On December 4, 2009, a federal district court in Va. entered judgment in favor of the U.S. Coast Guard and Matson Navigation Company, Inc. in a long-running vessel foreign rebuild case. Winston & Strawn LLP represented Matson.
The Shipbuilders Council of America, Inc. and Pasha Hawaii Transport Lines LLC sued the Coast Guard initially in November 2006 seeking to disqualify the M/V Mokihana from the U.S. coastwise trade because of work to be done to the vessel in China. That initial suit was dismissed in 2007, but then re-initiated on December 10, 2007 after the work on the M/V Mokihana was complete. The M/V Mokihana, a container ship, had work done in China to prepare the vessel for the addition of a roll-on/roll-off garage added to the stern of the vessel in Alabama.
U.S coastwise laws – commonly referred to as the Jones Act – generally restrict U.S. coastwise trade to U.S. constructed vessels. In connection with that U.S. build requirement, otherwise eligible coastwise vessels permanently lose their ability to participate in the U.S. coastwise trade if they are “rebuilt” foreign.
The Coast Guard determines whether foreign shipyard work is disqualifying pursuant to a regulation it issued in 1996. That regulation provides that a vessel is considered rebuilt foreign “when a major component of the hull or superstructure not built in the United States” is added to the vessel or if “work performed on its hull or superstructure constitutes more than 10 percent of the vessel’s steelweight.” Steel work in excess of 7.5 percent but less than 10 percent of the vessel’s steelweight can also be disqualifying unless the Coast Guard in its discretion approves the amount.
The regulations also provide a process for ship owners to approach the Coast Guard and obtain a preliminary rebuild determination in advance of the shipyard work being done in order to obtain some assurance that the work won’t be disqualifying. Matson sought and obtained both a preliminary and a final rebuild determination from the Coast Guard to the effect that the work to be done to the M/V Mokihana would not result in the vessel being considered “rebuilt.”
Shipbuilders and Pasha advanced a number of arguments claiming that the Coast Guard acted arbitrarily and contrary to law in issuing those determinations. Among other things, Shipbuilders/Pasha argued that the claimed addition of a deck in China was the addition of a “major component,” that the Coast Guard incorrectly excluded certain outfitting items from the steel calculation (such as auto platforms) and should have counted both removed and added steel in that calculation. Initially, Shipbuilders/Pasha also argued that the work done in Alabama should have been cumulated with the work done in China in determining whether a foreign “rebuild” had occurred.
The “major component” issue was decided against the Coast Guard in a related case involving two Seabulk tank vessels which had been “double hulled” in China. However, the district court’s decision in Seabulk case was reversed by the U.S. Court of Appeals for the Fourth Circuit in favor of the Coast Guard on August 21, 2009. On appeal, the Coast Guard’s view that a “major component” should be judged based on whether it is “separable” was validated. On that basis, the Coast Guard found that the addition of an inner hull piece-by-piece was not the addition of a “major component.”
On December 3, 2009, federal judge T.S. Ellis, III concurred and found that the addition of a deck piece-by-piece to the M/V Mokihana, none of which was “major,” did not constitute the addition of a “major component” within the meaning of the Jones Act. Judge Ellis also rejected Shipbuilders/Pasha’s other arguments finding in each instance that the actions of the Coast Guard were reasonable and within its lawful discretion. Finally, Judge Ellis concluded the Coast Guard was correct in focusing on the foreign portion of the work in assessing whether there was a foreign “rebuilding” under the law.