Alaska District Court Says Seafood Shipments Don't Qualify for Exception to Jones Act

The U.S. District Court for the District of Alaska in a May 25 opinion found that shipments from two Alaskan shipping companies, Kloosterboer International Forwarding and Alaska Reefer Management, do not qualify for an exception of the Jones Act. Judge Sharon Gleason ruled that the shipments do not qualify for the Third Proviso of the Jones Act since they do not engage in transportation over a Canadian rail line.

However, the judge said that $25 million in penalty notices related to the shipments were void since CBP failed to provide adequate notice to revoke treatment established for the companies (Kloosterboer International Forwarding v. United States, D. Alaska # 3:21-00198).

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." What the companies took this to mean is that if the goods get on a Canadian rail line at some point in their journey, they're permitted under the Jones Act.

The companies sought to fulfill the requirements of this exception by putting their fish shipments on a train in Canada, the Bayside Canadian Rail (BCR), 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 with the use of a through route in part over Canadian rail lines, used a route recognized by the STB and that it had filed rate tariffs for the routes with the STB. Litigation then commenced over whether the BCR endeavor passed this test and qualified for this exception to the Jones Act.

Gleason first looked at whether the Jones Act should be broadly or narrowly construed. The judge landed on broadly, finding absent any indication, much less "clearest proof," that Congress intended for Jones Act penalties to be criminal in nature. This means the law will be viewed as regulatory in nature and not penal. Gleason then looked at all of the elements of the Third Proviso to decide whether the BCR qualified.

Key to the case was the definition of the term "through route," for which the judge said that both the plaintiffs and the U.S.'s definitions of the term were lacking. KIF and ARM said that a through route remains consistent so long as it starts and ends in the same locations even if there are changes in intermediary destinations, while the U.S. argued that the BCR is not a through route since the rail component lacks "continuous carriage." Gleason said that the relevant "through routes" under the Third Proviso "are the entire journeys between coastwise points," and as such, the BCR route is a through route.

Where the shipping companies failed was in their defense of using the BCR as engaging in transportation over a Canadian rail line. "The movement of merchandise out-and-back over the 100-foot track at the Port of Bayside does not provide actual progress along the through route and does not constitute 'transportation' over a rail line as required by the Third Proviso," the judge said. Gleason said the routes must be recognized by the STB and rates for the tariff route must have been filed with the board, and since that did not exist for the BCR, it does not qualify for Third Proviso.

KIF and ARM tried to argue that since the New Brunswick Southern Railway -- a rail terminal previously used by the plaintiffs -- was filed with the STB and had a tariff rate, their use of the BCR was valid since the BCR can be used in place of the NBSR. "The Court has determined that the BCR Route and the NBSR Route are distinct through routes," the judge said.

A lawyer close to the matter said that this is good news for the plaintiffs, though, since the door is still open for the companies to make their shipments Jones Act-compliant. "The participants in the BCR Route would probably need to go back to CBP first, make modifications to the routing of the rail line consistent with the Judge’s ruling, and obtain a letter ruling or consult with the Jones Act Division of Enforcement ('JADE'), a CBP office located in New Orleans," the lawyer said in an email. "If CBP resists, then they could go back to the Court, but parties are hopeful this can be resolved administratively now. "

The shipping companies also contested CBP's issuance of the penalty notices, made without any public notice and comment, and said that violated the law. The plaintiffs made two arguments to this effect -- one that was denied and the other that was granted, nullifying the penalties. In the first, KIF and ARM said CBP violated the law by issuing the notices premised on non-public revocations of Ruling Letters that were in effect for over 60 days. The court disagreed, finding that the statute is not applicable to the present litigation since CBP never issued a prior interpretive ruling over the BCR Route.

The other claim was that CBP violated the law since (1) the BCR Route is identical to transactions authorized under previous CBP ruling letters and (2) because CBP gave positive "treatment" to the BCR Route by repeatedly approving the entry of the merchandise that had travelled on the BCR. On this first claim, the judge found that a treatment was previously accorded by CBP, the conduct challenged in the enforcement action constitutes an identical transaction to the previous treatment, CBP issued an interpretive ruling that would modify the previous treatment and the ruling violated the notice-and-comment period, thus voiding the penalties.

"The Court finds that CBP was required to properly notify the public as specified in section 1625(c) that henceforth it intended to require that actual transportation of merchandise on a Canadian rail must occur, as opposed to 'any use' of a Canadian rail," the opinion said. "... CBP violated 19 U.S.C. § 1625(c)(2) when it issued the Notices of Penalty without complying with the notice-and-comment provision of that statute."

On the second claim, Gleason ruled that since there is "genuinely disputed material facts" over whether CBP's prior actions constitute "treatment," litigation would be needed to resolve the claim. The judge then declared the plaintiff's 8th amendment unfair penalty claims and due process claims to be moot since the penalty notices were not actually penalties.