OTIs And Their Unlicensed Agents: Understanding The Landstar Case And What It Means For OTIs (Dec. 4, 2009)

On November 6, 2009, the Federal Maritime Commission issued an Order Granting Petition for Declaratory Order wherein it accepted the Circuit Court of the District of Columbia’s mandate that Ocean Transportation Intermediaries may utilize unlicensed agents to provide transportation services. By this Order, the FMC departed from its former position that only licensed entities could provide ocean transportation intermediary services to the public. As a result, unlicensed entities may now perform ocean transportation services for FMC-licensed OTIs, so long as the unlicensed agent discloses the identity of its OTI principal. The FMC did not adopt this position willingly; rather, this change in position was precipitated by the District of Columbia Circuit’s ruling in Landstar Express America, Inc. v. Federal Maritime Commission, 569 F.3d 493 (D.C. Cir. 2009).

Prior to the Order of November 6, the FMC had construed the Shipping Act of 1984 to prohibit an OTI’s use of agents. The Shipping Act of 1984 provides that a “person in the United States may not act as an ocean transportation intermediary unless the person holds an ocean transportation intermediary’s license issued by the Federal Maritime Commission.” The use of agents was prohibited because the FMC viewed them as “act[ing] as an ocean transportation intermediary” in violation of the Act. However, the D.C. Circuit on June 26, 2009 held otherwise, and ruled that an entity only provides NVOCC services when it “holds itself out to the general public to provide transportation” and “assumes responsibility for the transportation.”

The reason that the D.C. Circuit held that an OTI may use agents, whereas the FMC had reached a contrary conclusion, was that the Court focused on the plain language of the Shipping Act, whereas the FMC’s prior administrative ruling had focused on the “spirit and basic policy” of the Act. The Act defines a common carrier under Section 40102(16) to be one who:

(i) holds itself out to the general public to provide transportation . . . [and]

(ii) assumes responsibility for the transportation.

The Act thus imposes two requirements that must be fulfilled before an entity becomes a common carrier as a matter of law.

The Court held that an NVOCC’s agent does not hold itself out to the public as an entity providing transportation if it discloses to the public its role as an agent to its NVOCC principal. This disclosure is critical because it holds out the licensed OTI as the party to be providing transportation, even if it is the agent that performs the tasks. The agent in such a situation does not assume responsibility for the transportation. That burden is borne by the licensed OTI principal, as the use of an agent does not shift responsibility for the transportation.

The Court admonished the FMC for failing to adhere to the language of the Act. The purpose of a statute does not control. Its words do. An agency cannot depart from the statute it is charged to administer in order to fulfill what it perceives to be the statute’s remedial purpose.

The FMC had long taken the position that it would allow third party arrangements so long as the activities undertaken by the third party were so “minimal” as to not require licensing. Of course, it was up to the FMC to determine what constituted “minimal,” and the logic of this test was rather circular.

The Circuit Court observed that the use of agents in the ocean transportation industry might “encourage[] [OTIs] to incorporate agency arrangements into their business models and arguably promote[] efficiency.” NVOCCs seeking efficiency gains were indeed the force that drove this matter to the D.C. Circuit to overturn FMC’s rule.

In 2003, NVOCC Team Ocean paid a $100,000 civil penalty to the FMC for allowing unrelated persons to use its OTI license. Seeking to eliminate the air of uncertainty and danger that surrounded use of third parties – as amply demonstrated by Team Ocean’s experience – NVOCC Landstar in January of 2006 sought the opinion of the FMC’s General Counsel as to the permissible use of unlicensed agents. The General Counsel advised that an NVOCC could use an unlicensed agent without violating the Shipping Act if the agent was held out to provide services as an agent only, and not in their own right. Sound familiar?

Despite having been burned for its association with unlicensed entities, Team Ocean was apparently still very interested in using agents under its own name to prepare shipping documents and handle cargo. In August of 2006, Team Ocean requested that the General Counsel’s opinion be adopted by the Commission itself. The FMC, however, declined to adopt the General Counsel’s position, and instead ruled in February of 2008 that the use of unlicensed agents was impermissible. It was that ruling that was appealed to the Circuit Court by Landstar and brought about the FMC’s change of position on November 6.

Now, thanks to judicial intervention, FMC-licensed entities are afforded a long-needed modicum of certainty regarding their interactions with non-licensed service providers. Additionally, the FMC has been forced to adhere to the plain text of the law that it is empowered to administer, and the agency was excoriated by the Court for advancing “nonsensical” arguments during the course of the litigation.

However, it should be remembered that, when utilizing agents, it is the licensed OTI’s bond that is at all times made available to guard against injuries to shippers, and OTIs are as a matter of law liable for the acts of their agents. So while promoting efficiency and rapid expansion of an OTI’s business, the use of agents is a double-edged sword. An OTI that has agents performing its work from remote locations, under the legal control of the OTI but not necessarily under its watchful eye, is exposed daily to potential liabilities that it may not even be aware of, but for which it will be held responsible for under the law. An OTI seeking to utilize agents should define its relationship with its agent through contract so as to provide certainty should disputes arise between the parties. Lastly, an OTI utilizing agents should ensure that they hold themselves out as agents only, and this can only be accomplished if the agent discloses to the public the identity of its licensed OTI principal.