“A calculated and secret scheme”: US CBP alleges willful Jones Act violations by pollock transporters

The U.S. government accused the operators and clients of a dead-end rail line in New Brunswick, Canada, used in transporting Alaska pollock to the U.S. East Coast, of engaging in “a calculated and secret scheme” to escape the restrictions of the Jones Act, which requires all domestically-caught seafood to be transported via vessels built in the United States with U.S. materials.

The filing in a U.S. District Court in Alaska on 14 September came in response to a lawsuit from American Seafoods subsidiary Alaska Reefer Management (ARM) and the company that operates the New Brunswick facility, Kloosterboer International Forwarding (KIF), challenging approximately USD 350 million (EUR 294.3 million) in fines issued by U.S. Customs and Border Protection against them and their contracted transportation partners. The suit was filed on 2 September.

The lawsuit alleges the transportation method for the fish – traveling via foreign-flagged and -built ships through the Panama Canal to a rail yard in Canada for a 100-foot roundtrip journey, before being loaded on trucks to complete the journey to the U.S. – was approved as exempted from the Jones Act requirements under the so-called “third proviso,” which allows for limited exemptions for companies transporting goods from Alaska, due to the fact that they are not contiguously connected to the rest of the country.

However, the CBP and the U.S. Department of Homeland Security said the scheme was a “blatant” attempt to evade the requirements of the Jones Act.

“The BCR was constructed and is operated for the sole purpose to attempt to evade the requirements of the Jones Act,” they wrote.

Further, they allege ARM and KIF did not follow proper procedure for requesting a review of Jones Act compliance when they switched over to using the 100-foot rail line in 2012, and that they may have done so to avoid a negative ruling.

“Plaintiffs are experienced importers of merchandise who know how to seek an administrative ruling as to the applicability of the third proviso from CBP by fully disclosing their change in operations,” they wrote. “Plaintiffs never did. Instead, Plaintiffs changed their operations to a model radically different from any other transportation model previously reviewed by CBP, without seeking a Ruling Letter, and without filing their new route with the [Surface Transportation Board].”

ARM and KIF assert that CBP was made aware of its route alteration via its filing of thousands of bills of lading, but CBP countered by insisting that it doesn’t monitor route-changes made only in bills of lading, and that a Ruling Letter is required for changes as significant as the case at issue.

“The bill of lading does not provide any other factual details about the nature of the railway in use. CBP does not expect it to, because that is not the purpose of the document; CBP does not use a bill of lading for the purpose of understanding the detailed facts about the rail being used,” it wrote.

CBP said it was only made aware of the change after it received a letter of complaint from an unnamed party in 2017. That letter, included in its filing, was written by Constantine G. Papavizas, a lawyer with the Winston and Strawn law firm. His client’s name is redacted in the court document.

“To a considerable degree, CBP relies upon the trade community to be forthright in its transactions with the government … CBP does not and cannot perform an in-depth investigation about every movement of merchandise into this country. In this case, CBP only became aware of the nature of the BCR operation when a third party presented an allegation to CBP about a potential violation of the Jones Act, at which time CBP began investigating the matter,” CBP wrote.

The CBP accused ARM and KIF of intentional obfuscation as part of “a calculated and secret scheme to find a loophole in the Jones Act.” It said ARM and KIF “misleadingly” suggested in its bills of lading that its rail line had “discrete stops” and failed to disclose that the train reverses and returns to its original position.

“Plaintiffs failed to seek a Ruling Letter because they suspected CBP would not sanction their conduct,” it wrote. “Furthermore, videos of the [rail line] were removed from social media shortly after notices of penalty were issued, even though reference to the [rail line] or the third proviso were not included in those notices.”

CBP defended the hundreds of millions of dollars in fines it had levied, saying they were reflective of illegal conduct conducted over many years. And CBP rejected the argument made by ARM and KIF that the fines would destroy their businesses, arguing the old rail line that had been approvied via the third proviso still exists.”

“Plaintiffs fail to explain why resuming the Bayside Program is the only way to avoid these alleged harms. For example, plaintiffs fail to explain why they have not simply resumed using the [older] route that CBP has already sanctioned and which plaintiffs used until 2012,” it wrote. “Thus, plaintiffs’ irreparable harm, if any, seems to be caused by their insistence that they use the low-cost [Bayside] route and no other method … and ultimately their insistence on using foreign-flagged vessels to ship product to Bayside.”

In its filing, the CBP criticized ARM and KIF for suing before pursuing mediation or altering their behavior, claiming it agreed to a two-week pause in the issuance of penalties, ostensibly so that ARM and KIF could gather more evidence its Bayside Program was in compliance with the Jones Act.

“While the Agency engaged with plaintiffs’ counsel in good faith, plaintiffs never submitted any supporting documentation to the agency. Instead, it is apparent that their time was spent drafting their pleadings and filings to this court, including a request for expedited consideration of their motion which provided the government limited time to respond.”

An initial hearing on the lawsuit will take place on Friday, 17 September. The CBP urged U.S. District Court Judge for the District of Alaska Sharon L. Gleason, who is hearing the case, to reject the request from ARM and KIF for relief.

“If plaintiffs wanted the benefit of an administrative ruling on whether their change in operations complied with the third proviso, they could have had such a ruling nearly a decade ago (the answer would have been ‘no’). Instead, in the best light, plaintiffs chose to assume the risk that their own interpretation of the statute, involving drastically different facts from prior scenarios, would align with CBP’s interpretation. At worst, plaintiffs chose to proceed in the manner they did hoping they would not get caught,” it said. “Having received the notices of penalty, plaintiffs seemingly could have reverted to using … another legal method of transportation, and sought review of CBP’s actions, either in an administrative process or through an action under the Administrative Procedure Act. Instead, plaintiffs seek breathtaking equitable relief on an expedited basis. Specifically, they ask this court to permanently enjoin CBP from collecting penalties for what CBP believes was years of flagrantly illegal conduct. Not only that, plaintiffs ask the court to permanently enjoin CBP from seeking any penalties for this conduct for the duration of this litigation – even if the court ultimately concludes that plaintiffs’ scheme is illegal. In short, plaintiffs are asking the court for a license to break the law. There is no authority for that kind of equitable relief. Plaintiffs brought this situation upon themselves, they have not shown that they are likely to suffer irreparable harm without an injunction, and they are not entitled to equitable relief from this court.”

Photo courtesy of U.S. District Court for the District of Alaska