Pacific Far East Line, Inc. v. United States

• Citation: 184 Ct. Cl. 169,394 F.2d 990
• Decision Date: 10 May 1968
• Docket Number: No. 119-63.,119-63.
• Parties: PACIFIC FAR EAST LINE, INC. v. The UNITED STATES.
• Court: Court of Federal Claims

184 Ct. Cl. 169, 394 F.2d 990 (1968)

PACIFIC FAR EAST LINE, INC. v. The UNITED STATES.

No. 119-63.

United States Court of Claims.

May 10, 1968.

Mark P. Schlefer, Washington, D. C., attorney of record, for plaintiff, T. S. L. Perlman, Washington, D. C., of counsel.

Allan J. Weiss, Admiralty & Shipping Section, Dept. of Justice, San Francisco, Cal., with whom was Asst. Atty. Gen. Edwin L. Weisl, Jr., for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Paul H. McMurray, with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a). The commissioner has done so in an opinion and report filed on June 5, 1967. Exceptions to the commissioner's opinion, findings and recommendation were filed by the parties and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's opinion, findings and recommended conclusion of law as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case.^* Therefore, the court concludes that plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 47(c).

OPINION OF COMMISSIONER

McMURRAY, Commissioner:

Pacific Far East Line, Inc., (PFEL) sues for damages under the Tucker Act, 28 U.S.C. § 1491 (1964), alleging that defendant breached its operating-differential subsidy (ODS) agreement with plaintiff by improperly withholding portions of subsidy funds due and payable to PFEL.

In my opinion plaintiff is entitled to recover.

In order to alleviate or diminish the complexities of this case, the parties requested and were permitted to present oral argument before the commissioner after they had filed their briefs under Rule 57. No transcript reflecting the oral argument was filed with the clerk of the court, but the transcript of testimony taken at the trial is very extensive. Complexities are involved in this case primarily because the events giving rise to the claim occurred over a 10-year period and involved voyages of many vessels which (voyages and vessels) are subject to a variety of classifications having many legal aspects.

PFEL, a Delaware corporation with its primary place of business in California, had engaged in the transoceanic foreign commerce of the United States since 1946. Anticipating keen competition from foreign shipping operators, PFEL sought an ODS to help replace its vessels with more efficient ships as a means of maintaining its favorable competitive position. Proceedings on the application were held pursuant to Title VI of the Merchant Marine Act of 1936 (hereinafter Act), 49 Stat. 2001, as amended, 46 U.S.C. §§ 1171-1183a (1964). Pacific Far East Line, Inc., 4 F.M.B. 7 (No. S-19, 1952). The defendant through the Federal Maritime Board,¹ subsequently entered into a subsidy contract (FMB-22) on December 31, 1952. FMB-22 covered the period from January 1, 1953 through 1962, which is the period of time (sometimes referred to as the recapture period) in which the activities giving rise to this case occurred. Later the parties substituted another contract (FMB-81) for FMB-22, effective January 1, 1959, but FMB-81 provided that the first recapture period should remain January 1, 1953 through 1962. The substitution does not change the issues in this case because the controversial contract provisions and the recapture period remain substantially the same. In this opinion both contracts may be referred to as one or as the agreement.

PFEL agreed to operate certain vessels on the service described by the contract (sometimes called the subsidized service) in accordance with the terms and conditions of the contract. In return, defendant promised to pay a subsidy toward various costs as determined by the contract. FMB-22 described the subsidized service as a berth service of a restricted number of outward sailings on essential Trade Route 29 — Service 2 as follows:

Between the California ports of Los Angeles and San Francisco and Yokohama, Kobe, Osaka, other Japanese ports (as traffic offers). Shanghai, other North China ports and ports in Manchuria and Korea (as traffic offers), Hong Kong, Manila, Philippine Islands outports, French Indo-China and Siam (as traffic offers); with privilege of calls at ports of U.S.S.R. in Asia.

FMB-81 described the service as between "ports in California" and, basically, the same Far Eastern ports. The agreement imposed upon PFEL an obligation to replace its old subsidized ships with new vessels and the new vessels became "subsidized vessels," i. e., the voyages of these vessels on the subsidized service were entitled to subsidy, as they were acquired.

Article II-16² of FMB-81 provided in part:

(a) Without the express approval of the United States, * * * PFEL shall not operate or cause or permit to be operated any unsubsidized vessel, * * * in competition with any subsidized service of the Operator PFEL or in the foreign commerce of the United States in competition with any other essential United States flag service, route, or line, as defined in applicable rules and regulations of the United States.

Article II-16 was included because defendant felt that it had a statutory duty to prevent the continuity of the service and the quality of operations from being adversely affected³ and because it had a contingent financial interest in the profits from subsidized operations by virtue of Article II-28.

Section 606(5) of the Act, 49 Stat. 2004, as amended, 46 U.S.C. § 1176(5) (1964), requires the inclusion in every ODS contract of language which constitutes the substance of Article II-28 of the agreement. Thus, the contract provided the following recapture formula:

(a) At the expiration of each 10-year recapture period during which, without interval, an immediately preceding subsidy agreement, this agreement, or a consecutive agreement shall have been in effect * * *, and upon the final termination of subsidized operations, the United States shall determine the amount of the net profits of the Operator on its subsidized vessel(s) and services incident thereto (without regard to capital gains and capital losses) during each 10-year recapture period, or the period to the final termination of subsidized operations, after deduction of depreciation charges based upon a life expectancy of the subsidized vessel(s) determined as provided in Section 607(b) of the Act. Forthwith upon such determination, if such net profit for any such period has averaged more than 10 per centum per annum upon the Operator\'s capital investment necessarily employed in the operation of the subsidized vessel(s), service(s), route(s), and line(s) the Operator shall pay to the United States an amount equal to one-half of such profits in excess of 10 per centum per annum, less amounts already retained, as partial or complete reimbursement for operating-differential subsidy payments received by the Operator for such recapture period, but the amount of excess profits so recaptured shall not in any case exceed the amount of * * * subsidy payments theretofore made * * * under this agreement or consecutive agreement(s) and the payment of such reimbursement * * * shall be subject to * * Section 607 of the Act and Articles II-26 and II-29 hereof.

* * * * * *

In effect, plaintiff's claim is for subsidy moneys withheld by defendant because the periodic payments of subsidy by defendant to PFEL were reduced by defendant's corresponding estimates of its recapture interest. Plaintiff, therefore, hopes to bring about a recalculation of defendant's recapture interest. Plaintiff cites the Article II-28 phrase "and services incident thereto," and contends that defendant's improper failure to include the financial results of certain nonsubsidized voyages, and inclusion of the financial results of other nonsubsidized voyages, as "services incident thereto" constitutes a breach of the contract resulting in the calculation of greater excess profits (i. e., profits subject to recapture by the United States) than would have been determined had the voyages been otherwise treated for recapture purposes. Defendant's basic defense is that Article II-16, relating to competing nonsubsidized operations, gave it the discretion to determine which of the nonsubsidized voyages should be included in the recapture formula and that defendant properly exercised its discretion. Resolution of this dispute requires understanding of the nature of the nonsubsidized voyages and analysis of the accounting involved.

In December 1952, before the ODS agreement was finally executed, PFEL informed the Maritime Administration (MARAD) by letter that it desired to operate certain nonsubsidized services. The letter stated that PFEL did not believe these services required the approval of MARAD under Article II-16 and that these services would not compete or conflict with the subsidized service, but it requested that MARAD treat the letter as an application for express approval if such approval was deemed necessary. The Maritime Administrator, treating the letter as an Article II-16 request, acted on it on November 17, 1953, and his letter of November 25, 1953, informing PFEL of his action largely sets the stage for this case.

The Administrator approved the following nonsubsidized services subject to stated conditions: (1) transpacific reefer service (i. e., transportation of food products under refrigeration) between United States West Coast ports, Alaskan ports and certain Far Eastern ports, many of which were also on the subsidized service; (2) Pacific-Guam and transpacific bulk cargo⁴ services consisting of "usually two sailings monthly in the service `California ports direct to Guam with general cargo, then to Japan with bulk cargo as well as...