ISSUE: The Jones Act

And now for something completely different.

We’ve previously looked at the Jones Act in the context of determining whether a particular worker is a seaman with a remedy under the Jones Act or a land based worker with a remedy under a workers’ compensation statute such as the Longshore and Harbor Workers’ Compensation Act.

There is another, very important aspect of the Jones Act.  It is a cabotage law that provides that, “A vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the U.S. to which the coastwise laws apply, either directly or via a foreign port…” generally unless the vessel is built in the U.S., crewed by Americans, and owned by Americans (46 U.S.C. 55102).

The Jones Act protects U.S. vessel owners, U.S. shipyards, and the jobs of U.S. seamen against competition with often subsidized, frequently under regulated foreign vessel interests that are non-compliant with U.S. labor, safety, security, tax, and environmental laws.

Most importantly, the Jones Act, enacted in 1920 (and continuing a U.S. cabotage tradition going back to the first Congress) represents an important element of national security as clearly stated in its Preamble:  “It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the U.S. shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency ….”

I’d like to step outside of our usual topics relating to various provisions of the Longshore Act and make a few observations with regard to the Jones Act.  It has been criticized in the aftermath of the Deepwater Horizon explosion on April 20, 2010, and it continues to be the focus of actions in Congress and in the federal regulatory and enforcement agencies.  There is much going on that should be of concern to the U.S. maritime community.  Here is a very brief and broad list.

1)      There is a large volume of pending legislation largely in reaction to the Deepwater Horizon event.  There are provisions in various bills to repeal the Jones Act, to repeal the Limitation of Liability Act, to amend the Jones Act, Limitation of Liability Act, and Death on the High Seas Act to increase vessel owner liabilities, to establish new offices in the Departments of the Interior and Energy with sweeping regulatory reform agendas, etc., etc. A PARTIAL list of the bills:  S. 3516, H.R. 3534, H.R. 5629, S. 3755, H.R. 5503, S. 3600, S. 3509, S. 3643, S. 3663, H.R. 5019, S. 2747, S. 3466, S. 3472, S. 3495, S. 3509, S. 3511, S. 3512, S. 3515, S. 3516, S. 3525, S. 3597, S. 3643.  Even in a lame duck session and with a divided Congress returning in January, where most of these provisions will not be enacted in their current form, this list is a good indicator of the current legislative mood.

2)      The Maritime Administration (MARAD) in the Department of Transportation has contracted with PricewaterhouseCoopers to perform a study to provide findings on the cost differential between operating U.S. and foreign flag vessels.  The conventional rule of thumb, based on virtually no data, has been $3 to $1 more costly to use U.S. flagged ships.  The study should be complete by the summer of 2011 and should better inform the Jones Act discussion.

3)      The U.S. Coast Guard in the Department of Homeland Security is in the process of developing a rule requiring foreign flagged vessels to report their arrival on the U.S. outer continental shelf (OCS).  In 2006, section 109 of the SAFE Port Act required the Coast Guard to update and finalize a rulemaking within 180 days to expand the notice of arrival regulations.  On June 22, 2009, the Coast Guard issued a Notice of Proposed Rulemaking and the comment period ended September 21, 2009.  No final rule has been issued and it is obviously overdue.  During Congressional hearings in June 2010 at the Subcommittee on Coast Guard and Maritime Transportation (House Committee on Transportation and Infrastructure) it was made clear that the U.S. currently has no comprehensive or centralized data set on the scope of foreign vessel activity on the OCS.  Except for mobile offshore drilling units and other vessels requiring annual Coast Guard inspections, the Coast Guard does not know who’s operating on the OCS.  This clearly has economic and security implications.

4)      The Internal Revenue Service has begun to focus on foreign vessels working in the oil and gas industry to assess whether there are instances of non-compliance with U.S. tax filing requirements.  The IRS Industry Director’s Directive #1 (10/09) stated (regarding activity on the U.S. OCS), “Our analysis indicates that a significant number of foreign vessels permitted to work in the OCS do not comply with U.S. tax filing requirements.”

5)      Customs and Border Protection (CBP) in the Department of Homeland Security issued (in July 2009) a “Proposed Modification and Revocation of Ruling Letters Relating to the Customs Position on the Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points”.  CBP had reviewed existing interpretive rulings on the issues of what constitutes merchandise as distinct from equipment of the vessel and realized that there was a record of conflicting (and incorrect) interpretations.  In a move supported by Jones Act proponents, CBP was planning to modify its previous positions in several areas.  CBP has now decided not to issue any new Rulemaking in this area.  We are back to splitting hairs on the issue of “merchandise” as opposed to “equipment of the vessel”, and we are stuck with the existing record of admittedly incorrect rulings.

6)      The Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) in the Department of the Interior, the relatively new federal agency that manages U.S. natural gas, oil, and other mineral resources on the OCS, has issued and is in the process of developing new environmental and safety regulations applicable to oil and gas drilling on the OCS.  These regulations can be expected to place greater burdens and costs on owners and operators on the OCS.

I could go on like this for quite a while, but the point of this extremely brief summary of current legislative and regulatory activities is that members of the maritime community should be interested observers of what is happening in Washington.

I know that Jones Act lawyers out there could easily spend an entire day discussing any single one of these issues, and Jones Act specialists could easily add several more items to my partial list of current concerns.  This is just my effort to alert members of the maritime community that a lot is at stake with the Jones Act under attack, foreign vessel activity reportedly increasing on the OCS, and new challenges going forward with the need to produce the advanced vessels increasingly needed for deepwater oil and gas exploration, development, and production, and the necessity that the Jones Act be correctly and consistently enforced with regard to the development of wind farms on the OCS, now in the early stages of becoming a major new industry.

Once again, vessel owners/operators, shipbuilders, ship repairers, and those who work aboard U.S. vessels and in U.S. shipyards should be interested observers.