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American Great Lakes Ports Association v. Zukunft

United States District Court, District of Columbia

November 3, 2017

ADMIRAL PAUL F. ZUKUNFT, Commandant, United States Coast Guard, et al., Defendants.


          RUDOLPH CONTRERAS, United States District Judge


         In 2016, the Coast Guard promulgated new rules for calculating the rates that international shippers must pay American maritime pilots on the waters of the Great Lakes. Throughout the notice-and-comment process, Plaintiffs-representatives of the international shipping community-criticized the proposed rules in a variety of ways. After having their comments largely rejected, the shippers sued the Coast Guard in this Court under the Administrative Procedure Act, 5 U.S.C. §§ 500 et seq. All the parties have now moved for summary judgment on Plaintiffs' claims. For the various reasons explained below, the Court grants in part and denies Plaintiffs' motion for summary judgment.


         With limited exceptions, all foreign vessels[1] operating in the Great Lakes and some of their connecting waters (collectively “the Great Lakes”) must employ a registered Canadian or American maritime pilot to aid in navigation. 46 U.S.C. § 9302(a)(1). In 1960, Congress enacted the Great Lakes Pilotage Act (“GLPA”), which authorized the United States Coast Guard (“Coast Guard”) to “form[] . . . a pool . . . of United States authorized pilots to provide for efficient dispatching of vessels and rendering of pilotage services” in the waters of the Great Lakes. Id. §§ 9301(2), 9304(a). Thus, pilots on the Great Lakes are organized into private associations certified by the Coast Guard, which operate in three separate geographical districts.[2]See Great Lakes Pilotage Rates-2016 Annual Review and Changes to Methodology, 81 Fed. Reg. 11, 908, 11, 910 (Mar. 7, 2016). The Coast Guard is responsible for setting “standards of competency” for registered American pilots and prescribes “rates and charges for pilotage services, giving consideration to the public interest and the cost of providing the services.” 46 U.S.C. § 9303(a), (f). Thus, the Coast Guard determines the base pilotage rates that foreign vessels must pay to hire American maritime pilots to navigate the Great Lakes and reviews and adjusts these rates annually. See id.

         In September 2015, the Coast Guard issued a Notice of Proposed Rulemaking (“NPRM”) informing the public that the Coast Guard sought to “revis[e] the current methodology by which the Coast Guard sets base rates for U.S. pilotage service” and to set pilotage rates for the 2016 shipping season using that new methodology. Great Lakes Pilotage Rates-2016 Annual Review and Changes to Mehodology, 80 Fed. Reg. 54, 484, 54, 484 (Sept. 10, 2015). The reasons for the methodology change were twofold. First, the Coast Guard explained that “over many years both pilots and industry have identified certain methodology issues that they believe significantly distort[ed] ratemaking calculations.” Id. In particular, “[p]ilot associations believe[d] those distortions result[ed] in low rates that contributed to their difficulty in retaining pilots and attracting applicant pilots.” Id. Second, a methodology change was required because certain data that the Coast Guard previously relied upon would no longer be available. See Id. Before 2016, the Coast Guard's pilotage rate-setting methodology relied, in part, on union compensation data for merchant marine masters and mates.[3] 81 Fed. Reg. at 11, 908; see also St. Lawrence Seaway Pilots Ass'n, Inc. v. United States Coast Guard, 85 F.Supp.3d 197, 204-05 (D.D.C. 2015). According to the Coast Guard, “only one union's contract data [was] ever [] made available to the Coast Guard, ” but that union “now regards th[e] data as proprietary and [would] no longer disclose it to the Coast Guard.” 80 Fed. Reg. at 54, 484. Consequently, “the Coast Guard no longer ha[d] access to the detailed breakdown of compensation calculation that [its] [former] methodology [once] relie[d] on.” Id. Thus, as a result of the previous complaints from pilots and industry concerning the old methodology combined with the future unavailability of pilot compensation data, the Coast Guard decided to change its methodology.

         A. 2016 Rate-Setting Methodology

         The final pilotage rate-setting methodology adopted by the Coast Guard was largely the same as the rule that it had proposed in September 2015. See 81 Fed. Reg. at 11, 942. The Coast Guard developed this methodology based on a set of recommendations made by the Great Lakes Pilotage Advisory Committee (“GLPAC”). See Id. at 11, 911. The GLPAC is a committee created by statute whose purpose is to assist the Coast Guard in formulating pilotage rates and policies.[4] See 46 U.S.C. § 9307(a). When the Coast Guard engages in those functions, the Coast Guard is required to consider the GLPAC's recommendations, id. at § 9307(d)(2), and in this instance, the Coast Guard accorded the GLPAC's recommendations significant weight, see 81 Fed. Reg. at 11, 911.

         In concept, the revised methodology is rather straightforward. The Coast Guard seeks to set hourly pilotage rates that will be sufficient to cover pilotage associations' expenses and also provide a modest rate of return. To do this, the Coast Guard first estimates the expenses that it expects the pilotage associations will incur, including expenses associated with pilot compensation, in the upcoming season. It then adds a return on investment based on high-grade corporate securities. Viewed together, the expenses and the return on investment, represent the target revenue amount that the Coast Guard is hoping the pilotage associations will achieve. To come up with an hourly pilotage rate sufficient to meet this goal, the Coast Guard divides the target revenue by an estimate of the number of hours it expects the associations will work. The Coast Guard can then adjust this rate on an ad hoc basis under “supportable circumstances.” The Coast Guard has broken out this methodology into the following eight steps:

Step One: “Recognize previous operating expenses.” First, the Coast Guard examines the pilotage associations' prior expenses based on independent third-party audits and then determines which expense items should be recognized for the purpose of ratemaking.
Step Two: “Project operating expenses, adjusting for inflation or deflation.” Next, the Coast Guard projects the pilotage associations' operating expenses (other than those expenses associated with compensating pilots) using the recognized operating expenses identified from Step One and adjusting them for inflation or deflation using U.S. government consumer price index data for the Midwest.
Step Three: “Determine number of pilots needed.” The Coast Guard then projects how many pilots the Great Lakes will need in the upcoming shipping season. Unlike the prior methodology, this step takes into account not only the “hours a pilot is on the vessel's bridge, but also the total average time a pilot spends in preparing for and returning from each pilot assignment.” It also uses a “peak-staffing model, ” which aims to determine the number of pilots needed at all times by looking to the amount of pilots needed during average peak-season demand in previous years.
Step Four: “Determine target pilot compensation.” The Coast Guard then uses “the most relevant currently available non-proprietary information” to determine base individual pilot compensation. The Coast Guard then multiplies that figure by the number of pilots needed calculated in Step Three.
Step Five: “Project return on investment.” Because associations have management responsibilities and exposure to business risk, the Coast Guard calculates a return on investment. To do this, the Coast Guard multiplies the sum of the operating expenses from Step Two and the target pilot compensation from Step Four by the annual rate of return for high-grade corporate securities.
Step Six: “Project needed revenue.” Here, the Coast guard estimates the revenue that each pilotage association will need to successfully operate by adding together the projected operating expenses (Step Two), projected pilot compensation (Step Four), and projected return on investment (Step Five).
Step Seven: “Initially calculate base rates.” At this step, the Coast Guard divides the projected needed revenue from Step Six by the averages of past hours worked in each geographic area's waters.
Step Eight: “Review and analyze rates.” Finally, the Coast Guard reviews the base pilotage rates to make sure the rates meet the “goal of . . . promot[ing] safe, efficient, and reliable pilotage service on the Great Lakes.” At this step, the Coast Guard may either finalize the rates or “make[] necessary and reasonable adjustments to them based on requirements of Great Lakes pilotage agreements between the United States and Canada, or other supportable circumstances.”

See 81 Fed. Reg. at 11, 908-42.

         B. The Present Action

         On May 31, 2016, the American Great Lakes Ports Association, a not-for-profit organization representing the interests of commercial ports and port users in the United States, and several other organizations in the shipping industry sued the Coast Guard under the Administrative Procedure Act (“APA”), claiming that the new methodology and 2016 pilotage rates were arbitrary and capricious in various respects. See Compl. at 4-5, 20, ECF No. 1. Thereafter, the three Great Lakes pilotage associations (“Pilots”) moved to intervene as defendants. Pilots Ass'ns Mot. Intervene Supp. Defs., ECF No. 6. The Court granted the pilotage associations' motion to intervene because of their strong interest in the outcome of the litigation. See Am. Great Lakes Ports Ass'n v. Zukunft, 16-cv-1019, 2016 WL 8608457 (D.D.C. Aug. 26, 2016). Plaintiffs, Defendants, and Intervenors have each moved for summary judgment, and the motions are now ripe for decision. See Pls.' Mot. Summ. J. (“Pls.' Mot.”), ECF No 18; Def.-Intervenors' Cross-Mot. Summ. J. (“Pilots' Mot. Summ. J.”), ECF No. 20; Defs.' Cross-Mot. Summ. J. (“Coast Guard's Mot. Summ. J.”), ECF No. 21.

         C. 2017 Modification to Rate-Setting Methodology

         On April 5, 2017, the Coast Guard issued a notice of proposed rulemaking setting rates for the 2017 shipping season. In that notice, the Coast Guard also proposed modifying the rate-setting methodology to account for so-called “weighting factors”[5] that it did not account for in 2016. Great Lakes Pilotage Rates-2017 Annual Review, 82 Fed. Reg. 16, 542 (Apr. 5, 2017). However, the Coast Guard made clear that “until a final rule is produced, the 2016 rates will stay in effect, even if a final rule is not published by the start of the 2017 season.” Id. at 16, 542 On August 31, 2017, the Coast Guard issued a final rule incorporating the weighting factors into its rate-making methodology. See Great Lakes Pilotage Rates-2017 Annual Review, 82 Fed. Reg. 41, 466, 41, 466 (Aug. 31, 2017). While this rule revised “the pilotage rates for the remaining portion of the 2017 shipping season, ” it made no purported adjustments to the rates applied in the 2016 shipping season. See id.


         In a typical case, the Court must grant summary judgment to a movant who “shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Winston & Strawn, LLP v. McLean, 843 F.3d 503, 505 (D.C. Cir. 2016). But in the context of the APA, the Court's review of the administrative record is limited. Sierra Club v. Mainella, 459 F.Supp.2d 76, 89 (D.D.C. 2006) (citing National Wilderness Inst. v. United States Army Corps of Eng'rs, 2005 WL 691775, *7 (D.D.C. 2005)). It is the agency's role to resolve issues of fact and regulate in accordance with those facts. See Id. The district court's review is confined to determining whether, as a matter of law, the evidence in the administrative record supports the agency's decision. Citizens for Responsibility & Ethics in Washington v. SEC, 916 F.Supp.2d 141, 145 (D.D.C. 2013). “Summary judgment thus serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review.” Id. at 90 (citing Richards v. INS, 554 F.2d 1173, 1177 & n. 28 (D.C. Cir. 1977)).

         Under 5 U.S.C. § 706(2)(A), a reviewing court must set aside agency actions that are arbitrary or capricious. The touchstone of arbitrary-and-capricious review is reasoned decisionmaking. Harry T. Edwards, Linda A. Elliott & Marin K. Levy, The Requirement of Reasoned Decisionmaking: Arbitrary and Capricious Review Under the APA, Federal Standards of Review Ch. XV (Apr. 2013) (“Federal Standards of Review Ch. XV”) (citing Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Thus, a court cannot set aside an agency rule that is “rational, based on consideration of the relevant factors[, ] and within the scope of the authority delegated to the agency by the statute.” State Farm Mut. Auto. Ins. Co., 463 U.S. at 42-43. Although this is a deferential standard, it still requires a reviewing court to take a “hard look” at an agency's reasoning. See Federal Standards of Review Ch. XV (quoting Nat'l Lime Ass'n v. EPA, 627 F.2d 416, 451 n.126 (D.C. Cir. 1980)). In the context of notice-and-comment rulemaking, “[t]he function of the court is to assure that the agency has given reasoned consideration to all the material facts and issues.” Greater Boston Television Corp. v. FCC, 444 F.2d 841, 851 (D.C. Cir. 1970). This requires the agency to “articulate with reasonable clarity its reasons for decision, and identify the significance of the crucial facts.” Id.

         An agency action is arbitrary and capricious if the agency “entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before [it], or [the explanation] is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” State Farm Mut. Auto. Ins. Co., 463 U.S. at 43. Thus, an “agency must examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Int'l Ladies' Garment Workers' Union v. Donovan, 722 F.2d 795, 814 (D.C. Cir. 1983) (quotation marks and citation omitted). With that said, “[a]n agency has discretion to design rules that can be broadly applied, sacrificing some measure of ‘fit' for administrability.” Leather Indus. of Am., Inc. v. EPA, 40 F.3d 392, 403 (D.C. Cir. 1994) (citing Petroleum Commc'ns v. FCC, 22 F.3d 1164, 1172 (D.C. Cir. 1994)); see also Am. Pub. Gas Ass'n v. Fed. Power Comm'n, 567 F.2d 1016, 1046 (D.C. Cir. 1977) (internal quotations and citations omitted) (“Courts cannot fairly demand the perfect at the expense of the achievable.”). Shortcomings and analytical weak points, if justified or explained in light of practical constraints, do not render a regulation arbitrary or capricious. See City of Brookings Mun. Tel. Co. v. FCC, 822 F.2d 1153, 1168 (D.C. Cir. 1987). Indeed, even the “best available data standard leaves room for error, so long as more reliable data did not exist at the time of the agency decision.” Baystate Med. Ctr. v. Leavitt, 545 F.Supp.2d 20, 49 (D.D.C. 2008), amended in part, 587 F.Supp.2d 37 (D.D.C. 2008), judgment entered, 587 F.Supp.2d 44 (D.D.C. 2008).

         IV. ANALYSIS

         In this case, Plaintiffs present a litany of arguments for why the Coast Guard's 2016 rate-setting methodology and 2016 pilotage rates were arbitrary and capricious.[6] Broadly speaking, these challenges fall into three categories. First, Plaintiffs challenge one of the Coast Guard's overall rationales underpinning the changes to the rate-setting methodology. Specifically, they challenge the Coast Guard's conclusion that pilotage rates should be increased to address the pilotage associations' problems in recruiting and retaining pilots. Second, Plaintiffs challenge features that the Coast Guard chose to include in its rate-setting methodology. Namely, the methods by which the Coast Guard estimates expenses associated with pilotage compensation. Finally, Plaintiffs challenge certain features that the Coast Guard decided not to include in its rate-setting methodology. In particular, Plaintiffs argue that the Coast Guard's failure to consider the impact of so-called “weighting factors” on revenue was arbitrary and capricious. In addition, Plaintiffs contend that the Coast Guard also violated the APA when it decided not to include a “truing up” mechanism to account for the differences between projections and actual collections in past years. The Court addresses each of these arguments in turn.

         A. Challenge to the Coast Guard's Overall Rationale - Pilot Recruitment and Retention

         According to the Coast Guard's NPRM, one of the reasons the Coast Guard sought to change the rate-making methodology was to address the problem of attracting and retaining qualified pilots to service the Great Lakes. The NPRM states:

According to the pilot associations, the variance between projected revenue and actual revenue represents a significant challenge, because failure to achieve published revenue projections deprives them of the resources they need to provide safe, efficient, and reliable pilotage service. The associations cite challenges in making capital investments, recruiting and retaining adequately qualified pilots, achieving professional development and training schedules recommended by the American Pilots Association, updating technology, and achieving target compensation goals. The associations say that ...

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