Security/Terrorism Developments

The September 11, 2002 attack on the World Trade Center has dramatically altered the manner in which transportation security is regulated in the United States.

The first step in improving security took place on November 19, 2001, less than two months after the attack on the World Trade Center, when the United States Congress passed the Aviation and Transportation Security Act, which, among other things, established the Transportation Security Administration (TSA).  Until recently, the TSA has been focusing on the federalization of the passenger screening process.  However, the TSA has also taken over the cargo security functions which were previously handled by the Federal Aviation Administration.  We will be reporting more on this development in our next newsletter.

During the past year, there have been several other important statutory and regulatory developments, including the passage or near passage of several new bills during the "lame duck" session of Congress which is underway as this Newsletter is being written.  We shall summarize these developments in the following sections.

Transportation Security/Antiterrorism Bills Sweep Through Lame Duck Session of Congress

Several bills which were stalemated during the regular session of Congress have passed or are very near to passage during the "lame duck" session of Congress which is still underway.

Perhaps the most significant of these bills is H.R. 5710, which was approved by the House of Representatives on November 13, 2002, and which will establish a new Department of Homeland Security upon its expected passage by the Senate.  This legislation will move the following agencies to the new Department of Homeland Security:  U.S. Coast Guard, U.S. Customs, Border functions of the Animal Plant Health Inspection Service (APHIS), enforcement and border protection functions at the Immigration and Naturalization Service (INS), the Federal Emergency Management Agency (FEMA), and the Secret Service.  The moves will be made over time, starting 60 days after the bill is adopted as law.

On November 14, 2002, the Senate and House both passed the Port and Maritime Security Bill (S.2014), which is intended to tighten security at seaports.  The Act will mandate extensive changes in the manner in which ocean cargo is handled, including the use of transportation security cards for entry to any antiterrorism secure area of a vessel or facility and development of an antiterrorism cargo identification and screening system, including performance standards for seals and locks of shipping containers.  The bill also requires assessment of vulnerability at ports, expands the Coast Guard's authority to stop and search ships, and requires background checks of workers in security-sensitive jobs.

Also on November 14, 2002, the House passed the Terrorism Risk Protection Act (H.R.3210), which is intended to provide federal insurance against damage caused by terrorism.  The bill will establish a Terrorism Insured Loss Shared Compensation Program, administered by the Secretary of the Treasury, to administer the program and pay the federal share of compensation for insured losses.  The purpose of the Act is "to ensure the continued financial capacity of insurers to provide coverage for risks from terrorism."

U.S. Coast Guard Mandates Providing Notice of Arrival Required 96 Hrs. Prior to Arrival

Less than a month after the September 11 attack on the World Trade Center, the U.S. Coast Guard published "Temporary Final Rules" which require foreign-flagged vessels to provide a notice of arrival at a U.S. port 96 hours prior to the expected time of arrival.  See 66 FR 50565 et seq. (October 4, 2001).  Shortly thereafter, the U.S. Coast Guard established the National Vessel Movement Center (NVMC) to track  notices of arrival.  The "Temporary Final Rules" have been extended for comment twice, most recently on September 28, 2002.  See 67 FR 55115 et seq.

U.S. Customs Requires Cargo Manifest to be Filed 24 Hrs. Prior to Lading

U.S. Customs has published a final rule which requires ocean carriers and NVOCC's to file a cargo manifest 24 hours prior to the lading of a vessel at a foreign port for transport to the United States.  See 67 F.R. 66318-66333 (October 31, 2002).  Customs will publish a further proposed rulemaking to expand the list of persons who may file a biennial certification of confidentiality on behalf of importers or consignees.  We have been informed that Customs might consider changes to the final rule in response to late-filed comments.  Although there will be a brief (60 day) period of relaxed enforcement, all carriers and NVOCC's should immediately familiarize themselves with these rules and consult with counsel to ensure that procedures are established to comply with the new rules.

RSPA Proposes to Extend Hazmat Registration System to Security Matters

On May 28, 2002, the Research and Special Programs Administration (RSPA) of the Department of Transportation (DOT) issued a notice in Docket No. HM-232 which proposes to extend the use of the DOT Hazmat shipper and carrier registration system to security matters.  Although the comment period expired in July, RSPA has not yet issued a final rule, probably because of the many negative comments regarding the rule as proposed.

U.S. Customs C-TPAT Program Update

U.S. Customs has adopted a program entitled the "Customs-Trade Partnership Against Terrorism" (C-TPAT).  The program requires participating carriers, brokers, intermediaries and shippers to sign an agreement which commits them to several actions to increase security in exchange for unspecified benefits in dealing with U.S. Customs, such as a reduced number of inspections. At this time, it is difficult to determine whether the costs are worth the potential benefit.  If you are interested in the program, you should explore the C-TPAT program on the U.S. Customs web site and, with the assistance of counsel, decide whether participation is worthwhile.

U.S. Customs CSI Program

In January 2002, Customs launched the Container Security Initiative (CSI) to increase the security of containers arriving in the United States.  A core element of the program is to place U.S. Customs inspectors at foreign ports to inspect containers bound for the U.S.  CSI ports presently in operation include Montreal, Vancouver and Halifax, Canada and Rotterdam, The Netherlands.  U.S. Customs anticipates that the following CSI ports will be operational in the near future:  Singapore, Antwerp, Belgium, Le Havre, France, Bremerhaven and Hamburg, Germany, Hong Kong, and Tokyo, Nagoya, Kobe and Yokohama, Japan.  On October 25, 2002, President Bush announced that China had joined the CSI initiative in principle.

Importers and Exporters Subject to New Documentation Obligations under the 2002 Trade Act 

On September 6, 2002, President Bush signed the Trade Act of 2002.  This bill includes provisions which require shippers and/or intermediaries to provide documentation concerning exports and imports to a marine terminal operator by no later than 24 hours before departure.  The bill also requires the Secretary of the Treasury to (1) draft regulations facilitating electronic cargo data transmissions and (2) establish a joint task force to evaluate, prototype, and certify secure systems of transportation. 

Intermediary News

OTI's Risk Enforcement Action Under OSRA

Still Regulated The Ocean Shipping Reform Act of 1998 (OSRA) has brought about dramatic changes in the shipping industry.  Prior to the passage of OSRA, ocean carriers were required to file tariffs for ocean carriage with the Federal Maritime Commission.  Although they could enter into service contracts, the contracts were subject to several requirements which created substantial obstacles to their use--most notably, the requirement that the rates offered in the contract also be offered to "similarly situated" shippers (not so affectionately known as "me-too rights").  OSRA effectively eliminated the limitations on service contracts for actual carriers (VOCC's).  Now, over 80% of U.S. ocean cargo moves under service contracts.

Although carriage by VOCC's has thereby been "deregulated," ocean transportation intermediaries (OTI's) are still subject to substantial regulation by the FMC.  For example, non-vessel operating cargo carriers (NVOCC's), who are substantially equivalent to domestic motor "freight forwarders," are still required to file tariffs with the FMC.  See the FMC's "Frequently Asked Questions" for OTI's.  Among other things, the regulations adopted by the FMC to enforce OSRA's requirements prohibit NVOCC"s from charging less than the rates specified in their tariffs.  See OTI Regulations at the FMC Web Site.  The regulations also prohibit freight forwarders from acting as "shippers" on the ocean bill of lading.

Unfortunately, many OTI's have run afoul of these new regulations, and the FMC has imposed substantial penalties on those about whom complaints have been brought to its attention.  The Shipping Act provides for a penalty of up to $27,500 for each willful or knowing violation of the Act, and the FMC has a penchant for assessing maximum penalties.  See Docket No. 01-10, Green Master International Freight Services, Ltd., served July 30, 2002.  If you serve as an ocean forwarder or NVOCC, you must carefully review FMC's regulations and consult with knowledgeable counsel to ensure that you are in compliance with the new rules.

China Stays New Regulations on Ocean Transportation

On December 5, 2001, the People's Republic of China enacted laws to regulate ocean transportation to and from that country.  The Regulations of the People's Republic of China on International Maritime Transport (RIMT), which were apparently modeled on the pre-OSRA version of the Shipping Act of 1984, were scheduled to become effective on January 1, 2002.  Among other things, the RIMT requires foreign NVOCC's to register with the Ministry of Communications (MOC) of the PRC and post a security deposit of approximately $96,000 before commencing operations--since surety bonds are not available to satisfy this requirement, many, and perhaps most, foreign NVOCC's could not or would not apply for the required license.

In the spring of 2002, representatives of the MOC met with  representatives of the FMC and Maritime Administration to discuss the new rules but were unable to resolve their differences.  Accordingly, on  May 2, 2002, the FMC requested comments on the Chinese restrictions.  See FMC Docket No. 98-14 (Notice of Inquiry).   On June 21, 2002, the MOC issued a Notice inviting comment on the "implementing rules" of the RIMT.  See FMC Notice of Further Inquiry.  Stay tuned for further news on this subject.

OTI's Seek Relief from Discrimination by Carriers

Although OSRA substantially deregulated the shipping rates charged by VOCC's, it did not eliminate the pre-existing exemption of ocean carriers from the antitrust laws of the U.S.  Hence, OTI's cannot use the antitrust laws to attack carriers who collusively set rates or refuse to negotiate reasonable service contracts with them.

Accordingly, the National Customs Brokers and Freight Forwarders Association of America (NCBFAA) has filed a petition in which they allege that the carrier members of the "Transpacific Stabilization Agreement" have violated the Shipping Act by engaging in a concerted practice of discriminating against NVOCC's in negotiating and setting service contract rates.  The FMC is undertaking an investigation of these claims.  See FMC Docket for Petition No. P1-02.  The Commission is expected to decide whether or not to open a formal adjudicatory hearing on the subject in January 2003.

Motor Carrier Safety News

FMCSA Moves to Enforce Registration Requirements

On August 28, 2002, the Federal Motor Carrier Safety Administration (FMCSA) issued an "Interim Final Rule" which amends its regulations to require that a motor carrier subject to the registration requirements under 49 U.S.C. 13902 may not operate a commercial motor vehicle in interstate commerce unless it has registered with this agency. If an unregistered carrier's motor vehicle is discovered in operation or being operated beyond the scope of the carrier's registration, the motor vehicle will immediately be placed out of service, and the carrier may be subject to other applicable penalties.  See Docket No. FMCSA-2002-13015.

Safety Assurance Process Proposed for New Registrants

On May 13, 2002, the FMCSA published an Interim Final Rule which requires all new applicants registering with DOT on Form MSC-150 to participate in a new "safety assurance" process.  The registrant will be required to certify that safety management systems are in place with respect to driver qualifications, hours of service, drug and alcohol testing, vehicle condition, production of records and hazardous materials.  See Docket No. FMCSA-2002-11061.

Rulemaking on Cross-Border Trucking Temporarily Stalled

On February 6, 2001, an Arbitration Panel found that the U.S. was in violation of its obligations to permit cross-border trucking services under Articles 1202 and 1203 of the North American Trade Agreement (NAFTA).  See Docket No. FMCSA 1998-3297-2.  After issuance of this ruling, the FMCSA embarked on rulemaking proceedings, the goal of which was to comply with Articles 1202 and 1203, while at the same time ensuring the safety of Mexican trucks and drivers on U.S. highways.

On March 29, 2002, the FMCSA published an "Interim Final Rule," the effectiveness of which has been delayed, which is intended to implement a safety monitoring system and compliance program to evaluate the continuing safety fitness of all Mexico-domiciled motor carriers within 18 months after receiving a provisional Certificate of Registration or provisional authority to operate in the United States. The rule also established suspension and revocation procedures for provisional Certificates of Registration and operating authority and incorporates criteria to be used by FMCSA in evaluating whether Mexico-domiciled carriers exercise basic safety management controls.  See Docket No. FMCSA-2002-3299.  Hundreds of comments have been received, and it is not yet clear whether or when Articles 1202 and 1203 will actually be implemented.

Recent Court Decisions

[Editor's Note:  As part of our effort to make this newsletter more interesting for our non-attorney readers, we have significantly reduced the numbers of court decisions summarized.  Please let us know what you think about the change.]

Fifth Circuit Court of Appeals Upholds Air Carrier's Unlawful Exclusion of Liability

The Fifth Circuit Court of Appeals recently upheld American Airlines' provision excluding liability for a lost video camera even though the exclusion is contrary to 14 CFR 254.4.  See Casas v. American Airlines, 304 F.3d 517, 2002 U.S. App. LEXIS 19107 (5th Cir., decided September 17, 2002).  The Court acknowledged that private parties have a federal common law right of action to recover for lost or damaged goods in interstate air carriage, but held that permitting recovery for the lost camera would, "in substance," create a private right of action to enforce the regulation, even though Congress did not authorize the creation of a private right of action.

Comment:  Although this decision can be cited to support the validity of several different types of exclusions of liability found in Air Waybills, you should keep in mind that the decision is contrary to several prior decisions which held that the exclusions were unenforceable because of the federal regulation.

Ninth Circuit Reverses Says Non-Exclusive Security Screeners Not Protected by Warsaw

The Ninth Circuit Court of Appeals has held that security screeners who screen passengers for both domestic and international air carriers (as well as non-passengers who to use shops and facilities which are located inside the secure area) are not protected by the limitations of liability of the Warsaw Convention.  Dazo v. Globe Airport Security Services, 2002 U.S. App. LEXIS 13035 (9th Cir., filed July 1, 2002).  The Court reversed a lower court decision which held to the contrary.

Comment:  Since all airport screeners will soon be federal employees who will be protected by other provisions of the law, the particular holding of this decision will soon become irrelevant.  However, the decision will still provide guidance in cases involving activities which occur prior to or after international carriage by air.

Indiana Court Requires Direct Evidence of Knowledge of and Agreement to Limitation on Liability for Motor Carriage

A U.S. District Court in Indian has held that evidence that (1) the shipper had filled out a "shipping order" which included an acknowledgement that the "straight bill of lading and applicable tariff and classification in effect" applied to the shipment,  (2) the parties had a prior contract which included limitations of liability, and (3) a long history of prior dealings in which the shipper knew of and agreed to limitations of liability is insufficient to establish that a shipper knew of and agreed to a motor carrier's limitation of liability.  Hillebrand Industries v. Con-Way Transportation Services, Inc., 2002 U.S. Dist. LEXIS 12417 (decided June 19, 2002).  The Court pointed out, among other things, that the "shipping order" did not include a blank for a declared value or excess shipping coverage. 

Comment:  Although this decision is rather extraordinary, this Court is not alone in insisting on rigid compliance with the requirement that a shipper be afforded a choice of rates and/or the opportunity to purchase excess coverage prior to a shipment.  The best remedy is to modify your forms and procedures to make it clear that your shippers always have the option to choose a higher level of liability for a higher rate and to purchase excess insurance coverage.  [Although some courts will enforce a limit if either option is afforded, we recommend that both options be provided].

Ninth Circuit Holds that Purchase of Cargo Insurance Alone is Sufficient to Show that Shipper Was Provided a "Fair Opportunity" to Purchase Higher Liability

In Kemper Insurance Companies v. Federal Express Corporation, 2002 U.S. App. LEXIS 14616 (filed July 16, 2002), the Ninth Circuit Court of Appeals held that "[the fact] that the shippers insured their packages privately through Kemper demonstrates they had a fair opportunity to purchase higher liability," thereby demonstrating that the limitation of liability in the FedEx waybill was valid.  [This decision is not officially published and may not be cited to or by the Courts of the Ninth Circuit.]

Comment:  Although this sort of decision is becoming more and more common, we still recommend that clients afford shippers the opportunity to purchase higher liability and cargo insurance, since not all courts would accept this reasoning.

Shipper Held Liable for Damage Caused by Hazardous Goods Regardless of Knowledge of Hazardous Nature of Goods

The Second Circuit Court of Appeal has held that an ocean shipper is strictly liable for damage and expenses caused by his hazardous goods under § 4(6) of the U.S. Carriage of Goods by Sea Act ("COGSA"), 46 U.S.C. § 1304(6), even though he did not know and could not have known that the goods being shipped were hazardous at the time he shipped them.  Senator Line v. Sunway Line, Inc., 291 F.3d 145; 2002 U.S. App. LEXIS 9551 (decided May 17, 2002).  The cargo involved was thiourea dioxide ("TDO"), a white, odorless powder used as a reducing agent and in the bleaching of protein fibers, which was considered a stable compound at the time of the shipment in issue.  The fire resulted in damage to the vessel and other cargo, resulting in damages of $439,785.88.  

Comment:  One of the parties held liable for the damage was an NVOCC, which acted as a "shipper" in relation to the actual carrier.  The lesson of this case is to make sure that you have proper insurance in place to cover all of your potential liabilities, including liability as a shipper under COGSA.

We hope you like this edition of our newsletter.  If you have any comments, please let us know by sending an e-mail to jdaley@johnmdaley.com.

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