In 1920, Congress passed the Merchant Marine Act, colloquially the Jones Act, which restricts transportation of cargo in the U.S. domestic (or “coastwise”) trade to vessels flying the Stars & Stripes, and which are by and large U.S. built, owned, financed and operated. Since then, numerous other statutory enactments called “cabotage laws” have added virtually every salty business – from fisheries and towing to transportation of government personnel and property – to the “U.S. boats only” list. If your trade is on this list, you can’t move cargo on a foreign vessel between any two U.S. ports without making an intermediate stop elsewhere.
This politically charged law has long found salvation and justification in the simple notion that, hey, we need American-flagged vessels. They serve economically and militarily crucial functions. If we want American vessels, we need shipyards to build and service them. And while we’re at it, let’s keep vessel financing, taxing, labor and safety close to home as well. These all promote essential American interests, while increasing tax revenues and keeping a labor force afloat to boot. Legally restricting foreign vessels from playing in our backyard is the only way to combat a nasty reality of world economics: foreigners simply can build and operate boats cheaper than we can.
As much as keeping foreign competish out of U.S. waters is a priority of domestic waterborne industries, foreign concerns would sure like to find ways around Jones Act restrictions. The U.S. Coast Guard is tasked with making sure only American entities receive certificates of documentation with coastwise endorsements by way of an application process that includes a statement of vessel ownership and other particulars. Regs prohibit sneaky maneuvers certain foreigners have been known to try like opening U.S.-based companies as nominal vessel titleholders, and retaining ultimate control through layers of disguised ownership.
Do the Coasties always get it right? Probably not, especially when information an applicant provides is inaccurate. A series of marine transport service providers, all U.S. based and operating in the Gulf of Mexico, recently alleged that a Singapore company, Otto Marine, set up phantom U.S. entity Surf Subsea, Inc. in Texas, hired an American citizen to call himself its CEO, and arranged for the entity to purchase support- and-supply vessel M/V SURF CHALLENGER. The U.S. water carriers alleged that Surf Subsea, in its application to the Coast Guard for coastwise certification, stated that (1) its president and CEO were U.S. citizens; (2) it had no alien directors; (3) title to 75% or more of its stock was “owned by U.S. citizens eligible to document vessels in their own right with an endorsement for coastwise trade”; and (4) “[b]y no means whatsoever is control in excess of 25% conferred upon or permitted to be exercised by any person who is not a citizen of the United States.” The SURF CHALLENGER got its certification and began operations in the Gulf.
The local team sued Surf Subsea in a Louisiana state court, alleging that points 3 and 4 of its application were false. They sought a declaratory judgment (in lawyer-speak, a judicial determination of a point of law) that Surf Subsea didn’t qualify for a coastwise endorsement; an injunction prohibiting SURF CHALLENGER from operating in U.S. waters without foreign calls; and money damages under the Louisiana Unfair Trade Practices and Consumer Protection Law. Surf Subsea removed the action to the U.S. District Court for the Eastern District of Louisiana, claiming federal question jurisdiction.
Both sides moved to dismiss. The plaintiffs urged there was no federal jurisdiction over state claims for declaratory relief, injunction and a consumer protection award (and that the action should be sent back to state court). The defendant asserted that not only is federal jurisdiction exclusive in a matter like this, it preempts state law such that the matter must be dismissed.
Surf Subsea won the day on all points. While a plaintiff generally gets to chose the legal theories it thinks it has rights under, and plead them before a court of its liking, if those theories fall within a narrow class of matters that necessarily raise a stated federal issue, even if that issue isn’t raised in the complaint, federal jurisdiction obtains and the matter may be removed to one of Uncle Sam’s courts. Federal vessel documentation and coastwise trade laws fit that bill. A court would have to construe federal laws to adjudicate any one of the issues the plaintiffs raised in their complaint and, put simply, federal courts have a much greater interest in the outcome of a dispute like this than would any state court. Accordingly, the court kept the case.
And then it through it out. Federal law preempts state law whenever application of the state law would conflict with or create a burden on federal law. If the Coast Guard and industry players had to worry about how 50 state tort regimes might impact coastwise licensing, their tasks would be complicated many fold. This rationale in finding state law claims preempted has specifically been applied in the “fraud-on-an-agency” context, such as here. Because the relationship between the Coast Guard and Surf Subsea is “inherently federal in character,” and was “prompted by the Jones Act,” plaintiffs attempts to “police” fraud on the Coast Guard cannot be adjudicated pursuant to state law.
Moreover, while federal statutes provide criminal enforcement remedies, they don’t say anything about a private right of action parties can take advantage of when they feel they’ve lost money to fraudulent operators. Allowing the plaintiffs’ claim to proceed under state law would expand the “express remedies” federal law provides. That’s a no-no, and prompts preemption.
If the plaintiffs’ allegations about fraudulent application statements are true, they probably could make a convincing argument that Surf Subsea should be shut down, and that they should be awarded damages. Unfortunately for plaintiffs, they have no private cause of action for alleged coastwise trade violations.
Ref: Offshore Service Vessels, LLC, et al. v. Surf Subsea, Inc., 2012 WL 5183557 (E. D. La. 2012); and the Jones Act, 46 U.S.C. §55101, et seq, available at http://www.law.cornell.edu/uscode/text.
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