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09/30/77 Sea-Land Service, Inc. v. Juanita M. Kreps

September 30, 1977







KREPS, Individually and as Secretary of

Commerce, et al. 1977.CDC.226

Rehearing Denied November 1, 1977.

Appeals from the United States District Court for the District of Columbia (D.C. Civil 74-786).


McGowan, Robinson and Wilkey, Circuit Judges. Opinion for the Court filed by Circuit Judge Wilkey. Dissenting opinion filed by Circuit Judge Robinson.


This appeal is from an order of the District Court (Robinson, J.) reversing the decision of the Maritime Subsidy Board (hereinafter the Board) to grant an amended operating differential subsidy contract to intervenor-appellant American President Lines, Ltd. *fn1 pursuant to the Merchant Marine Act of 1936 (the Act). *fn2 Before the Board can grant an ODS to a United States flag carrier, it is required by section 605(c) of the Act to find that "the service already provided by vessels of United States registry is inadequate. . . ." *fn3

The sole issue presented in this appeal is whether the Board can lawfully recognize transoceanic cargo carried by U.S. flag vessels between Canada and the Far East in making the finding as to the adequacy of U.S. flag service on a particular trade route. *fn4 The Board ruled that such cargo could be recognized for purposes of making the section 605(c) adequacy determinations; *fn5 the District Court reversed the Board on this point. *fn6 We conclude that the District Courts' interpretation of section 605(c) was in error and that the Board's position was a proper interpretation and application of the Act entitled to deference from the reviewing court. Accordingly, we reverse the order of the District Court and remand the case with instructions to affirm the Board's decision to grant the ODS application of APL. I. BACKGROUND

A. Statutory Framework.

The Merchant Marine Act of 1936 was enacted to foster the development and continued maintenance of a modern merchant marine fleet for the United States. *fn7 The Act's declaration of policy states that

It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine (a) sufficient to carry its domestic water-borne commerce and a substantial portion of the water-borne export and import foreign commerce of the United States and to provide shipping service essential for maintaining the flow of such domestic and foreign water-borne commerce at all times, (b) capable of serving as a naval and military auxiliary in time of war or national emergency . . .. *fn8

To accomplish these goals the Act establishes two subsidies for American shipping enterprises - the operating-differential subsidy that is the focus of this appeal, and a construction-differential subsidy that is not implicated in these proceedings. *fn9

The operating-differential subsidy is governed by Title VI of the Act. Under section 601(a) of the Act, the Secretary of Commerce is authorized and directed "to consider the application of any citizen of the United States for financial aid in the operation of a vessel or vessels, which are to be used in an essential service in the foreign commerce of the United States . . .." *fn10 The approval of an application for ODS is predicated on a determination by the Secretary that "the operation of such vessel or vessels in an essential service is required to meet foreign flag competition and to promote the foreign commerce of the United States"; that the applicant possesses the vessels and qualifications necessary to enable him "to meet competitive conditions and promote foreign commerce"; and that the subsidy is "necessary to place the proposed operations . . . on a parity with those of foreign competitors, and is reasonably calculated to carry out effectively the purposes and policy of this Act." *fn11

The term " essential service " is expressly defined in section 601(a) to mean "the operation of a vessel on a service, route, or line described in section 211(a) . . .." *fn12 Section 211(a) of the Act authorizes and directs the Secretary to determine

the ocean services, routes, and lines from ports in the United States, or in a Territory, district, or possession thereof, to foreign markets, which are, or may be, determined by the Secretary of Commerce to be essential for the promotion, development, expansion, and maintenance of the foreign commerce of the United States, and in reaching his determination the Secretary of Commerce shall consider and give due weight to the cost of maintaining each of such steamship lines, the probability that any such line cannot be maintained except at a heavy loss disproportionate to the benefit accruing to foreign trade, the number of sailings and types of vessels that should be employed in such lines, and any other facts and conditions that a prudent business man would consider when dealing with his own business, with the added consideration, however, of the intangible benefit the maintenance of any such line may afford to the foreign commerce of the United States, to the national defense, and to other national requirements13

If the Secretary approves the application for an ODS, a contract is entered into with the applicant for payment of the subsidy.14 The amount of the ODS is the excess of certain operating costs (wages, insurance, maintenance and repairs) incurred in the operation of the subsidized vessel over the estimated fair and reasonable cost of the same items of expense if the vessel were operated under the registry of a foreign country whose vessels are substantial competitors of the subsidized vessel.15 The subsidy contract specifies the trade route (the "essential service") for which the subsidy is authorized, including the number of vessels to be operated thereon, and the minimum and maximum number of outbound and inbound sailings by such vessels per year. Contracts are typically for 20-year terms.

Section 605(c) of the Act - the provision involved in this case - provides in pertinent part:

No contract [for ODS] shall be made . . with respect to a vessel to be operated in an essential service served by citizens of the United States which would be in addition to the existing service, or services, unless the Secretary of Commerce shall determine after proper hearing of all parties that the service already provided by vessels of United States registry is inadequate, and that in the accomplishment of the purposes and policy of this Act additional vessels should be operated thereon . . ..16

The Secretary of Commerce has interpreted this provision to cover significant changes in existing ODS contracts involving additional service (not only new ODS contracts); and to cover, among other things, additional sailings by existing subsidized vessels as well as the operation of additional vessels by existing subsidized lines.17

The effect of section 605(c) is thus to bar any increase in the maximum number of sailings specified in an ODS contract for a subsidized line operating in a particular trade route, if any other objecting American shipping company (subsidized or unsubsidized) operates U. S.-flag vessels in that trade route, unless the Secretary determines at a hearing that the existing service provided by all U. S.-flag vessels is "inadequate." Under a general guideline established by the Board, carriage by U. S.-flag vessels of less than 50 percent of the available waterborne U.S. foreign commerce on a particular trade route will be considered "inadequate." Carriage of 50 percent or more of the available U. S. foreign commerce by U. S.-flag vessels will be considered adequate unless a higher percentage is feasible.18

In summary, the Act authorizes the payment of ODS in order to promote the development of an American merchant marine, both for national defense purposes and to carry a substantial portion of this country's foreign commerce. ODS is authorized for U. S.-flag vessels in order to meet foreign flag competition and to carry U. S. foreign commerce in particular essential trade routes between American and foreign ports. Where competing U. S.-flag carriers operate, no ODS contracts may be executed, and no additional sailings by subsidized vessels can be authorized, unless existing services provided by all U. S.-flag vessels in a particular trade route are determined to be inadequate.

B. The Application by APL.

APL, a subsidized line, filed an application with the Board on 3 June 1971 requesting authority for additional sailings between ports in the Pacific Northwest of the U. S. and the Far East, within Trade Route No. 29.19 Trade Route No. 29 shipping service has been determined by the Secretary of Commerce to be an "essential service" under section 211(a) of the Merchant Marine Act.20 This Route is the ocean trade route between U. S. Pacific ports (in Alaska, Washington, Oregon, California, Hawaii, and U. S. islands lying between the United States and the Far East) and ports in Japan, Taiwan, Philippines, the Continent of Asia from the U.S.S.R. to Thailand, inclusive, and other Pacific Islands lying between the United States and the Continent of Asia.21

The principal American ports served by Trade Route No. 29 are Seattle and Tacoma (Washington), Portland (Oregon), and San Francisco and Los Angeles (California). There are two adjacent Canadian ports in the Puget Sound area, Victoria and Vancouver, in British Columbia. As a matter of practice, most U. S.-flag and foreign-flag trans-Pacific vessels which serve the American ports in Puget Sound, including the parties to this case,22 also serve one or both of these Canadian ports.

The APL application sought the approval of the Board for an increase in the maximum number of sailings by its vessels operating on Route 29 from 60 to 80 sailings per year. In consequence of converting four breakbulk freighters into containerships,23 APL proposed to revise its trans-Pacific service by instituting a weekly shuttle service between the Pacific Northwest and Japan (i. e., 52 round-trip sailings). In addition, APL proposed using 6 additional breakbulk vessels (5 having some container capacity), to institute 28 annual sailings (13-day frequency) from the Pacific Northwest to the Korea-Singapore range (involving Trade Route Nos. 29 and 17).24 APL expected that the latter vessels would be converted to partial or full containerships by 1975. Since these containerships are capable of being loaded and unloaded faster than breakbulk vessels, and are faster, APL could expect to increase its sailings from 60 to 80 per year without any increase in the number of its vessels.

Since no increase in the number of vessels was requested in this application, no increase in the amount of ODS was involved.25 The increase in the number of sailings was, however, deemed by the Board sufficient to require notice and opportunity for hearing under section 605(c) of the Act.

C. Factual Basis Underlying the Dispute.

The dispute in this case centers around the particular technique (the formula) used by the Board in making the section 605(c) adequacy determination. At this stage in the litigation there is no dispute as to the underlying data to be used in the formula that is chosen; the dispute is solely over the proper formula to apply to these undisputed facts. Since the data as to projected capacity and cargo are central to all phases of this case, we provide that data at this point and reserve our discussion of the proper calculation technique for Part II of this opinion.

In discussing the data involved in this case, there are two sets of figures that are relevant to a determination of adequacy. The first is the available capacity of the ships serving the particular geographical area in question; the second is the available cargo to be carried to or from that geographical area. There is no dispute that it is the ratio of capacity to cargo that yields the relevant percentage in determining the adequacy of U.S.-flag service. Rather the controversy revolves around the correct method of determining the available capacity of U.S.-flag vessels.

The Board projected that, for calendar year 1975, 755,000 long tons of containership cargo26 would be available for shipment from the Far East inbound to American ports in the Pacific Northwest portion of the Trade Route No. 29.27 The Board's figures also showed that a total of 336,000 long tons of containership cargo would be available for shipment from the Far East inbound to the Canadian ports off Puget Sound.28 The combined projected available inbound containership cargo for this particular sea route was thus 1,091,000 long tons for 1975.

The Board's figures revealed that the projected net cargo-carrying capacity of the inbound containerships of all U.S.-flag operators serving the Pacific Northwest portion of Trade Route 29 would be 432,000 long tons for 1975.29 It is important to note that this figure was based on the assumption that no applications for increased sailings, such as made by APL, would be granted. In addition to this U.S.-flag capacity, the Board projected that the capacity of the containerships of all foreign-flag operators serving the inbound Pacific Northwest portion of Trade Route 29 would be 595,000 long tons for 1975.30 Thus, according to the Board, the total inbound net cargo capacity for all U.S. and foreign-flag containerships on the relevant portion of Trade Route 29 was projected to be 1,027,000 long tons for 1975. Quite significantly, this projected capacity was less than the projected available inbound cargo of 1,091,000 long tons for 1975.31 Now that these figures relating to available capacity and cargo have been presented, we can proceed to describe how the raw data was treated in the proceedings at the agency level and in the district court.

D. The Agency Proceedings.

1. The Initial Agency Decision. The application by APL was consolidated with the applications of other subsidized lines for additional service on Trade Route No. 29. The U.S. flag carriers operating at the time on the Pacific Northwest portion of Trade Route 29 were APL (subsidized), States Steamship Company (subsidized), and Sea-Land Service, Inc. (unsubsidized). Sea-Land Service, Inc., the appellee in this case, intervened in the proceedings to oppose the applications under section 605(c) of the Act. Sea-Land contended that the service already provided by vessels of United States registry on the Pacific Northwest ...

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