Shipbuilders Council v. Dept. of Homeland Sec.

• Citation: 673 F.Supp.2d 438
• Decision Date: 03 December 2009
• Docket Number: Case No. 1:07cv1234.
• Parties: SHIPBUILDERS COUNCIL OF AMERICA, INC., et al., Plaintiffs, v. UNITED STATES DEPARTMENT OF HOMELAND SECURITY, et al., Defendants, Matson Navigation Company, Inc., Defendant-Intervenor.
• Court: United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)

673 F.Supp.2d 438

SHIPBUILDERS COUNCIL OF AMERICA, INC., et al., Plaintiffs, v. UNITED STATES DEPARTMENT OF HOMELAND SECURITY, et al., Defendants Matson Navigation Company, Inc., Defendant-Intervenor.

Case No. 1:07cv1234.

United States District Court, E.D. Virginia, Alexandria Division.

December 3, 2009.

Donald Jeffrey Kassilke, Sher & Blackwell LLP, Washington, DC, for Plaintiffs.

Monika L. Moore, Ralph Andrew Price, Jr., U.S. Attorney's Office, Alexandria, VA, for Defendants.

Gordon A. Coffee, Andrew Curtis Nichols, Ryan Robert Sparacino, Winston & Strawn LLP, Washington, DC, for Defendant-Intervenor.

MEMORANDUM OPINION

T.S. ELLIS, III, District Judge.

In this Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-706, suit, plaintiffs challenge a Coast Guard decision to issue a certificate of documentation with a coastwise endorsement to a vessel that underwent significant rework in a foreign shipyard. More precisely, the aft end of the M/V Mokihana, owned by Intervenor Matson Navigation Company, Inc. ("Matson"), was converted in a Chinese shipyard from an area for container storage to a lower garage for vehicle storage. On the basis of submissions by Matson, the Coast Guard decided that this work did not amount to a foreign rebuilding of the vessel under the Second Proviso to the Jones Act, 46 U.S.C. §§ 12101, 12132. At issue here is whether this decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." See 5 U.S.C. § 706(2)(A).

I.

A.

An understanding of the statutory and regulatory framework governing coastwise trading privileges is essential to an assessment of the Coast Guard's decision in this case. In 1920, Congress enacted the Merchant Marine Act, commonly known as the Jones Act, to shelter the American shipping industry from foreign competition "[b]ecause building ships and manning them in the United States was and remains more expensive than in other countries." OSG Bulk Ships v. United States, 132 F.3d 808, 809 (D.C.Cir.1998). In particular, Congress limited the coastwise trade—that is, trade between points in the United States—to vessels built in American shipyards and owned by American citizens. See Jones Act, ch. 250, § 27, 41 Stat. 988, 999 (1920) (codified as amended at 46 U.S.C. § 55102 (2006)). In 1956, Congress added the Second Proviso to Section 27 of the Jones Act, which prohibited vessels that had been "rebuilt" abroad from engaging in the coastwise trade. Act of July 14, 1956, ch. 600, § 1, 70 Stat. 544, 544 (codified as amended at 46 U.S.C. § 12132).¹ Yet, shipowners sought to end-run the Second Proviso by having large ship sections constructed abroad, towed to the United States, and installed by American shipyards into coastwise-eligible vessels. Seeking to close this loophole,² Congress amended the Second Proviso in 1960 to specify that the foreign construction of any major component of a vessel's hull or superstructure renders the vessel ineligible for coastwise trading. Act of July 5, 1960, Pub.L. No. 86-583, § 1, 74 Stat. 321 321. As codified by Congress in 2006, the Second Proviso appears, as follows:

A vessel eligible to engage in the coastwise trade and later rebuilt outside the United States may not thereafter engage in the coastwise trade.

[A] vessel is deemed to have been rebuilt in the United States only if the entire rebuilding, including the construction of any major component of the hull or superstructure, was done in the United States.

46 U.S.C. §§ 12132(b), 12101(a).³ Thus, under the Jones Act, if a vessel is "rebuilt," the entire rebuilding must be done in the United States if the ship is to retain its eligibility for the coastwise trade.

In 1996, the Coast Guard promulgated a regulation governing when a vessel has been rebuilt outside of the United States. In particular, the regulation provides that a vessel is "rebuilt foreign" (a) when "a major component of the hull or superstructure not built in the United States is added to the vessel" or (b) when a "considerable part" of the hull or superstructure has been "built upon or substantially altered outside of the United States." 46 C.F.R. § 67.177. These tests are commonly referred to as the "major component" and "considerable part" tests. Although the term "major component" is defined neither by statute nor regulation, the Coast Guard has traditionally found that objects weighing in excess of 1.5% of the vessel's discounted lightship weight are major components.⁴ With regard to the considerable part test, the Coast Guard determines whether a considerable part of the hull or superstructure has been worked upon by comparing the amount of work performed on the hull or superstructure to the vessel's steelweight prior to the work.⁵ Specifically, the following thresholds apply for steel vessels:

(1) A vessel is deemed rebuilt when work performed on its hull or superstructure constitutes more than 10 percent of the vessel's steelweight, prior to the work....

(2) A vessel may be considered rebuilt when work performed on its hull or superstructure constitutes more than 7.5 percent but not more than 10 percent of the vessel's steelweight prior to the work.

(3) A vessel is not considered rebuilt when work performed on its hull or superstructure constitutes 7.5 percent or less of the vessel's steelweight prior to the work.

46 C.F.R. § 67.177(b).

An important feature of the regulation also enables vessel owners to ascertain whether their planned overseas work will be deemed a foreign rebuilding through a "preliminary rebuilt determination." 46 C.F.R. § 67.177(g). After work has been completed, the regulation instructs vessel owners seeking a final determination to file the following information: (i) a detailed outline of the work performed; (ii) calculations showing the steelweight of the work performed on the vessel, the steelweight of the vessel, and comparing the two; (iii) accurate sketches or blueprints describing the work performed; and (iv) any further submissions requested. Id. § 67.177(e). In addition, the vessel owner must submit a separate application, in which he must certify that the vessel has not been foreign rebuilt, in order to receive a certificate of documentation with a coastwise endorsement. Shipowners potentially face forfeiture of their vessel for knowingly providing false information in this process. See 46 U.S.C. § 12151(b)(1) ("A vessel and its equipment are liable to seizure by and forfeiture to the Government if the owner of the vessel ... knowingly falsifies or conceals a material fact, or knowingly makes a false statement or representation, ... in applying for documentation of the vessel...."). This statutory and regulatory framework is the lens through which the Coast Guard's decision in this matter must be viewed.

B.

Two plaintiffs brought this action: Pasha Hawaii Transport Lines LLC ("Pasha"), a California limited liability company that operates a vessel engaged in the coastwise trade, and Shipbuilders Council of America, Inc. ("SCA"), a Virginia corporation and the largest national trade association representing the American shipyard industry. These plaintiffs named three defendants: (i) the Department of Homeland Security ("DHS"), the department of the federal government responsible for administering certain aspects of the Jones Act; (ii) the Coast Guard, the component of DHS responsible for administering certain aspects of the Jones Act; and (iii) the National Vessel Documentation Center ("NVDC"), a unit of the Coast Guard responsible for making rebuilt determinations under 46 C.F.R. § 67.177. In addition, Matson, the owner of the M/V Mokihana, the vessel that was the subject of the rebuilt determination considered here, was allowed to intervene as a defendant. See Shipbuilders Council of Am., Inc. v. U.S. Dep't of Homeland Sec, No. 1:07cv1234 (E.D.Va. Feb. 8, 2008) (Order).

The M/V Mokihana, a class C9 container vessel, was built in the early 1980s by Avondale Shipyards, Inc. in New Orleans, Louisiana. It served as a containership in foreign trade for approximately twenty years, after which it became eligible for the domestic coastwise trade.⁶ During this time, the M/V Mokihana was unaltered, except for minor changes that mitigated local cracking problems and that allowed the vessel to accommodate different sizes of containers.

On June 15, 2004, Matson sent a letter to the Coast Guard requesting a preliminary rebuilt determination, pursuant to 46 C.F.R. § 67.177(g), for three of its vessels: the M/V Mokihana, the M/V Mahimahi, and the M/V Manoa. These vessels were slated to undergo alterations partly in China and partly in the United States. Matson described the proposed alterations and sought confirmation "that the proposed work does not constitute a `foreign rebuilding'" within the meaning of the Second Proviso to the Jones Act. A.R. 1. Specifically, Matson related that it planned to modify the stern of one or more of its C9 vessels in order to accommodate a growing demand for rolling cargo between Hawaii and the continental United States. The overall project involved converting the container stowage area aft of the vessel's machinery casing to a garage for automobiles and other rolling cargo, with levels both above and below deck. Matson reported that the Chinese portion of the project would consist of part of the work on the upper deck and all of the work on decks, platforms, and the side shell below the upper deck, including associated outfitting and mechanical/electrical systems. A U.S. shipyard would then complete work on the upper deck and construct a five-level automobile garage above deck. In addition to describing the project and including sketches of the proposed work, Matson provided an estimate for the overall steelweight of the vessel (12,097 LT) and a summary of steelweight estimates for the work to be performed on the vessel. Specifically, Matson estimated that the steel work performed overseas on the...