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Transparency in shipping - Public comments to OSRA “unreasonable” refusal of vessel accommodations

Under the Shipping Act of 1916 (“The Shipping Act”), ocean shipping carriers have been largely exempt from U.S. antitrust enforcement. These exemptions apply to agreements on shipping rates, pooling arrangements, and shipping route allocations, provided that those agreements are submitted to the Federal Maritime Commission (“FMC”). Furthermore, under 46 U.S.C. § 40307(d), private parties may not recover damages under Section 4 of the Clayton Act for violations of the Shipping Act. In recent years, there has been a call to increase oversight in the shipping industry, as shown by the recent amendments contained in the Ocean Shipping Reform Act signed by President Biden.

The Ocean Shipping Reform Act of 2022 (“OSRA”) was signed into law on June 16, 2022. OSRA amended previous statutory language to provide that a common carrier “shall not unreasonably refuse cargo space accommodations when available, or resort to other unfair or unjustly discriminatory methods.” Additionally, a carrier may not “unreasonably refuse to deal or negotiate, including with respect to vessel space accommodations provided by an ocean carrier.” On September 21, 2022, FMC published a Notice of Proposed Rulemaking with respect to the meaning of “unreasonable” refusal by ocean carriers to provide vessel space accommodations to shippers under new shipping legislation. The FMC solicited comments from the public, with the Antitrust Division of the Department of Justice (“DOJ”) and many U.S.-based companies and trade organizations responded to the call in a positive manner.

(a) Responses to the Proposed Rule Change

U.S.-based companies and trade agencies welcomed the rule change, with many commenting on the need for increased transparency in the shipping industry. The challenges brought by the COVID-19 Pandemic shone a light on this issue for many with some commenters noting that during the Pandemic some vessels departed from U.S. ports without properly refilling their cargo, with some ships departing at merely 50-60% capacity.

The International Federation of Freight Forwarders Associations (“FIATA”) reported in its comment that as a result of this, “importers were…forced to resort to purchasing ocean freight service on the “spot market”—in some instances directly or indirectly from the very same Vessel Operating Common Carriers (“VOCCs”)…at prices that quickly skyrocketed to unprecedented multiples of historical rates.” Consumers ultimately experienced a lack of supply and price hikes because many industries could not properly ship or import goods. Many commentators emphasized that, without increased regulation and diligent oversight of common carriers, supply shortages and price hikes likely would continue, effecting both U.S. and foreign consumers.

The DOJ also welcomed the rule change, strongly supporting the FMC’s efforts to further regulate common carriers. The DOJ stated it had a “significant interest” in ensuring that vessel space accommodations were not unreasonably refused to U.S. shippers and noted that it was devoted to the protection of “competition in the shipping industry, which is essential to lowering prices, improving quality of service, and strengthening supply chain resilience.” The DOJ went one step further and in its response called for a removal of all antitrust exemptions in the shipping industry. The DOJ is not alone in seeking a repeal of all antitrust exceptions. H.R. 6864, or The Ocean Shipping Antitrust Enforcement Act, introduced this past February would repeal all antitrust exceptions for the shipping industry. The bill remains in committee, however, the increased focus placed on antitrust enforcement by both the Biden Administration and Congress suggest that the shipping industry may be subject to increased regulation regardless of the state of the bill.

(b) Proposed Amendments to the Rule

Many U.S. companies and the DOJ called for clarification regarding the proposed rule, asking the FMC to provide clear definitions for terms like “negotiate” and “deal” in addition to clarifying other proposed factors and definitions. Commentators also asked the FMC to provide more examples of both reasonable and unreasonable refusal to deal. Notably, one commenter called for the use of monetary penalties to deter common carriers from unreasonably refusing to deal. This new call for penalties would go beyond the civil penalty scheme put in place for violation of The Shipping Act. Under the current rule, knowing and willful violations of The Shipping Act may result in a maximum of $65,000 in penalties per day. By contrast, the proposed amendments suggest that the FMC consider, “the economic impacts…from the failure to negotiate on vessel,” in evaluating penalties, allowing shippers to be refunded for losses and additional costs.

The FMC’s call for public comments is now closed, and the FMC has until the end of this year to finalize its rulemaking on this issue. However, should the FMC wish to issue further regulations under OSRA, it has a three year congressional grace period to do so (until June 16, 2025).

To view all of the public comments submitted to the FMC, visit fmc.gov.

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transportation, transparency in shipping, shipping

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