Service Contracts

FEDERAL MARITIME COMMISSION

46 CFR Parts 514 and 581

[Docket No. 92-31]

Service Contracts

AGENCY: Federal Maritime Commission.

ACTION: Proposed rule; withdrawal.

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SUMMARY: The Federal Maritime Commission is discontinuing this

rulemaking proceeding. An analysis of the comments received reveals no

need for the Rule as proposed. The Commission will continue to address

specific situations on an ad hoc basis.

DATES: This action is effective February 2, 1994.

FOR FURTHER INFORMATION CONTACT:

Robert D. Bourgoin, General Counsel, Federal Maritime Commission, 800

North Capitol Street, NW., Washington, DC 20573, (202) 523-5740.

SUPPLEMENTARY INFORMATION: The Federal Maritime Commission (``FMC'' or

``Commission'') initiated this proceeding by an Advance Notice of

Proposed Rulemaking (``ANPR''), published in the Federal Register on

June 8, 1992, 57 FR 24220. Following comments on the ANPR, the

Commission published a Notice of Proposed Rulemaking (``Proposed Rule''

or ``NPR'') in the Federal Register on November 3, 1992, 57 FR 49665.

The NPR stated that the Commission was proposing to amend the

definition of the term ``shippers' association,''\1\ contained in its

service contract and Automated Tariff Filing and Information System

(``ATFI'') rules, to indicate that a group of shippers would be

considered a shippers' association if it met certain requirements. In

addition, the proposed definition further clarified the terms

``consolidates'' and ``nonprofit basis'' as used in the subject

definition.

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\1\Section 3(24) of the Shipping Act of 1984 (``1984 Act''), 46

U.S.C. app. 1702(24), defines a shippers' association as:

``* * * a group of shippers that consolidates or distributes

freight on a nonprofit basis for the members of the group in order

to secure carload, truckload, or other volume rates or service

contracts.''

The Commission's present service contract and ATFI regulations

simply restate the statutory definition. 46 CFR 514.2, 581.1(r).

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The Commission received 15 comments in response to the NPR.

Commenters supporting the Proposed Rule are:

(1) Conagra, Inc.;

(2) Household Goods Forwarders Association of America, Inc.

(``HHGFAA'');

(3) Society of the Plastics Industry, Inc. (``SPI'');

(4) Cone Mills Corporation (``Cone''); and

(5) United States Department of Justice (``DOJ'').

Commenters supporting the Proposed Rule, but suggesting

clarifications are:

(1) American Institute for Shippers' Associations, Inc. (``AISA'');

(2) Fashion Accessories Shippers' Association, Inc. (``FASA'');

(3) National Industrial Transportation League (``NITL''); and

(4) American Import Shippers Association (``Import S.A.'').

Commenters opposed to the Proposed Rule are:

(1) Transpacific Westbound Rate Agreement (``TWRA'');

(2) Trans-Pacific Freight Conference of Japan and Japan-Atlantic

and Gulf Freight Conference (``Japan Conferences'');

(3) a group of nine conferences of ocean common carriers (``Nine

Conferences'');\2\

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\2\The eight conferences originally submitting comments are:

Asia North America Eastbound Rate Agreement; ``8900'' Lines; Israel

Trade Conference; South Europe/USA Freight Conference; United States

Atlantic and Gulf Ports/Eastern Mediterranean North African Freight

Conference; United States/Southern Africa Conference; United States/

East Africa Conference; and U.S. Atlantic and Gulf/Western

Mediterranean Rate Agreement. After the comment period closed, the

U.S. Atlantic & Gulf/Australia-New Zealand Conference joined in

these comments.

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(4) Hanjin Shipping Co., Ltd. (``Hanjin'');

(5) a group of 14 South/Central American and Caribbean Conferences

(``South American/Caribbean Conferences'');\3\ and

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\3\Venezuelan American Maritime Association; Atlantic and Gulf/

West Coast South American Conference; United States/Central America

Liner Association; Central America Discussion Agreement; United

States Atlantic & Gulf/Hispaniola Steamship Freight Association;

Hispaniola Discussion Agreement; United States Atlantic Gulf/

Southeastern Caribbean Steamship Freight Association; Southeastern

Caribbean Discussion Agreement; Jamaica Discussion Agreement; United

States/Panama Freight Association; PANAM Discussion Agreement;

Puerto Rico/Caribbean Discussion Agreement; Caribbean and Central

American Discussion Agreement; and Inter-American Freight

Conference.

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(6) Fritz Companies, Inc. (``Fritz'').

Positions of the Commenters

A. Comments Supporting the Proposed Rule

Cone supports the Proposed Rule because it believes it will enable

Cone to move cargo to emerging countries where its volume alone is not

sufficient to justify a service contract. Conagra likewise believes

that the Proposed Rule will make it possible for shippers with

complementary traffic to present a carrier with a more attractive

traffic profile than each could present separately. It contends that to

the extent such traffic can be handled more efficiently, the carrier's

handling costs will be reduced. Conagra suggests that concerns about

the lawfulness of the proposal are without merit and that it raises no

valid antitrust concerns.

HHGFAA notes that presently, non-vessel-operating common carriers

(``NVOCCs'') can combine their cargo to achieve containerload rates. It

perceives no reason why these arrangements between NVOCCs should not

serve as a basis for negotiating service contracts without the

administrative burden and expense of establishing a formal shippers'

association. Allegedly, an agreement containing terms set forth in the

Proposed Rule would meet the 1984 Act's definition of a shippers'

association.

SPI notes that there is no requirement in the 1984 Act that

shippers form a separate corporate entity to operate as a shippers'

association and that the Commission has not required shippers'

associations to be structured in any particular manner. It views the

Proposed Rule as presenting shippers with a variety of options in

forming shippers' associations, which it argues would be consistent

with the policies of the 1984 Act.

DOJ contends that the Proposed Rule simply reflects past Commission

policy, and that it is a reasonable interpretation of legislative

intent that is well within the Commission's rulemaking discretion. DOJ

believes that the Proposed Rule is likely to promote efficiency. It

suggests that regulatory impediments may be discouraging the formation

of shippers' associations, noting that only one percent of service

contracts are with shippers' associations. DOJ advises that the

Proposed Rule will not create substantial antitrust risks for either

carriers or shippers. As for carriers, DOJ notes that their statutory

antitrust immunity is determined by compliance with the terms of the

1984 Act and it would not be diminished if shippers were in violation

of the law. DOJ explains that the formation and operation of a

shippers' association ordinarily creates no antitrust concerns.

B. Comments Supporting the Proposed Rule With Modifications

As it did in its comments on the ANPR, NITL favors permitting two

or more shippers to enter into a joint service contract, regardless of

whether they are members of a shippers' association. It believes that

the Proposed Rule will still inhibit a large number of small and

medium-sized shippers from accessing joint service contracts. NITL

claims that two or more shippers would be required to operate as a de

facto shippers' association in order to access a service contract. NITL

further suggests that the standard for ``nonprofit basis'' is unclear

and may also inhibit shippers. Lastly, NITL recommends that the process

for memorializing the provisions for apportioning liability and

authorizing the execution of a service contract should be left to the

contracting parties.

AISA finds the Proposed Rule helpful in that it clarifies that

``rate negotiator'' shippers' associations are bona fide shippers'

associations under the 1984 Act, and that they do not require

Government review. AISA contends, however, that Proviso (2) of the

Proposed Rule, which requires that shippers' association agreements

indicate which parties have the authority to execute a service contract

on behalf of the combination, inadvertently limits the function of a

shippers' association to solely that of negotiating and executing

contracts. AISA further claims that Proviso (3), which requires the

agreements to indicate whether liability is apportioned among the

combination members, should be eliminated. AISA is concerned that

Proviso (3) will foreclose other valid options for addressing

membership liability and that carriers may use it to impose unilateral

membership liability contract terms on shippers' associations. Lastly,

AISA suggests that the clarification of ``consolidates'' be modified to

include both ``rate negotiator'' and ``full service'' shippers'

associations.

FASA contends that the rule should specify a written agreement, and

that any such agreement should be signed prior to negotiation or

execution of a service contract. FASA notes that Proviso (3) of the

Proposed Rule does not require that the agreement include an

apportionment method but rather indicate only whether liability is

apportioned. It suggests that this may result in simple ``yes'' or

``no'' answers. FASA also believes that the phrase ``profit-making

enterprise'' is misleading and should instead read ``* * * is not

organized for the purpose of profit.'' Lastly, FASA asserts that NVOCCs

should not be eligible to form or join shippers' associations.

Import S.A. likewise believes that the requisite agreement forming

a shippers' association should be in writing and concluded prior to and

independent of the execution of any service contract. Import S.A.

suggests that the term ``nonprofit basis'' could use some

clarification. It notes that an association organized on a nonprofit

basis may in fact earn a profit during a particular period. It

suggests, therefore, that the words ``it simply requires that an

association itself not be a profit-making enterprise'' be deleted or be

amended to state ``it simply requires that the association be organized

on a nonprofit basis.'' Like FASA, Import S.A. also maintains that

NVOCCs should be prohibited from forming or participating in shippers'

associations.

C. Comments Opposing the Proposed Rule

The Nine Conferences contend that the Proposed Rule expands the

meaning of ``shippers' association'' beyond the plain meaning of the

1984 Act and the intent of Congress. They explain that Congress

explored many ways to balance the power of ocean carriers with the

interests of small and medium shippers. One approach was antitrust

immunity for shippers' councils, but this was rejected by the House.

Another alternative, which arose in the Senate, was the shipper joint

venture. As described by the None Conferences, this would have

permitted loose affiliations of shippers, without any central

organization and operating on their own behalf, to obtain service

contracts. The conferences suggest that this concept is very similar to

that advanced by the Proposed Rule. Congress is said to have

specifically rejected shipper joint ventures and replaced that

proposal, in Conference Committee, with shippers' associations.

The Nine Conferences also point out that the definition of

shippers' association refers to a ``group'' of shippers, and concludes

that this contemplates an organization or entity separate and apart

from the members, which performs functions on behalf of members. In

contrast, they maintain that, under the proposed definition, there is

no requirement of a group or entity acting on behalf of the members,

and consolidation of cargo would be in name only. The Nine Conferences

are of the opinion that under the Proposed Rule, any shipper could

force negotiations with a carrier simply by joining together with

another shipper. Allegedly, section 10(b)(13) of the 1984 Act\4\ was

not intended to extend this far.

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\4\Section 10(b)(13) states that no common carrier may ``refuse

to negotiate with a shippers' association.'' 46 U.S.C. app.

1709(b)(13).

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The Japan Conferences argue that there is no statutory authority

for joint service contracts or for substituting a mere shippers'

agreement for a shippers' association. They contend that the Proposed

Rule would weaken and undermine existing shippers' associations. They

submit that Congress, in approving shippers' associations, envisioned

ongoing, reliable shippers' associations subject to the internal

discipline of an association. The Japan Conferences believe that it is

currently easy to join bona fide shippers' associations and

consequently suggest that there is no need for any liberalization. The

South American/Caribbean Conferences likewise contend that it is not

necessary to clarify that multiple shippers may form or operate a

shippers' association, as shippers of all sizes have been doing so

since enactment of the 1984 Act.

Fritz opposes the Proposed Rule because it perceives it as allowing

combinations of shippers or joint ventures to be treated as shippers'

associations although they are not. It notes that the definition of

``shipper'' refers to a person for whose account transportation is

provided and concludes therefore that a shippers' association must act

as a single entity. In addition, Fritz expresses concern about the

possibility that a ``me-too'' shipper will be able to access the rate

and volume of only one of the combination shippers rather than the

entire obligation of the combination.

Hanjin suggests that the stated purpose of the Proposed Rule--to

permit multiple shippers to enter into joint service contracts--is

beyond the Commission's authority. Hanjin contends that there would

essentially be no requirements for the formation of an association and

that one could be formed by a one or two-sentence agreement. Hanjin

contends that the proposal would make enforcement of shipper contract

obligations increasingly burdensome for carriers. Hanjin notes that if

the agreement among the members allows for the apportionment of

liability, each shipper in effect has its own minimum volume and the

carrier has the burden of enforcing portions of a single contract

against different parties. On the other hand, if a carrier refuses to

permit apportionment of liability, Hanjin suggests that it may be

subject to claims of refusing to negotiate.

TWRA contends that the word ``combination'' is vague and

substantially more inclusive than ``association,'' a term, it claims,

has distinct legal meaning and consequences. It states that all

associations are combinations, but not all combinations are

associations. TWRA advises that both incorporated and unincorporated

associations have legal status, obligations, and rights among the

members and also in relation to third parties. A ``combination'' is

said to have no legal definition similar to an association and to

create no definitive similar to an association and to create no

definitive rights or obligations.

Noting that the Proposed Rule does not require a written document

forming a shippers' association, only an ``agreement,'' TWRA takes the

position that such an association would have no permanence, structure,

or articles of association to establish control of the association and

its nonprofit status. In this regard, TWRA points out that the

definition of ``shippers' association'' is an almost verbatim

restatement of a term used in the Interstate Commerce Act for many

years. TWRA advises that the ICC requirements for a shippers'

association are:

(1) That there be an association;

(2) That it consolidate or distribute freight on behalf of its

members; and

(3) That it have a formal, continuing structure that shows it is a

nonprofit association controlled by its members.

Discussion

Upon review of the comments in this proceeding and a reevaluation

of the concerns that prompted this proposal, the Commission has

concluded that no final rule is warranted. The legal objections to the

Proposed Rule have presented close and difficult questions. These

questions need not be resolved at this time, however, because there are

practical and policy concerns that counsel against additional

regulations affecting service contract negotiations between carriers

and shippers' associations.

As indicated in the Report of Commissioner Ming C. Hsu, the

investigative Officer in Fact Finding Investigation No. 20, Service

Contract Negotiations with Shippers' Associations and Non-Vessel-

Operating Common Carriers, issued September 21, 1993, the service

contract system appears to be working reasonably well as a general

matter. In addition, under the present regulations that merely restate

the statutory definition of ``shippers' association,'' shippers have

been able to form shippers' associations without apparent undue

difficulties. If such an association meets the brief statutory

definition, it is free to operate unimpeded by any additional

regulatory requirements. By contrast, it appears that the Proposed Rule

could create confusion where none presently exists. We note, for

example, that even some of the supporting comments opposed specific

provisions of the Proposed Rule on the ground that they might be

counterproductive or unnecessarily burdensome. Discontinuation of this

proceeding without imposing regulations will maintain the status quo in

the area of service contract oversight, while allowing the Commission

to address specific situations as they arise on an ad hoc basis. We

are, accordingly, discontinuing this proceeding without issuing a final

rule.

Therefore, it is ordered, That this proceeding is discontinued.

By the Commission.

Joseph C. Polking,

Secretary.

[FR Doc. 94-2326 Filed 2-1-94; 8:45 am]

BILLING CODE 6730-01-M