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ST. Lawrence Seaway Pilots Association v. United States Coast Guard

United States District Court, District of Columbia

February 19, 2019

ST. LAWRENCE SEAWAY PILOTS ASSOCIATION, et al., Plaintiffs,
v.
UNITED STATES COAST GUARD, Defendant.

          MEMORANDUM OPINION

          CHRISTOPHER R. COOPER, UNITED STATES DISTRICT JUDGE

         Under federal law, a foreign-owned shipping vessel must use the services of a registered, experienced American or Canadian seaway pilot to navigate the Great Lakes or the St. Lawrence Seaway. The United States Coast Guard is responsible for setting the rates that foreign shipping companies must pay these pilots. To ensure that the rates adequately reimburse pilots associations for the cost of doing business, the Coast Guard must account for their operating expenses. In 2016, the Coast Guard announced that it would no longer recognize legal fees as reimbursable operating expenses if the fees were incurred in litigation against the U.S. government. In 2017, it did just that, excluding $75, 049 in legal fees that three pilots associations had incurred in an earlier suit against the Coast Guard.

         Those three pilots associations have again sued the Coast Guard. They allege that the 2016 Rule excluding such fees is arbitrary and capricious under the Administrative Procedure Act (“APA”) because it was an unacknowledged policy change and was insufficiently justified. The pilots associations thus move for summary judgment, asking the Court to vacate the rule. The Coast Guard and several foreign shipping companies, who have intervened as defendants, oppose that motion, and the Coast Guard cross-moves for summary judgment. Because the record shows that the Coast Guard neither acknowledged that the 2016 Rule represented a change in policy nor adequately explained its reasoning, the Court will grant summary judgment to Plaintiffs.

         I. Background

         A. Legal Background

         The Great Lakes Pilotage Act of 1960, 46 U.S.C. § 9301 et seq., requires foreign ships to employ registered, experienced American or Canadian seaway pilots to navigate American portions of the St. Lawrence Seaway or the Great Lakes. Id. § 9302. It requires the Secretary of Homeland Security to set the rates shipping companies must pay for these services. Id. § 9303(f). The statute does not prescribe any particular method for calculating appropriate rates, although it instructs the Secretary to “giv[e] consideration to the public interest and the costs of providing the services.” Id.

         The Secretary has delegated rate-setting responsibility to the Great Lakes Pilotage Office of the United States Coast Guard, which has promulgated regulations establishing the methods by which rates are set. See 46 C.F.R. Part 404. It applies these methods through notice-and-comment rulemaking to determine the applicable rates. The Coast Guard's stated goal is to set rates that “promote safe, efficient, and reliable pilotage service on the Great Lakes, by generating for each pilotage association sufficient revenue to reimburse its necessary and reasonable operating expenses, fairly compensate trained and rested pilots, and provide an appropriate profit to use for improvements.” Id. § 404.1(a). In other words, the Coast Guard strives to account for “necessary” and “reasonable” expenses when setting rates to ensure that pilots associations can recoup those costs through sufficiently high revenue.

         This case revolves around a 2016 regulatory overhaul of the rate-setting methodology. Until that overhaul, the Coast Guard used rate-setting methods promulgated in 1995. See Great Lakes Pilotage Methodology, 60 Fed. Reg. 18, 366 (April 11, 1995). While this case turns on differences between the two sets of methods, they both take the same general approach to operating expenses. Under each set of regulations, pilots associations are responsible for providing a detailed accounting of expenses for the Coast Guard to consider in setting rates. See 46 C.F.R. § 404.2(a); 46 C.F.R. § 404.5(a)(1) (2015). The Coast Guard must then determine whether an expense is both “necessary” for providing pilotage services and “reasonable” in amount. 46 C.F.R. § 404.2(a); 46 C.F.R. § 404.5(a)(1) (2015). If an expense meets both criteria, it can be included when determining rates, meaning rates will be set higher to allow pilots associations to recoup the costs.

         Both the 1995 and 2016 regulations provide the same general definition for “necessary” and “reasonable” operating expenses. An expense is necessary if it is directly related to pilotage services. 46 C.F.R. § 404.2(a); 46 C.F.R. § 404.5(a)(1) (2015). The amount of an expense is reasonable if it compares to similar expenses paid by others in the maritime or other industries, or when compared to Internal Revenue Service guidelines. 46 C.F.R. § 404.2(a); 46 C.F.R. § 404.5(a)(2) (2015).

         B. Pre-2016 Rule

         The 1995 regulation that governed rate setting said relatively little about legal expenses. It noted only that “[e]ach [pilots] Association must substantiate its expenses, including legal expenses.” 46 C.F.R. § 404.5(a)(8) (2015). In applying the rule, the Coast Guard recognized legal fees among necessary and reasonable expenses, whether or not they were incurred in litigation against the U.S. government. In a 2003 interim rulemaking, the Coast Guard responded to comments questioning the wisdom of recognizing legal fees as allowable expenses by explaining that it “reviewed all legal fees using the guidelines of necessity and reasonableness contained in [the 1995 regulation], ” and approved “[o]nly reasonable and necessary legal fees[.]” Rates for Pilotage on the Great Lakes, 68 Fed. Reg. 69, 564, 69, 566 (Dec. 12, 2003). Under this framework, “[l]egal fees for litigation against the Government were allowed as long as there was no court proceeding in which there had been a finding of bad faith on the part of the pilot organizations.” Id.

         C. 2014 Litigation

         In 2014, Plaintiffs in this case sued the Coast Guard over its pilotage rates. Another court in this district awarded them summary judgment and ordered supplemental briefing on an appropriate remedy. See St. Lawrence Seaway Pilots Ass'n v. U.S. Coast Guard, 85 F.Supp.3d 197, 207-08 (D.D.C. 2015). Prior to that briefing, the parties settled and Plaintiffs dismissed the case. See Stipulation of Settlement and Dismissal, ECF No. 32, St. Lawrence Seaway Pilots Ass'n v. U.S. Coast Guard, 14-cv-392 (July 30, 2015). As part of that settlement, the Coast Guard paid $47, 992 of the pilots ...


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