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20th March 2017

US antitrust regulators raid Box Club meeting

US antitrust investigators last week raided the biannual Box Club meeting in San Francisco, handing subpoenas to the CEOs of major container lines and capitalizing on a rare window to exercise their power over non-US-based companies.

Maersk Line confirmed on Monday that it was served a subpoena by the DOJ on Wednesday “in course of an investigation into the global ocean container shipping industry.” Maersk told the subpoena doesn't set any allegations against the company.

“A subpoena does not mean that a company has engaged in illegal behavior nor does it prejudge the outcome of the investigation itself,” Maersk said. “As always, Maersk will fully cooperate with the authorities in their investigations, and will respond as appropriate to the subpoena.”

Maersk was the only container line immediately available for comment, but sources tell several CEOs of other containers lines were also subpoenaed. It’s unclear whether Department of Justice’s investigation centered around the biannual meeting of the International Council of Containership Operators, commonly known as “Box Club,” or something else.

The Box Club includes the CEOs of all the major container lines and allows only the heads of each company to participate at its twice-yearly meetings. It makes no announcement of its plans to meet, the meeting location, or what was discussed.

US antitrust attorneys sit in on the meetings, even when held outside the United States, to ensure that discussions don't veer into legally precarious territory such as pricing. Typically, the group invites economists or industry analysts to address it on current topics of interest.

Under limited US antitrust authority granted by the federal maritime regulators, container lines that belong to discussion agreements can meet to discuss and agree on voluntary rate guidelines. The carriers are subject to Justice Department antitrust prosecution if they exceed this authority by jointly fixing rates. Carriers retained this limited antitrust immunity in the last major revision of US shipping law, the Ocean Shipping Reform Act (OSRA) of 1998.

Before OSRA, carriers jointly set rates through legalized cartels known as conferences, and shippers and carriers were prohibited from negotiating confidential contracts with each other. OSRA undercut conferences by legalizing confidential contracts, which quickly became the norm. Carriers then established discussion agreements that, when approved by the FMC, are permitted to establish voluntary guidelines but are prohibited from fixing rates.

The most recent example of a major Justice Department antitrust prosecution of carriers came in a Baltimore-based case in which roll-on, roll-off carriers Wallenius Wilhelmsen Logistics, “K” Line Japan, NYK Line Japan and CSAV pleaded guilty to price-fixing charges and were fined a total of more than $230 million, and several former carrier executives pleaded guilty and received prison terms. Several of the carriers also were penalized by regulators in the European Union, Japan, Australia, and South Africa.

Another Justice Department prosecution of carrier price-fixing came several years earlier in the US mainland-Puerto Rico trade, which as a domestic service is not covered by the limited antitrust immunity that international carriers enjoy under OSRA. Horizon Lines, Sea Star Line and Crowley Maritime pleaded guilty to price-fixing charges and paid multimillion-dollar criminal and civil penalties, and six former Horizon and Sea Star officials were sentenced to prison for their parts in the scandal.

Antitrust investigators believe that due to a history of legally having the ability to discuss pricing under antitrust immunity, the industry lacks a disciplined culture and would be vulnerable to illegal activity. For example, the DOJ regularly issues a statement raising concerns after FMC allows a shipping alliance, or major vessel-sharing agreement, to take effect. The FMC has yet to reject to reject a VSA, with the three newest ones — THE, Ocean and 2M alliances — set to take effect April 1.

Carriers’ rejoinder is that rates fluctuate wildly and that supply and demand determine rate levels. Overcapacity in recent years has driven rates to record lows, leading to billions of dollars in losses in 2016 and the significant industry consolidation seen last year.

JOC Article

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