Did Matson and Horizon Lines defraud the United States?
by Michael Hansen, Hawaii Shippers Council
A federal district court jury is scheduled to decide late next year whether or not the ocean carriers Matson Inc. (MATX) and Horizon Lines Inc. (HRZL) defrauded the United States of America in connection with military cargo shipments they carried in the Hawaii and Guam trades as alleged in a three-year old whistleblower lawsuit.
The original Complaint of the whistleblower lawsuit formally known as a qui tam action was filed on October 4, 2010 in the United States District Court for the Central District for California (Western Division – Los Angeles). The original Complaint identified twenty-four defendants, three ocean carriers and twenty-one household goods carriers. By November 13, 2013, all twenty-one of the household goods carriers and one of the three ocean carriers were dismissed from the suit without prejudice. The only ocean carrier dismissed was Pasha Hawaii Transport Lines Inc., a wholly-owned subsidiary of the privately-held Pasha Group. Leaving Matson and Horizon as defendants in the civil case United States of America v. Horizon Lines LLC et al (No. 2:10-cv-07409-PA-AJW).
The whistleblower lawsuit was brought by Mr. Mario Rizzo, a former corporate officer of 24 years with Allied Van Lines, a nationwide household goods moving company, and six-year employee of the Pasha Group’s household goods business. Currently, Mr. Rizzo resides in the Chicago, Illinois area and is employed as a consultant with the International Shippers Association of America (for which there is no internet presence). Typically, entities entitled shippers’ associations are anti-trust protected, nonprofit cooperatives, which negotiate and manage transportation services on behalf of its member shippers with transportation service providers including motor carriers, railroads, ocean carriers and air carriers.
Mr. Rizzo’s role as a plaintiff in a whistleblower suit is known as relator (Latin for “narrator”). A relator is the private person who brings a qui tam (Latin for “who as well”) action in the name of the government against those who are defrauding it by filing false claims. The law requires a relator must have possession of information substantiating the allegation of fraud against the government. If the suit is successful, the government shares with the relator a percentage of the claims, damages and penalties. The instant action has been brought by Mr. Rizzo under the False Claims Act (31 U.S.C. §3729 – 3733) which authorizes qui tam actions.
The United States Government has several options in respect of a qui tam action brought under the False Claims Act. The Government, through the Department of Justice (DOJ) must investigate the allegations, and then can: (1) intervene in one or more of the counts and participate as a plaintiff (this occurs in less than 25% of cases); (2) decline to intervene in the case allowing the relator and his attorneys to prosecute the action on behalf of the government; or, (3) move to dismiss the relator’s complaint, if there is no case.
The DOJ filed a notice of election to decline intervention on May 10, 2013, but did not move to dismiss the complaint in the instant case. Mr. Rizzo and his attorneys decided to continue the action on behalf of the United States. According to DOJ fraud statistics for 2012, a total of 647 qui tam cases were settled including those in which the government intervened garnering $3.3 billion in collections, and those in which the government declined that garnered $29.4 million. For those cases where the government declined to intervene, the relator share awards totaled $8.3 million. As such, relators and their attorneys do achieve success and financial reward even in those cases when the government declines to intervene, albeit at lower level than when the government participates.
The original complaint and subsequent filings in the instant case were placed under seal for a statutory 60 day period required for qui tam actions. Typically for these cases, the seal was extended several times until the order was lifted on May 15, 2013, five days after the government declined to intervene. Subsequently, the Relator filed his second amended complaint on August 23, 2013 (see the second amended complaint Part 1 and Part 2).
In a nutshell, the Relator alleges the defendant ocean carriers improperly and with intent applied ocean bunker fuel surcharges to inland (overland) freight charges. Inland freight is either fully exempt from fuel surcharges or fuel surcharges are strictly proscribed by the terms of carriage for military household goods. These terms are issued by the federal contracting agency, the U.S. Surface Deployment and Distribution Command (SDDC) of the U.S. Department of Defense (DOD). The bunker fuel surcharge applied by ocean carriers goes by several different names including: Bunker Surcharge (BSC or BS), Bunker Adjustment Factor (BAF), Bunker Fuel Surcharge (BFS), and Fuel Adjustment Fact (FAF). Ocean bunker fuel surcharges are ubiquitous on all the world’s trade lanes and typically much higher than fuel surcharges applied to overland freight in the U.S.
The circumstances creating the opportunity for the defendant ocean carriers to wrongly apply bunker surcharges arose when the carriers issue through Bills of Lading (Bs/L) sometimes known as intermodal Bs/L covering combined ocean and inland (or overland) transportation. The ocean carriage in these instances is between the U.S. West Coast and Hawaii and Guam; and, the inland segment is on the Contiguous U.S. (CONUS – or, the U.S. mainland). The inland transportation is primarily by railroad, which has been fully exempt from fuel surcharges by the government terms of carriage since April 1, 2007. The Relator alleges that overcharges were incurred from 2005 through 2012 on an estimated 108,000 individual shipments, but did not specify a monetary amount.
The contracting hierarchy implicit in these arrangements may provide a contractual veil allowing the ocean carriers to deny direct responsibility and will likely be the thrust of their defense. The government contracts with household goods carriers for the movement of military household goods usually to accommodate service members moving to a new posting. The contracting document is the Government Bill of Landing (GBL) issued by SDDC to the household goods carriers and refers to the terms of carriage. The household goods carriers in turn contract with an ocean carrier not just for the ocean carriage but also for inland carriage which is normally by rail. To provide the inland segment, the ocean carrier in turn contracts with an overland carrier such as a railroad or trucking company.
Although the household goods carriers are the parties that have a direct contractual relationship with the government and the ocean carriers are essentially subcontractors in these transactions; the Relator dismissed all the household goods carriers and has continued the lawsuit against the two ocean carriers Matson and Horizon. This seems to indicate the Relator and his attorneys believe they have a legal approach which will pierce the carrier’s contractual veil.
On November 11, 2013, the defendant ocean carriers Horizon and Matson answered the Relator’s second amended complaint. For the most part, in their respective answers, the ocean carriers denied all of the Relator’s allegations and each asserted several times that they were not directly contracted with the government. As such, it appears the ocean carrier will seek to avoid culpability on technical grounds by asking the jury to uphold the protections provided by contractual veil.
In an interesting aside, when responding to the Relator’s second amended complaint, Matson stated in their answer (on page 5 lines 1-13), “With respect to the second sentence of Paragraph 20, Matson avers that trade between Hawaii and the west coast of the United States is regulated by the Jones Act, 46 U.S.C. § 101 et seq., but that trade between Guam and the west coast of the United States is not regulated by the Jones Act.” The residents of Guam will be surprised by this assertion, as their island is in fact encompassed by the Jones Act and only exempt from the U.S. build requirement of that law.
The ocean carrier defendants have both noticed the instant case in their Security Exchange Commission (SEC) 10-Q reports for the second quarter of 2013. Horizon on its 10-Q stated at page 38, “The case was unsealed on May 15, 2013, and we were served with a complaint in June 2013.” Matson similarly stated on its 10-Q at page 9, “Matson believes that the suit is without merit and at this time is unable to estimate any possible loss.”
On November 6, 2013, the presiding Judge Perry Anderson filed scheduling and civil trial orders. The discovery cut-off date is July 28, 2014 and civil jury trial is scheduled at 09:00 a.m., October 7, 2014, Pacific Daylight Time, in Los Angeles District Court.
An important follow-on question is: Are there any implications for the purely commercial shippers (i.e., private cargo owners) in the Hawaii and Guam trades? Many of these shippers regularly arrange inland transportation through the ocean carriers (usually by rail) either as pre-carriage to or on-carriage after the ocean segment. Additionally, the bunker fuel surcharge has been a bane for all shippers in the Hawaii and Guam trades for the past decade. Over that time the magnitude of the bunker fuel surcharge has had a significant impact on the private shippers’ businesses. And, these surcharges will continue to be a substantial cost item as new air pollution regulations come into effect requiring the use of more expensive low sulfur fuels onboard ship. If the ocean carriers have been improperly applying ocean bunker fuel surcharge to freight amounts on through intermodal commercial shipments too, this could be a significant level of overcharging affecting the private sector.
As Matson stated in its answer to the second amended complaint at paragraph 31, page 7, lines 24-28, “Matson admits that it levies a fuel surcharge to recover its approximate fuel costs. Matson further admits that its fuel surcharge fluctuates with fuel costs and has, at certain times, been less than 5% and greater than 40%, of its freight charge.” Over the past decade, Matson’s bunker fuel surcharge has been significantly higher than 5% and closer to the 40% especially in the Guam trade. Matson’s statement of the magnitude of the surcharge emphases its importance and the admission their bunker surcharge is only “approximate” will strike many shippers the wrong way.
Without access to the remedies of the federal False Claim Act, some may ask what recourse do commercial shippers have in respect to the improper application of bunker fuel surcharges by the ocean carriers? In particular, whether or not government regulations or regulatory agencies cover the ocean carriers rates? The rates including bunker fuel surcharges applied by the ocean common carriers in the noncontiguous trades – Alaska, Guam, Hawaii and Puerto Rico – are regulated by the federal Surface Transportation Board (STB) of the U.S. Department of Transportation. The carriers only have the responsibility of filing changes to their rates with the STB and no approval process is involved under the doctrine of zone of reasonableness. Since its creation in 1995 from the Interstate Commerce Commission (ICC), the STB has primarily focused on rail and truck regulation and paid scant attention to the noncontiguous ocean trades.
Alternatively, if the federal lawsuit being brought by Mr. Rizzo is successful and he proves his allegations, it could potentially lay the foundation for a federal class action lawsuit by the private shippers in the Hawaii and Guam trades to recover any improperly assessed ocean bunker fuel surcharges that might have been applied to intermodal freight amounts.
In the meantime, the best advice to shippers is to carefully check your through Bills of Landing and freight invoices for intermodal shipments to ensure the ocean bunker fuel surcharges are being applied properly and the carriers are not overcharging you by applying ocean surcharges to inland freight.