Merchandise? Vessel? — Both!
Is an offshore drilling rig — a vessel so large that it cannot pass through the Panama Canal — “merchandise” subject to the Jones Act’s restriction that cargo
transported between two domestic points be carried on ships built and registered in the United States and crewed by Americans?
Yes, said a federal judge in a recent decision that’s part of an ongoing lawsuit being watched closely by various parties interested in cabotage trades.
The decision (Furie Operating Alaska, LLC v. US Dept. of Homeland Security, et al. U.S. District Court, D. Alaska. No. 3-12-cv-00158. March 27) grew out of another in 2011 by Escopeta Oil Co. to move the jack-up oil rig, Spartan 151, from the Gulf of Mexico to Cook Inlet, Alaska.
The rig was first carried on a foreign-flag, semi-submersible heavylift ship to Vancouver, British Columbia, where it was outfitted and then towed to Cook Inlet using U.S.-flag tugs to be used during the summer months to drill for natural gas.
Escopeta was subsequently sold to Furie, the plaintiff in this litigation.
Furie said it filed the lawsuit in response to an “unwarranted and unprecedented penalty” imposed by Customs and Border Protection (CBP) for an alleged violation of the Jones Act.
Furie said it had transported the rig to Alaska “based on a reasonable belief that a national defense waiver would be granted under the Jones Act… and based on a promise made by Secretary [Janet] Napolitano in May 2011 that any penalty imposed under the Jones Act would be substantially mitigated.”
Furie said it expected to be granted the waiver, because Napolitano’s predecessor, Michael Chertoff, had in 2006 “based on virtually identical facts for a virtually identical voyage, but a voyage that Furie was unable to make.”
The facts justifying a waiver, Furie said, included a natural gas shortage in South-Central Alaska and defense-related facilities such as Joint Base Elemendorf-Richardson and the Ted Stevens International Airport.
Instead of granting the waiver, CBP determined that transportation of the rig violated the Jones Act and assessed a $15 million civil penalty against Furie, which the oil company said is equal to the value of the rig as ascertained by CBP and “not only the largest penalty that CBP could have possibly assessed, it is, based on information and belief, the largest penalty ever assessed for an alleged Jones Act violation.”
After CBP billed Furie for $15 million and rejected its request for reconsideration, the company filed a lawsuit against the government arguing the penalty should not be enforced, while the government filed a counterclaim requesting the court to enforce the penalty.
Furie’s Spartan 151 “was not merchandise whose coastwise movement would be governed by the Jones Act, but instead was a vessel whose movement was governed by a different law, the Coastwise Towing Statute, which requires that any towing of a vessel between United States ports and harbors be done by a documented American towing vessel, and has different penalties.”
A violation of the Jones Act can result in forfeiture of the merchandise transported, a penalty “equal to the value of the merchandise (as determined by the Secretary of Homeland Security) or the actual cost of the transportation, whichever is greater,” while a violation of the Towing Statute can result in a $1,100 penalty, plus an additional penalty of $60 per ton based on the tonnage of the towed vessel.
The government said the movement of the rig was governed by the Jones Act, because it was hauled on board a vessel instead of being towed in the water by another.
To determine whether CBP’s interpretation of the Jones Act and the Towing Statute warranted deference, the court had to determine whether the statute is unambiguous.
If it is, the court said CBP must give effect to Congress’s intent, regardless of what the agency determined; if, on the other hand, the statute is ambiguous, the court must decide how much weight to give the agency’s interpretation.
The court noted while Furie argued the rig was not “merchandise,” CBP “has construed the term broadly” and historically viewed jack-up rigs or other vessels carried aboard other vessels “to be merchandise, because in such situations they do not retain their vessel function and are being transported in a commercial sense.”
Furie argued CBP’s interpretation of the term “merchandise” is contrary to law, or at least unsound, and the rig is clearly a vessel at all times, even when not in the water.
CBP did not dispute the rig was a vessel, but asserted when it is carried aboard another vessel, for purposes of the Jones Act, it is also merchandise, relying in part on the Tariff Act to inform its interpretation of the term “merchandise.”
The court said its use of the Tariff Act did not require CBP to exclude vessels from the Jones Act.
Furie further argued that case law interpreting the definition of merchandise under the Tariff Act cargo must be in the stream of commerce — that is, something intended for sale rather than something already in the hands of an owner.
But the court said the cases Furie cited (which dealt with the proper duty rate that should be applied to imported garment bags) could not be read so broadly.
Furie contended the Towing Statute governs all transportation of vessels and as long as the vessel is being transported as part of its normal maritime activities, and not as a commodity for sale, Congress intended the Towing Statute to apply.
The government disagreed, arguing the Towing Statute does not apply any time a vessel is transported, but rather, it is limited to actual “towing” situations where the vessel being moved remains in the water.
The court concluded the Towing Statute was ambiguous, that it was “not clear that Congress intended the Towing Statute to apply any time a vessel is transported as part of its regular maritime activities” and it had to consider whether CBPs application of the Jones Act instead of the Towing Statute to dry-towing situations where a vessel loaded on another vessel is entitled to deference.
It decided CBP’s distinction between when the Jones Act and Towing Act apply is rational and persuasive and upheld it. The court denied Furie’s motion to dismiss the case.
This column was published in the June 2014 issue of American Shipper.