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Judge Rules That "Canadian Rail" Scheme Violated the Jones Act

Published May 26, 2022 5:07 PM by The Maritime Executive

A federal court in Alaska has ruled that the controversial "Canadian Railway" transport arrangement used by American Seafoods Company (ASC) violates the Jones Act.

In a ruling issued Wednesday, Judge Sharon Gleason determined that the brief rail treatment that ASC's affiliates applied to the cargo is not legitimate "transportation" for the purposes of compliance, and therefore does not satisfy the Jones Act's cabotage exemption for "transportation . . . in part over Canadian rail lines." 

However, the judge also ruled that U.S. Customs and Border Protection failed to follow administrative procedure after its agents reached the same conclusion. She threw out millions of dollars in CBP fines aimed at ASC affiliates, and an injunction against further CBP enforcement action remains in place. The decision calls into question whether ASC's associated businesses will face financial penalties for years of alleged Jones Act violations. 

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" (video at top). From the BCR's loading ramp, the truck drives over the border into Maine, finishing 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.

On Wednesday, Judge Gleason agreed with CBP andd ruled that the Third Proviso requires "transportation" to occur during the Canadian rail portion of that route. Since the rail portion of the route starts and ends at the same point, it does not result in forward progress and therefore does not meet the statute's standard for "transportation," she ruled.

"To construe the statute otherwise -  to simply require the peripheral involvement of a rail line - would result in absurdity, as it would effectively permit almost any non-coastwise-qualified vessel to fall within the Third Proviso so long as the journey included some contact, however limited, with a railroad in Canada," she wrote.

This, however, does not mean that CBP has the green light to proceed with enforcement. Gleason determined that by immediately pursuing fines against ARM, CBP reversed its own previous guidance. In 2004, CBP had advised in a letter ruling that "any use of Canadian rail" - no matter the size or scope - met the standards of the Third Proviso.

Instead of following the federal process for changing its regulatory interpretations, CBP moved ahead with issuing fines to ARM, without providing prior notice. Because there was no notice-and-comment period, the court found that CBP violated procedural requirements, and it dismissed the fines.

An injunction against CBP that forbids the agency from issuing new fines against ARM will remain in place until after other disputed elements of the case are litigated.