The Mouse That Roared: A Look Back at TCW v. Evergreen

The Shipping Act of 1984, as amended (the “Shipping Act” or the “Act”),[2] regulates the competitive activities and business practices of “ocean common carriers” (“VOCCs”)[3] and “marine terminal operators” (“MTOs”),[4] among others. Among the many proscriptions applicable to regulated entities and contained in the Act[5] is section 41102(c), which provides that a VOCC or MTO may not fail to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property.[6] Such practices include those relating to the D&D practices of VOCCs and MTOs.[7]

The D&D practices of VOCCs and MTOs, including the application and reasonableness of such practices under section 41102(c), have occupied the FMC’s attention for many years.[8] Following a major fact-finding investigation conducted by the FMC in 2018,[9] which produced detailed interim[10] and final[11] reports on the topic, the FMC initiated a rulemaking proceeding[12] to establish guidance concerning factors it may consider when assessing the reasonableness of D&D practices and regulations under section 41102(c). The so-called “Interpretive Rule”, adopted by the FMC in 2020,[13] added a new section[14] to the FMC’s existing policy guidance on section 41102(c),[15] and a new term in the agency’s D&D lexicon: the “incentive principle.”

The Interpretive Rule applies to “practices and regulations relating to demurrage and detention for containerized cargo”[16] providing guidance as to how the FMC will interpret the reasonableness requirements set forth in section 41102(c) of the Act and 545.4(d) of the FMC’s rules in the context of D&D.”[17] In assessing the reasonableness of D&D practices and regulations, the Interpretive Rule states that the FMC “will consider the extent to which demurrage and detention are serving their intended primary purposes as financial incentives to promote freight fluidity.”[18] This is the incentive principle.

The Interpretive Rule contains “a non-exclusive list of factors for the FMC to consider when determining whether demurrage and detention practices are ‘just and reasonable’.”[19] These factors “may be considered” in specific factual settings (cargo availability, notice of cargo availability and government inspections).[20] In the case of empty container returns, the Interpretive Rule states that, absent “extenuating circumstances,” practices and regulations that impose detention charges “when empty containers cannot be returned, are likely to be found unreasonable.”[21]

The Interpretive Rule further states that the FMC may adjudge reasonableness under section 41102(c) by considering the transparency and accessibility of definitions, as well as “the existence, accessibility, content and clarity of policies implementing D&D practices and regulations.”[22] Lastly, and perhaps most importantly, the Interpretive Rule contains non-preclusionary language that allows the FMC to consider “factors, arguments, and evidence in addition to those specifically listed in this rule.”[23]

The Interpretive Rule was not intended to subject regulated entities to “new legal authority” nor was it intended to impose new ‘“requirements’ or mandates or dictates” for a regulated entity to violate.[24] The Interpretive Rule did not create blanket rules applicable to section 41102(c) cases; each case brought “thereunder would be decided on its own facts.”[25]

The claimant in TCW (the “Claimant”) was a “preferred trucker” for the import loads of Yamaha Motor Company, Ltd. (the “Shipper”)[26] in the Port of Savannah (the “Port”). The respondents were Evergreen Line Joint Service Agreement, an ocean common carrier, and its U.S. agent, Evergreen Shipping Agency (America) Corporation (collectively, “Evergreen”).

The relevant controlling documents applicable to the Claimant consisted of various contracts and agreements through which the Claimant and the Shipper accepted Evergreen’s assessment of per diem detention charges during weekends and holidays.

The relevant cargo was shipped in a container supplied by Evergreen on a port-to-house basis. When the Claimant retrieved the container at the Port of Savannah for inland delivery to the Shipper, it used a chassis also supplied by Evergreen. For each item of equipment, Evergreen allotted a specified number of days to return the equipment,[27] after which detention charges would accrue at agreed per diem rates.[28]

The Claimant failed to return the container and chassis within allotted free time, which resulted in per diem detention charges billed to the Claimant for the equipment. However, the Port was closed on each of the three days immediately prior to the date of return, which prevented the return of the equipment on those days. One of the days was a Saturday on which the Port was temporarily closed due to COVID-19, the second was a Sunday on which the Port was regularly closed, and the third was the following Monday on which the Port was closed for the Memorial Day holiday.

Although the Claimant had advance notice of all three Port closures, and accepted Evergreen’s right to impose per diem charges on weekends and holidays, it contested the detention charges for the three days in question. The contested charges totaled a mere $510. When Evergreen declined to waive the charges, the Claimant paid them and then commenced a small claims proceeding against Evergreen in the FMC to collect reparations[29] and obtain a corresponding cease-and-desist order against Evergreen based upon the alleged violation of section 41102(c).[30]

On the facts presented, the Small Claims Officer (“SCO”) issued an Initial Decision (the “Initial Decision”)[31] in which she found that Evergreen’s[32] detention charges for the three days when the Port was closed, and when the equipment could not be returned, were “unjust and unreasonable” in violation of section 41102(c) as they failed to serve an “incentivizing purpose” under section 545.5(c)(2)(ii). The SCO rejected out-of-hand the various “extenuating circumstances” and other “factors, arguments and evidence” proffered by Evergreen in their own defense.

The SCO awarded reparations to the Claimant in the amount of $510, plus interest,[33] and ordered Evergreen to “cease and desist from imposing per diem charges when imposition of per diem charges does not serve its incentivizing purposes, such as when empty equipment cannot be returned on weekends, holidays and port closures.”[34]

The outsized importance of the TCW case was not lost on the full Commission, which quickly exercised its discretionary authority to review the Initial Decision.[35]

Upon review, the FMC issued an Order Affirming the Initial Decision (the “FMC Order”) in which it upheld the Initial Decision in all respects.[36]

Commissioner Carl W. Bentzel[37] issued a vigorous dissent in which he took issue with the SCO’s findings and legal rationale, emphasizing that “terms such as the ‘incentive principle’ do not replace reasonableness which is the underpinning of the Shipping Act,” and expressing concern that the majority decision put the Commission at risk “of overstating the manufactured principle at the peril of usurping reasonableness.”[38]

Commissioner Bentzel found that the detention charges assessed by Evergreen “were consistent with the ‘incentive principle’ and the need to promote cargo fluidity.”[39] As factors favoring Evergreen, he noted that the Claimant (1) knew in advance when the Port would be open for business and when it would be closed, (2) had contractually agreed to the rules and standards governing free time and detention for the equipment (3) possessed sufficient free time, and (4) knew that the equipment had already exceeded its allotted free time before the Port closures.[40] Importantly, Commissioner Bentzel cautioned against any application of the incentive principle that would automatically prohibit the assessment of demurrage or detention for days that a terminal is closed for business or on a holiday.

On petition by Evergreen, the U.S. Court of Appeals for the District of Columbia Circuit (the “Court”) vacated the FMC Order, as it applied to the reasonableness of Evergreen’s[41] detention charges, and remanded the matter to the FMC for further proceedings.[42]

The Court held that the FMC’s application of the Interpretive Rule was arbitrary and capricious in violation of the Administrative Procedure Act, observing that the FMC failed to consider relevant factors or “respond in any meaningful way to most of Evergreen’s arguments.”[43] According to the Court, such failures were due to the FMC’s “myopic focus on the incentive principle,” while its narrow application of the incentive principle was “in defiance of common sense to reach an illogical result.”[44] As stated by the Court:

In effect, the Commission treated the incentive principle as just the sort of “bright line” rule it had denied creating when adopting the rule. Yet, as the Commission itself noted when it published the rule, and as Commissioner Bentzel explained in his dissent, an interpretive rule does not create any legal obligations; “terms such as ‘incentive principle’ do not replace ‘reasonableness’ which is the underpinning of the Shipping Act.”[45]

To the extent that the FMC Order did address Evergreen’s arguments, the Court was less than impressed:

For those of Evergreen’s arguments to which the FMC did respond, its reasoning is, charitably put, implausible. Bright line rule or not, the Commission errs insofar as it maintains a detention charge necessarily lacks any incentivizing effect because it is levied on a day on which a container cannot be returned to a marine terminal. On the contrary, being charged for detention during a port closing announced before the carrier picks up the equipment heightens the incentive to return equipment on time.[46]

In its Order on Remand, the FMC stated that it would use a “broader lens” when applying the incentive principle in its reasonable analysis “to determine if the charges at issue are furthering the goal of freight fluidity”.[47] Unfortunately, the FMC did nothing of the sort. Instead, the FMC once again rubber-stamped the Initial Decision as to its award of reparations,[48] this time on the basis of a results-oriented analysis of the competing incentivizing and extenuating factors.

The FMC acknowledged that there was an “incentivizing effect” for the Claimant to return equipment before the scheduled Port closures in order to avoid the buildup of per diem charges.[49] However, the FMC dismissed this factor, stating that the incentivizing impact of early equipment returns “will not always have a positive impact on freight fluidity.”[50] As an example, the FMC stated that common carriers were unlikely to “process and turn around equipment returned late on Friday before a weekend closure because they too ... [were unlikely to] be working during a port’s closure.”[51] According to the FMC:

There is likely minimal positive effect on freight fluidity for these containers returned right before port closures. Thus, detention charges in these circumstances would not serve the ultimate goal of promoting freight fluidity, but rather are serving to penalize shippers and truckers unreasonably. Additionally, multi-day scheduled closures could lead to congestion and logjams at ports when truckers rush to return equipment to avoid harsher penalties, which also hinders freight fluidity.[52]

This self-fulfilling argument, which is based upon pure conjecture without any factual support, is nonsense. The FMC provided no evidence to establish that empty containers returned to a marine terminal late on a Friday could not be processed over the weekend or that the returns would create universal port congestion. To the contrary, the mere fact that an empty container has been returned to the possession of its rightful owner or lessee means that it has re-entered the intermodal supply chain[53] and is available for reuse, a factor which inherently promotes “the efficient, competitive, and economical transportation system in the ocean commerce of the United States.”[54]

In support of its position that detention charges assessed during port closures will “not incentivize behavior that will best promote freight fluidity,” the FMC further stated that truckers may have their own “commercial reasons” to promptly return equipment. That may be so, but so what? If a trucker is incentivized to promptly return equipment for its own “commercial reasons,”[55] as well as a desire to avoid the buildup of detention charges, why should the former trump the latter for purposes of the incentive principle? The argument is indeed illogical; if a trucker is always incentivized “to return equipment as timely as possible” in furtherance of its own commercial interests, it seems self-evident that those interests would naturally include the avoidance of accreting per diem charges.

The FMC next argued that allowing the assessment of detention charges during port closures “disincentivizes” common carriers and MTOs from performing “efficiently” by opening marine terminal gates during weekend hours.[56] This argument ignores reality and the FMC knows better. The opening of terminal gates on weekends for cargo deliveries is an expensive proposition that may not be justified if truckers and cargo interests do not take advantage of the extended hours, which is very often the case. This is particularly true in demurrage cases since inland warehouses are themselves frequently closed on weekends, and truckers would rather leave their pickup loads safely parked in protected marine terminals until the warehouse reopens on the next business day.

The FMC found that because the Shipper had shuttered its own facility in Georgia, the Claimant could not pick up the equipment until the first day of the three-day Port closure.[57] The FMC made much ado about the uncontested evidence submitted by the Claimant in this regard and concluded that “no amount of detention charges over the Port’s scheduled closures could have incentivized Claimant to return the equipment before the closures because Claimant could not collect the equipment any earlier.”[58] This statement is baffling. As between the parties, Evergreen had nothing to do with the closure of the Shipper’s facility, so why should this risk factor be credited to the Claimant in the balancing of competing factors?

The FMC rejected all of the “extenuating circumstances” and additional factors, arguments and evidence proffered by Evergreen, both individually and collectively, including its assertion that the allotted free time for the container was “generous,” and that factor should weigh in favor of a finding of reasonableness. Although the FMC agreed that the allotted free time was generous,[59] it concluded that this factor was not dispositive, and that it was simply unreasonable to assess detention charges during port closures.[60]

The FMC acknowledged that the Claimant had advance notice of the Port closures, and that advance communication of a port closure “is a relevant consideration in determining the reasonableness of detention charges,”[61] stating that “advance and well-publicized notice of port closures can weigh in favor of the reasonableness of assessing detention charges during those closures because parties will have more time to take steps necessary to return equipment prior to the closures.”[62] However, once again, the FMC concluded that this factor was not dispositive because the Claimant was unable to pick up the equipment until the first day of the Port closure due to the closure of the Shipper’s plant. Again, this factor is unfathomable as one favoring the Claimant’s position since Evergreen had nothing to do with the closure of the Shipper’s facility. The fact that the FMC gives credence to this argument underscores the pretzel logic of its own position.

Evergreen argued that because the Claimant had exceeded its allotted free time and that the equipment was already in detention status by the start of the three-day Port closure, these undisputed factors weighed in its favor. The FMC rejected this “once on demurrage, always on demurrage” argument, stating that this bright-line maxim was not outcome determinative under the Interpretive Rule,[63] which is true.[64] However, the FMC noted that the Interpretive Rule does not preclude VOCCs and MTOs from “arguing and producing evidence regarding the compensatory aspects of demurrage and detention”[65] and that such evidence might support application of the maxim in certain circumstances. However, according to the FMC, Evergreen produced no supporting evidence in this regard.

Lastly, the FMC reversed the blanket cease-and-desist order issued by the SCO, finding it necessary to make a “case-by-case determination as to the reasonableness of challenged demurrage and detention practices.”[66]