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Antitrust insights in shipping – recapping 2021 and preparing for 2022

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Antitrust insights in shipping – recapping 2021 and preparing for 2022

At a Glance…It’s a new year, but the pandemic continues to cause supply chain disruptions worldwide, and there is no end in sight with the omicron variant exacerbating the global traffic jam. Surges in demand combined with clogged transportation systems have caused the cost of moving cargo to skyrocket. U.S. ports are overwhelmed with imported containers. It has become common to ship empty containers back to Asia because it is often more profitable than spending time and manpower filling containers, affecting U.S. exporters.

Against this backdrop, the Biden administration and federal agencies responsible for enforcement of the antitrust laws have repeatedly emphasized their focus on competition issues that affect the shipping and transportation industries. In this alert, we summarize the administration’s recent policy announcements and initiatives and highlight key takeaways as we sail into 2022.

Capability: Antitrust & Competition; Shipping; Transportation

Authors: Courtney Bedell Averbach, Leah Hungerman, Michelle Mantine, Greg Chase, and Alice Colarossi

2021 recap

1. Biden’s Executive Orders: A “whole-of-government” approach

Six months ago, President Biden issued Executive Order (EO) 14036, “Promoting Competition in the American Economy,” with the stated goal of fostering competition within the U.S. economy in light of increased corporate consolidation. EO 14036 and its accompanying Fact Sheet highlight a number of initiatives aimed at enhancing competition across multiple sectors. While EO 14036 did not immediately establish any new requirements, it is a call to action that seeks the cooperation of multiple federal agencies in reviewing issues and establishing new policies to implement the administration’s goals under a “whole-of-government” approach.

Specific to container shipping, EO 14036 notes that the global container shipping market is dominated by a small number of large companies and has rapidly consolidated since 2000, increasing costs and “leaving domestic manufacturers who need to export goods at these large foreign companies’ mercy.” EO 14036 encourages the Federal Maritime Commission (FMC) to vigorously enforce the prohibition of unjust and unreasonable practices in relation to “detention and demurrage” fees – fees that ocean carriers charge for time that freight is sitting in port waiting to be loaded and unloaded and for equipment that is not promptly returned.

An earlier Biden EO titled “America’s Supply Chains” (EO 14017) did not specifically target competition issues, but likewise seeks a “whole-of-government approach to assessing vulnerabilities in, and strengthening the resilience of, critical supply chains.” EO 14017 aligns with the Administration’s increased focus on the shipping industry, given the importance of global shipping to the supply chains that underpin economic activity across nearly all sectors.

2. Piling on: DOJ-FMC collaboration

In the same month that EO 14036 was issued, the FMC and the Antitrust Division of the Department of Justice (DOJ) entered into a memorandum of understanding relative to “Cooperation with Respect to Promoting Competitive Conditions in the U.S.-International Ocean Liner Shipping Industry.” The agencies agreed to share information “for the purpose of improving each agency’s effectiveness in carrying out its respective legal responsibilities.” They also agreed to confer, at least annually, to address law enforcement, regulatory, and other matters related to competitive conditions in the international ocean liner shipping industry. This is the first-ever agreement of this nature between the two agencies.

Importantly, unlike the FMC, the DOJ has criminal enforcement capabilities. Specifically, the DOJ has jurisdiction to enforce U.S. antitrust laws not only against domestic business activities but also against foreign business activities that have a substantial and intended effect in the United States, up to and including criminal prosecution. In recent years, the DOJ has indicted a foreign ocean liner shipping company and its executives in relation to a conspiracy regarding allocation of customers and routes, bid rigging, price fixing, and other anticompetitive conduct in the international roll-on, roll-off ocean shipping industry, resulting in guilty pleas, hefty fines, and prison time for individuals, not just for the company and its executives, but also for four other competitors that were found to have participated in the conspiracy. The DOJ’s prosecutions followed a European Union antitrust probe into the container line shipping industry, which was resolved in 2016 when 14 companies entered into legally binding commitments to increase price transparency for customers and reduce the likelihood of coordinating prices.

The FMC, on the other hand, has jurisdiction to investigate and sanction ocean carriers that implement unfair and unreasonable practices in violation of the U.S. Shipping ActSpecifically, the FMC brings enforcement actions and issues civil penalties against ocean carriers; the FMC also adjudicates private party actions brought by cargo owners and awards reparations. The FMC has intensified its efforts to use these tools against ocean carriers, in particular in relation to their demurrage and detention practices during the COVID-related port congestion crisis. The most recent illustrations are three policy statements issued by the FMC last month to encourage shippers to file private party complaints against ocean carriers, either individually or collectively, and to protect them from retaliation and attorney fees awards when such actions were brought in good faith. In one of these statements, the FMC recognized that private actions are important to alert the agency of potential violations and to deter unfair and unreasonable conduct by carriers.

The new collaboration between the FMC and the DOJ demonstrates that the agencies are taking seriously the Biden administration’s encouragement to ramp up enforcement of unlawful and anticompetitive activity in the international shipping industry. In particular, the DOJ’s cooperation gives sharper teeth to the initiative due to the DOJ’s capacity to prosecute criminal activity.

3. “Progress at our ports,” but more work is needed

November 2021 blog post from the Biden Administration noted that some progress has been made in addressing the supply chain issues at U.S. ports. Specifically, the total number of containers imported by two major ports – the Port of Los Angeles and the Port of Long Beach – increased 16 percent as compared to 2018, and the number of containers sitting on the docks for more than nine days decreased by about one-third over the first two weeks of November, due in part to a new congestion fee the ports imposed on ocean carriers. This fee was later postponed due to the carriers’ successful clearance of the docks.

At the same time, the post emphasized that more work is needed to improve exports out of the nation’s ports, blaming the dominance of nine container lines that have formed three alliances that together control 80 percent of the global container shipping market and 95 percent of the critical East-West lines, according to the administration. The post also highlighted the sharp increase in 2021 in the share of exported containers that are empty, leaving some U.S. exporters in a bind. To resolve these issues, the administration encourages the FMC, with the support of the DOJ and Congress, to use all of the tools at its disposal to ensure free and fair competition, up to and including challenges to the alliance agreements between the carriers to the extent that they “produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost or … substantially lessen competition.” 

2022 takeaways

It remains to be seen what concrete action will be taken by U.S. enforcers to further the Biden administration’s policy goals, but there are a few things that ocen carriers operating in the United States and globally should keep in mind throughout 2022.

1. Compliance is key

Ocean carriers should implement competition compliance programs, or evaluate and improve their existing competition compliance programs, to ensure that they are adequate and effective. In addition to deterring potential antitrust violations, a compliance program may entitle a company to leniency at both the charging and sentencing stages in a criminal case, subject to discretion. There is no rigid formula to assess the adequacy of a compliance program, but factors include its design and comprehensiveness, whether it facilitates a culture of compliance, whether it is appropriately tailored to account for the particular business’s antitrust risk, and whether it is periodically assessed and revised, among other things. Experienced antitrust counsel can assist in evaluating and updating a compliance program to ensure that it is well designed and functions effectively in practice. An investigation, even if it does not ultimately result in prosecution, can place a significant strain on a company’s resources, so prevention is the best policy.

2. Merger reviews are likely to be longer and more intense

In evaluating and pursuing mergers and acquisitions, companies that operate in the shipping and transportation industries should be prepared for questions and expect potentially lengthier reviews as part of the U.S. and foreign merger control processes. In the United States, 2021 brought a surge in merger activity across all industries, and accompanying Hart-Scott-Rodino (HSR) filings, that is expected to continue into 2022. In light of the unprecedented volume of filings, the Federal Trade Commission (FTC) and the DOJ announced the suspension of early termination, meaning that reportable transactions are subject to a mandatory 30-day waiting period (15 days for cash tender offers and certain bankruptcy transactions) unless and until the suspension is lifted. The FTC also began issuing “pre-consummation warning letters” for transactions that it cannot fully investigate during the HSR waiting period due to the “tidal wave of merger filings,” alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently challenge a deal even if the parties elect to close.

3. Amplified pricing and market scrutiny

Ocean carriers will likely face heightened scrutiny from government agencies and customers when implementing even ordinary course price increases, which may result in complaints, investigations, and lawsuits brought by both government and private plaintiffs. A company is, of course, free to set its own prices, but given market conditions and the ongoing pandemic, companies should ensure that any price increases are both licit and justified. Moreover, price fixing is a significant concern of government antitrust enforcement across all sectors, so changes to pricing (as well as to other terms that affect prices to customers and consumers) must result from a company’s independent determination. Thorough, contemporaneous documentation of a company’s individual, well-grounded, and procompetitive justification for any price increase is critical in the current enforcement atmosphere.

Conclusion

Given the complexities and nuances in this area of the law, it is always wise to consult with experienced antitrust counsel regarding substantive antitrust, merger control, and compliance issues as they arise. Reed Smith will continue to monitor developments regarding the administration’s initiatives in the supply chain, shipping, and transportation spaces. To learn more about our experience, please contact any of the authors listed or the Reed Smith lawyer with whom you regularly work.

If you have questions or would like additional information on the material covered in this mailing, please contact one of the authors – listed below – or the Reed Smith lawyer with whom you regularly work. 
 
 Averbach  Courtney Averbach
Associate, Pittsburgh
+1 412 288 3148
caverbach@reedsmith.com
 Hungerman  Leah Hungerman
Associate, Pittsburgh
+1 412 288 4048
lhungerman@reedsmith.com
 
 
 Mantine  Michelle Mantine
Partner, Pittsburgh
+1 412 288 4268
mmantine@reedsmith.com 
 Chase  Greg Chase
Partner, New York
+1 212 549 0407
gchase@reedsmith.com
 
 
 Colarossi  Alice Colarossi
Associate, New York
+1 212 549 4682
acolarossi@reedsmith.com
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