Furie Operating Alaska, LLC (formerly Escopeta Oil Company, LLC) and the Department of Homeland Security (DHS) jointly filed a Stipulation of Dismissal in the U.S. District Court for the District of Alaska on March 24, 2017, bringing an end to the parties’ long-standing Jones Act dispute. The dispute arose out of Furie’s transportation of the jack-up rig Spartan 151 from the Gulf of Mexico to Cook Inlet, Alaska, in March 2011. A portion of the transportation, between the Gulf of Mexico and Vancouver, Canada, was performed by a foreign-flag, heavy-lift vessel instead of a coastwise-qualified, U.S.-flag vessel.
Prior to commencing the transportation of the jack-up rig, Furie had sought a waiver of the Jones Act from DHS pursuant to 46 U.S.C. § 501. Such waivers are only available (1) upon the request of the Secretary of Defense to DHS, or (2) when DHS considers the waiver necessary in the interest of national defense following a determination by the Maritime Administration (MARAD) that no qualified U.S.-flag vessels are available to meet the national defense requirements. On March 7, 2011, DHS initially denied Furie’s waiver request based upon MARAD’s finding that qualified U.S.-flag capacity existed to undertake the required transportation. Furie disagreed with MARAD’s finding and asked DHS to reconsider its denial. Believing that a waiver was forthcoming, Furie undertook the transportation of the jack-up rig on March 18, 2011. Following further input from Furie, DHS issued its final waiver denial on May 20, 2011.
Finding that Furie had violated the Jones Act, DHS, acting through Customs and Border Protection (CBP), assessed a $15 million penalty against Furie, the largest penalty ever assessed for a Jones Act violation. CBP denied Furie’s two petitions for mitigation, prompting Furie to file suit in August 2012, alleging that the jack-up rig was not “merchandise” within the meaning of the Jones Act, DHS acted arbitrarily and capriciously, and the fine was unconstitutionally excessive. The case continued until the filing of the Stipulation of Dismissal. Details of the settlement have not been released.
Two lessons can be learned from Furie’s experience. First, companies should never assume that DHS will grant a Jones Act waiver. As stated above, under 46 U.S.C § 501(b) a waiver can be issued only if DHS considers the waiver necessary in the interest of national defense. This is a very high standard that results in very few waiver requests being granted. Additionally, following amendments to 46 U.S.C § 501(b) under the Coast Guard and Maritime Transportation Act of 2012, when MARAD issues a determination that no qualified U.S.-flag vessels are available, the agency is required to identify any actions that could be taken to enable qualified U.S.-flag capacity to meet national defense requirements. Correspondingly, after issuing a waiver, DHS is required to report to Congress the reasons why the waiver was necessary and why MARAD’s recommended actions were not feasible. Therefore, if a company desires to pursue a waiver of the Jones Act for a coastwise move on a non-coastwise-qualified vessel, it must have a clear, concrete national defense basis for the waiver request. The company also must have completed its due diligence regarding the availability of qualified U.S.-flag vessels prior to submitting its waiver request.
The second lesson is that companies should never undertake a prohibited coastwise move without a DHS waiver in hand. As this case demonstrates, violations of the Jones Act can be extremely costly. DHS does not grant waivers retroactively and Jones Act violations are not mitigated by the fact that the violator had a waiver request pending with DHS at the time the transportation occurred. Early planning, proactive engagement with U.S.-flag vessel operators, and advanced consultation with DHS, MARAD, and appropriate counsel are the keys to avoiding Jones Act violations.