In response to U.S. President Joseph Biden’s July 9, 2021 Executive Order to enhance competition and antitrust enforcement, the U.S. Federal Maritime Commission (“FMC”) entered into a Memorandum of Understanding (“MOU”) with the Antitrust Division of the U.S. Department of Justice (“DOJ”) to facilitate criminal investigations of violations of U.S. laws. Given that shipping companies and their employees may be separately charged by DOJ regardless of their physical location and face draconian penalties upon conviction, it is incumbent for all shipping companies – foreign and domestic – to monitor these recent developments and take steps to minimize the likelihood of harmful consequences, including by establishing or enhancing existing compliance programs.
Overview of the MOU
On July 12, 2021, the FMC and DOJ signed its first interagency MOU to foster cooperation in the enforcement of antitrust and other laws related to the maritime industry. Key provisions of the MOU provide that the agencies will: i) share information and materials relevant to the competitive conditions in the U.S.-international ocean liner shipping industry, including terminal services provided to ocean liners, and ii) confer, at least annually, to discuss and review enforcement and regulatory matters.
Unlike the FMC, DOJ has the authority to bring criminal charges against alleged offenders of antitrust laws. In the past, DOJ has made its presence known by issuing statements regarding certain alliance agreements (vessel-sharing agreements); this MOU raises the stakes as it suggests more intense scrutiny by DOJ.
FMC Activity, Audit Program and Recent Litigation
On July 19, 2021, within days of the Executive Order and the signing of the MOU, the FMC also disclosed the Vessel-Operating Common Carrier Audit Program to review carrier compliance with FMC’s detention and demurrage rule. As part of this new audit program, the FMC will audit the top nine carriers by market share ― i.e., Maersk, MSC, CMA CGM, COSCO Group, Hapag-Lloyd, ONE, Evergreen, HMM and Yang Ming. Initially, the FMC will request information from the carriers to create a database of quarterly reports on detention and demurrage practices, and will follow with individual carrier interviews. The audit may also focus on other aspects of these companies’ practices and operations, such as billing, appeals procedures, penalties assessed by the lines, and any other restrictive practices.
Significantly, the FMC has already been auditing carriers to address issues concerning intermodal congestion related to COVID-19 and to identify operational solutions to cargo delivery system challenges. The FMC is apparently poised to investigate eight carriers ― CMA CGM, Hapag-Lloyd, HMM, Matson, MSC, OOCL, SM Line and Zim ― that were identified as having implemented congestion-related surcharges. In August, the FMC requested information about these surcharges from these carriers. The FMC’s inquiry may focus on whether surcharges were implemented following proper notice, if their purpose was clearly defined, and whether there were clear events or conditions that triggered or terminated the surcharges. The FMC suggested enforcement action may occur if tariffs are improperly established.
Shipping customers are also imploring the FMC to investigate shipping practices. On July 28, 2021, MCS Industries, a Pennsylvania-based home furnishings manufacturer, filed an administrative proceeding against COSCO and MSC, alleging that the carriers had violated provisions of the Shipping Act and refused to honor their service contracts, calling for the FMC to conduct an investigation of these companies’ shipping practices. COSCO and MSC have denied the allegations and noted, among other things, that MCS’s complaint should be heard in the fora specified in its respective service contracts with the carriers. An administrative law judge was appointed to hear the matter, the outcome of which should be closely watched by industry participants.
DOJ Antitrust Landscape
DOJ’s coordinated efforts with the FMC have implications for the shipping industry as DOJ antitrust prosecutions have been both expansive and punitive. DOJ’s jurisdiction includes foreign business activities that have a “substantial and intended effect in the U.S.” That broad reach has impacted numerous companies throughout the world in various industries ranging from auto parts to air cargo. Companies in such industries have paid millions of dollars in penalties and many of their employees have been imprisoned.
The shipping industry has not been spared. In a long-running investigation, a Norwegian shipping company and its executives were indicted for their participation in an antitrust conspiracy focused on the allocation of customers and routes, rigging bids, and fixing prices for the sale of international ocean shipments of roll-on, roll-off cargo to and from the United States. The company pled guilty and was sentenced to pay a $21 million fine; four individuals have already been sentenced to serve prison terms. Four other companies also pled guilty for their roles in the conspiracy, leading to the assessment of more than $255 million in criminal fines.
Importance of Compliance Programs
Given these developments, it is important for all shipping companies to establish effective compliance programs. Since 2019, DOJ has resolved certain criminal investigations without charges where DOJ concluded that the companies under investigation have implemented adequate and effective compliance programs. This leniency policy was implemented to incentivize companies to prioritize antitrust compliance and to be proactive in detecting and reporting anticompetitive behavior.
Under this policy, DOJ will not automatically grant leniency to companies that merely maintain a compliance program. Rather, DOJ will determine whether the compliance plan is adequate. If deemed adequate, even where unlawful conduct has occurred, more lenient treatment is potentially available. In determining the adequacy of compliance plans, DOJ’s Guidance on Corporate Compliance Programs is instructive. That Guidance details the components of an effective compliance program, including whether the company at issue has devoted sufficient antitrust compliance resources, conducted training, created effective reporting systems, and tailored the compliance program to the company’s business and industry.
For those companies operating under DOJ jurisdiction, the existence of an effective compliance program minimizes the likelihood of an investigation and decreases the resulting penalties where violations occur. With the FMC and DOJ now committing to collaborating in investigating the shipping industry, it is crucial to follow developments arising from this collaboration and to implement a substantial compliance program to curtail the occurrence of improper conduct and to minimize penalties should misconduct occur.
If you have any questions regarding the matters covered in this e-mail, please contact: Michael Considine (212) 574-1334, Bruce Paulsen (212) 574-1533, Brian Maloney (212) 574-1448 and Julie Hong (212) 574-1285 in the Litigation Group and Hoyoon Nam (212) 574-1640 and Michael Timpone (212) 574-1342 in the Maritime and Transportation Group.