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OSG BULK SHIPS, INC. v. UNITED STATES

March 22, 1996

OSG BULK SHIPS, INC., et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, et al., Defendants.



The opinion of the court was delivered by: FRIEDMAN

 OSG Bulk Ships, Inc. sued the United States, the Secretary of Transportation and the Administrator of the Maritime Administration ("MarAd"), seeking declaratory and injunctive relief with respect to the defendants' interpretation of Section 506 of the Merchant Marine Act of 1936, 46 U.S.C. app. § 1156. Attransco, Inc. and Matson Navigation Company, Inc. were granted leave to intervene as plaintiffs. *fn1" Thereafter, American President Lines, Ltd., Puerto Rico Maritime Shipping Authority, Sea-Land Service, Inc., Margate Shipping Company, Chestnut Shipping Company, Mormac Marine Transport, Inc., BP Oil Shipping Company, USA, Aquarius Marine Company, and Atlas Marine Company sought and were granted leave to intervene as defendants. *fn2"

 The case is before the Court on the cross-motions for summary judgment of OSG Bulk Ships and of the United States (supported by the separate motions and briefs of the defendant-intervenors). The Court concludes that there are no genuine disputes of material fact and that the defendants are entitled to judgment as a matter of law.

 I. BACKGROUND

 A. The Merchant Marine Act Of 1936

 Congress enacted the Merchant Marine Act of 1936 to "foster the development and encourage the maintenance" of a merchant marine with U.S.-flag ships and American sailors in order to provide for the national defense and the commercial welfare of the United States. § 46 U.S.C. app. § 1101. The Act was necessary because constructing ships in American shipyards and manning them with American crews was, and continues to be, more expensive than constructing ships in foreign shipyards and staffing them with foreign crews. See Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. 572, 574-75, 63 L. Ed. 2d 36, 100 S. Ct. 800 (1980). To overcome these cost disparities and to protect and support the shipbuilding and shipping industries of the United States, Congress fashioned two different solutions, one for the domestic trade and one for the foreign trade.

 The Merchant Marine Act of 1936 (hereafter "the Merchant Marine Act"), 46 U.S.C. app. §§ 1101 et seq., authorizes the maritime agency of the United States, the Maritime Administration ("MarAd"), to provide subsidies to enable U.S.-built and -staffed vessels to compete effectively in foreign trade with foreign-built and -staffed vessels. *fn3" Title V of the Merchant Marine Act provides subsidies for the domestic construction of U.S.-flag vessels that will in turn be used exclusively in foreign trade and have to compete with foreign-flag vessels built at lower costs on foreign shipyards, so-called "construction-differential subsidies" ("CDS"). 46 U.S.C. app. §§ 1151 et seq. Under the CDS program, the government may pay up to half the construction costs of a U.S.-built vessel to be used in the foreign trade. 46 U.S.C. app. §§ 1151-61. Title VI of the Act provides subsidies for the operation of U.S.-flag ships in foreign trade, "operating-differential subsidies" ("ODS"). 46 U.S.C. app. §§ 1171 et seq.

 To ensure that the construction subsidies granted to the CDS shippers do not give them an unfair advantage in the domestic maritime trade, Section 506 of the Act provides that the owners of vessels built with government subsidies must agree that they will operate exclusively in foreign trade. Section 506 sets forth two exceptions to this restriction. First, a CDS-built ship is permitted to operate in the domestic trade incident to a bona fide foreign voyage; the ship may sail in the domestic trade on one leg of certain overseas voyages. Second, the Secretary of Transportation may consent to the temporary transfer of a CDS-vessel to domestic trade for up to six months in any year when it is necessary to further the purposes of the Act. 46 U.S.C. app. § 1156. The shipowner, however, must refund proportionate amounts of the CDS subsidy when engaging in any domestic trade pursuant to either of these two exceptions. 46 U.S.C. app. § 1156. *fn4"

 The Maritime Administration has construed Section 506 to allow CDS-vessels to operate in the domestic trade after the expiration of their economic lives. Thus, in MarAd's view, ships built with government subsidies may compete domestically with ships built without such subsidies after 25 years in the case of a dry cargo ship or liner and after 20 years in the case of a liquid bulk carrier or tanker. MarAd's interpretation is not found in any formal legislative rule or regulation, but is expressed in a series of letters, memoranda, a Comptroller General decision, and other public statements dating back to 1963.

 In the mid-1950's, the 1960's and the 1970's, MarAd entered into a number of CDS contracts for the construction of vessels. In all of these contracts, the parties agreed to be bound by the domestic trading restrictions of Section 506. *fn5" Most of the contracts also provided that the restrictions of Section 506 "shall run with the title to the Vessels and be binding on all owners thereof except the United States." See, e.g., Contract No. MA/MSB-4, A.R. at 488; Contract No. MA/MSB-80, A.R. at 500; Contract No. MA/MSB-135, A.R. at 519. Other contracts provided that the operating restrictions "shall run with the title to the Vessel for the twenty-five year life of said Vessel and be binding on all owners thereof, excepting, however, the United States or any subsequent transferee of the United States." Contract No. MA/MSB-9, A.R. at 9; see also Contract No. FMB-48, A.R. at 3; Contract No. MA/MSB-2, A.R. at 12. *fn6"

 B. The Parties To This Action

 Plaintiff OSG and plaintiff-intervenor Attransco, Inc. are unsubsidized domestic operators. Their vessels were built without construction-differential subsidies and are eligible for trade under the Jones Act. OSG Bulk Ships, Inc. Complaint P 2. OSG owns or leases 13 U.S.-flag tankers operating in the United States domestic trade carrying oil and oil products between United States ports. OSG Bulk Ships, Inc. Complaint P 2. Attransco is the owner and operator of unsubsidized tankers carrying crude oil and oil products in the domestic trade. OSG Bulk Ships, Inc. and Attransco, Inc. Complaint P 2. The complaints allege that these tankers are threatened with unlawful competition from government-subsidized tankers as a result of rulings by MarAd allowing tankers built with CDS for exclusive operation in the foreign trades to be diverted instead into the domestic trades after they reach the age of 20 years. OSG Bulk Ships, Inc. and Attransco, Inc. Complaint P 1.

 It is undisputed that many other tankers and bulk liquid carriers will soon reach the age of 20 years and that many dry cargo ships and liners will reach the age of 25 years; several already have and already operate in the domestic trade. Plaintiffs Statement of Material Facts P 12; Letter from Joseph A. Klausner, Counsel for OSG Bulk Ships, to the Court (Oct. 20, 1994). According to plaintiffs, the additional ships will add significant additional tonnage to the domestic trade and unfairly and illegally compete with plaintiffs. OSG Bulk Ships, Inc. Complaint PP 24-25, 29; Plaintiff's Statement of Material Facts PP 14-15. Plaintiffs argue that Section 506 prohibits CDS tankers from ever operating in the domestic maritime trade without continued payment to the government because otherwise the CDS-vessels would have an unfair cost advantage over non-CDS-vessels.

 Defendant-Intervenors American President Lines, Ltd., Puerto Rico Maritime Shipping Authority, and Sea-Land Service, Inc. (the "Liner Defendants") each operate liners that were built with construction-differential subsidies. American President Lines owns and/or operates over ten CDS liners that will all reach age 25 within the next four years. Liner Defendants' Statement of Material Facts P 10; A.R. at 477-78. Puerto Rico Maritime Shipping Authority operates five liners that either have entered or soon will enter the domestic trade. Liner Defendants' Statement of Material Facts P 11. Sea-Land owns and/or operates fourteen liners that were built with CDS between 1968 and 1981. Id. at P 12. Four of these CDS-vessels have already operated for over 25 years. The remaining Sea-Land CDS-vessels will attain 25 years of age between 1997 and 2006. Id.

 Defendant-Intervenors Margate Shipping Co. and Chestnut Shipping Co. (the "Tanker Defendants") and their affiliates operate ten U.S.-flag tankers in the domestic trade, including two that became 20 years old and entered the domestic trade in 1994, one that attained the age of 20 years in 1995, and two that will become 20 years old in 1997. Tanker Defendants' Statement of Material Facts PP 1, 12, 13, 16, 27, 31, 46. Defendant-Intervenor Mormac Marine Transport, Inc. operates three U.S.-flag CDS tankers; one became 20 years old in 1995 and the other two will become 20 years old in 1996 and 1997, respectively. Mormac's Statement of Material Facts P 5. *fn7"

 Defendant-Intervenor BP Oil Shipping Company is a principal user, or charterer, of tankers that operate in the domestic trade, shipping Alaska North Slope crude oil from Alaska to other United States ports. Memorandum In Support of Motion of BP Oil Shipping Company, USA, Aquarius Marine Company, and Atlas Marine Company To Intervene at 1. In addition to seeking to use or charter the tankers of Aquarius Marine Co. and Atlas Marine Co. once their domestic trading restrictions are lifted, BP Oil Shipping already charters the services of a 20-year old tanker operated by defendant-intervenor Margate Shipping. Id. at 2-3.

 II. ANALYSIS

 Plaintiffs seek a declaration that the restrictions of Section 506 against operation in the domestic trade by a vessel built with construction-differential subsidies run for the entire life of the vessel and do not expire when the vessel reaches a minimum age or at any other time. Defendants and defendant-intervenors argue that over a 30-year period MarAd has consistently interpreted Section 506 to impose domestic trading restrictions on vessels constructed with CDS only during their "economic" or "statutory" life, which for tankers is 20 years and for dry cargo and passenger vessels is 25 years. They maintain that after the expiration of the economic or statutory life of such ships, they no longer are restricted from entering the domestic trade.

 The Court agrees with defendants. The Supreme Court's unanimous decision in Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. 572, 63 L. Ed. 2d 36, 100 S. Ct. 800 (1980), requires the Court to conclude that the trading restrictions expire when either the CDS-shipowner pays back the unamortized subsidy or the subsidy becomes fully amortized at the end of the economic life of the ship. In addition, because the statute is silent with respect to whether the domestic trading restrictions last forever or lapse after 20 or 25 years, the Court concludes that it should defer to MarAd's reasonable, long-standing and consistent interpretation of the Merchant Marine Act, which MarAd has the sole authority to administer.

 A. MarAd's Interpretation Of Section 506 Of The Merchant Marine Act Is Consistent With Supreme Court Precedent

 In Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. 572, 63 L. Ed. 2d 36, 100 S. Ct. 800 (1980), Seatrain received a construction-differential subsidy to construct a supertanker, the Stuyvesant. Seatrain agreed to operate the vessel exclusively in foreign trade unless otherwise authorized by Section 506 of the Merchant Marine Act. By the time construction of the vessel was completed, however, there no longer was any demand for the use of the Stuyvesant in the foreign trade as a result of the Arab oil embargo. To counter this problem and to take advantage of the growing need for transportation of Alaskan crude from Valdez to ports in the Eastern United States, Seatrain requested that the Stuyvesant be released from the restrictions on its operation in domestic trade in exchange for Seatrain's repayment of the vessel's CDS. The Secretary of Commerce granted Seatrain's request. Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. at 576-78. Shell Oil, Alaska Bulk Carriers and Trinidad Corporation filed lawsuits, arguing that the Secretary had no authority under the statute to do so.

 The Supreme Court held that while Section 506 permitted temporary releases from the foreign-trade-only requirement in two specific situations, it did not speak to the availability of permanent releases from the requirement but certainly did not forever bar CDS-built vessels from entering the domestic trade. Rather, the Court concluded that it was consistent with the statute to permit an owner to obtain a permanent release from the domestic trading restriction by buying out the remaining subsidy on its CDS-vessel and that the Secretary had broad discretion to grant such a release. Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. at 587-90.

 The Supreme Court found that Congress had expressed no clear intention regarding permanent releases from the Section 506 restrictions. The Court determined that the language of the Act and its legislative history reflected an intent by Congress to grant the Secretary of Commerce broad authority to administer it. Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. at 585. Because it found no language in the statute suggesting that Congress intended to rule out permanent releases from the domestic trading restrictions of Section 506, the Court rejected the view that "the Secretary's authority to approve entry of subsidized vessels into the domestic trade" was limited to "the specific exceptions in § 506." Id. at 587-88. It concluded that the Secretary had the authority under the statute to approve a permanent release from the domestic trading restrictions.

 The Court also considered whether the Secretary's construction of the Act was reasonable. It observed that "a permanent release from the foreign-trade-only requirement may quite directly further the general goals of the Act by . . . improving the chances that a domestic shipyard will survive." Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. at 588. It stated that a permanent release

 
confers no windfall. On the contrary, at least where repayment of the CDS includes some amount reflecting capital costs which would have been incurred had no subsidy been available, such a transaction merely permits a once subsidized vessel to enter the domestic trade on a footing equal to that of vessels already in that trade. It was not the purpose of the Act to prohibit such entry, and we accordingly agree with the District Court that "nothing in section 506, [or] in any other ...

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