The U.S. Department of Justice served several container shipping lines with subpoenas last week in Sausalito, Calif., where their top executives were attending industry meetings.
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Maersk, MSC and Hapag-Lloyd all confirmed Tuesday they were served with subpoenas.
Several container shipping lines were served with subpoenas last week by the U.S. Department of Justice in California where their top executives were attending industry meetings.
Top executives from shipping companies were attending meetings in Sausalito outside of San Francisco of the World International Council of Containership Operators, informally known as the “Box Club” and the World Shipping Council.
According to an agreement filed with the Federal Maritime Commission (FMC), there are 18 members of the Box Club, and one attorney thought most, if not all, were served with subpoenas. The FMC said it “would not comment on any investigation conducted by the Department of Justice.”
The Box Club members are: China COSCO Shipping, CMA CGM, Crowley, Evergreen Line, Hamburg Süd, Hapag-Lloyd, Hyundai Merchant Marine (HMM), “K” Line, Maersk Line, MOL, Mediterranean Shipping Co. (MSC), NYK, OOCL, Pacific International Lines, UASC, Wan Hai, Yang Ming and ZIM.
One Washington insider said the subpoenas are “unexpected… in this political environment where you have a new administration that seems to be pro-business, that has been championing less regulatory oversight – the so-called two-for-one rulemaking, whereby you kill two for every new one.”
Carriers respond:
Maersk, MSC and Hapag-Lloyd and Crowley all confirmed that they were served with subpoenas.
Maersk said last Wednesday it “was served a subpoena (request for documents) by the U.S. Department of Justice in the course of an investigation into the global ocean container shipping industry. The subpoena does not set out any specific allegations against Maersk Line.
“A subpoena does not mean that a company has engaged in illegal behavior nor does it prejudge the outcome of the investigation itself,” Maersk said, adding that it “will fully cooperate with the authorities in their investigations, and will respond as appropriate to the subpoena.”
Crowley said “While the subpoena is not limited, it
does reference the Transpacific trade – a trade in which Crowley does
not offer container shipping services. Moreover, the subpoena does not
accuse the company, or any Crowley employee, of wrongdoing. The company
is reviewing the matter and intends to cooperate fully.”
Likewise, MSC confirmed that it and several container shipping lines “received last week subpoenas from the U.S. Department of Justice.” MSC added, “Due to the ongoing nature of the investigation, we cannot comment further at this stage.”
Hapag-Lloyd also said it had “received a subpoena as well. It is an investigation into the global container shipping industry – which we would not like to further specify. We fully cooperate with the authorities.”
DOJ raises concerns over container shipping consolidation:
Last year, the DOJ wrote to the FMC to raise concerns about the consolidation of top container carriers into three large vessel sharing agreements:
• The 2M Alliance, consisting of Maersk and MSC (which is also cooperating with HMM);
• The Ocean Alliance, consisting of CMA CGM, COSCO Container Lines, Evergreen Line and OOCL;
• And THE Alliance, consisting of Hapag-Lloyd, Yang Ming, MOL, NYK and “K” Line.
When the letters were written, it was unclear if Hanjin Shipping, now defunct, would join THE Alliance; and Maersk’s pending acquisition of Hamburg Süd had not been announced.
In letters dated Sept. 19, 2016 and Nov. 22, 2016, Renata Hesse, then acting assistant attorney general (she has since joined the law firm Sullivan and Cromwell), expressed concerns about the new alliances, noting the DOJ “has long taken the position that the general antitrust exemption for international ocean shipping carrier agreements is no longer justified. The passage of the Ocean Shipping Reform Act in 1998 was a step towards deregulation, but the industry still lacks the full benefits of competition. The ocean shipping industry exhibits no extraordinary characteristics that warrant departure from competition policy.”
Hesse added, “Price fixing and other anticompetitive practices by the industry over the years have imposed substantial costs on our economy through higher prices on a wide variety of goods shipped by ocean transportation. However, to the extent that ocean carrier agreements continue to be immunized under the 1984 Shipping Act, it is important for the agreements to be limited and precise, as it is well-settled that antitrust immunities should be construed as narrowly as possible.
“The OCEAN Alliance’s proposal that it jointly determine capacity on a broad range of trade routes raises serious competition concerns,” she contended. “Although alliance members ostensibly retain independent pricing authority, they propose to determine capacity jointly. It is foreseeable that the members will agree to rationalize schedules, call on ports less frequently, and/or call on fewer ports, resulting in significant harm to shippers in the form of reduced service and increased prices. Current low rates and overcapacity do not justify granting the parties the ability to collude on capacity or any other dimension. The shipping industry is cyclical, like many industries, and approving the current round of alliances now may be harmful in the long term.
Hesse also noted how the three resulting alliances will be particularly dominant on transpacific-U.S. routes.
Under DOJ/Federal Trade Commission Horizontal Merger Guidelines, the transpacific container shipping market constitutes a “highly concentrated” market, while the worldwide container shipping market constitutes a “moderately concentrated market,” she said.
In addition, Hesse pointed out how there is evidence of past collusion, or anticompetitive behavior, within the roll-on/roll-off (ro-ro) business. Wallenius Wilhelmsen, NYK, “K” Line and CSAV (now part of Hapag-Lloyd) and eight individuals were indicted or pled guilty in connection with a worldwide conspiracy involving price fixing, bid rigging and market allocation.
Hesse noted how Jones Act carriers Sea Star, Horizon Lines and Crowley, and six of their employees “have pled guilty or been convicted at trial in connection with a price fixing conspiracy among carriers of domestic freight between the continental U.S. and Puerto Rico.” Domestic ocean carriers do not enjoy the antitrust immunity provided to liner shipping companies in international trade.
In the Nov. 22 letter, Hesse repeated many of these concerns over industry consolidation, saying, “This increase in concentration and reduction in the number of shipping alliances will likely facilitate coordination in an industry that is already prone to collusion. Once an agreement among ocean carriers is filed with the FMC and becomes effective, conduct covered in the agreement could enjoy immunity from the antitrust laws.”
FMC container alliance approval:
The FMC allowed the Ocean Alliance agreement to become effective on Oct. 24, 2016, and THE Alliance agreement to become effective Dec. 19, 2016.
FMC Commissioner William P. Doyle noted that the three alliance agreements require members to “negotiate independently with American businesses such as tugs, barges, stevedores, chassis providers, container equipment lessors, bunker suppliers and other third-party service providers in the U.S. On commercial matters, THE parties can gain significant efficiencies by jointly discussing operational matters. I believe this balances the ocean carriers’ economic needs to gain operational efficiencies while the FMC exercises its duty to foster a vibrant domestic maritime sector for the American businesses, families, and workers that rely upon it.”
Shipping Act of 1984:
In January, Doyle dissented from a decision, allowing Wallenius Wilhelmsen Logistics, Eukor Car Carriers, American Roll-on Roll-off Carrier and Hyundai Glovis Co. Ltd. to amend an agreement so they could jointly solicit bids for contracts covering the provision of tug services rather than negotiate separately. He contended that the amendment reached beyond the scope of the Shipping Act of 1984.
“Under the Shipping Act, antitrust immunity is permissible to certain agreements among and between ocean common carriers and marine terminal operators,” he said. “U.S-flag tug service providers are not ocean common carriers and they are not marine terminal operators. Under this amendment, we are now witnessing the use of the Shipping Act to actually undermine the U.S.-flag domestic fleet, in this case tugboat operators.”
The Shipping Act of 1984 gives international carriers extraordinary rights.
“If there’s an agreement that’s filed and effective with the FMC, they can literally do almost anything that’s prohibited by the general antitrust laws of the U.S.,” said one attorney, noting how “price fixing, market share allocation and service rationalization – some of it being so-called efficiency enhancing – space sharing, slot chartering, equipment rationalization.
“Provided they’re doing it pursuant to an agreement, then they’re fine,” he said. But formal rate-setting agreements or “conferences” have disappeared in the U.S. because of the Ocean Shipping Reform Act, confidential contracting, and the decision by the European Union to end anti-trust immunity or “block exemption” for liner shipping in 2008.
Carriers could get into trouble, however, if they take concerted action outside the scope of an agreement they have filed with the FMC.
