The Jones Act and Coastwise Trade

Texas Lawyer

One of the more protectionist laws that applies to U.S. coastal trade is the Merchant Marine Act of 1920, commonly known as the Jones Act, after its sponsor Senator Wesley Jones of Washington state. Among other provisions that pertain to personal-injury claims, the Jones Act imposes restrictions upon vessels plying the cabotage or coastwise trade. Specifically, only U.S. flag vessels are permitted to carry persons or merchandise between points in the United States; foreign flag vessels are prohibited from doing so. The Act serves to promote the U.S. merchant marine industry by requiring the employment of “Jones Act vessels” staffed with U.S. merchant mariners.

Jones Act vessels must be built in the United States and owned by U.S. citizens, which sounds fairly straightforward, until you consider that for a public corporation this requires: 75% ownership by U.S. shareholders at every tier of the corporate structure; regular monitoring of the company’s publicly-owned stock to ensure compliance; and never selling the vessels “foreign.” Once a Jones Act vessel is sold to an entity not qualified to own a U.S.-flag vessel, or is flagged foreign, the vessel loses its Jones Act privileges forever, absent an act of Congress.

There are numerous permutations of how the Jones Act’s point-to-point rule applies. For example, what happens if a foreign vessel loads merchandise in Houston and discharges it in Miami? The cargo is subject to seizure and forfeiture and the carrier is subject to civil penalties up to the value of the merchandise transported or the cost of the transportation, whichever is greater. What if the ship sails to the Bahamas first and then returns to deliver the cargo to Miami? Still in violation because the cargo nevertheless was transported between two coastwise points. What if the cargo is carried aboard a foreign vessel but the carrier discovers the cargo is contaminated after it leaves Houston and needs to return it to the United States? Generally, the cargo may only be returned to the same berth and processed ashore. If the loading terminal cannot accept the contaminated cargo, the cargo must be carried and disposed of overseas, absent extraordinary circumstances, for example, if the cargo is rejected by a foreign government. What if the cargo is blended or commingled with another product at a foreign port en route to Miami – will that process enable the cargo to be delivered to Miami aboard a foreign vessel? The cargo must be transformed into a “new and different product,” a standard applied by  U.S. Customs and Border Protection (CBP), which interprets the Jones Act. This blending, however, may not occur aboard the vessel. What if a foreign tanker offloads in New York liquid product loaded in Rotterdam and plans to make a second port call to offload that product in Norfolk, Virginia, but mistakenly loads product in New York into the tanks destined for Norfolk? That carriage would violate the Jones Act if the comingled product is discharged in Virginia because some of that product was loaded at a U.S. port. As you might imagine, when these incidents occur in real time, decisions with serious financial ramifications are implicated.

Two recent events highlight the continued clout of this U.S. cabotage law. The Colonial Pipeline ransomware attack in May 2021 shutdown that pipeline and its ability to transport gasoline and jet fuel from the Gulf coast to the East coast, which resulted in a short-term spike in gasoline prices and fuel shortages, and impacted airline operations at Atlanta’s Hartsfield-Jackson Airport, one the nation’s busiest, among others. Gulf suppliers and their traders observed that the available Jones Act fleet did not have the capacity to keep fuel  flowing, and sought a Jones Act waiver from CBP headquarters within the Department of Homeland Security. CBP granted a very limited waiver in the “interests of national defense,” which is the only statutory basis permitted to deviate from the Jones Act’s U.S. flag-carriage requirements.

More recently, in August 2021, CBP began a Jones Act coastwise-trade-enforcement action against carriers transporting fish from Alaska by way of Canada into the northeast United States aboard foreign-flag ships. CBP has assessed approximately $350 million in civil penalties on numerous parties in the supply chain, asserting that this transportation violates the Jones Act’s third proviso by using foreign vessels to transport merchandise from Alaska to U.S. points within the lower 48 states, via Canada. The pollock cargo is transported by foreign-flag vessels from Dutch Harbor, Alaska through the Panama Canal and then to Bayside, Canada where it is offloaded, transported in part by Canadian rail, and trucked for delivery to the Eastern United States. Interestingly, a caveat exists in the Jones Act’s third proviso that permits a foreign-vessel movement via Canada if the merchandise is carried aboard a registered-Canadian railroad, which is at the crux of the enforcement action: the rail line employed is about 100 feet long and within the railroad’s terminal. Suit has already been filed and a federal district court has granted a preliminary injunction against CBP. Presently, the supply chain continues to operate as it has in the past until the court rules on the merits, likely sometime after the new year.

CBP has created a coastwise trade enforcement office in New Orleans called JADE: the Jones Act Division of Enforcement, which serves as a clearinghouse for all coastwise-trade matters and informal compliance advice, save for Jones Act Customs Rulings, which CBP’s Cargo Security, Carriers and Restricted Merchandise Branch will continue to issue. These rulings enable affected parties to seek an interpretation from CBP before undertaking the proposed coastwise movement to ensure compliance with the Jones Act. Among other issues, CBP’s rulings address requests relating to the construction of structures on the outer continental shelf (OCS) and whether movements of merchandise and personnel aboard foreign-flag construction vessels involving these structures constitute U.S. point-to-point movements barred by the Jones Act. A recent extension of the Outer Continental Shelf Lands Act (OCSLA) to offshore wind farms and a CBP ruling finding that the movement of scour material from a U.S. shoreside location to a pristine point on the OCS falls with the Jones Act’s coastwise trade penumbra means that this cabotage law will apply to the expected rapid expansion of U.S. coastal wind farms in the second half of this decade, and perhaps may lead to an increase in the size of the U.S. merchant fleet. Ironically, while the Jones Act seeks to promote the U.S. merchant marine fleet, its size continues to contract with only 180 privately-owned vessels greater than 1,000 gross tons in the fleet as of February 2021. One hundred years ago, the U.S. merchant fleet consisted of more than 4,100 ships, and that was after accounting for the losses sustained in World War I. Nevertheless, though now more than one-hundred-years old, the Jones Act’s coastwise-trade restrictions remain very much in force.

“The Jones Act and Coastwise Trade,” by Keith Letourneau was published on November 15, 2021, in Texas Lawyer.

Reprinted with permission from the November 15, 2021, edition of Texas Lawyer © 2021 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.