Secretary to form a Joint Task Force to undertake the following: (1) establish standards and a process for screening and evaluating cargo prior to its crossing a U.S. border; (2) implement a system to monitor cargo and ensure its security in transit; (3) formulate a program enabling government agencies to ensure and validate program compliance; and (4) complete any other efforts the Secretary deems necessary to enhance security.

A concern voiced by the OTI industry and certain shippers is potential disclosure of confidential business information to competitors. The Act directs the Treasury Secretary to "take into account" these concerns, and that regulations be designed "to protect the privacy of business proprietary and any other confidential information," subject to other existing law.

These requirements, which must be implemented within one year of the Act’s enactment, work in coordination with trade policy provisions which are beyond this paper’s scope. Observers note the increasing role U.S. Customs appears to be playing in the regulation of OTIs, a topic further explored below.

3) Proposed Transfer of OTI Regulation to the U.S. Customs Service

On August 1, 2002, Sen. Diane Feinstein (D-CA) submitted to the Senate a bill entitled the Comprehensive Seaport and Container Security Act of 2002²⁰. While the bill primarily addresses port security issues, it contains a provision (section 104) that would transfer regulatory authority over OTIs from the FMC to the U.S. Customs Service. The Senate’s Committee on Commerce, Science, and Transportation currently is analyzing the bill.

Per its preamble, this legislation is designed primarily to "enhance the security of the United States by protecting seaports." Section 104 appears under Title I, entitled "Law Enforcement at Seaports." The proposed regulatory transfer is part of a larger shift to Customs of a variety of law enforcement tasks aimed at combating terrorism.

Customs’ role in post–9/11 transportation security is increasing substantially. While this bill has not yet been endorsed by key senatorial elements, it is in concert with legislation in that direction. Port security legislation heightens Customs’ responsibilities, in addition to border security measures Customs must put into practice pursuant to recent statutory and regulatory provisions. By divesting the FMC of one of its primary functions, passage of this bill would signal that government administration of OTIs has become more of a security and duty-collection issue than an element of shipping regulation.

4) COGSA Reform

This politically charged topic has been pending since the mid 1990s, with proposed legislation reportedly close to submission on several occasions. The U.S. Carriage of Goods by Sea Act ²¹ ("COGSA") governs liability for cargo lost or damaged during international ocean transit into or out of the U.S. While OSRA may grant parties leeway to negotiate liability in their service contracts, COGSA applies to common carriage and as a default regime when parties do not negotiate specific liability terms.

Sen. Kay Bailey Hutchison (R-TX) originally supported proposed COGSA-reform legislation which had been negotiated by numerous elements of the maritime industry largely through the auspices of the U.S. Maritime Law Association. The concept was halted in the spring of 2000 when a coalition of carriers, concerned about the bill’s potentially imminent passage, issued a letter to Senator Hutchison objecting to it. Shipper interests, perhaps feeling protected from unreasonable liability terms by the current economic environment and negotiated liability provisions allowed by OSRA’s contractual freedom, have not exerted much effort since that time.

The COGSA reform bill’s proponents and opponents currently are focused on an international movement to draft a uniform liability regime that would be implemented through the United Nations. Drafts of the bill pending before the U.N. incorporate most, though not all, revisionary terms of the American COGSA reform bill.

A thorough analysis of proposed COGSA reform, even as it relates only to OTIs, is well beyond the scope of this paper. However, a few points are worth noting. Foreign intermediaries voiced considerable concern about proposed terms that would subject them to U.S. law and jurisdiction under an expanded definition of the "carriers" subject to COGSA’s dominion. Moreover, the bill would subject cargo loss/damage to COGSA even if the loss is sustained in non-ocean going segments of a transport (subject to caveats). The 1995 Sky Reefer decision,²² in which the U.S. Supreme Court validated foreign jurisdiction selection clauses in contracts subject to COGSA, would be legislatively vacated by proposed reform. This means that proposed COGSA amendments would subject foreign OTIs to lawsuits and potential liability in the U.S. under a wider variety of circumstances than currently is the case. International OTI groups are expressing their concern about these circumstances in both U.S. and international negotiations.

Conclusion

The OTI industry finds itself at a transition point. Future intermediaries focusing on international ocean transit will not be able to attract the same shipper customers they have in years past simply by offering them competitive rates otherwise unavailable directly through service contracts with carriers. However, the value added services OTIs are uniquely qualified to offer shippers will keep this business-savvy industry profitably afloat.

Carriers do not have the ability or inclination to offer the individualized service and attention shippers require. Cargo forwarding often involves intensely personal inter-relationships between transportation professionals and shippers with particularized needs. One whose vocation is analyzing and following industry trends in shipping can offer the information, counseling, and service that transportation consumers require; carriers are not in the business of selling this expertise. Only one intimately familiar with the transportation process can timely and efficiently solve the myriad problems and mishaps that inevitably occur during that process. Shippers and carriers are best served by engaging professionals qualified to attend to those essential tasks.

Successful OTIs of the future will focus on these advantages and market themselves accordingly. The industry as a whole must continue with its efforts at damage control in OSRA’s aftermath, supporting the efforts of trade organizations before the FMC and Congress. Shipping regulation is an evolutionary process, one in which OTIs are accustomed to surviving.