FMC walks tightrope on 'refusal of service' rulemaking

A change in how the U.S. Federal Maritime Commission (FMC) is approaching contentious rulemaking on when a container line can refuse to serve shippers could significantly alter the regulatory landscape by making it hard for carriers to turn away loss-making cargo or not honor a booking.

The agency, in the latest yet-to-be-finalized rulemaking draft released June 12, has taken the suggestions of some agricultural exporters, along with other shippers, to forbid container lines from refusing shipments because the economics aren't justifiable. Container lines are worried about the myriad of implications for their ability to run their networks, and ultimately, when they can turn away less profitable or even loss-making bookings.

The FMC's explanation for the changes isn't exactly straightforward. "Profit and business factors may be present when engaging in negotiations, but these factors would have to be considered alongside other factors presented when the commission is determining what the true driving factor is for refusing to deal in a given case and whether that driving factor is reasonable," the agency wrote.

The Agriculture Transportation Coalition (AgTC) is outrightly pleased, after sharply criticizing the FMC's earlier approach to what factors can be considered justifiable for a container line to not accept a laden import or export container in a rulemaking draft released last Sept. 13. Justifiable reasons for container lines to not accept bookings include if there's safety issues, a blank sailing or scheduling challenges, according to the revised proposed rulemaking.

"The two most obvious shortcomings of the [original rulemaking proposal] were the 'loophole' for carrier 'profitability' and an apparent misunderstanding of the practical means by which carriers have declined to carry export cargo," wrote Peter Friedmann, executive director of AgTC, in a July 31 comment to the FMC. "This second attempt demonstrates how serious the commission is in meeting the objectives of Congress in [the Ocean Shipping Reform Act of 2022], and how diligently it considered all the comments of shippers."

Container lines have defended turning away cargoes and prioritizing even higher-paying imports by saying they needed to inject fluidity to disrupted circulatory loops, something the repositioning of empty containers for outbound loads hampers. The FMC's change to the supplemental notice doesn't eliminate the so-called business factor but no longer allows it to be used as a sole reason for refusing to serve or deal with a shipper.

"Because that was at least the impression that was given by the original rule that if it's more profitable, [refusing to honor or deal is] justifiable," Friedmann told the Journal of Commerce Aug. 14. "It's now got to be considered a spectrum, if you will, of considerations, and, personally, I do believe that the business element does obviously play a role."

Friedmann pointed to how the most recent rulemaking proposal allows container lines to deploy extra-loaders to clear empty containers, similar to what they did during the worst of U.S. port congestion, and if the lines accept laden exports. The providing of a sweeper ship is an example of such a business purpose, and the supplemental rule outlines that purpose as one of many to be considered when gauging whether it was unreasonable for a carrier to refuse service.

Carriers say proposal is vague

Unsurprisingly, container lines are less sanguine about the changes to how extra loaders are viewed and the broader supplemental proposed rulemaking made since April. The World Shipping Council (WSC), which represents the major carriers, takes issue with changes to how business justifications will be considered and questioned how the agency could determine "reasonableness."

"By expressly removing business factors from the regulatory text, the commission is effectively saying - its preambular assurances notwithstanding - that business factors will no longer be considered in evaluating reasonableness," the WSC wrote in a July 31 comment. "The explanation the commission offers - that business factors are too important to be included in the regulation - is directly contrary to the commission's claim that all legitimate factors will be considered."

The WSC argues the agency's proposed measure of determining when it's reasonable for a carrier to refuse service is too vague that all conduct could fall under the rule. Some container lines privately complain that they're already being stung by FMC field staff who are apparently uncertain on how details of shipping reform should be implemented because they are new to the industry.

Thanks to more Congressional funding, the FMC has increased resources to receive shipper complaints, and through shipping reform, can offer shippers and others an easier way to challenge carrier practices. Agency staff have spoken at major industry events, including AgTC's annual conference in mid-June, to get the word out to shippers on the new avenues for relief available to them, raising the eyebrows of some of the attendees from container lines.

Balancing act for FMC

The clash between shippers and container lines highlights a major challenge for the FMC in finalizing rulemaking: honoring Congress' mandate to ensure that carriers are meeting their obligation under U.S. shipping law to serve shippers while not creating a rule that's too commercially restrictive.

Or as some warn in container shipping circles, the agency risks creating a rulemaking that's so commercially restrictive that it's unconstitutional. Maritime attorney Rebecca Fenneman, for example, questions whether the agency can force a common carrier to do business with all shippers on the same terms. Shipping law requires them to make their services public and not "unreasonably refuse" to deal or negotiate, "but they don't have to do so on exactly the same terms," Fenneman told the Journal of Commerce Aug 11.

The WSC warns that the vagueness of when it's unreasonable for a carrier to refuse a booking or fail to honor one will spur a wave of litigation, weighing down the agency and do the opposite of Congress' mission to bring shippers swifter relief against unfair practices. Many shippers, however, would welcome the expanded ability to address grievances, and would argue the solution is to give the agency more resources rather than not shrink from its mandate.

How the FMC finalizes the rulemaking — with no firm deadline from Congress — will show just what type of agency the FMC is post-OSRA-22.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.