B-199215 L/M, AUG 25, 1980

B-199215 L/M, AUG 25, 1980

DIGEST: REVIEW OF OPERATING DIFFERENTIAL SUBSIDY (ODS) PROGRAM (FILE B-199215; CODE 065551)

GROUP DIRECTOR, CED - ROBERT E. ALLEN, JR.:

INCIDENT TO THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES' REQUEST THAT GAO REVIEW THE OPERATING DIFFERENTIAL SUBSIDY (ODS) PROGRAM AS PROVIDED FOR BY THE MERCHANT MARINE ACT OF 1936 (1936 ACT), AS AMENDED, YOU ASKED THE QUESTIONS BELOW.

QUESTION 1:WHAT ARE THE PRIMARY OBJECTIVES OF THE ODS PROGRAM AS PROVIDED FOR IN THE 1936 ACT, AS AMENDED, AND RELATED HEARINGS?

ANSWER: THE 1936 ACT WAS PASSED TO PROMOTE THE AMERICAN MERCHANT MARINE SO THAT IT COULD DEVELOP FOREIGN AND DOMESTIC COMMERCE AND CONTRIBUTE TO THE NATIONAL DEFENSE. ASSISTANCE TO THE SHIPPING INDUSTRY THROUGH OPERATING DIFFERENTIAL SUBSIDIES UNDER THIS ACT IS INTENDED TO EFFECT A BALANCE BETWEEN THE COSTS OF OPERATING AMERICAN FLAG VESSELS AND THE COSTS INCURRED BY FOREIGN SHIPPERS. FARRELL LINES, INC. V. UNITED STATES, 499 F.2D 587, 594 (CT.CL. 1974). THE RESULTANT PARITY OF OPERATING EXPENSES IS EXPECTED TO PLACE AMERICAN SHIPPERS IN A BETTER COMPETITIVE POSITION WITH THEIR FOREIGN COUNTERPARTS WHO HAVE HISTORICALLY HAD THE ADVANTAGE OF LOWER COSTS.

QUESTION 2: DOES THE CONGRESS HAVE LEGAL AUTHORITY TO ELIMINATE ODS IMMEDIATELY DESPITE OUTSTANDING 20-YEAR CONTRACTS WITH OPERATORS?

ANSWER: THE ODS PROGRAM OPERATES AS CONTRACTS, NOT GRATUITIES. THE BENEFITS CONFERRED BY GRATUITIES MAY BE WITHDRAWN AT ANY TIME IN THE DISCRETION OF CONGRESS. IN CONTRAST, OPERATING DIFFERENTIAL SUBSIDIES, BEING CONTRACTS, CREATE VESTED RIGHTS AND ARE PROPERTY. CONGRESS CAN ONLY EXTINGUISH THESE RIGHTS WHEN ACTING UNDER A PARAMOUNT POWER IN THE PUBLIC INTEREST.

CONGRESS, ACTING UNDER THE POWER VESTED IN IT BY THE COMMERCE CLAUSE, MAY TERMINATE THESE CONTRACTS, AS LONG AS SUCH AN ACTION IS NOT ARBITRARY OR CAPRICIOUS. THIS ACTION, HOWEVER, WOULD CONSTITUTE A TAKING OF PROPERTY SO THAT CONGRESS WOULD BE REQUIRED TO MAKE JUST COMPENSATION TO THE HOLDERS OF THESE CONTRACTS.

QUESTION 3: WHAT ARE THE LEGAL IMPLICATIONS OF REDUCING ODS PAYMENTS USING SECTION 606(1) OF THE 1936 ACT?

ANSWER: SECTION 606(1) OF THE 1936 ACT GIVES THE SECRETARY OF COMMERCE, WHO MAY ACT THROUGH HIS AGENT, THE MARITIME SUBSIDY BOARD, THE AUTHORITY TO REDUCE, POTENTIALLY DOWN TO ZERO, OPERATING SUBSIDIES WHEN CONDITIONS ARE SUCH THAT THE PAYMENTS ARE NO LONGER NEEDED TO PUT THE AMERICAN OPERATOR ON PARITY WITH HIS FOREIGN COMPETITOR. ANY ATTEMPT TO USE THIS PROVISION TO MAKE AN ACROSS-THE-BOARD CUT IN THE ODS PROGRAM WOULD BE UNLAWFUL SINCE IT REQUIRES A CASE-BY-CASE DETERMINATION BASED ON THE FACTS PECULIAR TO EACH SHIP OPERATOR.

ATTACHED IS AN ANALYSIS THAT MORE FULLY DISCUSSES THESE MATTERS.

ATTACHMENT

OPERATING DIFFERENTIAL SUBSIDY PROGRAM

DIGESTS:

1. PURPOSE OF OPERATING DIFFERENTIAL SUBSIDY (ODS) IS TO PLACE OPERATING COSTS OF AMERICAN-FLAG SHIPS ON PARITY WITH COSTS INCURRED BY THEIR FOREIGN COMPETITORS IN ORDER TO PROMOTE AMERICAN MERCHANT MARINE, DEVELOP COMMERCE AND STRENGTHEN NATIONAL SECURITY.

2. OPERATING DIFFERENTIAL SUBSIDY PROGRAM IS STRUCTURED AS CONTRACTS, NOT GRATUITIES, BESTOWING VESTED RIGHTS ON PARTIES. ANY ACTION TO TERMINATE THESE CONTRACTS MUST FALL WITHIN SOME PARAMOUNT POWER VESTED IN CONGRESS BY THE CONSTITUTION. PURSUANT TO COMMERCE CLAUSE, ART. 1, SEC. 8, CL. 3, CONGRESS WOULD HAVE AUTHORITY, IN PUBLIC INTEREST, TO ABROGATE EXISTING ODS CONTRACTS. SINCE, HOWEVER, THESE CONTRACTS ARE PROPERTY TO THEIR HOLDERS, JUST COMPENSATION WOULD HAVE TO BE MADE UPON THEIR TERMINATION.

3. SECTION 606(1) OF MERCHANT MARINE ACT OF 1936 AUTHORIZES SECRETARY OF COMMERCE TO READJUST AMOUNTS OF OPERATING DIFFERENTIAL SUBSIDY IN ACCORDANCE WITH CIRCUMSTANCES AFFECTING AMERICAN OPERATOR'S ABILITY TO COMPETE WITH FOREIGN OPERATORS AND WITH ACT'S GOAL OF ESTABLISHING PARITY BETWEEN AMERICAN AND FOREIGN OPERATORS. THIS PROVISION REQUIRES INDIVIDUAL DETERMINATION OF FACTS IN EACH CASE, AND CANNOT BE USED TO MAKE AN ACROSS-THE-BOARD REDUCTION OF ALL OPERATING SUBSIDIES.

DISCUSSION

QUESTION 1: WHAT ARE THE PRIMARY OBJECTIVES OF THE OPERATING DIFFERENTIAL SUBSIDY (ODS) PROGRAM AS PROVIDED FOR IN THE 1936 ACT, AS AMENDED, AND RELATED HEARINGS?

ANSWER: THE ODS PROGRAM IS A PRODUCT OF CONGRESSIONAL JUDGMENT EXPRESSED IN 1936 BY THE MERCHANT MARINE ACT, CH. 858, SEC. 101, 49 STAT. 1985 (1936), AND REITERATED IN 1970, PUB. L. 91-469, SEC. 1, 84 STAT. 1018 (1970), THAT VITAL NATIONAL SECURITY AND COMMERCIAL INTERESTS ARE SERVED BY THE MAINTENANCE OF OCEAN VESSELS UNDER UNITED STATES REGISTRY. OCEANIC STEAMSHIP CO. V. UNITED STATES, 586 F.2D 774, 777 (CT.CL. 1978); SEA-LAND SERVICES, INC. V. KREPS, 566 F.2D 763, 767 (D.C. CIR. 1977).

AS RECENTLY AS 1974, IT WAS NOTED THAT:

"THE PROBLEM OF SHIPPING HAS BEEN A PERENNIAL ONE FOR AMERICANS. FROM AT LEAST THE TIME OF THE CIVIL WAR, THIS COUNTRY, THE WORLD'S LARGEST INDUSTRIAL NATION AND EXPORTER, HAS EXPERIENCED A SHORTAGE OF AMERICAN- FLAG VESSELS NECESSARY FOR THE COMMERCIAL AND MILITARY REQUIREMENTS OF THIS NATION." AMERICAN EXPORT ISBRANDTSEN LINES, INC. V. UNITED STATES, 499 F.2D 552, 557 (CT.CL. 1974).

THE MERCHANT MARINE ACT OF 1928, 46 U.S.C. SEC. 891 ET SEQ., FIRST SOUGHT TO STRENGTHEN THE AMERICAN MERCHANT MARINE. IT PROVED TO BE A FAILURE, LEADING PRESIDENT FRANKLIN D. ROOSEVELT TO URGE THAT NEW MEASURES BE TAKEN. IN HIS MESSAGE TO CONGRESS ON MARCH 4, 1935, THE PRESIDENT GAVE THE FOLLOWING REASONS WHY THE UNITED STATES SHOULD HAVE AN ADEQUATE MERCHANT MARINE:

"THE FIRST IS THAT IN TIME OF PEACE, SUBSIDIES GRANTED BY OTHER NATIONS, SHIPPING COMBINES, AND OTHER RESTRICTIVE OR REBATING METHODS MAY WELL BE USED TO THE DETRIMENT OF AMERICAN SHIPPERS. THE MAINTENANCE OF FAIR COMPETITION ALONE CALLS FOR AMERICAN FLAG SHIPS OF SUFFICIENT TONNAGE TO CARRY A REASONABLE PORTION OF OUR FOREIGN COMMERCE.

"SECOND, IN THE EVENT OF A MAJOR WAR IN WHICH THE UNITED STATES IS NOT INVOLVED, OUR COMMERCE, IN THE ABSENCE OF AN ADEQUATE AMERICAN MERCHANT MARINE, MIGHT FIND ITSELF SERIOUSLY CRIPPLED BECAUSE OF ITS INABILITY TO SECURE BOTTOMS FOR NEUTRAL PEACEFUL FOREIGN TRADE.

"THIRD, IN THE EVENT OF A WAR IN WHICH THE UNITED STATES ITSELF MIGHT BE ENGAGED, AMERICAN FLAG SHIPS ARE OBVIOUSLY NEEDED NOT ONLY FOR NAVAL AUXILIARIES, BUT ALSO FOR THE MAINTENANCE OF REASONABLE AND NECESSARY COMMERCIAL INTERCOURSE WITH OTHER NATIONS ***." MERCHANT MARINE ACT, 1936:

HEARINGS BEFORE THE COMM. ON COMMERCE, S. REP. NO. 1721, 74TH CONG., 2D SESS. 4-5, AT 7 (1936).

CONGRESS FOLLOWED THE PRESIDENT'S RECOMMENDATIONS IN ITS PREPARATION OF THE MERCHANT MARINE ACT OF 1936. IN ITS STATEMENT OF PURPOSE, THE 1936 ACT, AS AMENDED, RECOGNIZES THAT:

"IT IS NECESSARY FOR THE NATIONAL DEFENSE AND DEVELOPMENT OF ITS FOREIGN AND DOMESTIC COMMERCE THAT THE UNITED STATES SHALL HAVE A MERCHANT MARINE (A) SUFFICIENT TO CARRY ITS DOMESTIC WATER-BORNE COMMERCE OF THE UNITED STATES AND TO PROVIDE SHIPPING SERVICE ESSENTIAL FOR MAINTAINING THE FLOW OF SUCH DOMESTIC AND FOREIGN WATER-BORNE COMMERCE AT ALL TIMES, (B) CAPABLE OF SERVING AS A NAVAL AND MILITARY AUXILIARY IN TIME OF WAR OR NATIONAL EMERGENCY, (C) OWNED AND OPERATED UNDER THE UNITED STATES FLAG BY CITIZENS OF THE UNITED STATES INSOFAR AS MAY BE PRACTICABLE, (D) COMPOSED OF THE BEST-EQUIPPED, SAFEST, AND MOST SUITABLE TYPES OF VESSELS CONSTRUCTED IN THE UNITED STATES AND MANNED WITH A TRAINED AND EFFICIENT CITIZEN PERSONNEL, AND (E) SUPPLEMENTED BY EFFICIENT FACILITIES FOR SHIPBUILDING AND SHIP REPAIR. IT IS DECLARED TO BE THE POLICY OF THE UNITED STATES TO FOSTER THE DEVELOPMENT AND ENCOURAGE THE MAINTENANCE OF SUCH A MERCHANT MARINE." 46 U.S.C. SEC. 1101 (1970).

TO ACCOMPLISH THESE GOALS, THE 1936 ACT ESTABLISHED TWO SUBSIDIES FOR THE AMERICAN MERCHANT MARINE, THE OPERATING DIFFERENTIAL SUBSIDY AT ISSUE HERE AND A CONSTRUCTION DIFFERENTIAL SUBSIDY.

"THE PROBLEM CONGRESS SOUGHT TO ADDRESS WAS THE WEAKNESS OF THE AMERICAN MERCHANT MARINE, WHICH WAS COMPETITIVELY DISADVANTAGED BY THE LOWER COSTS, PARTICULARLY WITH RESPECT TO WAGES INCURRED BY FOREIGN COMPETITION." OCEANIC STEAMSHIP CO. V. UNITED STATES, SUPRA.

THIS COMPETITIVE DISADVANTAGE MAY BE EXPLAINED BY NOTING THAT:

"SINCE AT LEAST THE TURN OF THE CENTURY, UNITED STATES SHIPOWNERS AND SHIPBUILDERS HAVE BEEN UNABLE TO COMPETE EFFECTIVELY WITH FOREIGN SHIPYARDS AND OPERATING FLEETS. THE HIGHER WAGE RATES FOR SKILLED LABORERS AND MORE STRINGENT SAFETY STANDARDS PREVAILING IN THIS COUNTRY RESULT IN MUCH HIGHER COSTS FOR THE PRODUCTION OF SHIPS; HIGHER SEAMAN'S WAGES, MORE PROTECTIVE WORKING CONDITIONS, AND GREATER FOOD, OUTFITTING, INSURANCE, AND REPAIR COSTS MAKE IT IMPOSSIBLE FOR A SHIP UNDER FOREIGN FLAGS. INDIRECT AND DIRECT SUBSIDIES GIVEN SHIPYARDS AND OPERATING FLEETS FURTHER AGGRAVATE THE DISPARITY IN COSTS." MOORE MCCORMACK LINES, INC. V. UNITED STATES, 413 F.2D 568, 570-571 (CT.CL. 1969).

THUS, THIS SUBSIDY WAS DESIGNED TO PLACE AMERICAN OPERATORS IN A POSITION TO COMPETE MORE FAVORABLY WITH THEIR FOREIGN COUNTERPARTS. THE SENATE COMMITTEE ON COMMERCE EXPLAINED:

"IT IS THE PURPOSE OF THIS BILL TO ENDEAVOR TO PLACE THE AMERICAN OWNER AND OPERATOR OF AN AMERICAN FLAG SHIP ON A COMPETITIVE PARITY WITH HIS FOREIGN-FLAG COMPETITOR." MERCHANT MARINE ACT, 1936: HEARINGS BEFORE THE COMM. ON COMMERCE, SUPRA, NOTE 8.

THE ODS SUBSIDY PLACES THE AMERICAN FLAG OPERATOR AT PARITY WITH HIS FOREIGN COMPETITOR SINCE HE GETS HIS LABOR AND OPERATING EXPENSES AT THE FOREIGN RATE, WITH THE GOVERNMENT PAYING ANY DIFFERENCE. HOWEVER, ODS WAS NOT A GUARANTEE OF PROFITS:

"'PARITY' CARRIES WITH IT NO GUARANTEE OF PROFITS, AND IF THERE ARE TO BE ANY PROFITS, THEY MUST BE MADE IN COMPETITION WITH FOREIGN SHIPPING." ID.

THE OPERATING DIFFERENTIAL SUBSIDY IS GOVERNED BY TITLE VI OF THE 1936 ACT. UNDER SECTION 603 OF THE ACT, 46 U.S.C. SEC. 1173 (B), THE AMOUNT RECEIVED UNDER ODS PROGRAM IS THE EXCESS OF CERTAIN OPERATING COSTS (WAGES, INSURANCE, MAINTENANCE AND REPAIRS) INCURRED IN THE OPERATION OF THE VESSEL OVER THE ESTIMATED FAIR AND REASONABLE COST TO OPERATE THE VESSEL IF IT WERE UNDER THE REGISTRY OF A FOREIGN COUNTRY WHOSE VESSELS ARE SUBSTANTIAL COMPETITORS OF THE SUBSIDIZED VESSEL. THE CONDITIONS THAT MUST BE MET BEFORE AN OPERATOR IS ELIGIBLE FOR SUBSIDIES GIVE FURTHER INDICATION OF THE AIMS OF THE ODS PROGRAM. TWO PREREQUISITES SPECIFIED BY SECTION 601(A) OF THE ACT, 46 U.S.C. SEC. 1171(A), ARE:

"(1) THE OPERATION OF SUCH VESSEL OR VESSELS IN AN ESSENTIAL SERVICE IS REQUIRED TO MEET FOREIGN-FLAG COMPETITION AND TO PROMOTE THE FOREIGN COMMERCE OF THE UNITED STATES *** (D) THE GRANTING OF THE AID APPLIED FOR IS NECESSARY TO PLACE THE PROPOSED OPERATIONS OF THE VESSEL OR VESSELS ON A PARITY WITH THOSE OF FOREIGN COMPETITORS, AND IS REASONABLY CALCULATED TO CARRY OUT EFFECTIVELY THE PURPOSES AND POLICY OF THIS CHAPTER ***."

IT SHOULD BE NOTED THAT CONGRESS DID NOT SEE THE OPERATING DIFFERENTIAL SUBSIDY AS THE ONLY MEANS BY WHICH TO ACHIEVE THE PURPOSES OF THIS ACT. IN ITS 1970 AMENDMENT, PUB. L. 91-469 (1970), CONGRESS REAFFIRMED ITS BELIEF IN THE NEED FOR A STRONG AMERICAN MERCHANT MARINE FOR THE NATION'S ECONOMY AND DEFENSE, ACKNOWLEDGING THAT THE U.S. OPERATOR IS AT A DISADVANTAGE WITH HIS FOREIGN COMPETITOR. H.R. REP. NO. 1073, 91ST CONG., 2D SESS. 17 (1970). NONETHELESS, BOTH THE HOUSE AND THE SENATE INDICATED THE DESIRE TO REDUCE OPERATORS' DEPENDENCY UPON THE ODS PROGRAM, BY THE DEVELOPMENT OF THE AMERICAN FLEET THROUGH A SHIPBUILDING PROGRAM, H.R. REP. NO. 1973, SUPRA, AND BY THE LOOSENING OF RESTRICTIONS UPON OPERATORS, ALLOWING THEM TO OPERATE MORE EFFICIENTLY, S. REP. NO. 1080, 91ST CONG., 2D SESS. 66 (1970).

QUESTION 2: DOES THE CONGRESS HAVE LEGAL AUTHORITY TO ELIMINATE ODS IMMEDIATELY DESPITE OUTSTANDING 20-YEAR CONTRACTS WITH OPERATORS?

ANSWER: OPERATING DIFFERENTIAL SUBSIDIES ARE CONSTRUCTED AS CONTRACTS, NOT GRANTS. IT HAS BEEN NOTED THAT:

"THE LEGAL REALITY IS THAT, AT THIS POINT IN THEIR DEALINGS WITH THE GOVERNMENT, THE PLAINTIFFS' INTEREST IS NOT A MATTER OF GRACE OR OF MERE STATUTORY LARGESSE, BUT OF MUTUALLY ENFORCEABLE UNDERTAKINGS. THE GOVERNMENT HAS NOT CHOSEN TO GRANT SUBSIDY WHEN AND IF IT DEEMS IT NECESSARY; IT HAS ENTERED INTO A TWENTY-YEAR CONTRACT WITH EACH OF THESE COMPANIES UNDER WHICH IT HAS ASSUMED A NUMBER OF OBLIGATIONS, AND THE SHIPOWNER HAS ALSO GIVEN VALUABLE CONSIDERATION ***." MOORE MCCORMACK LINES, INC. V. UNITED STATES, SUPRA AT 582.

THE COURT IN ISBRANDTSEN LINES, SUPRA AT 576, EXPLAINED THAT THESE OPERATING DIFFERENTIAL SUBSIDIES ARE NOT "TRUE" SUBSIDIES, BUT INSTEAD ARE "SUBSIDY CONTRACTS." WHAT DISTINGUISHES THE ODS PROGRAM FROM "TRUE" SUBSIDIES IS THAT THE SHIP OPERATORS ARE NOT THE ONLY PARTIES TO BENEFIT FROM THE ODS AGREEMENTS, THERE IS A QUID PRO QUO TO THE GOVERNMENT.

"THE FEDERAL GOVERNMENT BEARS THIS BURDEN OF THE HIGHER COST OF CONSTRUCTING AND OPERATING THE SHIPS. IN TURN, THE SUBSIDIZED SHIP OWNER SHOULDERS A NUMBER OF OBLIGATIONS, CHIEFLY THE MAINTENANCE OF THE VESSEL UNDER UNITED STATES REGISTRY." MOORE-MCCORMACK LINES, INC. V. UNITED STATES, SUPRA AT 571. THE SENATE COMMERCE COMMITTEE REPORT, MERCHANT MARINE ACT, 1936, SUPRA, AT 9-10 (80 CONG. REC. 10075 (1936)), CONTAINS A SECTION ENTITLED "SUBSIDY PAYMENTS NOT A GIFT TO SHIPOWNER," IDENTIFYING 12 BENEFITS TO THE GOVERNMENT. THIS QUID PRO QUO IS ALSO MENTIONED IN HEARINGS PURSUANT TO S. RES. 50 BEFORE A SUBCOMM. OF THE SENATE COMM. ON INTERSTATE AND FOREIGN COMMERCE, 81ST CONG., 2D SESS., PT. 7, AT 1510-11, 1649-51 (1950).

THE FACT THAT THE ODS PROGRAM IS STRUCTURED AS CONTRACTS IS OF GREAT SIGNIFICANCE. IN AN ANALOGOUS SITUATION IT WAS DETERMINED THAT: "BEING VALID CONTRACTS THE GOVERNMENT HAS THREE COURSES OPEN TO IT: IT MAY CARRY OUT THE CONTRACTS, OR MODIFY OR READJUST THEM BY AGREEMENT WITH THE HOLDERS, OR CANCEL THEM AND MAKE JUST COMPENSATION. THE GOVERNMENT CANNOT SIMPLY REPUDIATE THE CONTRACTS AND THERE END THE MATTER, NOT ONLY BECAUSE IT IS WITHOUT CONSTITUTIONAL POWER TO DO SO, BUT BECAUSE IT WOULD THEREBY DESTROY ALL THE CONFIDENCE NOW HELD BY SHIPPING INTERESTS IN GOVERNMENT CONTRACTS ***." HEARINGS BEFORE THE COMM. ON COMMERCE ON S. 3500, S. 4110 AND S. 4111, 74TH CONG., 2D SESS. 163 (1936) (STATEMENT OF JOHN M. FRANKLIN).

THIS STATEMENT WAS MADE IN RESPECT TO THE TERMINATION OF OCEAN MAIL CONTRACTS, AN INDIRECT SHIPPING SUBSIDY PROVIDED FOR BY THE MERCHANT MARINE ACT OF 1928. THE SAME OPTIONS FACE CONGRESS TODAY. IT MAY CARRY OUT THE SUBSIDY CONTRACTS OR IT MAY MODIFY THEM BY AGREEMENT WITH THE HOLDERS OR, IN CERTAIN INSTANCES, BY INVOKING SECTION 606(1) OF THE 1936 ACT, AS DISCUSSED UNDER THE FOLLOWING QUESTION, OR IT MAY CANCEL THEM AND MAKE JUST COMPENSATION.

IT HAS BEEN POINTED OUT THAT:

"WHEN THE UNITED STATES, WITH CONSTITUTIONAL AUTHORITY MAKES CONTRACTS, IT HAS RIGHTS AND INCURS RESPONSIBILITIES SIMILAR TO THOSE OF INDIVIDUALS WHO ARE PARTIES TO SUCH INSTRUMENTS." PERRY V. UNITED STATES, 294 U. S. 330, 352 (1934).

ONE OF THE PRINCIPAL DIFFERENCES BETWEEN THE UNITED STATES AND AN INDIVIDUAL CONTRACTING PARTY IS THAT THE UNITED STATES CANNOT BE SUED WITHOUT ITS CONSENT. UNITED STATES V. BANK OF THE METROPOLIS, 40 U. S. 377, 392 (1841). THIS FACT, HOWEVER, IS ONLY A MATTER OF PROCEDURE THAT

"*** DOES NOT AFFECT THE LEGAL AND BINDING CHARACTER OF ITS CONTRACTS. WHILE THE CONGRESS IS UNDER NO DUTY TO PROVIDE REMEDIES THROUGH THE COURTS, THE CONTRACTUAL OBLIGATION STILL EXISTS AND, DESPITE INFIRMITIES OF PROCEDURE, REMAINS BINDING UPON THE CONSCIENCE OF THE SOVEREIGN." PERRY V. UNITED STATES, SUPRA, AT 354, CITING LYNCH V. UNITED STATES, 292 U. S. 571, 580, 582 (1933).

IN THE LYNCH CASE, CONGRESS ATTEMPTED TO ABROGATE EXISTING WAR INSURANCE CONTRACTS AS BUDGET-CUTTING MEASURE. THIS ACTION CONSTITUTED AN ACT OF REPUDIATION. LYNCH V. UNITED STATES, SUPRA, AT 580. IT IS EXPLAINED THAT:

"THE UNITED STATES ARE AS MUCH BOUND BY THEIR CONTRACTS AS ARE INDIVIDUALS. IF THEY REPUDIATE THEIR OBLIGATIONS, IT IS AS MUCH REPUDIATION, WITH ALL THE WRONG AND REPROACH THAT TERM IMPLIES, AS IT WOULD BE IF THE REPUDIATOR HAD BEEN A STATE OR A MUNICIPALITY OR A CITIZEN." SINKING-FUND CASES, 99 U. S. 700, 719 (1878).

THE COURT, HOWEVER, ACKNOWLEDGED THAT CONGRESS MAY HAVE THE AUTHORITY TO CANCEL OUTSTANDING GOVERNMENT CONTRACTS. WITH REFERENCE TO THE INSURANCE CONTRACTS, IT SAID:

"AS CONGRESS HAD THE POWER TO AUTHORIZE THE BUREAU OF WAR INSURANCE TO ISSUE THEM, THE DUE PROCESS CLAUSE PROHIBITS THE UNITED STATES FROM ANNULLING THEM, UNLESS, INDEED, THE ACTION TAKEN FALLS WITHIN THE FEDERAL POLICE POWER OR SOME OTHER PARAMOUNT POWER." LYNCH V. UNITED STATES, SUPRA AT 579.

THE AUTHORITY TO ENTER INTO A GOVERNMENT CONTRACT CARRIES WITH IT THE POWER TO CANCEL THAT CONTRACT WHEN SUCH AN ACTION IS IN THE PUBLIC INTEREST. UNITED STATES V. CORLISS STEAM ENGINE CO., 91 U. S. 321 (1875). THIS POWER TO ENACT LAWS TO ALTER CONTRACTS, WHETHER MADE BETWEEN PRIVATE PARTIES OR BETWEEN THE GOVERNMENT AND PRIVATE CITIZENS IS AN ATTRIBUTE OF CONGRESS'S SOVEREIGNTY. PFILE V. CORCORAN, 287 F. SUPP. 554, 559 (D. COLO. 1968). AFTER REFERRING TO THE PERRY AND LYNCH CASES CITED ABOVE, THE PFILE DECISION STATED THAT:

"THESE CASES INDICATE THAT ABROGATION IS PERMISSIBLE WHERE THE ABROGATION OCCURS THROUGH THE EXERCISE OF SOME PARAMOUNT POWER OF THE SOVEREIGN, AND THE ABROGATION OPERATES TO FURTHER THE ENDS SOUGHT TO BE ACHIEVED IN EXERCISE OF THIS POWER." SUPRA AT 560.

RUSSELL MOTOR CAR CO. V. UNITED STATES, 261 U. S. 514 (1922) IS AN EXAMPLE OF A SITUATION WHERE THE SUPREME COURT UPHELD A STATUTE THAT ALLOWED THE CANCELLATION OF CONTRACTS FORMED UNDER EARLIER CONGRESSIONAL AUTHORIZATION. THE OBJECT OF THE ORIGINAL STATUTE WAS TO PROVIDE FOR THE NECESSITIES OF WAR. ONCE THE WAR WAS OVER, THE PRODUCTION CONTRACTS WERE NO LONGER NEEDED SO THAT:

"NOT TO PROVIDE, THEREFORE, FOR THE CESSATION OF THIS PRODUCTION WHEN THE NEED FOR IT HAD PASSED WOULD HAVE BEEN A DISTINCT NEGLECT OF THE PUBLIC INTEREST." RUSSELL MOTOR CAR CO., SUPRA AT 521.

SIMILAR MOTIVATION LED CONGRESS TO TERMINATE THE OCEAN MAIL CONTRACTS. THESE CONTRACTS WERE SUBJECT TO FRAUD AND OTHER ABUSES SO THAT THEY WERE NOT ACHIEVING THE PURPOSES OF THE MERCHANT MARINE ACT OF 1928. HEARINGS BEFORE THE COMM. ON COMMERCE ON S. 3500, S. 4110 AND S. 4111, SUPRA AT 8. (STATEMENT OF J. M. JOHNSON, ASSISTANT SECRETARY OF COMMERCE); MOORE- MCCORMACK LINES, INC. V. UNITED STATES, SUPRA AT 570. HENCE, CONGRESS, BY THE MERCHANT MARINE ACT OF 1936, SECS. 401 TO 404, 46 U.S.C. SECS. 1141 TO 1144 (1936) (OMITTED AS EXECUTED AND OBSOLETE) ANNULLED OUTSTANDING OCEAN MAIL CONTRACTS.

FROM THESE PRINCIPLES AND EXAMPLES IT IS EVIDENT THAT CONGRESS HAS THE AUTORITY TO ABROGATE CONTRACTS MADE WITH THE UNITED STATES WHEN ACTING UNDER ONE OF ITS CONSTITUTIONALLY GRANTED POWERS IN THE PROMOTION OF THE GENERAL WELFARE.

UNDER THE COMMERCE CLAUSE OF THE CONSTITUTION, ART. 1, SEC. 8, CL. 3, CONGRESS HAS BEEN GIVEN THE POWER TO REGULATE COMMERCE WITH FOREIGN NATIONS. THIS CLAUSE IS ALSO THE SOURCE OF CONGRESS' AUTHORITY TO REGULATE SEAMEN, SHIPS AND NAVIGATION STOCKTON V. BALTIMORE & N.Y. R. CO., 32 F. 9, 16 (1887), APPEAL, DISMISSED, 140 U. S. 699 (1890); PROVIDENCE & NEW YORK STEAMSHIP CO. V. HILL MANUFACTURING CO., 109 U. S. 578, 589 (1883). SINCE ONE OF THE PRIMARY PURPOSES OF THE MERCHANT MARINE ACT OF 1936 IS THE PROMOTION OF COMMERCIAL ACTIVITY WITH OTHER NATIONS, THE COMMERCE CLAUSE SERVES AS A SOURCE OF AUTHORITY FOR THIS MEASURE BY CONGRESS. UNDER THE COMMERCE CLAUSE, CONGRESS HAS THE POWER BOTH TO MAKE AND TO ANNUL ODS CONTRACTS.

"THE CONSTITUTION IN THE COMMERCE CLAUSE, ART. 1, SEC. 8, CL. 3, VESTS IN CONGRESS POWER TO ELIMINATE ANY RIGHTS IT HAS HERETOFORE CREATED." HOLLINGSWORTH V. FEDERAL MINING & SMELTING CO.," 74 F. SUPP. 1009, 1021 (D. IDAHO 1947).

IN THAT PARTICULAR DECISION IT WAS NOTED THAT:

"THERE ARE NO CONTRACT RIGHTS INVOLVED IN THE CASES HERE BEING CONSIDERED. STILL IF *** IT CAN BE SAID THAT THE RIGHTS HERE ARE CONTRACT RIGHTS IN A LIMITED SENSE CONGRESS NEVERTHELESS IS NOT PROHIBITED FROM EXERCISING ITS POWER TO PROTECT COMMERCE." ID.

IF CONGRESS ACTS WITH THE GOAL OF ADVANCING AND BETTERING COMMERCE IN TERMINATING THE ODS PROGRAM, IT WOULD BE DOING SO LAWFULLY. FOR EXAMPLE, IF IT WERE SHOWN THAT THE AMERICAN FLEET WOULD BE IN A BETTER COMPETITIVE POSITION WITHOUT THESE CONTRACTS OR WITH ANOTHER FORM OF AID, TERMINATION OF THE ODS CONTRACTS WOULD BE A LAWFUL EXERCISE OF CONGRESS' AUTHORITY UNDER THE COMMERCE CLAUSE. ALTERNATIVELY, IF IT WERE DEMONSTRATED THAT THESE CONTRACTS DID NOT SERVE THE PURPOSES OF THE 1936 ACT, CONGRESS MIGHT CANCEL THEM AS THEY CANCELLED THE INEFFECTUAL OCEAN MAIL CONTRACTS. EITHER OF THESE CONSIDERATIONS WOULD ALSO BE FOUNDED UPON THE PUBLIC INTEREST. AS LONG AS CONGRESS IS ACTING UNDER SUCH A PARAMOUNT POWER AS THE COMMERCE CLAUSE IN PURSUIT OF THE PUBLIC INTEREST, IT HAS THE AUTHORITY TO ABROGATE EXISTING OPERATING DIFFERENTIAL SUBSIDY CONTRACTS.

SIMILARLY, CONGRESS HAS THE AUTHORITY TO PROVIDE AND MAINTAIN A NAVY, UNDER ART. 1, SEC. 8, CL. 13 OF THE CONSTITUTION, A POWER WHICH SERVES AS ANOTHER BASIS FOR THE 1936 ACT. IF IT WERE TO BE FOUND THAT THE OPERATING DIFFERENTIAL SUBSIDY WAS NOT CONTRIBUTING AS EXPECTED TO THE NATIONAL DEFENSE OR THAT BETTER MEANS COULD BE ENACTED TO ACHIEVE THAT END, THIS CLAUSE WOULD GIVE CONGRESS AUTHORITY TO TERMINATE THE ODS CONTRACTS.

ONE COURT EXPLAINED CONGRESS' BROAD POWER TO GIVE AND TAKE AWAY BY SAYING THAT:

"CONGRESS IS THE LAW MAKING BODY ESTABLISHED BY THE CONSTITUTION AND THE RESPONSIBILITY IS ITS TO ENACT GOOD LAWS OR BAD LAWS AND IF IT ENACTS A BAD ONE IT IS NOT ONLY WITHIN ITS POWER TO MODIFY OR REPEAL IT BUT IT IS ITS DUTY TO DO SO." ID. AT 1017-18.

THE ONLY LIMITATION UPON THIS POWER IS THE GUARANTEE OF DUE PROCESS WHICH DEMANDS THAT:

"*** THE LAW SHALL NOT BE UNREASONABLE, ARBITRARY OR CAPRICIOUS, AND THAT THE MEANS SELECTED SHALL HAVE A REAL AND SUBSTANTIAL RELATION TO THE OBJECT SOUGHT TO BE ATTAINED." NEBBIA V. NEW YORK, 291 U. S. 502, 525 (1933).

CONGRESS' POWER TO CANCEL GOVERNMENT CONTRACTS IS SUBJECT TO ONE FURTHER LIMITATION:

"THE FIFTH AMENDMENT COMMANDS THAT PROPERTY BE NOT TAKEN WITHOUT MAKING JUST COMPENSATION. VALID CONTRACTS ARE PROPERTY WHETHER THE OBLIGOR BE A PRIVATE INDIVIDUAL, A MUNICIPALITY, A STATE OR THE UNITED STATES." LYNCH V. UNITED STATES, SUPRA AT 579, CITING UNITED STATES V. CENTRAL PACIFIC R. CO., 118 U. S. 235, 238 (1885); UNITED STATES V. NORTHERN PACIFIC CO., 256 U. S. 51, 64, 67 (1920).

IN RUSSELL MOTOR CAR CO., SUPRA AT 552, IT WAS DECIDED THAT THE PRESIDENT, ACTING UNDER A CONGRESSIONAL DIRECTIVE, WAS AUTHORIZED TO CANCEL THE GOVERNMENT'S CONTRACTS, "UPON MAKING JUST COMPENSATION TO THE PARTIES CONCERNED." IN THE TERMINATION OF THE OCEAN MAIL CONTRACTS, CONGRESS PROVIDED THAT THE CONTRACTORS WHO WERE NOT SATISFIED WITH ADJUSTMENT AGREEMENTS WITH THE GOVERNMENT COULD SUE THE UNITED STATES IN THE COURT OF CLAIMS. IT WAS PROVIDED IN PART THAT:

"THE JURISDICTION OF SAID COURT TO AWARD ANY DAMAGES OR PAYMENTS TO THE OCEAN MAIL CONTRACTOR IS HEREBY EXPRESSLY LIMITED TO AN AWARD OF JUST COMPENSATION ... SUCH JUST COMPENSATION SHALL NOT INCLUDE ANY ALLOWANCE FOR PROSPECTIVE PROFITS OR FOR SPECULATIVE FUTURE PROFITS THAT MIGHT HAVE BEEN REALIZED BY THE CLAIMANT IF PERMITTED FURTHER TO CARRY OUT THE CONTRACT." MERCHANT MARINE ACT OF 1936, SEC. 402(C), 46 U.S.C. SEC. 1142(C) (1936).

IT MAY BE CONCLUDED THAT, UNLESS SOME ALTERNATIVE AGREEMENT IS REACHED WITH THE INDIVIDUAL CONTRACTORS, JUST COMPENSATION WILL HAVE TO BE MADE FOR THOSE OPERATING DIFFERENTIAL SUBSIDY CONTRACTS THAT ARE CANCELLED BY CONGRESS.

QUESTION 3: WHAT ARE THE LEGAL IMPLICATIONS OF REDUCING ODS PAYMENTS UNDER SECTION 606(1) OF THE 1936 ACT?

ANSWER: SECTION 606(1) OF THE 1936 ACT, 46 U.S.C. SEC. 1176(1), PROVIDES IN PART THAT:

"EVERY CONTRACT FOR AN OPERATING DIFFERENTIAL SUBSIDY UNDER THIS SUBCHAPTER SHALL PROVIDE (1) THAT THE AMOUNT OF THE FUTURE PAYMENTS TO THE CONTRACTOR SHALL BE SUBJECT TO REVIEW AND READJUSTMENT FROM TIME TO TIME, BUT NOT MORE FREQUENTLY THAN ONCE A YEAR, AT THE INSTANCE OF THE SECRETARY OF COMMERCE OR OF THE CONTRACTOR. IF ANY SUCH READJUSTMENT CANNOT BE REACHED BY MUTUAL AGREEMENT, THE SECRETARY OF COMMERCE, ON HIS OWN MOTION OR ON THE APPLICATION OF THE CONTRACTOR SHALL, AFTER A PROPER HEARING, DETERMINE THE FACTS AND MAKE SUCH READJUSTMENT IN THE AMOUNT OF SUCH FUTURE PAYMENTS AS HE MAY DETERMINE TO BE FAIR AND REASONABLE AND IN THE PUBLIC INTEREST ***." MERCHANT MARINE ACT OF 1936, CH. 858, SEC. 606(1), 49 STAT. 2004 (1936), 46 U.S.C. SEC. 1176(1).

THIS SECTION GOES ON TO PROVIDE THAT:

"HIS DECISION SHALL BE BASED UPON AND GOVERNED BY THE CHANGES WHICH MAY HAVE OCCURRED SINCE THE DATE OF SAID CONTRACT, WITH RESPECT TO THE ITEMS THERETOFORE CONSIDERED AND ON WHICH SUCH CONTRACT WAS BASED. ***." ID.

THE LANGUAGE OF SECTION 601(A) AND THE LEGISLATIVE HISTORY OF THE 1936 ACT MAKE IT CLEAR THAT FOREIGN COMPETITION MUST EXIST BEFORE AN ODS CONTRACT MAY BE FORMED, SO THAT:

"IT DOES NOT APPEAR THAT CONGRESS INTENDED THAT THE SUBSIDY WOULD COMPENSATE SHIPPERS WHICH HAD NO ACTUAL OR POTENTIAL COMPETITION FROM FOREIGN LINES." STATES MARINE INTERNATIONAL, INC. V. PETERSON, 518 F.2D 1070, 1077 (D. C. CIR. 1975).

THUS, IF A SUBSIDIZED OPERATOR WERE FACED WITH LESS OR NO FOREIGN COMPETITION, HIS SUBSIDY PAYMENTS COULD BE REDUCED. THE PURPOSE OF THESE PAYMENTS IS TO PUT THE AMERICAN OPERATOR ON PARITY WITH HIS FOREIGN COMPETITION. THUS, EVEN IF HE DOES HAVE FOREIGN COMPETITION, IN INSTANCES WHERE THE AMERICAN OPERATOR'S EXCESS COSTS HAVE DECREASED OR DISAPPEARED, HIS ODS PAYMENTS SHOULD BE REDUCED ACCORDINGLY.

SECTION 606(1) ALSO DIRECTS THE SECRETARY TO APPRAISE CHANGES IN "OTHER CONDITIONS AFFECTING SHIPPING." OTHER CONDITIONS MAY EXIST WHICH SERVE TO REDUCE A FOREIGN-FLAG SHIP'S OPERATING EDGE OR TO GIVE SOME OFFSETTING ADVANTAGE TO AMERICAN-FLAG SHIPS. FOR EXAMPLE, THE THEN MARITIME ADMINISTRATOR TESTIFIED THAT NEW TECHNOLOGICALLY ADVANCED CONTAINERSHIPS WOULD REDUCE ELEMENTS OF COST WHICH HAD PLACED U. S. OPERATORS AT A DISADVANTAGE, PRODUCING AN OPPORTUNITY FOR PROFITABLE OPERATION WITHOUT AN OPERATING SUBSIDY. HEARINGS ON THE "PRESIDENT'S MARITIME PROGRAM" BEFORE THE HOUSE SUBCOMM. ON MERCHANT MARINE OF COMM. ON MERCHANT MARINE AND FISHERIES, 91ST CONG., 1ST SESS. 21 (1969). THE MARITIME SUBSIDY BOARD HAS POINTED OUT THAT IN ADDITION TO THE ADDED EFFICIENCY OF CONTAINERSHIPS, A GREATER DEGREE OF CONTAINERIZATION, THE LENGTH OF TIME INVOLVED AND THE FINANCIAL RESULTS OF U. S. OPERATORS ALL HAVE CONTRIBUTED TO A DECREASED DEPENDENCY UPON THE ODS PROGRAM. AMERICAN PRESIDENT LINES, LTD., ORDER TERMINATING DOCKET, NO. A-121 (MSB DEC. 8, 1977). IT IS APPARENT THAT SECTION 606(1) DOES PROVIDE A MEANS BY WHICH TO REDUCE OR EVEN ELIMINATE ODS PAYMENTS. THIS PROVISION, HOWEVER, DOES NOT GRANT THE AUTHORITY TO MAKE ACROSS-THE-BOARD ODS READJUSTMENTS. THE LANGUAGE OF THIS PROVISION CLEARLY REQUIRES A CASE-BY-CASE DETERMINATION OF PAYMENT ADJUSTMENTS, TO BE MADE EITHER BY MUTUAL AGREEMENT WITH THE INDIVIDUAL CONTRACTOR OR BY CONSIDERATION OF FACTS ESTABLISHED BY A PUBLIC HEARING. IT SHOULD BE NOTED THAT ANY DECISION BY THE SECRETARY MAY BE SUBJECT TO JUDICIAL REVIEW UNDER THE ADMINISTRATIVE PROCEDURE ACT, 5 U.S.C. SEC. 702 (1966).