Legal Lookout     February 2008

Ocean Transportation Intermediaries may not operate through “agents”: the U.S. Federal Maritime Commission outlaws unlicensed OTI deputies.

by Steve Block

With the proliferation of non-vessel operating common carriers (NVOCCs) and ocean freight forwarders catering to expanding international trade, it’s only natural that some of these middlemen of ocean shipping have become creative in enlarging their operations.  Grouped together for regulatory purposes as “Ocean Transportation Intermediaries” (OTIs), many NVOCCs and forwarders have followed the path of other service providers with multi-geographical presences, and opened branch offices in areas where business is, or might become, robust.

The OTI industry is governed by federal statute and regs promulgated and enforced by the U.S. Federal Maritime Commission (FMC).  FMC requires OTIs to obtain licenses and post bonds available to aggrieved shippers as a payment source for unpaid claims.  The licensing process requires applicants to have on staff a “qualified individual” (or “QI”) who is familiar with ocean shipping regulation.

But with the trend toward expansion, a question has arisen as to whether each of an OTI’s branch offices, particularly regarding unincorporated satellites managed directly by the mother ship, must hold its own license and post its own bond.  OTI Team Ocean Services, Inc. took the question to FMC’s general counsel by way of an informal inquiry process FMC offers the shipping public that is not binding on the FMC itself.

In other words, FMC’s law office can tell you a proposed action would be kosher, but the commissioners themselves can disagree and still slap an inadvertent offender’s hand if it relies on their lawyer’s advice.  When asked whether branch offices whose employees are “agents” that undertake virtually all OTI services in the name of license-holding Team Ocean need their own separate FMC blessings, FMC’s attorney apparently opined that this business plan wouldn’t require separate licensing.  To be sure, and in coordination with other elements of the OTI industry, Team Ocean petitioned the FMC itself for a final ruling that would be applicable to the entire OTI world.

The National Customs Brokers and Forwarders Association of America (NCBFAA) chimed in, as did two other private concerns.  Team Ocean, NCBFAA and another OTI pointed to the extreme difficulty – if not absurdity – of requiring agents of OTIs to be licensed and bonded, when so many service providers undertake OTI services at licensed entities’ behest for any given shipment.  For example, forwarders regularly engage truckers, packers, consolidators, warehousemen, and numerous others to perform essential services that properly would be classified as regulated OTI activities.  If they aren’t licensed and regulated – and they aren’t – then why should a more closely affiliated agent of an OTI be subject to FMC oversight?  Moreover, general principles of agency law suggest that separate licensing and regulation aren’t warranted under these circumstances.

In issuing its order, FMC explained how mindful it was of the evolving OTI industry, and the modifications to regs it has taken in recent years to accommodate ocean shipping middlemen.  Most significantly, FMC retooled its regs and enforcement procedures in 2004 to allow NVOCCS to enter into service arrangements with carriers, putting them roughly on equal footing with shippers who contract directly with steamship lines.

But in response to the current petition, FMC concluded it was bound by Congress to disallow separately situated “agents” of OTIs to operate without their own licensing and bonding.  The most current version of the Shipping Act, along with Congress’ stated concerns about security, preclude FMC from letting entities without an onsite QI from operating under a remotely located OTI’s authority.  Because the statute is “remedial” in nature (i.e., intended to provide remedies to members of the public harmed by OTI error), FMC must interpret it broadly.  Congress could and would have carved an exception it if had so intended.

If Team Ocean’s petition were granted, FMC envisioned an explosion of “agents” operating nationwide under someone else’s name and credentials, rendering scrutiny and enforcement impossible.  The bonding requirements would become virtually meaningless, as a single bond might apply to perhaps hundreds of agents, such that effective coverage would become diluted.  FMC’s work with law enforcement would be weakened, as it would have less data about and control over players in international transportation.

 
FMC’s treatment of Team Ocean’s comparison of service vendors to its closely held agents is less compelling.  The opinion declares there is no “bright line” as to what constitutes an unregulated OTI vendor or service provider, and an agent that must be bonded, licensed and staffed by a QI.  Presumably, FMC’s enforcement division will know a violation when it sees one, perhaps when the unlicensed entity actually holds itself out to the public as an OTI or deals directly with shippers and carriers á la an intermediary.

 
Ultimately, the circumstances surrounding Team Ocean’s petition are a reflection of the successful business evolution created by ocean shipping deregulation in 1998.  Unfortunately, security concerns have increased since that time, and Congress is slow to move in re-legislating shipping law.  The result may be the best we could hope for.

Ref: FMC Order, available on the FMC’s website at http://www.fmc.gov/UserFiles/pages/File/Commission_Order_Docket_No._06-08.pdf