Challenging Split Routing

The Federal Maritime Commission is at the eye of a bitter dispute over whether split routing, as practiced by Global Link Logistics, is legal.
If the commission rules it is not, other non-vessel-operating common carriers may have to rethink the way they handle the split routing of imported freight, a practice also known as rerouting, triangulation, diversion and a host of other industry terms.

Global Link, a Tucker, Ga.-based NVOCC, and its previous owner, Olympus Growth Fund III, want the FMC to determine whether the company, while owned by Olympus, violated the Shipping Act of 1984. Last month, Mitsui O.S.K. Lines filed a complaint with the FMC to recover $4.5 million in underpayments from Global Link.

The FMC, however, is in no hurry. It referred the MOL complaint to an administrative judge who has a year to make a ruling. It has yet to act against Global Link or issue the ruling or order sought by Olympus.

The dispute split wide open when Olympus, which bought Global Link in 2003 for $20 million, sold it to its current owner, Golden Gate Logistics, in 2006 for $128.5 million. After the sale, the new owner found that Global Link routinely engaged in split routing, and alleged the practice allowed Olympus to inflate the company’s pretax earnings. It also charged that Olympus “misrepresented” when it said Global Link complied with all applicable laws.

The new owner said the company had violated the law’s prohibitions against shipping at less-than-contract rates and false documentation. Then it turned its own company in to the FMC’s Bureau of Enforcement, disclosing the split routing activity as a potential violation of the law. Olympus then petitioned the FMC for a declaratory ruling, rule-making or order on whether Global Link’s split routing was illegal.

Split routing or rerouting through shipments to new destinations is not uncommon, NVOs say. Global Link’s way of handling it, however, may not be the norm.

According to documents in the case, Global Link would book a container to an inland destination using door-to-door rates in its service contract. The terms would appear in the ocean carrier’s master bill of lading. However, the NVO intended to ship the cargo to a different destination that might have a higher door rate. Before the container landed at a U.S. port, Global Link would arrange with a U.S. trucker to move the cargo to the actual destination, which was listed on the house bill that was presented to shippers.

For example, Global Link would book a through shipment to Tulsa, for which the ocean carrier had listed a door rate, while intending to ship the container to Fort Smith, Ark., at a higher rate. By collecting that higher rate from the shipper, Global Link was able to inflate its gross earnings per container, without the ocean carrier’s knowledge.

The case came before a three-member panel of the American Arbitration Association earlier this year. The arbitrators, in their decision, said Global Link “would not only lie to the ocean carriers about where it intended to send the cargo, but . . . lie to the ocean carriers after delivery about where the cargo had been sent when paying for the shipment.” False booking, they said, “was an institutional practice” at Global Link.

Although the panel decided Olympus had overstated Global Link’s value to its buyers — the company, in fact, was nearly insolvent at the time of the sale — it said Global Link’s evidence of wrongdoing was inconclusive.

In February, the FMC sought public comment from the industry about the practice of diversion. It received only one comment, from a consultant.
Is split routing legal? Most NVOs agree that diverting containers from one destination to another is a shipper’s decision, and there are legal ways to do it.

“Their (Global Link’s) action, I believe, is not common at all,” said Joseph R. Meunier, particularly arranging for delivery before the container arrived. “When something is diverted, usually the decision is made post-arrival, or while it’s on the water,” said Meunier, president of New England Groupage in Holbrook, Mass., and chairman of the NVOCC standing committee of the National Customs Brokers and Forwarders Association of America. The NCBFAA did not file comments on the case.

“While we understand that there are times you need to divert cargo, there are also procedures to be followed with the carrier,” he said.
Usually an NVO informs the ocean carrier if a shipper wants a container delivered to point B instead of point A, he said. The carrier will amend the bill of lading, and charge the additional trucking rate.

“The carrier handles it on a case-by-case basis, but the Shipping Act is quite clear, if you have a through bill of lading, and the intermodal move is negotiated through the carrier, if there’s a change, you’re obligated to notify the carrier,” Meunier said.

Meunier believes the Shipping Act and FMC rules already cover cases such as Global Link’s. “It’s difficult to comment on a rule that already exists. If they violated the rule, they violated the rule.”

Contact R.G. Edmonson at bedmonson@joc.com.