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AERON MARINE SHIPPING CO. v. UNITED STATES

October 21, 1981

AERON MARINE SHIPPING CO., et al., Plaintiffs,
v.
UNITED STATES of America, et al., Defendants, and American Maritime Association, Defendant-Intervenor



The opinion of the court was delivered by: JOHNSON

MEMORANDUM OPINION

This case presents an issue involving the interaction of certain provisions of the Merchant Marine Act of 1936 (the Act), *fn1" its 1970 Amendments, *fn2" and various Acts which provide preferences for American-flag ships for the carriage of certain cargo. *fn3" Before detailing the procedural posture of the instant litigation, it appears necessary to discuss the major congressional objective of the 1970 Amendments to the Act. To build a strong merchant marine, Congress in 1936 provided for operating differential subsidies (ODS) *fn4" for United States-flag, liner vessels. While most foreign trade in 1936 was of a break bulk variety transportable in liner vessels, most foreign trade in 1970 was carried by foreign-flag bulk carriers. *fn5" The few existing American bulk carriers were engaged almost exclusively in the carriage of preference cargoes at premium freight rates paid by the government as an indirect subsidy to offset higher United States-flag operating costs. To encourage the operation of American bulk carriers in foreign commercial trade, Congress in the 1970 Amendments extended the ODS to bulk carriers. *fn6"

 One of the issues left unresolved by Congress in the 1970 Amendments was whether subsidized carriers *fn7" could carry preference cargoes. *fn8" In June 1972, the Maritime Subsidy Board (MSB) concluded that subsidized carriers could participate in the preference trades under certain conditions. *fn9" Both the D.C. and Ninth Circuits subsequently upheld the MSB's order, which removed a significant barrier to the entry of subsidized carriers in the preference trades. *fn10" Nevertheless, other legal requirements had to be satisfied before the MSB would permit a subsidized carrier to enter the preference trades.

 On April 18, 1978, Aeron Marine Shipping Co. (Aeron) and five other subsidized bulk contractors *fn11" filed applications with the MSB in which they sought to remove restrictions in their existing ODS agreements barring the carriage of dry bulk preference cargo reserved for United States-flag carriers. *fn12" After the timely submission of comments by various organizations including the American Maritime Association (AMA), the MSB held an expedited one-day hearing, pursuant to the stipulation of all parties, *fn13" under § 605(c) of the Act. *fn14" On September 8, 1978, the MSB found, inter alia, that § 605(c) was no bar to the carriers' applications because United States-flag service in the bulk preference trades was and would continue to be inadequate and the operation of the applicants' seven vessels would further the accomplishment of the purposes and policy of the Act. *fn15"

 Despite clearance of the 605(c) barriers, the applicants still had to satisfy other statutory requirements *fn16" which were reserved by the MSB in its 605(c) opinion for later consideration. *fn17" After an initial consideration of these non-605(c) issues, the MSB on March 16, 1979, issued a tentative opinion and order in which it denied all of the applications except those of the two vessels operated by Aeron. *fn18" In addition, the MSB granted Aeron's application on the condition that Aeron would charge world rates for the carriage of preference cargoes. *fn19" The MSB then invited comments on the tentative opinion and, following consideration of the comments, issued a final opinion on June 15, 1979, which adopted all the material findings of the tentative opinion. *fn20" Aeron and the five unsuccessful applicants filed suit on August 3, 1979, against the United States, challenging the MSB's authority to exclude five ships from the preference trades and to impose conditions on the rates that the two Aeron vessels could set for the carriage of preference cargoes.

 The case is now before the Court on cross-motions for summary judgment. After plaintiffs' cross-motion was filed, AMA, an active participant in all phases of the administrative proceeding underlying the MSB decision, was permitted to intervene in this litigation. AMA then filed a memorandum in support of defendants' motion for summary judgment and in opposition to plaintiffs' cross-motion for summary judgment.

 DISCUSSION

 I. Standard of Review Under the Administrative Procedure Act

 A reviewing court under the APA must set aside agency action found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law," 5 U.S.C. § 706(2)(A) (1976), or contrary to constitutional, statutory, or procedural mandates. See 5 U.S.C. § 706(2)(B), (C), (D) (1976). In two other narrowly defined instances, agency action must be set aside if the court finds that the action was not supported by "substantial evidence," 5 U.S.C. § 706(2)(E) (1976), or if, after a trial de novo, the court concludes the action was "unwarranted by the facts." 5 U.S.C. § 706(2)(F) (1976). The substantial evidence standard applies only to cases where agency action is predicated upon a public adjudicatory hearing (5 U.S.C. §§ 556, 557 (1976)), or where agency action is taken after a rulemaking hearing required by statute (5 U.S.C. § 553 (1976)). See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 414, 91 S. Ct. 814, 822, 28 L. Ed. 2d 136 (1971). Neither circumstance applies here. While § 605(c) provides for a "proper hearing," this provision has been interpreted not to require a public, trial-type hearing. See Sea-Land Service v. Connor, 135 U.S. App. D.C. 306, 418 F.2d 1142, 1148 (D.C.Cir.1969). See generally United States v. Fla. E. Coast Ry. Co., 410 U.S. 224, 234, 93 S. Ct. 810, 815, 35 L. Ed. 2d 223 (1973). As a result, no public adjudicatory hearing was held in the instant case. The Act likewise does not require a rulemaking hearing and such a hearing was not held. Hence, the substantial evidence standard is clearly inapplicable to the instant case.

 Plaintiff's argument fails first because the MSB proceedings cannot be characterized as "adjudicatory in nature." The MSB has argued persuasively that when it considers ODS applications, it engages in a legislative function:

 
This granting of public funds (for ODS) in an effort to realize a public purpose is clearly a legislative function. We are not determining "rights" or "interests" between parties like the courts would do. We are deciding whether to grant public moneys to private interests to accomplish a public purpose.... We have to look at our national purpose and goals as set out in the statute, and we have to decide not the rights between competing lines ... but rather between the national interest and the individual interest of various U.S. citizens as Congress would do if it had the time.

 American President Lines, Ltd., 2 Shipping Reg. Rep. (P&F) 633, 646, 649 (1963). While it is true that the MSB in its ODS proceedings may consider some adjudicative facts, *fn21" the predominant consideration in these proceedings is whether granting the ODS fulfills the purposes and policy of the Act. Therefore, the MSB proceedings in the instant case should not be considered "adjudicatory in nature."

 Assuming, arguendo, that the MSB proceedings are "adjudicatory in nature," plaintiffs fail to demonstrate that the MSB's fact-finding was inadequate. Plaintiffs contend that the MSB engaged in inadequate fact-finding in determining that Aeron's vessels must carry preference cargoes at world rates. Where no "hearing" of any type is required by statute, *fn22" procedural fairness demands that plaintiffs be informed of the MSB's position on the world rate issue and have an opportunity to respond to MSB's contentions before the issuance of a final determination on the issue. See Moore-McCormack Lines, Inc. v. United States, 188 Ct. Cl. 644, 413 F.2d 568, 584-85 (1969). These procedural prerequisites were satisfied in the instant case. After the MSB issued its tentative opinion in which it fully discussed its reasoning for requiring world rates, see Defendant's Exhibit No. 1, supra at 19-22, the MSB afforded all of the interested parties an opportunity, which the plaintiffs exercised, to comment on the tentative opinion. As the MSB's final opinion indicates, see Defendant's Exhibit No. 2, supra at 10-12, the MSB fully considered plaintiffs' arguments in reaching its final determination. Moreover, the conclusion that the MSB engaged in adequate fact-finding is enforced by the plaintiffs' concession that "the fundamental arguments contained in the(ir) affidavits *fn23" were presented to the Board and fully considered in its Final Decision." Hence, even the extra record materials submitted by the plaintiffs raise no arguments that the MSB had not fully considered. Thus, de novo review is not justified because the MSB was under no procedural obligation to engage in additional fact-finding and because the MSB fully considered all the arguments made by plaintiffs, who had adequate opportunity to make those arguments. *fn24"

 In applying the arbitrary and capricious standard, a reviewing court "must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Overton Park, 401 U.S. at 415, 91 S. Ct. at 823. A court must even affirm a decision with which it disagrees, as long as the agency has considered the relevant factors and a rational basis exists for its decision. See id. at 416, 91 S. Ct. at 823. While a court must be satisfied "that the agency has exercised a reasoned discretion, with reasons that do not deviate from or ignore the ascertainable legislative intent," Ethyl Corp. v. EPA, 176 U.S. App. D.C. 373, 541 F.2d 1, 34-37 (D.C.Cir.) (en banc ), cert. denied, 426 U.S. 941, 96 S. Ct. 2662, 49 L. Ed. 2d 394 (1976), a court should not second-guess the agency's expertise in the exercise of its specialized, experienced judgment. Id.

 The only remaining issue which affects the scope of review is what deference should be given to the legal judgments of the MSB such as its ability to exclude subsidized carriers from the preference trades and its authority to condition receipt of ODS on the setting of world rates. In a case involving a MSB decision under § 605(c), the Court of Appeals for the District of Columbia Circuit concluded that a district court should "defer to a reasonable interpretation by the agency of a statute which it is charged with administering." *fn25" Sea-Land Service, Inc. v. Kreps, 185 U.S. App. D.C. 98, 566 F.2d 763, 772 n.45 (D.C.Cir.1977). Yet, less deference should be accorded where, as in the instant case, the resolution of legal issues depends largely on an analysis of legislative history for which "the courts are the specialists," Id. at 780-81 n.15 (Robinson, C. J., dissenting), quoting K. Davis, Administrative Law Treatise § 30.09, at 243 (1958). Moreover, the MSB's statutory interpretations, which supported exclusion of five of plaintiffs' vessels and the imposition of the world rate condition, were not adopted contemporaneously with enactment of § 605(c), are not long-standing constructions, and have not been implicitly relied upon by Congress. See NLRB v. Bell Aerospace Co., 416 U.S. 267, 275, 94 S. Ct. 1757, 1762, 40 L. Ed. 2d 134 (1974). Hence, giving deference to the MSB's statutory interpretations does not force this Court to adopt agency constructions contrary to congressional intent.

 II. The Denial of Five Vessels from Participation in the Preference Trades

 Plaintiffs initially claim that the MSB had no authority to exclude five of their subsidized vessels from carrying preference cargoes. Two questions must be considered in analyzing this claim. First, did the MSB in its 605(c) opinion determine a two or seven ship deficit in United States-flag bulk vessel capacity in the preference trades? Second, if the MSB did find a seven ship deficit, did it have the power to exclude five of those seven ships from the preference trades in order to protect existing unsubsidized carriers?

 A. The MSB's § 605(c) Inadequacy Determination

 Before an ODS may be awarded, one of the conclusions the MSB must reach is "that the service already provided by vessels of United States registry is inadequate." 46 U.S.C. § 1175(c) (1976). The MSB explained that the threshold issue it faced in making this determination was "the proper definition of the pool of cargo (demand) against which available capacity (supply) is to be compared." Atlas Marine Co., 18 Shipping Reg. Rep. (P&F) 987, 999 (1978). The MSB found that "the relevant pool of cargo is that bulk cargo which would move in the preference trade." Id. Then, the MSB compared the projected supply of tankers and dry bulk vessels against the available cargoes reserved to United States-flag vessels. *fn26" Id. at 1003-04. Concluding that the projected total demand would exceed vessel supply by an amount greater than the capacity of all seven of plaintiffs' vessels, the MSB determined that granting plaintiffs' applications would not result in overtonnaging the bulk preference trades. Id. at 1004-10.

 Despite a clear § 605(c) inadequacy determination by the MSB that all seven of plaintiffs' ships could be accommodated in the preference trades, *fn27" defendants assert that the MSB found only a two ship deficit in United States-flag bulk vessel capacity. Defendants reason that an examination of the projected cargo carried only by tankers in the two categories of preference trade in which plaintiffs propose to participate reveals only a two vessel deficit. While defendants' assertion may be accurate if one focuses only on tankers and two of the five preference categories, defendants' reasoning is inconsistent with the MSB's findings in its § 605(c) opinion. Defendants' argument is merely a post hoc rationalization, see Burlington Truck Lines v. United States, 371 U.S. 156, 168-69, 83 S. Ct. 239, 245-46, 9 L. Ed. 2d 207 (1962), which has "traditionally been found to be an inadequate basis for review." Overton Park, 401 U.S. at 419, 91 S. Ct. at 825. This Court cannot affirm the MSB's decision on a ground that the MSB has rejected.

 It is inappropriate in the instant case, however, to remand this issue to permit the MSB to explain its reasoning more fully. This is not a case where the agency has reached conclusions that merely were inadequately explained by the administrative record. Rather, defendants are advancing an argument that already has been rejected by the agency itself. For example, the MSB rejected defendants' desire to consider only tanker supply and demand when it concluded that any "division between tanker and dry bulk (vessels) is a purely arbitrary one without significance" because most dry bulk cargoes "might be carried in either tankers or dry bulk ships." Atlas Marine Co., 18 Shipping Reg. Rep. (P&F) 987, 1003 n.29. The MSB also rejected focusing on only the two preference categories in which plaintiffs applied to participate when it determined that "the relevant pool of cargoes is that bulk cargo which would move in preference trade." *fn28" Id. at 999. Thus, it is clear that the MSB rejected the defendants' calculations and found at least a seven ship deficit in United States-flag bulk vessel capacity in the preference trades.

 This Court's review of the MSB's factual determination of the vessel deficit is limited to discerning whether the MSB considered relevant factors in reaching a rational decision. See Overton Park, 401 U.S. at 415-16, 91 S. Ct. at 823-24. Since either tankers or dry bulk ships can carry most dry bulk cargo, the capacity of and cargo demand for dry bulk ships was a relevant factor for the MSB to include in its analysis. In addition, the three preference categories plaintiffs did not seek to enter were relevant factors for consideration by the MSB in its calculations. Because existing United States-flag unsubsidized vessels are free to ship in any of the five preference categories where demand is present, an unsubsidized carrier shipping cargo from one of the three preference categories that plaintiffs do not propose to carry will remove itself from the pool of vessels capable of carrying cargo in the two preference categories for which plaintiffs have applied. Therefore, the MSB's consideration of relevant factors enabled it to reach a rational determination that there was at least a seven ship deficit in United States-flag bulk vessel capacity in the preference trades. *fn29"

 B. Exclusion of Five Vessels from the Preference Trades, Despite a Favorable 605(c) Hearing, To Protect Existing Unsubsidized Carriers

 The MSB must make two determinations under § 605(c) before an ODS can be granted: (1) "that the service already provided by vessels of United States registry is inadequate;" and (2) "that in the accomplishment of the purposes and policy of this chapter additional vessels should be operated thereon." 46 U.S.C. § 1175(c) (1976). The purposes and policy "determination is to be made independently of the inadequacy determination; that is, there are two independent requirements (inadequacy and furtherance of the Act's policies) to be made before an ODS award can be made." Sea-Land Service, Inc. v. Kreps, 566 F.2d at 773 n.50. Accordingly, the proper approach for the MSB to follow in any § 605(c) proceeding is first to make an inadequacy determination. Yet, § 605(c) uses the term "inadequate" without providing any guideposts as to the practical meaning of the term. Id. at 767 n.18. The Secretary of Commerce, however, has specifically tied the inadequacy determination to the § 101 policy of providing vessels "sufficient to carry a substantial portion" of United States foreign commerce. 46 U.S.C. § 1101 (1976). The term "substantial" has in turn been interpreted to mean 50%. Sea-Land Service, Inc. v. Kreps, 566 F.2d at 767 n.18. After the ...


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