Industria y Distribucion de Al, et al v. Vazquez, et al

Filing

OPINION issued by Jeffrey R. Howard, Chief Appellate Judge; Sandra L. Lynch, Appellate Judge and William J. Kayatta , Jr., Appellate Judge. Published. [13-2518]

Case: 13-2518

Document: 00116876664

Page: 1

Date Filed: 08/17/2015

Entry ID: 5930546

United States Court of Appeals
For the First Circuit
No. 13-2518
INDUSTRIA Y DISTRIBUCTION DE ALIMENTOS; ASOCIACION DE
INDUSTRIALES DE PUERTO RICO; CAMARA DE COMERCIO DE PUERTO RICO;
ASOCIACION DE NAVIEROS DE PUERTO RICO; NORTON LILLY
INTERNATIONAL; ISLAND STEVEDORING, INC.; PUERTO RICO SUPPLIES
GROUP; TO-RICOS, LTD.; PLAZA PROVISION CO.; HORIZON LINES OF
PUERTO RICO, INC.; CROWLEY PUERTO RICO SERVICES, INC.; SEA STAR
LINES, INC.; V. SUAREZ & CO., INC; CAMARA DE MERCADEO; LUIS A.
AYALA COLON SUCRES,
Plaintiffs, Appellants,
v.
TRAILER BRIDGE; FLEXITANK, INC., a/k/a Flexitank; PEREZ Y CIA DE
PUERTO RICO, INC.; HARBOR BUNKERING CORPORATION; PLAZA LOIZA;
COLOSO FOODS, INC.; SUPERMERCADOS SELECTOS, INC.; B. FERNANDEZ &
HERMANOS, INC.; PAN PEPIN INC.; SUPERMERCADOS CENTRO AHORROS,
CORP.; TRAFON GROUP, INC.; PONCE CARIBBEAN DISTRIBUTORS, INC.;
KRAFT FOODS, LLC; MOLINOS DE PUERTO RICO, INC.; SUCESORES PEDRO
CORTES, INC.; COLOMER & SUAREZ,INC.; SUPERMERCADOS PLAZA LOIZA;
MENDEZ & COMPANY, INC.; MARVEL SPECIALTIES, INC.,
Plaintiffs,
v.
VICTOR A. SUAREZ-MELENDEZ, in his official capacity as Interim
Executive Director of the Commonwealth of PR's Ports Authority;
MELBA I. ACOSTA-FEBO, in her official capacity as Secretary of
the Treasury of the Commonwealth of PR,
Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Bruce J. McGiverin, Magistrate Judge]

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Before
Howard, Chief Judge,
Lynch and Kayatta, Circuit Judges.

Rafael Escalera-Rodríguez, with whom Carlos M. Hernández
Burgos and Reichard & Escalera were on brief, for appellants.
Jorge
Martínez-Luciano,
with
whom
Martínez-Luciano
&
Rodríguez-Escudero, Guillermo San Antonio-Acha and GSA Law, LLC
were on brief, for appellee Víctor A. Suárez-Meléndez.
Rosa Elena Pérez-Agosto, Assistant Solicitor General,
Department of Justice, with whom Margarita Mercado-Echegaray,
Solicitor General, and Tanaira Padilla-Rodríguez, Deputy Solicitor
General, were on brief, for appellee Melba I. Acosta-Febo, in her
official capacity as Secretary of Treasury for the Commonwealth of
Puerto Rico.
Eyck Lugo-Rivera, with whom Eliseo Roques-Arroyo, Jelka L.
Duchesne-Sanabria and Edge Legal Strategies, P.S.C., were on
brief, for S2 Services Puerto Rico, LLC, amicus curiae.

August 17, 2015

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HOWARD, Chief Judge.

Date Filed: 08/17/2015

Entry ID: 5930546

The appellants are three shipping

operators who pay a fee to Puerto Rico to conduct business out of
the Port of San Juan.

The Commonwealth supplied each company with

cargo-scanning technology, required them to scan all of their
inbound cargo, and then charged each an additional fee.

The

question on appeal is whether the dormant Commerce Clause bars
Puerto Rico from charging the additional fee to defray the costs
of the scanning.

Because the operators have failed to establish

that the additional fee violates the Constitution, we affirm the
magistrate judge's decision holding the same.
I.
We draw the facts from the magistrate judge's findings
following a bench trial.

See McDermott v. Marcus, Errico, Emmer

& Brooks, P.C., 775 F.3d 109, 113 (1st Cir. 2014).
This matter stems from the aftermath of the terrorist
attacks of September 11, 2001, and the concomitant need to augment
port security.

Until 2008, Puerto Rico's port security was

predominantly limited to random and manual searches of cargo.

To

bolster

of

this

piecemeal

approach,

the

Legislative

Assembly

Puerto Rico passed a law calling for improved safety procedures.
P.R. Laws Ann. tit. 23, §§ 3221 et. seq.
Puerto

Rico

Ports

Authority

("PRPA")

The following year, the
solicited

proposals

to

implement that law with respect to its busiest port, the Port of
San Juan.

In particular, it sought to craft a system where it

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would be able to scan all inbound cargo at the port.

In due

course, PRPA reached an agreement with Rapiscan Systems, Inc.,
which assumed responsibility for the scanning.

In turn, Rapiscan

Systems transferred its rights and obligations to a subsidiary, S2
Services Puerto Rico, LLC ("S2 Services").
In late 2011, PRPA promulgated Regulation No. 8067,
which required the scanning of all inbound cargo at the Port of
San Juan.

The regulation permitted PRPA personnel, in the event

of undue delay, to reduce the amount of cargo scanned at a given
time.

Through these requirements, PRPA aimed to increase the

identification of unreported taxable goods and to improve security
and safety at the port.

S2 Services and the Puerto Rico Treasury

Department were responsible for carrying out this directive.
As of 2013, Puerto Rico installed scanning technology at
the facilities of three shipping operators at the port of San Juan:
Crowley,

Horizon

Lines,

and

Sea

Star

Lines.

Except

during

particularly busy times, these three operators were required to
scan all containerized cargo (though not their bulk cargo) and
then have two S2 Service employees and one Treasury agent review
those scans. In total, 313,383 containers have been electronically
scanned, an amount substantially higher than the 7,142 containers
manually searched during a prior, analogous time period.
To

pay

for

the

scanning,

PRPA

charged

all

vessels

carrying cargo into the Port of San Juan (including cargo carried

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by operators who did not have access to the scanning facilities)
an "Enhanced Security Fee" ("ESF").

PRPA assessed the ESF on top

of the existing fees that it already charged operators to utilize
the port.

The amount of the ESF varied based on the weight and

type of the vessel's cargo.

Since implementing the ESF, PRPA

billed Crowley, Horizon Lines, and Sea Star Lines with 63% of all
costs arising from the scanning procedure.

In total, PRPA has

collected $20,412,371.34 through the ESF, and it has used that
money to pay: $17,136,894 to S2 Services, $2 million to Treasury
employees,

$1.4

million

to

the

General

Security

Office,

and

$300,000 to the Office of Maritime Security.
In response to Regulation 8067 and the ESF, thirty-two
businesses and organizations involved in importing cargo at the
Port of San Juan (along with associated trade groups) sued the
heads of PRPA and Puerto Rico's Treasury Department; they attacked
both the regulation and the fee.

The parties consented to proceed

before a magistrate judge, and the court conducted a bench trial.
The bulk of the evidence at trial centered on the constitutionality
of the scanning regulation and the permissibility of the ESF as
applied to all of the operators (as opposed to just the three with
access to the scanning technology).
Following those proceedings, the court ruled that the
scanning

procedure

implemented

by

Regulation

8067

was

constitutional but that the ESF, as applied to the operators who

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did not have access to the scanning facilities, violated the
dormant Commerce Clause.

The court thus entered an injunction

prohibiting the government from collecting the ESF from those
shipping operators.

Neither the government nor the plaintiffs

appealed those decisions.
The

magistrate

judge

next

turned

to

the

constitutionality of the ESF as applied to the three shipping
operators equipped with the scanning technology. As to these three
companies, the court concluded that the ESF was constitutional.
The three operators timely appealed that decision; they continue
to argue that the ESF violates the dormant Commerce Clause.1
II.
We review the lower court's factual findings following
a bench trial for clear error and its legal conclusions de novo.
See Allstate Interiors & Exteriors, Inc. v. Stonestreet Constr.,
LLC, 730 F.3d 67, 74 (1st Cir. 2013).
The Constitution's Commerce Clause serves as both an
affirmative grant of power to Congress, U.S. Const. art. I, § 8,

We pause to highlight the fact that some of the lines PRPA
has drawn -- e.g., that only three shipping operators are required
to scan their cargo -- do strike us as odd.
Perhaps, as the
Commonwealth claims, this is simply the first step of many to come
in implementing the regulation. Perhaps not. Either way, we need
not dwell on such oddities.
The three shipping operators have
brought this appeal solely under the dormant Commerce Clause, and
have only targeted the ESF as applied to them. Our analysis is
therefore limited exclusively to that claim.
1

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cl. 3, and "a further, negative command, known as the dormant
Commerce Clause."

Comptroller of Treasury of Md. v. Wynne, 135 S.

Ct. 1787, 1794 (2015).

This latter doctrine "precludes States

'from discriminat[ing] between transactions on the basis of some
interstate element,'" id., and inhibits "economic protectionism"
between the states, New Energy Co. of Ind. v. Limbach, 486 U.S.
269, 273-74 (1988).
A litigant can wield the dormant Commerce Clause to
attack the propriety of a "user fee," i.e. a charge assessed for
the use of a government facility or service.
apply a three-pronged test.

In such cases, we

See Evansville-Vanderburgh Airport

Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707, 716-17 (1972).
A user fee is constitutional if it: "(1) is based on some fair
approximation of use of the facilities, (2) is not excessive in
relation to the benefits conferred, and (3) does not discriminate
against interstate commerce."
510 U.S. 355, 368-69 (1994).

Nw. Airlines, Inc. v. Cty. of Kent,
Those challenging the government

action carry the burden of persuasion.

See N.H. Motor Transp.

Ass'n v. Flynn, 751 F.2d 43, 47 (1st Cir. 1984).
i.
Turning to Evansville in the context of this case, we
first

consider

whether

the

user

fee

"is

approximation of use of the facilities."

based

on

some

fair

Nw. Airlines, 510 U.S.

at 369; cf. Capitol Greyhound Lines v. Brice, 339 U.S. 542, 546

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(1950) (noting that a "rough approximation" is sufficient).

This

is essentially a question of allocation; we ask whether the
government is charging each individual entity a fee that is
reasonably proportional to the entity's use, and whether the
government has reasonably drawn a line between those it is charging
and those it is not.

See Nw. Airlines, 510 U.S. at 368.

PRPA attempts to assess a fee to these three operators
in an amount that is reasonably proportional to their use of the
scanning services.

PRPA requires the operators to scan nearly all

of their containerized cargo (though their bulk cargo is not
scanned), and then charges them an amount corresponding to the
total cargo they import (comprising both containerized and bulk
cargo).

While not perfect, the fee was intentionally designed to

approximate the operators' use of the scanning service.

Moreover,

these three operators are the only ones with access to the scanning
service and, given the unchallenged injunction entered by the lower
court, the only three that have to pay for it.2
Despite this conceptually sound approach, we see two
potential flaws.

First, the operators could be importing so much

bulk cargo that the total amount of imports -- and thus the fee

As noted previously, the plaintiffs succeeded below in
establishing that the Commonwealth improperly assessed the ESF to
operators without access to the scanning facilities. This likely
explains why, on appeal, the three shipping operators do not argue
that the other entities should also be required to pay the fee.
2

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charged -- is grossly disproportionate to the containerized cargo
that is actually scanned.

Likewise, during particularly busy

times, PRPA exempts some containerized cargo from the scanning
procedures; if this occurs with significant frequency, then the
fee may not match the operators' use of the scanning service.
Ultimately, though, the burden lies with the three operators to
prove that either of these concerns renders the fee improper.
Flynn, 751 F.2d at 47.

This they have failed to do.

See

Specifically,

the operators have not produced evidence contrasting the total
amount of cargo imported with the amount of cargo actually scanned
for these three operators, nor have they provided specific evidence
that

the

bypassing

of

containerized

cargo

occurs

with

such

frequency that the ESF does not roughly correspond to their use of
the scanning technology.

While this record leaves us unable to

definitively hold that the fee is a fair approximation of the
operators' use of the scanning service, the operators' failure to
prove the converse requires us to rule against them on this first
Evansville factor.
The second Evansville query is whether the fee that the
government charges is excessive when weighed against the benefits
conferred.

Though the case law utilizes the term "benefits" in

characterizing this factor, this label is somewhat of a misnomer.
Our task is actually fairly limited; we compare the fee with the
"costs incurred in connection with . . . [the] facilities."

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Am.

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Airlines,

560

F.2d

at

Page: 10

1038.

Date Filed: 08/17/2015

In

other

words,

Entry ID: 5930546

a

fee

is

unconstitutional only insofar as it is "excessive in relation to
costs incurred by the taxing authorities."

Evansville, 405 U.S.

at 719 (emphasis added).
The
burden.

shipping

operators

again

fail

to

satisfy

their

PRPA charged these three operators roughly $ 18,617,449.

It then spent over $ 20 million to implement the scanning procedure
(specifically on the personnel necessary to conduct the scanning
which, despite the operators' contention, is clearly a necessary
expense related to the scanning service).

If we add the revenue

that PRPA collected from other operators, then PRPA brought in
$20,412,371.34, and spent 97% of that money on costs related to
the scanning service.
the entire picture.

Admittedly, these numbers may not reflect
But, the operators have failed to provide

other evidence establishing that PRPA collects an excessive amount
compared to what it spends on the scanning service.

Since it was

the operators' burden to establish that proposition with "a record
sufficiently specific and detailed," their failure to do so defeats
their claim on this prong.

Flynn, 751 F.2d at 48.3

The operators emphasize that a small portion of the ESF is
used to pay security fees that were previously paid for by another
tariff (which is still being charged), and that said money is not
used to directly pay for the scanning services. The operators do
not challenge the continued validity of that other tariff, so our
concern is solely with the ESF.
To the extent that certain
payments are made to general security-related items, the operators
have not established that this payment is anything more than de
3

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The

final

move

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in

the

Date Filed: 08/17/2015

Evansville

Entry ID: 5930546

three-step

is

to

determine whether the regulation discriminates against interstate
commerce.

Where we have a facially neutral regulation, as we do

here (i.e., a Commonwealth corporation bringing cargo into the
port, just like an out-of-Commonwealth company, would also pay the
ESF), the law "will be upheld unless the burden imposed on such
commerce is clearly excessive in relation to the putative local
benefits."

Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

Notably, a party cannot satisfy its burden simply by showing that
a

government

action

affects

an

out-of-state

company

or

manufacturer.

See Exxon Corp. v. Governor of Md., 437 U.S. 117,

126 (1978).

Instead, the evidence must illustrate that the

government action interferes with interstate commerce by, for
example, dissuading competition from out-of-state corporations.
See, e.g., Family Winemakers of Cal. v. Jenkins, 592 F.3d 1, 1011 (1st Cir. 2010).
On this point, not much need be said.

The shipping

operators contend that because only out-of-Commonwealth companies
utilize

the

Port

of

San

Juan,

and

therefore

only

out-of-

Commonwealth entities will pay the ESF, the fee interferes with
commerce.

Fair enough.

But, as noted above, just because a

minimis. Indeed, even without such payments, the government would
still have collected less from these three operators than it paid
out on scanning-related costs.
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facially neutral policy has an impact on an out-of-state company
(even exclusively so), it does not necessarily follow that the
policy burdens commerce.

Id.

some

scanning

rumblings

that

the

While the shipping operators make
requirement

interferes

with

commerce, they do not even attempt to fill the logical gap with
any argumentation respecting the fee.

Nor, we note, have we found

evidence in this record which could sustain such an argument.

The

shipping operators therefore fall far short of their burden on
this final Evansville factor.
ii.
Though the shipping operators take a few swings at the
Evansville analysis above, their central argument really takes
place on a different playing field.

They attack the ESF by

claiming that they (and the Commonwealth more generally) receive
no benefit from the scanning procedure and that it is "wholly
ineffective."

They home in on the magistrate judge's statement

that the operators received a "reputational benefit" from the
scanning -- a finding that they insist was clearly erroneous -and then go to great lengths to argue that the scanning is in fact
detrimental to their business.

Thus, they conclude: no user fee

was ever appropriate; any fee is necessarily excessive given the
lack of any benefit; and, any burden on interstate commerce
necessarily

outweighs

the

benefit

service.

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created

by

this

government

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This argument misses the point; our decision in American
Airlines explains why.

In that case, a number of airlines paid a

"landing fee" at Logan Airport in exchange for use of the runways.
The airport (through MassPort) increased the fee it charged in
order to pay for three new projects at the airport which were
"deemed by the airlines of little or no use to them." Am. Airlines,
560 F.2d at 1037.
sided

with

Over a dormant Commerce Clause challenge, we

MassPort

and

emphatically

rejected

the

idea

that

"customer judgments of benefits received" form any part of the
constitutional analysis.

Id. at 1038.

Instead, the service must

merely be "relevant to the operation of the [entity]."
1039.

Id. at

Thus, so long as the expenditures "were made for legitimate

. . . objectives," and so long as the state does not run "wild and
tax users for all extravagances," the actual service that the
government

provides

is

immaterial

constitutionality of a user fee.

when

considering

the

Id.

Therefore, whether the shipping operators here obtain a
reputational benefit from the scanning, whether they approve of
the scanning from a business perspective, or whether it is the
optimal way for PRPA to secure its ports, are not dispositive.
Indeed, these questions all boil down to whether the scanning
procedure is sound public policy, not whether the user fee is
constitutionally valid.

But, the Commerce Clause inquiry for user

fees has never been, and is not now, whether the government service

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or facility is ideal or advantageous.

Entry ID: 5930546

For good reason.

If the

heart of the dormant Commerce Clause beats to protect interstate
commerce, then it is irrelevant whether a government service is
beneficial.
facility

That is, the success or failure of the service or

itself

has

little

bearing

restricts the flow of commerce.
done

nothing

more

than

on

whether

the

user

fee

Ultimately then, since PRPA has

increase

its

fee

to

pay

for

a

new,

legitimate service -- one which, despite any shortcomings, is
clearly relevant to the operation of the port -- and since said
fee satisfies Evansville (which is essentially a short-hand test
for determining whether a user fee infects interstate commerce),
we reject the operators' policy-based contention.4
III.
The three shipping operators have failed to prove that
the ESF, as applied to them, violates the dormant Commerce Clause.
Accordingly, we affirm.

The operators also argue that they are involuntary subjects
of the scanning requirement and thus cannot be "users" required to
pay a user fee. The shipping operators provide no case law for
this proposition, nor do they provide any theoretical argument
that would support their position. In any event, the operators
can hardly be said to be "involuntary" users for dormant Commerce
Clause purposes. The scanning is simply a service provided for
using the port; a port that the operators voluntarily operate out
of. In choosing to do so, they have tacitly agreed to "share both
the benefits and the costs of [PRPA's] decisions, including the
imprudent ones." Am. Airlines, 560 F.2d at 1039.
4

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