Debates on shipping rebates spurred lawsuits, sensational marketing

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In this edition from the July 1975 issue of American Shipper, FreightWaves shares an article discussing a lawsuit against one company for a concept that was relatively common in the shipping industry at the time.

Topp Electronics is fined $75,000 for what a steamship line declares to be ‘the norm of this (Pacific) trade.’

The conference system was jolted from all sides last month with one carrier buying large display ads in New York papers to proclaim that “illegal rebating has become the norm in this trade” and a Miami district judge providing evidence that it could all be true.

Many of the arrows seem at first to be pointed toward the Russians, but the Soviets said their hands were clean and charged that the rebating was actually being done “by other operators including conference members.”

Some of the charges and countercharges involved rumors and perhaps even a little knife throwing. But in Miami, it was there for everyone to see. The defendant pleaded guilty.

The Miami case involved Topp Electronics Inc. and rebates on shipments which took place almost four years ago. It was by sheer coincidence that the case came to a head and U.S. District Judge Peter T. Fay imposed his sentence — a fine of $75,000 — only a few days after Pacific Far East Line had run its large display ads in the New York papers.

Deeply concerned over rebating, and the difficulty of obtaining evidence on which convictions can be obtained, Federal Maritime Commission Chairman Helen Delich Bentley seized upon the Topp Electronics case to set an example and issued a press release from Washington on the punishment handed down by Judge Fay.

Topp case

Topp Electronics, Inc. pleaded guilty to 15 out of 191 charges of taking rebates from Blue Sea Line on shipments from Hong Kong between August 1971 and May 1972. It paid a total fine of $75,000 based upon the maximum $5,000 fine allowed by law on each of the 15 counts in the guilty plea.

Assistant U.S. Attorney Clemens Hagglund, who handled the case, said, “The amount of the rebate was somewhat greater than the amount of the settlement but not substantially. The concessions were given because the proceedings would have been cumbersome and expensive.”

To press the matter in court, Hagglund said, it would have been necessary to bring people from the Far East to the United States to testify. The Federal Maritime Commission, the Justice Department, and the U.S. Customs Service believed that would have been difficult.

According to Hagglund, the rebates to which Topp Electronics pleaded guilty were brought to the attention of the FMC by the United States Customs Service, which stopped a person (not identified), returning to the United States with a large sum of money. He was questioned about the money by Customs agents. According to the attorney, this person explained that the money was a rebate and supplied papers to this effect.

Hong Kong shipments

The indictment, filed on April 10, 1975, listed 191 specific bills of lading on various Blue Sea Line ships between August 1971 and May 1972. The shippers were various firms operating in the Far East and manufacturing electronic products for the American market.

The indictment noted that Blue Sea Line was authorized by the Federal Maritime Commission under a joint service agreement to operate as a common carrier and was engaged in the transportation by water of property of foreign commerce to the United States. During the period, Blue Sea was represented by Butterfield and Swire, a Hong Kong company, and Bing Wooi Choy as agents for Blue Sea. The indictment went on to state:

“That on or about the dates hereinafter set forth in the Southern district of Florida the defendants, Topp Electronics, Inc., consignee, and Lazar Topp, a director, officer, and agent of consignee, did knowingly, willfully and unlawfully obtain and attempt to attain from Blue Sea Line transportation by water for property more specifically identified in counts 1 through 191, at less than the rates and charges which would otherwise be applicable by an unjust and unfair device and means, that is, by receiving and obtaining from agents of Blue Sea Line named (above) a rebate of a portion of the shipping charges for the transportation of said property …” in violation of Section 16 of the Shipping Act of 1960.

FMC statement

In issuing the press release on the Miami case, FMC described Topp Electronics as “a major importer of radios, and other electronic products from Hong Kong, Japan and other countries in the Orient. While their principal office is in Miami, Florida, it also maintains offices in Los Angeles, New York and Puerto Rico. The Commission said the Topp case was “part of the continuing effort to crack down when we can, against rebate practices.”

Just how extensive the practice is is anyone’s guess.

Newspaper ad

When Pacific Far East Line bowed out of the Eastbound Transpacific Freight Conference of Japan and Korea, PFEL President John I. Alioto said the action was based on indignation at the rebating in the U.S./Japan-Korea trade and the failure of Japanese and American flag carriers to find ways to compete with the Russian Fesco Line and other non-conference carriers.”

The surprising thing is that Alioto purchased display advertising space in the newspaper to state his case.

“This conference withdrawal is being made in order that we may pass on directly to shippers savings that are intrinsic in PFEL’s LASH system,” Alioto said in his ads. “The Eastbound Transpacific Freight Conference of Japan and Korea made real economic sense when all modes of shipping were identical. But now there are different ships to fit different types of cargo. Now one regulation that fits container shipping does not necessarily fit LASH shipping or other modes of shipping. As a consequence of this economic fact, illegal rebating has become the norm of this trade. As a consequence of the economic fact, the Russian Fesco Line has entered this trade carrying American and Japanese cargo at rates below those of the American and Japanese flag steamship companies.

“In an effort to compete with any flag carrier, Russian or otherwise, on an essential trade route of the United States, we have made this decision. We assure our shippers of our continued first-class liner service. And now at the best rates available in the trade.”

Other rumblings

In the Atlantic, meanwhile, Italian Line announced May 21 that it will resign from the North Atlantic Mediterranean Trade Conference (Eastbound) effective June 26. Rebating was not an issue in the Italian line announcement, but the line’s owner’s representative in New York, Capt. Nicola Arena, made it clear he was getting out of the Conference in order to make some adjustments which he could not do within the Conference structure. He said the conference “has not been fair to us” and said he felt the conference “should give a break to the new kid on the block.”

“We do not like to be part of a Conference and play games from the side,” Capt. Arena told newsmen. “We want to follow all the rules (and) if we cannot, we just feel it’s better to get out.”

It was just one more blow to the Conference system.

Soviet reaction

All of these things were happening as a Russian maritime delegation headed by Igor M. Averin, head of the Foreign Relations Department of the Ministry of the Merchant Marine, and George A. Maslov, chairman and managing director of Sovinflot, were in Washington negotiating an extension of the shipping agreement between the United States and Russia.

The present shipping agreement expires Dec. 31, and the two governments have been negotiating since last Autumn for a revision and extension on the agreement.

In a discreet way, the Russian negotiators were pleased over the turn of events. As Averin put it, “the present difficulties in the Pacific lines trade are attributable first and foremost to the regrettable flourishing of malpractice by shipowners operating in this area.”

Future?

Rebates are indeed a “custom of the trade” in many parts of the world but illegal in the United States. Just how the Federal Maritime Commission will go about stopping the practice is anyone’s guess. Seldom will FMC find another case as clean-cut as that involving Topp Electronics, or a company willing to enter a plea of guilty when the essential witnesses overseas cannot be forced to show up for trial.

FreightWaves Classics articles look at various aspects of the transportation industry’s history. Click here to subscribe to our newsletter!

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Editor: American Shipper Archives