A COURT CASE TO WATCH

A COURT CASE TO WATCH

The operator of the Tropic Sea wanted a chance to separate passengers from their money on gambling cruises to nowhere. When the ship was denied permission to dock at Charleston, the operator complained to the Federal Maritime Commission. Now, after two years and reams of legal briefs, the dispute is before the U.S. Supreme Court. If you're a customer or an operator of a port, it's a case worth watching.

As with most cases that the Supreme Court agrees to hear, the basic dispute is less significant than the underlying legal issue. In South Carolina State Ports Authority v. Federal Maritime Commission, the issue is sovereign immunity -- specifically, whether a private party can use a federal agency to challenge a state agency's actions.The FMC ruled that the port authority was not protected by the sovereign immunity that states enjoy under the 11th amendment. The FMC said the 11th amendment applies only in judicial cases, not federal administrative actions such as those handled by the FMC. The 4th U.S. Circuit Court of Appeals overruled the FMC. The commission appealed to the Supreme Court, and the high court is expected to decide the issue next year.

Hugh Welsh, deputy general counsel of the Port Authority of New York and New Jersey, has been following the case. Speaking this month at a port symposium in Gulfport, Miss., organized by the University of Southern Mississippi, he said the Supreme Court is likely to rule that the South Carolina port authority is protected by sovereign immunity. He said such a ruling would be a 'natural extension' of previous court decisions, and that it could have interesting effects.

To understand why, it's necessary to recognize two things about public ports:

l The law assumes that they are operated for profit. The FMC has declared in previous rulings that ports cannot charge non-compensatory rates for services.

l In fact, hardly any U.S. public port is profitable, when capital costs are considered. Most ports see their mission as economic development, and they routinely agree to non-compensatory deals to attract the business of carriers and terminal operators.

'Port tenants or potential users have learned to use the current regulatory regime to gain leverage over public port authorities,' Welsh said. 'If the negotiations are unsuccessful or the users don't get what they want, they will argue that there's a violation of the shipping act.'

So what does this have to do with sovereign immunity? Plenty, Welsh said.

If the Supreme Court rules that private parties can't use the FMC to challenge a state port authority's actions, one possible avenue of protest would be closed off. The effect of that, however, might be limited. For one thing, it's almost unheard of for one port to challenge another port's non-compensatory deal, because virtually every port is guilty of the practice. Shippers, carriers and terminal operators aren't going to file such challenges, because they benefit from the deals.

Even if the Supreme Court rules that private parties can't complain to the FMC about state port actions, the maritime commission could still act on its own to enforce shipping-act prohibitions against preferential treatment or refusal to deal. In recent years, though, the FMC has relied primarily on complaints filed by private parties. Budget cutbacks have left the FMC with limited resources to initiate investigations on its own.

It's possible that with an increased budget, the FMC might decide to challenge non-compensatory leases by ports. But that would be a bold step for the FMC -- there's no constituency for such an initiative, except possibly for local taxpayers in ports that are giving away the store to attract business.

The South Carolina case before the Supreme Court raises another issue. Not all ports are state-owned. Some, such as Los Angeles, are city-owned. Others are independent ports or navigation districts. The bi-state Port Authority of New York and New Jersey was created under a compact in which the agency voluntarily waived some of its sovereign immunity.

If the Supreme Court rules that state port authorities have sovereign immunity, enforcement wouldn't be uniform.

That could raise yet another issue: antitrust immunity. Like ocean carriers, ports enjoy antitrust immunity and can form conferences that permit joint setting of rates (although, except in California, joint action by ports on rates has been largely ineffective). Would ports be able to keep this antitrust immunity in the absence of uniform regulatory enforcement?

Clearly, the Tropic Sea case involves much more than the docking of a gambling ship. If you're a carrier, stevedore, terminal operator or shipper, watch for the Supreme Court ruling -- and more important, the reaction to it.

Joseph Bonney is deputy editor of JoC Week. He can be reached at (973) 848-7139, or via e-mail at jbonney

oc.com.