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03/08/67 States Marine Lines, Inc., v. Federal Maritime

March 8, 1967





STATES MARINE LINES, INC., and Global Bulk Transport

Conference, Intervenors 1967.CDC.49


Bazelon, Chief Judge, Edgerton, Senior Circuit Judge, and Wright, Circuit Judge.


Petitioners jointly operate an ocean common carrier known as States Marine Lines. They appeal from a final order of the Federal Maritime Commission approving a self-policing system adopted by two shipping conferences, the Trans-Pacific Freight Conference of Japan and the Japan-Atlantic and Gulf Freight Conference, intervenors here. Each Conference is comprised of a number of domestic and foreign carriers, *fn1 States Marine among them, that ply the trade between Japan and various United States ports. The Conferences, pursuant to approval granted by the Federal Maritime Commission under Section 15 of the 1916 Shipping Act, *fn2 are permitted to fix rates, as well as rules and regulations, that must be adhered to by Conference members. The Conferences' self-policing system with which we are presently concerned is intended to enforce that adherence, and has been, in one form or another, the subject of considerable litigation between these parties. As background, we review briefly the circumstances that have led to the present dispute.

A pervasive and perennial problem which has played havoc with the conference system generally has been that of the member who, in violation of the agreed-upon rate schedules, gives secret rebates or other concessions to a shipper in order to obtain its business. All of the numerous conferences have tried to devise effective self-policing systems to detect and punish such malpractices, without notable success. Much of the difficulty stems from the international scope of the shipping industry, a circumstance that not only augurs poorly for direct governmental policing and thus makes conference self-regulation desirable, but also places severe limitations on what the conferences themselves can realistically achieve by way of such regulation. *fn3 In 1961 Congress, although fully aware of the international implications involved in regulation, nonetheless expressed its concern over the industry's inability to curb malpractices and delivered a mandate to the conferences to make their self-regulation effective or risk disapproval of their conference agreements. *fn4

The origin of the policing system agreed upon by the Conferences here antedates Congress' mandate by several years; however, the modifications now in dispute are, of course, in part designed to satisfy Congress' call for effectiveness. The heart of the Conferences' policing system is the use of a so-called "Neutral Body" -- an international accounting firm selected by Conference members to investigate complaints of malpractice and to assess fines where called for. The first version of the system, adopted in 1958, required that the Neutral Body be absolutely free of any interest in or relationship with individual Conference members. A violation of this absolute-neutrality provision resulted in the invalidation of a series of fines levied against States Marine for alleged malpractices. See States Marine Lines, Inc. v. Trans-Pacific Freight Conference of Japan, 7 F.M.C. 204 (1962), aff'd sub nom. Trans-Pacific Freight Conference of Japan v. F.M.C., 9 Cir., 314 F.2d 928 (1963). A second version, as well as the third that is now before us, modified the neutrality requirement to permit disclosed professional relationships with members except where the relationship is with the company accused of malpractice. In addition, the system incorporates various rights, duties, and procedures relating to the initiation, investigation, and decision of complaints of malpractice -- some of which also have gone through several modifications.

In 1963 the Commission approved the Conferences' amendments embodying the second version of the system; States Marine appealed to this court, attacking the substance of the system as being fundamentally unfair and alleging certain defects relating to its method of adoption. In its brief, States Marine relied heavily on the then-recent Supreme Court decision in Silver v. New York Stock Exch., 373 U.S. 341, 83 S. Ct. 1246, 10 L. Ed. 2d 389 (1963). Because the Commission had not had the benefit of that decision when ruling on the merits of the system, we granted its request to "reopen and reconsider this case in light of Silver and to conduct such further proceedings as [the Commission] deems appropriate." Upon remand the Commission vacated the order approving the amendments and, after conducting further proceedings, approved the present version incorporating a third modification of the Neutral Body system.

States Marine renews its attack on the amendments, voicing substantially the same objections raised on its earlier appeal. Its primary contention is that the system is fundamentally unfair because it fails to provide an accused line adequate safeguards against abuse. The Government *fn5 strongly supports States Marine's position that the system is unfair, although not in as many particulars as States Marine would have us hold. We have concluded that certain aspects of the Neutral Body system are defective, and remand the case to the Commission for further consideration. In the interest of expediting this already lengthy litigation, we shall consider all of States Marine's objections and explain why we agree or disagree with them. *fn6 I

In brief, as it now stands the selfpolicing system -- or more specifically article 25 -- provides for the following procedures. The Neutral Body is selected by a two-thirds vote of the Conference members. It must disclose any present or future financial interests it may have in any Conference member, such an interest being a general disqualification. Likewise, it must disclose all business or professional relationships with members, but such relationships will be disqualifying only in those cases where the client is the accused. Once selected, the Neutral Body is authorized to receive written complaints of malpractice, to investigate the charges, and to assess and collect fines. In conducting the investigation, the Neutral Body may, without giving prior notice, call upon the accused and demand to see whatever records or other material the Neutral Body considers relevant; all members are obligated to cooperate in the investigation and must produce requested information. The identity of the complainant will be kept secret, and any evidence that would tend to reveal the complainant's identity will be withheld from the accused; however, the substance of the withheld evidence must be disclosed so the accused can rebut it. Once the investigation is completed the Neutral Body will notify the accused whether there are reasonable grounds to suspect malpractice, and the accused is given a specified time to prepare its defense. The accused is then entitled to a hearing before the Neutral Body, and has the right to counsel. The Neutral Body will not be restricted by legal rules of evidence or the burden of proof required in criminal or civil cases; rather it will employ rules of common sense -- that is, does the information developed persuade the Neutral Body that the malpractice occurred? Fines are to be assessed in accordance with a schedule setting forth certain maximum penalties, related to the number of times the member has been found guilty of malpractice -- $10,000 maximum for a first offense, and so on up to $30,000 for fourth and subsequent offenses; also, mitigating circumstances may be taken into account. Finally, the members agree that the Neutral Body's decision is to be "valid, conclusive and unimpeachable . . .." States Marine's objections place essentially all of these provisions in issue. But before we turn to these specific objections, we must first clarify the standard by which article 25 is to be judged.

All parties concede, as indeed they must, that whatever self-policing system is adopted has to accord an accused member fair treatment. In Silver v. New York Stock Exch. (supra) the Supreme Court held that it could find "no justification for anticompetitive collective action taken without according fair procedures. Congress in effecting a scheme of self-regulation designed to insure fair dealing cannot be thought to have sanctioned and protected self-regulative activity when carried out in a fundamentally unfair manner." 373 U.S. at 364, 83 S. Ct. at 1260. (Footnote omitted.) The same principle applies to the scheme of self-regulation instituted by the Conferences here. They, like the Stock Exchange in Silver, are allowed by Congress, in the public interest, to engage in anticompetitive collective action -- both in fixing rates and in enforcing compliance through self-regulation. Moreover, Congress quite clearly has not sanctioned unfair regulation. The express command of Section 15 of the Shipping Act is that no agreement be approved that is "unjustly discriminatory or unfair as between carriers . . .," or operates "to the detriment of the commerce of the United States," or is "contrary to the public interest . . .." 46 U.S.C. ยง 814. The question before us, therefore, is whether the self-policing system embodied in article 25 accords an accused Conference member "fair procedures."

In urging us to answer in the negative States Marine would have us impose upon the Conferences due process requirements that have evolved for judicial proceedings in criminal cases. But criminal due process standards do not apply in all other contexts. Instead, whether particular procedures are fair depends upon the particular institutional setting involved. For, as the Supreme Court has said of "due process" itself, "fairness" is "an elusive concept. Its exact boundaries are undefinable, and its content varies according to specific factual contexts." Hannah v. Larche, 363 U.S. 420, 442, 80 S. Ct. 1502, 1514, 4 L. Ed. 2d 1307 (1960). Because the context here is not a direct governmental action against someone accused of crime, but action of a private association in a regulated industry wielding economic power and engaging in certain types of congressionally sanctioned anticompetitive behavior, the procedural guarantees an accused enjoys when the full power of the government is arrayed against him need not control the Conferences' self-policing activities. On the other hand, neither can the Conferences be permitted the freedom of action traditionally accorded such voluntary private associations as church groups or social clubs. *fn7 Groups that wield economic power or exist solely for economic purposes have almost uniformly been held to a higher standard of procedural formality and regularity than voluntary non-economic organizations. *fn8 Shipping conferences cannot be realistically thought of as "voluntary" organizations in the usual sense. To say that a shipping company becomes a conference member voluntarily is usually to say that it cannot exist if it remains outside the conference. As anyone familiar with the shipping industry well knows, the conferences' monopoly power exercised through the dual rate system can as a practical matter work to compel conference membership. *fn9 Thus not only might a company have to join a conference, but it might well be forced to remain a member even though it finds the conditions of membership objectionable. Moreover, since the conferences in acting collectively do so presumably because the public interest demands or permits it, and in so acting are subject to regulation by the Commission, it would be less than candid to consider them as wholly "private" associations -- perhaps "semiprivate" would be a more accurate description.

When this complex of factors is taken into account, the principle becomes obvious that this kind of self-regulatory process must provide specific, realistic guarantees against arbitrary and injurious action. The Supreme Court applied this principle ...

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