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November 6, 1981

Marshall P. SAFIR, Plaintiff,
Philip M. KLUTZNICK, Secretary of Commerce, et al., Defendants, and United States Lines, Inc., et al., Intervening Defendants

The opinion of the court was delivered by: BRYANT


I. The Sapphire Litigation

 In 1964 Marshall P. Safir and his brother-in-law, Arnold Weissberger, incorporated the Sapphire Steamship Lines, Inc. ("Sapphire"). Sapphire, together with its affiliated service organizations, Pioneer Overseas Services Corporation, a traffic management agency wholly owned by Mr. Safir, and Liberty-Pac International Corporation, a freight forwarder specializing in the overseas transportation of household goods and wholly owned by Mr. Weissberger, was founded to promote an innovative entrepreneurial plan. Typically, household goods were shipped abroad for the military by a single carrier who would take responsibility for all the local and ocean transport. These household goods were generally boxed in plywood containers. Sapphire and its affiliates planned to use twenty-foot metal containers to ship such goods. In 1965 this seemingly mundane innovation, then currently in use in domestic shipping, had considerable repercussions. According to the Sapphire promoters, unlike the wood boxes the metal containers are reusable. They can be made larger and thus cut down on handling charges. The metal containers are also stronger and can thus be stored on the deck of a ship with less likelihood of damaging the goods. *fn1"

 In 1965 Sapphire sought to enter the military household goods market and filed proposed rates with the Military Sea Transport Service. At that time the market was dominated by the Atlantic and Gulf American Flag Berth Operators (AGAFBO), a conference of American shippers. Nine subsidized steamship operators were members of the AGAFBO conference in 1965: American Export Isbrandtsen Lines, Inc. (AEL), Bloomfield Steamship Company (Bloomfield), Lykes Bros. Steamship Co., Inc. (Lykes), Moore-McCormack Lines, Incorporated (Mor-Mac), United States Lines, Inc. (USL), American President Lines, Ltd. (APL), Farrell Lines Incorporated (Farrell), Grace Lines, Inc. (Grace), and Prudential Lines, Inc. (Prudential). AGAFBO was a shipping conference which allowed member lines to agree on a rate schedule and then negotiate for contracts with the government.

 Sapphire filed rates on the routes between the United States and United Kingdom and the Bordeaux-Hamburg range (U.K./B-H range) that seriously undercut the corresponding AGAFBO rates. When the government approved Sapphire's rates, AGAFBO countered by trying to undercut Sapphire with low prices of its own. Conference members lobbied with government agencies to revoke the approval of the Sapphire enterprise and also sought to pressure various van lines to prevent their cooperating with the new enterprise. Finally, after one of their member lines resigned rather than heed the AGAFBO rate schedule AGAFBO lowered its prices to fully meet the Sapphire challenge. AGAFBO, which under the existing arrangements with the government had been arguing strenuously and at regular intervals that its prices were justified by the high costs of shipping the military's cargo, was placed in the uncomfortable position of filing new prices that radically reduced the AGAFBO rates. Concurrent with its application for reduced rates, AGAFBO notified the military that these reduced rates were temporary and for competitive purposes only, and that the rates were not fair, reasonable or compensatory. *fn2"

 Soon after AGAFBO reduced its rates for shipping military goods on the U.K./ B-H range the Federal Maritime Commission (FMC) began, on its own initiative, an investigation of the shipment of military cargo. The investigation focused on AGAFBO conference and Sapphire. *fn3"

 AGAFBO renewed its bargain rates at thirty-day intervals between March 29, 1965 and March 1, 1966. Sapphire commenced operations in 1965 and continued to carry cargo, although with steadily mounting losses, well into 1966. By March of 1967 Sapphire was forced to file for bankruptcy.

 In 1966 Sapphire filed a treble damage antitrust suit seeking twelve million dollars from the AGAFBO lines. When Sapphire went bankrupt in 1967 a trustee was substituted as plaintiff in the treble damage suit. At this point the plaintiff in this suit and Sapphire's chief executive officer, Marshall Safir, was forced to stand aside and watch special counsel appointed by the trustee handle the antitrust lawsuit. Special Counsel proceeded to accept the defendant's offer of 1.6 million dollars and it was only after Sapphire's creditors intervened that the bankruptcy court withdrew approval of this settlement. Special counsel then accepted a settlement offer of two million dollars and was again frustrated by the bankruptcy court. A third offer of about 2.5 million dollars was ultimately approved by the bankruptcy court. In re Sapphire Steamship Lines, Inc., 509 F.2d 1242 (2nd Cir. 1975). According to Mr. Safir this money went entirely to satisfy the claims of Sapphire creditors. Far from receiving compensation, Mr. Safir was left in even deeper personal financial straits by the settlement of the antitrust suit. *fn4"

AGAFBO's rates, which were reduced to an admittedly noncompensatory and unreasonable level in an attempt unfairly to compete with Sapphire(,) were so unreasonably low as to be detrimental to the commerce of the United States contrary to the provisions of section 18(b)(5). ( *fn5" )
AGAFBO, by reducing its rates to an admittedly noncompensatory and unreasonable level in an attempt unfairly to compete with Sapphire, violated section 15 ( *fn6" ) by knowingly setting rates which were contrary to section 18(b)(5) and which were detrimental to commerce and contrary to the public interest. ( *fn7" )
After receiving the FMC's findings Sapphire wrote the Acting Maritime Administrator and the Maritime Subsidy Board ("MSB") asking that the government proceed against the AGAFBO member lines under § 810 of the Merchant Marine Act, 1936, 46 U.S.C. § 1227. Section 810 directs that no government subsidy of any kind shall be paid to shipping lines who agree among themselves to a practice which is unjustly discriminatory or unfair to an American line. Sapphire sought to have the government cease all subsidy payments to AGAFBO member lines and recover all subsidies paid to those lines since March 29, 1965, the date AGAFBO reduced its rates. *fn8"
When the Maritime Administration *fn9" failed to act on Sapphire's request, the shipping line sued in the federal court in New York. Although the suit was dismissed in the district court, Safir v. Gulick, 297 F. Supp. 630 (E.D.N.Y.1969), the United States Court of Appeals for the Second Circuit ruled in Sapphire's favor. The court reasoned that § 810 was passed primarily to address the "burden which subsidies impose on the competitive position of the victim" of unfair practices. Safir v. Gibson, 417 F.2d 972, 977 (1969), cert. denied, 400 U.S. 850, 91 S. Ct. 57, 27 L. Ed. 2d 88 (1970). Although the statute does not expressly call for the recovery of subsidies improperly paid in the past, the court concluded that "common law principles would permit (such recovery) under the subsidy contract in the absence of a statutory prohibition, and we find no such prohibition here." Id. Finally, the court concluded that although the Maritime Administrator may have some discretion in recovering past subsidies, the government must "consider( ) the interest of the victim, about which Congress was so concerned" and reach a "considered decision." Id. at 978.
After remand, the Maritime Administration directed the Maritime Subsidy Board (MSB) to commence hearings to determine whether AGAFBO violated § 810. Sapphire objected to this procedure, arguing that the Federal Maritime Commission had already concluded that AGAFBO had violated § 15 and that such a § 15 violation was necessarily also a violation of § 810. After again failing to gain relief within the Maritime Administration or the federal district court, Sapphire made its argument before the Second Circuit. Judge Friendly, writing his second opinion in the Sapphire saga, again held for the plaintiff. Safir v. Gibson, 432 F.2d 137, cert. denied, American Export Isbrandtsen Lines, Inc. v. Safir, 400 U.S. 942, 91 S. Ct. 241, 27 L. Ed. 2d 246 (1970). Section 15 requires the FMC to disapprove unjustly discriminatory or unfair agreements between shippers. Section 810 prohibits the payment of subsidies to lines which agree to engage in a practice which is unjustly discriminatory or unfair to an American line. Judge Friendly held that the finding of a § 15 violation by the FMC did indeed necessitate a finding of a § 810 violation by the MSB. By its participation in the earlier FMC proceeding, AGAFBO was thus collaterally estopped from relitigating the issue. The Second Circuit ordered that the Maritime Administration be directed not to redetermine the issue of AGAFBO's "unjustly discriminatory or unfair" price reductions. In so doing the court was careful to note that by its opinion it did not intend to preclude the Maritime Administration from "investigating the nature and extent of the individual carriers' participation in the illegal action, should it find these matters relevant to its ultimate decision on whether to seek recovery of subsidies paid during the violation and, if so, how much and from whom." 432 F.2d at 145 n.2.
II. Proceedings before the Maritime Administration
Once again the Maritime Subsidy Board had the responsibility of resolving the Sapphire dispute. Chief Hearing Examiner Paul N. Pfeiffer of the MSB issued a 100-page decision based on lengthy hearings that make up the bulk of the administrative record in the case before the court. After first resolving all the preliminary disputes over Sapphire's common carrier status in Sapphire's favor, Judge Pfeiffer held that § 810 mandated the imposition of some penalty on AGAFBO's members. Judge Pfeiffer refused to credit the respondents' claims that they relied on the expert advice of counsel *fn10" and that they reduced their rates in response to pressure from the Department of Defense. According to Judge Pfeiffer, although AGAFBO did consult with counsel, the organization's members knew full well that selective, discriminatory and noncompensatory price reduction were against the law.
Under the circumstances of record, the contention that astute AGAFBO shipping executives accepted legal advice to the effect that concerted price reductions to incremental cost levels were lawful, and therefore they are not responsible if the advice was incorrect, cannot be credited. The great preponderance of the evidence establishes a predatory intent by AGAFBO concerted action to restrain U. S. flag competition which any ordinary businessman should have known was illegal. ( *fn11" )
Similarly, although the military was indeed concerned with high AGAFBO rates, Judge Pfeiffer found no evidence that the military encouraged AGAFBO to reduce those rates to noncompensatory levels on a selective and discriminatory basis. *fn12"
In responding to the mandate of the Second Circuit to determine "how much" subsidy should be recovered and "from whom," Judge Pfeiffer carefully calibrated the culpability of each AGAFBO member. But Judge Pfeiffer began with an unstated premise: the maximum subsidy recoverable is that percentage of the subsidy received that is allocatable to Trade Route 21 (hereinafter T.R. 21), the United Kingdom/Bordeaux-Hamburg route served by Sapphire. The hundreds of millions of dollars of subsidies paid to the offending lines for other routes were, despite the plaintiff's urgings, never considered as ripe for recovery.
Among the AGAFBO lines Judge Pfeiffer assessed Lykes, the chief offender, the full amount of subsidy paid for T.R. 21. In addition, Lykes was to repay miscellaneous subsidies received by way of tax deferments, preference cargoes, and certain ship purchase agreements. *fn13"
AEL, the next offending line, although not the leader in the predatory priced reductions, was held by Judge Pfeiffer to be culpable as well. In calculating the subsidy recovery Judge Pfeiffer introduced a further innovation: AEL must refund only that percentage of T.R. 21 subsidy allocable to the kind of cargo that Sapphire carried. Thus since only about a fifth of AEL's T.R. 21 was military and household goods, Judge Pfeiffer reduced the operations subsidy recovery by four-fifths. *fn14" The identical prorating calculation was employed to arrive at subsidy recoveries for Moore McCormack Lines, U.S. Lines and Bloomfield, except Bloomfield's subsidy recovery was further reduced by 50% due to its marginal role in the rate reductions. In addition, subsidies received by virtue of the purchase of government ships and various other subsidies were ordered repaid by the remaining lines. *fn15" Finally, Judge Pfeiffer held that the "non-trade lines", those AGAFBO members who were not competitors of Sapphire and did not vote on the price reductions, need not refund any subsidies. *fn16"
To summarize, Judge Pfeiffer began his assessment of penalties by limiting subsidy recovery to those subsidy payments made for T.R. 21. After dispensing with Lykes, the chief offender, Judge Pfeiffer further limited the subsidy recovery to the percentage of T.R. 21 subsidy that represents support of military and household goods cargo. Finally, Judge Pfeiffer reduced Bloomfield's already twice narrowed penalty by 50%. Total subsidies to be recovered under the recommended decision were approximately ten million dollars.
All parties filed exceptions to Judge Pfeiffer's recommended decision before the Maritime Subsidy Board. *fn17" After hearing oral argument the MSB handed down a lengthy opinion and order on April 16, 1973. *fn18" Although certain of Judge Pfeiffer's findings were adopted, the three-member board decided the bulk of the controversy anew with results divergent from those recommended by their hearing examiner.
To begin with the MSB adopted Judge Pfeiffer's recommendations regarding Sapphire's common carrier status and its other qualifications for protection under § 810. The MSB then held that the four "non-trade lines"-the AGAFBO member lines not competing directly with Sapphire-had committed technical violations by their continued membership in a conference that was unjustly discriminating against Sapphire. *fn19" Reaching the crux of the dispute, the MSB reviewed the various factors proffered by AGAFBO to justify mitigating recovery of subsidies. The Board recounted the early 1965 flurry of exchanges between AGAFBO and various military personnel regarding AGAFBO rates, but concluded that military pressure was a minor reason for AGAFBO's price reductions. *fn20" Similarly, AGAFBO's alleged reliance on the advice of counsel was dubbed of "background" importance. *fn21" Although the opinion is not entirely clear on the point, it appears that the Board also lent some credence to AGAFBO's claim that their price reductions were motivated by the altruistic goal of helping AGAFBO-affiliated, land-based van lines who were threatened by Sapphire's affiliated Liberty-Pac van line. The Board saw AGAFBO's self-interest, however, as central to the price reduction. *fn22" Further, the Board obviously felt constrained by the Second Circuit's opinion holding the earlier FMC ruling to be res judicata. Thus, the Board reiterated the FMC ruling that the AGAFBO price reduction was a predatory one. *fn23" Finally, the Board determined that the threat of dissolution, partially realized when one line resigned in April 1965 to better compete with Sapphire's rates, was a significant factor in AGAFBO's decision to continue the rate reductions through the eleven-month period. *fn24"
While the Board reviewed and acknowledged the impact of some of the mitigating factors mentioned above, it nevertheless reached much the same ultimate conclusion as did Judge Pfeiffer: "Sapphire's operation was of overriding concern in any AGAFBO action in the U.K./B-H range." *fn25" Where the hearing examiner and the Board really diverge is in the level of recovery of subsidies.
The MSB interpreted the provision in § 810 which states that "no payment or subsidy of any kind shall be paid directly or indirectly ... to any contractor or charterer who shall violate this section" as governing operating-differential subsidies (ODS) only. The assorted other subsidies which the hearing examiner recommended be refunded *fn26" were held by the Board to be outside the purview of § 810. *fn27"
The Board apparently also felt that the unique setting of the case dictated further limitations on the recovery of subsidies. Following Judge Pfeiffer's recommendation, the MSB limited the recovery to those subsidy payments made for the operation of T.R. 21. *fn28" The Board went on to prorate the recovery from all the offending lines of even these subsidies by the percentage of military cargo revenues earned by the offending lines on T.R. 21. *fn29" To summarize the Board's holdings, it construed § 810 as covering only ODS and then determined to recover only "the percentage of ODS received from subsidized operations on the U.K./B-H range, as represented by the ratio of military cargo revenue received on such route to total revenues received therefrom during the period of violation." *fn30"
Next the Board considered the individual mitigating circumstances of each of the trade lines to determine whether to mitigate the subsidy recovery beyond the above formula. The Board found no basis for such a reduction in the case of Lykes, but reduced AEL's, Mor-Mac's and Bloomfield's payment 25%, and USL's 50%. *fn31" In total the Board ...

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