Flashback to enactment of Shipping Act of 1984

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In this week’s edition from the April 1984 issue, we take a step back in time to when the Shipping Act of 1984 was put into place. 

Maritime reform

Even discounting political rhetoric, clearly, the Shipping Act of 1984 will bring about major changes in the U.S. liner trades. The breadth and rate of change will not be determined solely by the Act itself; however, it will depend in large part on the implementing actions of the Federal Maritime Commission and the responses of carriers and shippers.

The major provisions of the Act, the opportunities they present, and some of the issues they raise are the focus of this article, but first, we offer a few general observations about the legislation.

That the Shipping Act of 1984 should have occurred at all is noteworthy. Measured by any current political yardstick, it is unusual, perhaps unique, legislation. Its philosophy and approach are almost diametrically at odds with the recent and more highly publicized “deregulation” statutes affecting the U.S. domestic airline, trucking, and railroad industries.

The new Shipping Act provides ocean common carriers operating in foreign commerce with more, not less antitrust immunity for their joint activities, including collective ratemaking. At the same time, it leaves in place a significant number of regulatory requirements and the regulatory agency (Federal Maritime Commission). By contrast, the domestic airline, trucking, and rail deregulation statutes greatly reduced carrier antitrust immunity (particularly for collective ratemaking), reduced sharply the number and scope of regulatory requirements, and either curtailed agency authority (Interstate Commerce Commission) or phased out the agency itself (Civil Aeronautics Board).

Precisely why Congress took this markedly different approach in the Shipping Act — and did so overwhelmingly — is a matter of political interpretation, but several considerations stand out. There was general agreement that the existing FMC regulatory system had become outmoded. The industry was and continues to be mired in the worst recession in memory. The carriers strongly pursued legislation, believing that while regulatory reform would not eliminate overcapacity or the worldwide recession, it would better equip them to cope with the dreary economic conditions. And the truly international character of ocean shipping played an important role in distinguishing it, in the eyes of the Congress, from the deregulated domestic airline, trucking, and rail industries.

Perhaps above all, the Congress passed the bill by such a clear margin because there was no out-and-out opposition to it. The Reagan Administration, through the Department of Transportation, took a unified position in support of most of the carrier-initiated reforms, thus precluding separate opposition from the Justice Department. By the time Congress reconvened in January of this year, the earlier and sporadic opposition to the bill from a consumer group and a few academics had disappeared. And, of critical importance, the users of the service, the shippers, did not oppose the legislation. Instead, they opted to support it — for a price. In particular, shippers sought and achieved new rights in negotiating with carriers and conferences and new restrictions on conference power.

The net result is that, under the new Shipping Act, ocean common carriers and conferences are given greater freedom at least initially to enter into cooperative agreements without extensive governmental preclearance or antitrust exposure. The trade-off is that carriers’ arrangements are now subject to greater commercial regulation by their shipping customers, who are provided by the Act with new legal rights. So ocean common carriers now move into an era of less government but more “marketplace regulation.”

Despite the significance of these changes, the Shipping Act of 1984, though lengthy, is not a complete rewrite of the 1916 Shipping Act, as amended (“the present law” or “present Shipping Act”). Interestingly, the basic elements of the present law are maintained. The more radical proposals were, one by one, discarded in the legislative process. Proposals to abolish the tariff system were rejected, as were suggestions to close conferences. Carrier antitrust exposure is not completely eliminated. Nor is carrier antitrust immunity phased out. The FMC remains as the regulatory agency charged with preventing carriers from engaging in practices Congress believes harmful to the foreign commerce of the United States. Thus, many of the new Act’s provisions simply restate and continue present law, while others reflect relatively minor changes.

But the Shipping Act of 1984 does contain many important new provisions, and the balance of this article will focus on the changes of broad interest.

Clear authority for intermodal conference agreements

The new legislation finally, and quite belatedly, catches up with the container revolution. In an era where container carriers offer inland routings and shippers have shown ever-increasing interest in purchasing intermodal, rather than port-to-port transportation, it is significant that the new law clearly provides that conferences may receive authority and antitrust immunity to set rates for intermodal services. The Department of Justice has disagreed with the FMC’s conclusion that, under the present Shipping Act, the FMC has authority to approve conference intermodal agreements. This difference of opinion between the two agencies has not been resolved by the courts. The new Act resolves this point in favor of intermodal authority. Combined with provisions relaxing government review of agreements, this change gives carriers a chance to compete for shippers’ intermodal cargo through the conference system. While there are no guarantees that intermodal traffic will be attracted to conference tariffs, this opportunity is critical to conferences. For it is no exaggeration to say that, without intermodal authority, it is unlikely that the conference system could survive.

The legislation also makes clear the precise nature of a conference’s intermodal rate-making authority. Under the new law, conference members may not agree on what are now called “inland divisions,” the amount that an ocean carrier pays to surface carriers to provide the ocean carrier with the inland U.S. transportation which the ocean carrier offers to shippers as part of a through movement. Ocean carriers must negotiate “inland divisions” individually with U.S. inland carriers. Ocean carriers may, however, discuss and agree upon what is now called the “inland portion” of an intermodal rate, the amount they charge to shippers for the inland service. Thus, with the new Shipping Act, it is finally clearly recognized that ocean carriers, which have been offering inland services to shippers for over twenty years, are in that business.

A new general standard eliminates a key obstacle to carrier agreements

The new Shipping Act establishes a new and more relaxed substantive standard to be applied in government review of agreements. Under the present law, the FMC may determine not to approve an agreement, even if it would comply with all other provisions of the Shipping Act, if the agency deems that the agreement is not in the “public interest.” This public interest standard, often referred to as a “general standard,” has been interpreted by the FMC and courts as giving very significant weight to the policies of the antitrust laws — policies which, to say the least, treat agreements between companies in the same industry with great skepticism.

The new general standard, section 6(g), allows the government to enjoin “substantially anticompetitive agreements,” those which are determined “likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost.” While retaining some focus on competition, this test differs significantly from the public interest test. In particular, the legislative history behind section 6(g) makes clear that this new test removes any per se condemnation of collective activity such as might be applied under the antitrust laws. In the view of the authors of the provision, because of this shift from antitrust policies, the new standard “establishes a threshold for prompt approval of most generally accepted joint conduct in ocean shipping.” Conference Report, Shipping Act of 1984, H.R. Rep. No. 98-600, p. 32 (Feb. 22, 1984).

Thus, while the new general standard leaves some room for agreements to be disapproved, it represents a very considerable shift from past practice.

Major procedural changes in government review of carrier agreements

The new Shipping Act also makes major changes in the procedure for government review of carrier agreements. Under the present Act, the parties to an agreement may not implement it until it is approved by the FMC — and there is no time limit on FMC review of a proposed agreement. Thus, under the present system, agreements not infrequently remained before the Commission for years before a decision was reached. Carriers were discouraged from entering into agreements, sometimes believing that, by the time an agreement was approved, it could lose its commercial relevance.

The idea of the new law is that the government must act promptly and allow most agreements to be implemented promptly. And, even if the government decides to enjoin implementation of an agreement, it must reach that decision promptly, so that carriers will know where they stand and whether they should develop alternative approaches to business conditions.

Thus, the new law establishes, in section 6, that agreements do not require FMC approval before they go into effect — an agreement automatically goes into effect on the 45th day after filing unless, before that 45th day, it is either specifically enjoined or the FMC utilizes its power to extend the 45-day period by requesting additional data from the parties to the agreement. And the FMC itself no longer has authority to disapprove agreements. The power to enjoin agreements is given to the Federal courts in Washington, D.C., with the FMC having the burden of persuading the court that an agreement should be enjoined.

The novelty of this approach should not be missed. Under the new Act, the FMC, the nation’s expert agency on ocean shipping, cannot make the final decisions on carrier agreements which it deems undesirable; that task is given to a Federal judge, who may well have little knowledge of ocean shipping. The FMC does, however, have the authority to determine not to go to court, in effect approving agreements to which it does not object. That the FMC does not have the final say-so on all agreements also opens up the possibility that the agency will negotiate settlements with the proponents of an agreement before or after it files suit in court. Under present law, where the FMC is the decision-maker, negotiated settlements are virtually impossible.

One aspect of the new procedure creates a possibility for delay. As noted, section 6 provides the FMC with authority to request additional information from the proponents of an agreement. This authority was provided by Congress to allow the Commission to make a more informed decision as to whether an agreement should be challenged in court. This authority supplements authority provided in section 5(a), which allows the Commission to require that data be submitted with an agreement when it is filed. To the extent the FMC chooses to make supplemental data requests, the ability of carriers to promptly put into effect desired agreements will be delayed, as it will take time for the parties to respond to such requests (just as it will take parties time to assemble any data which the FMC may require to be filed with the agreement). 

However, the legislative history of the Shipping Act is clear that the Congress does not intend for the Commission to make excessive data requests, or make more than occasional use of this authority. How the FMC seeks to harmonize its appetite for data in support of an agreement with the Congressional objective of prompt implementation of agreements will be one of the more interesting developments under the new Act.

On the other hand, yet another major change will tend to expedite implementation of agreements. The new Act flatly denies interested third parties, including competitors, any right to force the FMC to go to court or any right to intervene in court proceedings where the FMC is challenging an agreement on the grounds that it does not meet the new general standard. This change will presumably end the single largest source of litigation under present law, namely, protests by carriers seeking to prevent (or at least delay) competing carriers from forming joint services, space charters, and similar arrangements. Under the new Act, third parties may advise the FMC of their views as to how an agreement should be treated under the new general standard, but it is solely up to the FMC to determine whether an agreement should be challenged in court.

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Editor: American Shipper Archives