Jones Act Permits Building Canadian Rail Line to Skirt the Law, Proposed Amicus Brief Argues

Building a rail line in Canada to take advantage of an exception to the Jones Act is "ordinarily permissible" under the law, logistics company Lineage Logistics Holdings said in a proposed amicus brief at the U.S. District Court for the District of Alaska. The Supreme Court of the U.S. said that liability cannot be imposed just because an individual or entity set up a transaction to avoid liability. Due to this holding, even if two shipping companies set up a Canadian rail line to avoid Jones Act penalties, it cannot then be held liable under the Jones Act, the brief said (Kloosterboer International Forwarding LLC, et al. v. United States, D. Alaska #3:21-00198).

Kloosterboer International Forwarding and Alaska Reefer Management, the two companies, face penalties in excess of $25 million for the alleged Jones Act violations. KIF and ARM ship seafood from Alaska to the eastern U.S. via the Bayside, New Brunswick, Canada port. CBP said this violates the Jones Act -- the law that says that shipping between U.S. ports must be conducted by U.S.-flagged, -made and -owned ships. The companies shipped seafood from a U.S. port in Alaska to the East Coast on a Canada-flagged ship.

KIF and ARM argue that their shipments qualify for the Third Proviso exception of the Jones Act, which says that the act doesn't apply to the transportation of merchandise between points in the U.S. "over through routes in part over Canadian rail lines and connecting water facilities if the routes are recognized by the Surface Transportation Board (STB) and rate tariffs for the routes have been filed with the Board." The companies sought to fulfill the requirements of this exception by putting their fish shipments on a train in Canada, sending them to a destination 100 feet away and bringing the train right back. From there, the shipments finished their journey to Maine (see 2109170048).

A three-part test exists to qualify for the Third Proviso. A shipping company must prove that the transportation of the merchandise was conducted on a through route, in part over Canadian rail lines, using a route recognized by the STB and that it had filed rate tariffs for the routes with the STB.

Joining KIF and ARM's bid to qualify for the Third Proviso, Lineage Logistics filed its amicus. Its argument started with the contention that building a rail line, such as the one used by KIF and ARM, to take advantage of an exception to a law does not violate the law. In the 1972 opinion Reliance Electric Co. v. Emerson Electric Co., the Supreme Court held that “Liability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under § 16(b). The question is, rather, whether the method used to ‘avoid’ liability is one permitted by the statute.”

There is no anti-evasion provision or measures about the intentions of the shippers in the Jones Act, the brief said. "The criterion in the statute is solely whether the goods traveled on a Canadian rail line, not why they did," Lineage Logistics argued. The proposed amicus further stated that the government's invocation of customs law that prohibits avoiding customs duties via disguise or artifice is irrelevant since the Jones Act does not involve customs law. "CBP’s complaint is not really that the railroad is a sham, but that the railroad was constructed to enable a route that avoids Jones Act violations," the brief said. "That would not be a meritorious objection even under the customs cases."

The amicus also argued that CBP has not established that the Canadian rail line used by the plaintiffs even is a sham since the government does not know whether the rail portion of the Bayside Route has a commercial function. "Nothing in the record supports the government’s statements about why the BCR railroad was built," the brief said. "... CBP has no evidence and has offered no explanation why an operation that is obviously a railroad -- it has railroad cars traveling and carrying cargo over railroad track -- is not a railroad simply because it does not connect to the transcontinental rail network. Certainly the Third Proviso does not impose, as a precondition, that the rail line be capable of facilitating a transcontinental rail-only transit."