Jones Act Presentation March 26, 2014 Charlie Papavizas Chair, Maritime Practice Group cpapavizas@winston.com Maritime FedWatch Blog at winston.com
Agenda 1. Basics 2. Foreign Vessels in U.S. Waters 3. Foreign Investment in Jones Act Companies 4. Waivers 5. Politics 2
1. Basics History Jones Act traces its origins to the third Act of the first U.S. Congress in 1789 Imposed 50 cents per ton duty on foreign vessels versus 6 cents per ton on U.S. vessels Direct predecessor is an 1817 navigation act with the first outright prohibition of foreign vessels in U.S. domestic trade Current Jones Act is sec. 27 of the Merchant Marine Act, 1920 credited to Sen. Wesley L. Jones from Washington State Not to be confused with sec. 33 relating to maritime workman s comp. also called the Jones Act Sen. Wesley L. Jones 3
1. Basics Text a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel...[is a qualified US-flag vessel] a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel...[is a qualified US-flag vessel]." 4
1. Basics Penalties Penalties for violation of the Jones Act are harsh Merchandise transported in violation may be seized and forfeited Indirect additional penalty of up to U.S. $10,000 per day if documentation laws are violated Currently a case in Alaska where a U.S. $15 million penalty imposed for transporting a jack up rig from the U.S. Gulf of Mexico to Cook Inlet in Alaska 5
1. Basics U.S. Qualified Vessel For a vessel to qualify for the Jones Act it must be: Constructed in the United States (and if reconstructed, again, in the United States) Owned and operated by a qualified U.S. citizen Organized in the United States U.S. citizen management -- specifically Chairman of the Board, Chief Executive Officer and no more than a minority of the number necessary to constitute quorum of the Board can be non-citizens 75 percent owned by U.S. citizens Also, overall vessel control must be in the hands of U.S. citizens 6
1. Basics Where Jones Act Applies between points in the United States Obviously New Orleans and New York and other U.S. ports are points in the United States Offshore, every place within three nautical miles of the coast is a U.S. point Outside the 3 NM, a place becomes a U.S. point when a man-made device is permanently or temporarily attached to the seabed in the U.S. exclusive economic zone (out to 200 miles) for the purpose of exploring for, developing or producing natural resources So, drilling rigs, when attached by anchor, pipe, drill string or otherwise are U.S. points 7
1. Basics Where the Jones Act Applies 8
1. Basics Similar Laws Jones Act restricts transportation of merchandise Other laws similarly restrict transportation of passengers and salvage, towing, dredging and fishing in U.S. waters Dredging, in particular, has potential application to pipe/cable laying 9
2. Foreign Vessels in U.S. Waters Exemptions Jones Act has express and implicit/recognized exemptions for foreign vessels Express exemptions include Transportation of Empty cargo containers and barges Certain stevedoring equipment Vessel equipment -- Jones Act definition is not necessarily the same as a common sense definition Platform jackets when U.S.-flag launch barges are unavailable Oil spill response when U.S.-flag vessels insufficient When merchandise moves in part over Canadian rail lines 10
2. Foreign Vessels in U.S. Waters Exemptions Implicit exemptions include Construction and installation activities where there is no transportation of merchandise Oil drilling and similar activities think Deepwater Horizon Pipe and cable laying Oceanographic/research/seismic activities Voyages to no-where particularly important for gambling vessels Ice breaking 11
2. Foreign Vessels in U.S. Waters Wind Farms Arguably Jones Act does not generally apply to alternative energy projects A place is a U.S. point only when associated with oil and gas exploration, development and production U.S. Congress has had under consideration proposals to fix this loophole In any event, pure installation activities like installing towers is not covered by the Jones Act 12
2. Foreign Vessels in U.S. Waters Traps for the Unwary Transhipment JA cannot be avoided by foreign transhipment -- only if merchandise is altered on shore into new and different product, like refining crude oil into gasoline Part of a Voyage JA applies to any part of a movement including a small portion of a long voyage Temporary Unlading Once merchandise has been unladen in U.S. port, JA applies for shipment to another U.S. port unless a qualified emergency De minimis Movements JA has no de minimis rule there are ample rulings indicating that even short movements like 100 meters are encompassed 13
3. Foreign Investment in JA Companies Care needs to be taken as law broadly prohibits non-u.s. citizen control of JA vessels Yet, foreign investments occur all the time Bareboat charter of JA vessels to non-u.s. citizens prohibited But, genuine time charters are permitted JA applies to vessels not to ancillary businesses non-u.s. citizens can generally own, e.g. -- Terminals Containers, chassis, stevedoring equipment Shipyards 14
3. Foreign Investment in JA Companies JA focuses on current equity not debt So, generally non-citizens can freely lend to JA companies and hold mortgages on JA vessels Also, springing equity like options and warrants can generally be held by non-u.s. citizens 25 percent limit on foreign ownership can be extended Coast Guard has permitted tiered structures where the non-citizen has an aggregate interest of up to 49 percent Such structures are expressly prohibited with fishing vessels Important to always remember that control is in the eye of the regulatory beholder 15
4. Waivers Waivers can be granted by Act of Congress or by the U.S. Department of Homeland Security Legislated waivers are fairly common E.g. America s Cup Act in November 2011 Often appear in periodic Coast Guard authorization acts Picture source: Associated Press 16
4. Waivers Administrative waivers absent extraordinary circumstances are rare Must be a finding that it is in the interest of national defense Period waivers after each of Hurricanes Rita, Katrina and Sandy Commercial expediency is insufficient US Maritime Administration must find no US capacity for a waiver to issue 17
5. Politics Union-backed federal law helped create propane shortage The Daily Caller (Feb. 14. 2014) New Jersey is Out of Road Salt. Blame Maritime Law Business Week (Feb. 20, 2014) Salt held up by outdated Jones Act NorthJersey.com (Feb. 28, 2014) No economic reason for the law these days Jim Cramer, Mad Money, CNBC (Feb. 25, 2013) Sink the Jones Act National Review (March 1, 2013) Picture source The New York Times 18
5. Politics JA is strongly supported by US vessel owners/operators, labor unions and shipyards Organized as the American Maritime Partnership Despite criticisms, there is no current organized opposition Jones Act Reform Coalition active from 1995 to 1999, then gave up Bills introduced, but never got any traction to repeal the JA or modify it (e.g. the build requirement) There is virtually always reform proposals floating around E.g. two proposals to make citizenship requirements more restrictive are currently being considered 19
Conclusion Questions? 20