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Judge Denies Request to Block "Canadian Rail" Jones Act Penalties

Published Sep 29, 2021 7:17 PM by The Maritime Executive

On Monday, a federal judge denied a petition to block new Jones Act penalties for American Seafoods Company's controversial "Canadian railway" program. The paperwork that ASC used in connection with its unique rail operation is out of order, the judge ruled, making the compliance-oriented rail system noncompliant.

ASC and its partners face federal fines totalling to about $350 million for alleged violations of the Jones Act. Since 2017, U.S. Customs and Border Protection has been investigating a unique logistical arrangement that ASC created for transporting pollock from Alaska to Maine. An ASC subsidiary, Alaska Reefer Management (ARM), charters foreign-flag reefer ships to transport fish from Dutch Harbor to New Brunswick, Canada via the Panama Canal. At Bayside, New Brunswick, the fish is offloaded at a terminal operated by ARM subsidiary Kloosterboer International.

The cargo is then loaded into truck trailers and driven onto a two-car, one-track train, the Bayside Canadian Railway (BCR). This miniature onsite rail line carries each laden truck 100 feet to the south, then 100 feet back north, completing a round-trip "Canadian rail journey." From the BCR's loading ramp. the truck drives over the border into Maine, completing a 7,500 nm foreign-flag cargo shipment between U.S. points.

The Jones Act ordinarily bans foreign-flag vessels from transporting cargo in U.S. coastwise trade, but the law contains an obscure clause - the "Third Proviso" - that exempts shipment routes that are "in part over Canadian rail lines." According to ARM and terminal operator Kloosterboer International, the Bayside Canadian Railway - small as it may be - is indeed a "Canadian rail line" for the purposes of compliance. U.S. Customs and Border Protection disagrees, and in August, it issued fines totaling more than $350 million to ARM, ASC, Kloosterboer and other participants in the Bayside program.

In their lawsuit, Kloosterboer and ARM contend that the threat of additional Jones Act penalties is currently preventing them from delivering millions of pounds of fish to their U.S. East Coast customers. They have sought a temporary restraining order and a preliminary injunction to prevent CBP from charging them with any further violations of the Jones Act until litigation is completed.

On Monday, U.S. District Judge Sharon L. Gleason denied their petition. In ARM's attempts to precisely match the letter of the Third Proviso, it forgot to dot its i's and cross its t's, she ruled. To meet the clause's requirements, ARM relied on outdated railroad "rate tariff" paperwork from 2006, which had been filed by a different company for use on a different Canadian railroad. The Third Proviso requires that the rail route used must be "recognized" by the U.S. Surface Transportation Board (STB) and that rate tariffs for the route must have been filed with the STB.

"[ARM and Kloosterboer] have not demonstrated that they are in compliance with the Jones Act insofar as they have not demonstrated that a tariff for the BCR Route has been filed with the [U.S. Surface Transportation Board]. In addition, the record indicates that [they] are not diligently pursuing all available administrative remedies. In these circumstances, the balance of equities and public interest tip decidedly against [them], and the entry of a preliminary injunction is not warranted at this time," Gleason ruled. 

Her decision leaves CBP free to impose more penalties if American Seafoods attempts to move any additional fish along the Bayside route. However, she also left the door open for ARM and Kloosterboer to renew their request for an injunction - but only after they properly register the rate tariffs they charge themselves for the use of their own miniature Canadian railroad, as required by the Third Proviso. 

She also found that they might succeed on the merits in later litigation. "As CBP stated in one of its letter rulings in 2004, 'We have long held that "in part over Canadian rail lines" is any use of Canadian rail,'" she noted. "Clearly, the BCR Route includes, in part, the use of a rail in Canada. At least in terms of functionality, the BCR rail line would appear to be substantially identical to other Canadian rail lines on which merchandise is carried solely to comply with the Third Proviso."