Shipbuilders Council of America, Inc. et al v. U.S. Department of Homeland Security et al

Filing 73

MEMORANDUM OPINION re: Motion to Dismiss, and Cross Motions for Summary Judgment. (see Order for details) Signed by District Judge T. S. Ellis, III on 12/3/09. (tfitz, )

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA
Alexandria Division

DEC-3 2009
A:r

SHIPBUILDERS COUNCIL OF AMERICA, INC., ct aL, Plaintiffs,
v.

) ) )

Case No. l:07cvl234

UNITED STATES DEPARTMENT OF HOMELAND SECURITY, et aL, Defendants,
MATSON NAVIGATION COMPANY, INC.,
Defendant-Intervenor.

) ) )

)
)
)

MEMORANDUM OPINION

In this Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-706, suit, plaintiffs
challenge a Coast Guard decision to issue a certificate of documentation with a coastwise endorsement to a vessel that underwent significant rework in a foreign shipyard. More precisely,
the aft end of the M/V Mokihana, owned by Intervenor Matson Navigation Company, Inc. ("Matson"), was converted in a Chinese shipyard from an area for container storage to a lower
garage for vehicle storage. On the basis of submissions by Matson, the Coast Guard decided that this work did not amount to a foreign rebuilding of the vessel under the Second Proviso to the Jones Act, 46 U.S.C. §§ 12101, 12132. At issue here is whether this decision was "arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law." See 5 U.S.C. §

706(2)(A).
I.
A.

An understanding of the statutory and regulatory framework governing coastwise trading

privileges is essential to an assessment of the Coast Guard's decision in this case. In 1920, Congress enacted the Merchant Marine Act, commonly known as the Jones Act, to shelter the American shipping industry from foreign competition "[b]ecause building ships and manning them in the United States was and remains more expensive than in other countries." OSG Bulk
Ships v. United States, 132 F.3d 808, 809 (D.C. Cir. 1998). In particular, Congress limited the coastwise trade--that is, trade between points in the United States--to vessels built in American
shipyards and owned by American citizens. See Jones Act, ch. 250, § 27,41 Stat. 988,999
(1920) (codified as amended at 46 U.S.C. § 55102 (2006)). In 1956, Congress added the Second Proviso to Section 27 of the Jones Act, which prohibited vessels that had been "rebuilt" abroad
from engaging in the coastwise trade. Act of July 14,1956, ch.600, § 1, 70 Stat. 544, 544

(codified as amended at 46 U.S.C. § 12132).' Yet, shipowners sought to end-run the Second
Proviso by having large ship sections constructed abroad, towed to the United States, and

installed by American shipyards into coastwise-eligible vessels. Seeking to close this loophole,2
Congress amended the Second Proviso in 1960 to specify that the foreign construction of any major component of a vessel's hull or superstructure renders the vessel ineligible for coastwise
trading. Act of July 5, 1960, Pub. L. No. 86-583, § 1, 74 Stat. 321, 321. As codified by

1 The Senate Report recommending the passage of the bill containing the Second Proviso
stated that it "was designed to assist the shipyards of the United States by making applicable to vessels rebuilt in foreign yards the historic policy of exclusion from the coastwise trade which
has always applied, with certain exceptions, to vessels constructed outside the United States." S. Rep. No. 84-2395, at 1 (1956), as reprinted in 1956 U.S.C.C.A.N. 3162, 3162.

2 H. Rep. No. 86-1887, at 1 (1960), as reprinted in 1960 U.S.C.C.A.N. 2664, 2664 ("The
purpose of this bill is to amend existing law to close a loophole therein which would permit a frustration of the intent of Congress that vessels of foreign construction shall not be permitted to
operate in the coastwise trade of the United States.").
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Congress in 2006, the Second Proviso appears, as follows:

A vessel eligible to engage in the coastwise trade and later rebuilt outside the United States may not thereafter engage in the coastwise trade.

[A] vessel is deemed to have been rebuilt in the United States only if the entire rebuilding, including the construction of any major component of the hull or
superstructure, was done in the United States.

46 U.S.C. §§ 12132(b), 12101(a).3 Thus, under the Jones Act, if a vessel is "rebuilt," the entire
rebuilding must be done in the United States if the ship is to retain its eligibility for the coastwise
trade.

In 1996, the Coast Guard promulgated a regulation governing when a vessel has been rebuilt outside of the United States. In particular, the regulation provides that a vessel is "rebuilt
foreign" (a) when "a major component of the hull or superstructure not built in the United States

is added to the vessel" or (b) when a "considerable part" of the hull or superstructure has been
"built upon or substantially altered outside of the United States." 46 C.F.R. § 67.177. These tests are commonly referred to as the "major component" and "considerable part" tests. Although the term "major component" is defined neither by statute nor regulation, the Coast Guard has traditionally found that objects weighing in excess of 1.5% of the vessel's discounted

3 Prior to the 2006 codification, the Second Proviso read, as follows:
Providedfurther, That no vessel which has acquired the lawful right to engage in the coastwise trade ... and which has later been rebuilt, shall have the right thereafter to engage in the coastwise trade, unless the entire rebuilding, including the construction of any major component of the hull or superstructure of the vessel, is
effected within the United States, its Territories (not including trust territories), or its
possessions.

46 U.S.C. App. § 883 (2000). Congress stated that its intent in the 2006 codification was "to conform to the understood policy, intent, and purpose of the Congress in the original enactments." Act of Oct. 6,2006, Pub. L. No. 109-304, § 2, 120 Stat. 1485,1485.
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lightship weight are major components.4 With regard to the considerable part test, the Coast
Guard determines whether a considerable part of the hull or superstructure has been worked upon by comparing the amount of work performed on the hull or superstructure to the vessel's

steelweight prior to the work.5 Specifically, the following thresholds apply for steel vessels:
(1) A vessel is deemed rebuilt when work performed on its hull or superstructure
constitutes more than 10 percent of the vessel's steelweight, prior to the work ....

(2) A vessel may be considered rebuilt when work performed on its hull or
superstructure constitutes more than 7.5 percent but not more than 10 percent of the vessel's steelweight prior to the work.

(3) A vessel is not considered rebuilt when work performed on its hull or
superstructure constitutes 7.5 percent or less of the vessel's steelweight prior to the
work.

46C.F.R. §67.177(b).

An important feature of the regulation also enables vessel owners to ascertain whether
their planned overseas work will be deemed a foreign rebuilding through a "preliminary rebuilt

4 Notably, the exact method of calculation--such as whether the weight determination is
made prior to, or following, a components' addition to the hull or superstructure--is a sharply
contested issue in this case.

5 Another Coast Guard regulation defines the important terms "hull" and "superstructure."
A vessel's "hull" is "the shell, or outer casing, and internal structure below the main deck which provide both the flotation envelope and structural integrity of the vessel in its normal operations." 46 C.F.R. § 67.3. A ship's "superstructure" is "the main deck and any other structural part above the main deck." Id. The Coast Guard has further explained that "[pjarts of the hull or superstructure include the shell plating, keel, decks, supporting bulkheads, beams, frames, girders, stringers, and other structural items." Vessel Rebuilt Determinations, 60 Fed. Reg. 17290, 17291 (proposed Apr. 5, 1995). Work involved in installing or modifying a vessel's "inventory, equipment, furnishings, and stores" is not considered by the Coast Guard to be work performed on the hull or superstructure, nor is the installation or modification of "machinery ... that could be removed without affecting the structural integrity of the vessel." Id. Likewise, "items involved in outfitting and maintaining the vessel... are also not included as parts of the hull or superstructure" if work upon the items "could be performed without affecting the structural or watertight integrity of the vessel." Id.
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determination." 46 C.F.R. § 67.177(g). After work has been completed, the regulation instructs

vessel owners seeking a final determination to file the following information: (i) a detailed outline of the work performed; (ii) calculations showing the steelweight of the work performed

on the vessel, the steelweight of the vessel, and comparing the two; (iii) accurate sketches or
blueprints describing the work performed; and (iv) any further submissions requested. Id. §
67.177(e). In addition, the vessel owner must submit a separate application, in which he must

certify that the vessel has not been foreign rebuilt, in order to receive a certificate of documentation with a coastwise endorsement. Shipowners potentially face forfeiture of their vessel for knowingly providing false information in this process. See 46 U.S.C. § 12151(b)(l)

("A vessel and its equipment are liable to seizure by and forfeiture to the Government if the owner of the vessel... knowingly falsifies or conceals a material fact, or knowingly makes a false statement or representation,... in applying for documentation of the vessel "). This

statutory and regulatory framework is the lens through which the Coast Guard's decision in this
matter must be viewed. B.

Two plaintiffs brought this action: Pasha Hawaii Transport Lines LLC ("Pasha"), a

California limited liability company that operates a vessel engaged in the coastwise trade, and

Shipbuilders Council of America, Inc. ("SCA"), a Virginia corporation and the largest national trade association representing the American shipyard industry. These plaintiffs named three
defendants: (i) the Department of Homeland Security ("DHS"), the department of the federal
government responsible for administering certain aspects of the Jones Act; (ii) the Coast Guard,

the component of DHS responsible for administering certain aspects of the Jones Act; and (iii)

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the National Vessel Documentation Center ("NVDC"), a unit of the Coast Guard responsible for
making rebuilt determinations under 46 C.F.R. § 67.177. In addition, Matson, the owner of the

M/V Mokihana, the vessel that was the subject of the rebuilt determination considered here, was
allowed to intervene as a defendant. See Shipbuilders Council ofAm., Inc. v. U.S. Dep 't of Homeland Sec, No. l:07cvl234 (E.D. Va. Feb. 8, 2008) (Order). The M/V Mokihana, a class C9 container vessel, was built in the early 1980s by Avondale

Shipyards, Inc. in New Orleans, Louisiana. It served as a containership in foreign trade for

approximately twenty years, after which it became eligible for the domestic coastwise trade.6
During this time, the M/V Mokihana was unaltered, except for minor changes that mitigated local
cracking problems and that allowed the vessel to accommodate different sizes of containers.

On June 15,2004, Matson sent a letter to the Coast Guard requesting a preliminary rebuilt determination, pursuant to 46 C.F.R. § 67.177(g), for three of its vessels: the M/V Mokihana, the M/V Mahimahi, and the M/V Manoa. These vessels were slated to undergo alterations partly in China and partly in the United States. Matson described the proposed

alterations and sought confirmation "that the proposed work does not constitute a 'foreign
rebuilding'" within the meaning of the Second Proviso to the Jones Act. A.R. 1. Specifically, Matson related that it planned to modify the stern of one or more of its C9 vessels in order to accommodate a growing demand for rolling cargo between Hawaii and the continental United

States. The overall project involved converting the container stowage area aft of the vessel's

Mokihana was restricted to engaging in foreign trade because it was built with the assistance of a federal construction-differential subsidy. See A.R. 8; see also OSG Bulk Ships, 132 F.3d at 810
(explaining restrictions).
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6 Pursuant to a contractual agreement with the Maritime Administration, the M/V

machinery casing to a garage for automobiles and other rolling cargo, with levels both above and below deck. Matson reported that the Chinese portion of the project would consist of part of the work on the upper deck and all of the work on decks, platforms, and the side shell below the

upper deck, including associated outfitting and mechanical/electrical systems. A U.S. shipyard would then complete work on the upper deck and construct a five-level automobile garage above deck. In addition to describing the project and including sketches of the proposed work, Matson provided an estimate for the overall steelweight of the vessel (12,097 LT) and a summary of

steelweight estimates for the work to be performed on the vessel. Specifically, Matson estimated that the steel work performed overseas on the vessel's hull or superstructure would weigh 815.5
LT, or 6.7% of the vessel's steelweight; Matson included in that figure the weight of auto

platforms and ramps that would be added below the main deck and excluded work it categorized
as non-structural.

On June 23,2004, the Coast Guard sent a letter to Matson providing a preliminary

determination, based on Matson's submissions, that the proposed modifications would not

constitute a foreign rebuilding. In doing so, the Coast Guard accepted Matson's representation of the vessel's steelweight and its categorization of what work was relevant to the foreign rebuilt
inquiry, ultimately concluding that the steel work to be performed in China on the vessel's hull or
superstructure would constitute 6.7% of the vessel's steelweight, a figure below the 7.5%

regulatory threshold for "clearly permissible work." A.R. 9. The Coast Guard did not consider in its preliminary determination whether a foreign-built major component of the hull or
superstructure would be added to the vessel.

As Matson's designs crystallized, Herbert Engineering Corporation ("Herbert"), the

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engineering firm engaged by Matson to design the garage, wrote the Coast Guard on April 25, 2005, seeking confirmation that certain proposed work would be considered "outfitting" work

and therefore could be excluded from the 46 C.F.R. § 67.177(b) calculation of the steel work

performed on the vessel's hull or superstructure. Specifically, Herbert sought confirmation that the following items were properly considered part of the vessel's outfitting: (i) water-tight doors; (ii) hoistable car decks; (iii) cell guides for container storage; (iv) prefabricated ramps that would be bolted in place and/or set in foundations; and (v) liftable car deck panels that would be bolted in place and/or set in foundations. On June 8,2005, following Herbert's submission of
additional design details, the Coast Guard responded by letter, indicating that although the

installation of new water-tight doors would constitute work performed on the vessel's hull, the addition of the other items would be considered outfitting work.

On October 26, 2006, Matson wrote the Coast Guard seeking another preliminary determination because it had executed construction contracts and finalized the scope of the work, which facilitated calculation of "weight estimates [that] are more accurate." A.R. 28.7 Although the description of the planned project was substantially the same as initially submitted, Matson

revised its estimate of the amount of steel work that would be performed overseas on the vessel's
hull or superstructure, stating that the relevant work would weigh 974.8 LT, or 8.1% of the

vessel's steel weight prior to the work. The next day, on October 27,2006, Pasha requested that

the Coast Guard reconsider the preliminary determination given to Matson on June 23,2004, and
SCA sent a letter in support of that request on October 30,2006. On November 2,2006, the

7 In this letter, Matson also informed the Coast Guard that work would only be
performed on the M/V Mokihana and not either of its two sister vessels.
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Coast Guard advised Pasha and SCA that the preliminary determination issued to Matson on

June 23,2004, was "no longer subject to review or reconsideration." A.R. 47.8 The same day,
Matson withdrew its October 26,2006 request for a second preliminary determination before
receiving a response from the Coast Guard.

On August 13,2007, Matson submitted a request for a final determination that the M/V Mokihana had not been rebuilt outside the United States. At that point, after spending more than one hundred days in the Cosco Yard in Nantong, China, the vessel was at a shipyard in Alabama for the second phase of the bifurcated project. Matson again stated that the overall project
involved converting the container stowage area aft of the vessel's machinery casing to a structure for rolling cargo both above and below deck. The upper trailer deck and the second deck would

support either automobiles or large rolling stock, while only automobiles would be carried in a five-level garage above the upper trailer deck and on platforms below the second deck. The
rolling cargo would enter the vessel from a new opening on the vessel's starboard side at the
second deck level. Matson reported that the work that had been completed in the Chinese

shipyard included part of the work on the upper trailer deck, part of the work on the side shell below that deck, and all of the work on decks and platforms below the upper trailer deck; the
Chinese shipyard had also performed repair work in the forward container holds and modifications to forward deep tanks and double bottom tanks. Matson further stated that a U.S.

8 Approximately two weeks after the Coast Guard denied their request for
reconsideration, Pasha and SCA filed suit challenging the agency's June 23,2004 preliminary
determination that the modifications proposed by Matson would not constitute foreign
rebuilding. Their suit was dismissed for lack of subject matter jurisdiction on the ground that the

Coast Guard's preliminary determination did not constitute "final agency action" within the meaning of the APA, 5 U.S.C. § 704. See Shipbuilders Council ofAm., Inc. v. U.S. Dep't of
Homeland Sec, 481 F. Supp. 2d 550 (E.D. Va. 2007).
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shipyard would be (i) completing the upper trailer deck and the side shell below this deck, (ii) constructing an automobile garage above the upper trailer deck, and (iii) installing a fixed ballast.
In addition to describing briefly the overall project and the split of work between the

Chinese and U.S. shipyards, Matson directly addressed the regulatory criteria governing foreign rebuilt determinations. First, Matson asserted that no "major component of the hull or
superstructure" had been added to the vessel:

No modules or sections were added to the Vessel in China that could be considered

either 'major' or a 'component' under prior Coast Guard precedents. The largest item lifted on the Vessel in the China shipyard weighed approximately 26.9 metric tons, or 0.22% of the discounted steel weight of the Vessel.
A.R. 70. Second, Matson stated that the portion of the project performed in China did not represent work on a considerable part of the vessel's hull or superstructure because the amount of

relevant work was less than 7.5% of the vessel's steelweight prior to the work. Specifically, Matson provided summaries of the weight of major work items and reported that the "total

structural steel added in China to the hull or superstructure of the Vessel is 891.0 LT," which
Matson said represented 7.37% of the vessel's steelweight, estimated at 12,097 LT, prior to the

work. A.R. 71. This figure did not include the weight of auto platforms and ramps installed

below the second deck, although those items had been included in Matson's calculation of the relevant steel work in its 2004 request for a preliminary determination. Matson explained its decision to exclude this weight by stating that previous Coast Guard rulings--namely, correspondence its engineering firm, Herbert, had received from the Coast Guard--had
determined that such items were not part of the hull or superstructure. Even before Matson had submitted its request for a final rebuilt determination, Pasha and

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SCA repeatedly wrote the Coast Guard to challenge Matson's assertion that its vessel had not been rebuilt outside the United States. Plaintiffs questioned, among other things, Matson's

representations regarding the quantity of the work that had been performed on the vessel's hull or
superstructure in China. Because of this factual discrepancy, the Coast Guard's NVDC referred

all of the information submitted by both Matson and its opponents to the Coast Guard's Naval Architecture Division ("NAD"), asking that unit to assess the accuracy of Matson's steel weight

calculations.9
On October 23,2007, following the NAD's review, the Coast Guard issued both a final

determination that the M/VMokihana had not been rebuilt foreign and a certificate of
documentation with a coastwise endorsement. The Coast Guard's conclusion that the vessel had not been rebuilt outside the United States rested on two findings: first, stating that "by longestablished practice of the Coast Guard, only components added to the vessel which amount to

1.5 percent or more of the vessel's steelweight, prior to the addition, are considered major
components," the Coast Guard found that no "major component" had been added to the vessel because the largest item lifted onto the vessel in the Chinese shipyard weighed approximately 26.9 metric tons, or 0.22% of the vessel's discounted steelweight. A.R. 243,246. Second,

finding no credible basis to reject Matson's representation that the steel added to the vessel's hull

9 In its referral, the NVDC stated that it would not rely on the NAD for a determination of
"the ultimate legal and regulatory issues here." A.R. 215. Specifically, the NVDC advised the NAD that "[w]e do not, for example, ask or expect you to opine on whether or not 'major
components' have been added to the vessel, as that term is used in the statute and regulation." Id. Additionally, the NVDC told the NAD to assume that the NVDC would adhere to its practice of basing the calculation of the weight of the work performed on the vessel's hull or superstructure on the greater of the weight of the steel removed or steel added, rather than the net effect of the steel removed and added or the aggregate of steel removed and added. See id.
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or superstructure in China represented 7.37% of the vessel's steelweight prior to the work, the

Coast Guard determined that no considerable part of the hull or superstructure had been built
upon or substantially altered pursuant to 46 C.F.R. § 67.177(b)(3). In sum, the M/VMokihana spent over one hundred days in a Chinese shipyard. During

that time, the aft end of the vessel--a distance of approximately 267 feet--underwent significant rework. Workers in the Chinese shipyard essentially gutted the aft end of the vessel, raised its

side shell, and added the platforms, decks, and ramps that constitute a lower garage. In addition,
Chinese workers prepared the vessel for the second phase of the bifurcated project--the

installation of an upper garage in a U.S. shipyard. The Coast Guard decided that this work did
not amount to a foreign rebuilding that would preclude the M/VMokihana from engaging in the
coastwise trade.

Pasha and SCA filed this action on December 10,2007, to obtain judicial review of the

Coast Guard's decision and a remand of the matter to the Coast Guard with instructions to revoke immediately the M/VMokihana's coastwise endorsement. The parties' threshold jurisdictional
motion to dismiss and cross-motions for summary judgment on the merits were fully briefed and

argued.10 By Order dated September 30, 2008, plaintiffs' cross-motion for summary judgment
was granted, and defendants' and Matson's cross-motions were denied. See Shipbuilders

10 Defendants filed a motion to dismiss for lack of jurisdiction, which was argued at a
March 28,2008 hearing. Disposition of the motion was deferred by Order dated April 4,2008, because "[t]he arguments advanced by the parties made clear that appropriate disposition of the motion to dismiss requires a fuller presentation of the merits of the parties' arguments."

Shipbuilders Council ofAm., Inc. v. U.S. Dep't of Homeland Sec, No. l:07cvl234 (E.D. Va.
Apr. 4, 2008) (Order). Following submission of briefs and arguments on the parties' cross-

motions for summary judgment, the matter was taken under advisement. See Shipbuilders Council ofAm., Inc. v. U.S. Dep 7 of Homeland Sec, No. 1:07cvl234 (E.D. Va. June 20, 2008)
(Order).
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Council ofAm., Inc. v. U.S. Dep't of Homeland Sec, No. l:07cvl234 (E.D. Va. Sept. 30,2008)

(Order). The Order further indicated that a final order would not be entered until a forthcoming
memorandum opinion issued. Subsequently, on November 5,2008, however, this Order was stayed pending appeal to the Fourth Circuit ofShipbuilders Council ofAmerica v. United States
Department of Homeland Security (The Seabulk Trader I), 551 F. Supp. 2d 447 (E.D. Va. 2008),

a similar case in which a plaintiff challenged as arbitrary and capricious the Coast Guard's
decision to issue a certificate of documentation with a coastwise endorsement to a vessel that had undergone significant work in a foreign shipyard. See Shipbuilders Council ofAm., Inc. v. U.S.

Dep 't of Homeland Sec, No. 1:07cvl234 (E.D. Va. Nov. 5,2008) (Order). In particular, the Fourth Circuit review of the Coast Guard's application of the "major component" test in The
Seabulk Trader I was deemed potentially dispositive of the motions at bar.
The Fourth Circuit issued its opinion in the Seabulk Trader case on August 21,2009.

Shipbuilders Council ofAm. v. U.S. Coast Guard (The Seabulk Trader II), 578 F.3d 234 (4th Cir.
2009). Accordingly, the November 5,2008 stay in this case was appropriately lifted and the parties were called upon to submit simultaneous briefs addressing whether, if at all, the Fourth

Circuit's decision affects the issues currently pending in the instant case." The effect of the Fourth Circuit's decision has now been fully briefed, and accordingly the parties' motions and

" The stay was initially lifted on September 8, 2009. See Shipbuilders Council ofAm.,
Inc. v. U.S. Dep't of Homeland Sec, No. l:07cvl234 (E.D. Va. Sept. 8,2009) (Order). Yet, on

joint motion by the parties, and as a matter of grace, the matter was again stayed pending the parties' decision to seek panel rehearing or en bane rehearing in the Fourth Circuit pursuant to Rules 35 and 40, Fed. R. App. P. See Shipbuilders Council ofAm., Inc. v. U.S. Dep't of Homeland Sec, No. 1:07cvl234 (E.D. Va. Sept. 15, 2009) (Order). Following the Fourth Circuit's issuance of a final mandate pursuant to Rule 41, Fed. R. App. P., an Order issued on October 20, 2009, once again lifting the stay and calling for supplemental briefing.
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cross-motions are ripe for disposition.
II.

At the threshold, the Coast Guard challenges jurisdiction. Two grounds are advanced,
neither of which, in the end, is persuasive. First, the Coast Guard argues that plaintiffs' complaint is barred in part by the six-year

statute of limitations applicable to APA actions. See 28 U.S.C. § 2401 (a). The Coast Guard
focuses this jurisdictional challenge primarily on one allegation in the plaintiffs' complaint--namely, plaintiffs' argument that when a project is performed in part abroad and in
part in the United States, the Coast Guard must determine whether the project as a whole

constitutes a "rebuilding" of the vessel and, if so, whether the "entire rebuilding" must be
completed in the United States if the vessel is to retain eligibility for the coastwise trade. See Compl. TI64. There is some force to the Coast Guard's argument that this claim is foreclosed by the applicable statute of limitations, as there appears to be some tension between the statute on

the one hand, which specifies that if a vessel is "rebuilt," the entire rebuilding must be done in the United States in order for the ship to retain its coastwise eligibility, and the Coast Guard's
implementing regulation on the other hand, which arguably limits the rebuilt inquiry's considerable part test to examination of the amount of work that has been performed "outside of

the United States." 46 C.F.R. § 67.177. Nonetheless, the Coast Guard errs in characterizing the
plaintiffs' complaint as raising a facial challenge to the regulation because plaintiffs here

challenge not the regulation itself, but the manner in which the Coast Guard interpreted its
regulation in the process of determining that the M/V Mokihana was still eligible for a coastwise

endorsement. This determination occurred well within the statute of limitations period.

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Accordingly, the defendants' argument that the plaintiffs' complaint is in part time-barred is

without merit.12
Second, the Coast Guard argues that there is no subject matter jurisdiction over plaintiffs'
claim because it is solely within the discretion of the Coast Guard to determine issues such as (i)
what constitutes "a major component," and (ii) how to calculate the steel percentages used in the

regulation's "considerable part" test. The APA establishes that its provision for judicial review

does not apply to agency action "committed to agency discretion by law." 5 U.S.C. § 701(a)(2). Yet, "[t]his exception to judicial review is a 'very narrow one,' reserved for 'those rare instances
where statutes are drawn in such broad terms that in a given case there is no law to apply.'"

Inova Alexandria Hosp. v. Shalala, 244 F.3d 342,346 (4th Cir. 2001) (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 821, 830 (1971)). For there to be no law to apply, the statute must be written "so that a court would have no meaningful standard against which to judge the agency's exercise of discretion." Heckler v. Chaney, 470 U.S. 821, 830

(1985). Furthermore, "even if the underlying statute does not include meaningful (or
manageable) standards, regulations promulgated by an administrative agency in carrying out its statutory mandate can provide standards for judicial review." Inova Alexandria Hosp., 244 F.3d
at 346 (citation omitted).

12 Defendants also briefly argue that plaintiffs' claim that the Coast Guard acted
arbitrarily and capriciously when it did not consider certain work when deciding that the vessel

had not been rebuilt abroad is time barred as a facial challenge to 46 C.F.R. § 67.177. This argument also fails. As plaintiffs note, they do not challenge the fact that the Coast Guard's
regulation only makes work performed on the vessel's hull or superstructure relevant to the

determination of whether the vessel has been rebuilt; rather, they challenge the Coast Guard's

characterization of certain work that was performed on the vessel as "outfitting," as opposed to work on the hull or superstructure, a claim that is not a facial challenge to the regulation.
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Here, there is no lack of "judicially manageable standards to guide meaningful review" of
the Coast Guard's determination that the vessel has not been rebuilt abroad. Menkes v. Dep 7 of

Homeland Sec, 486 F.3d 1307, 1311 (D.C. Cir. 2007). Although the statute and the regulation
certainly cloak the Coast Guard with authority to determine what constitutes a "major
component" and "work performed on [a vessel's] hull or superstructure," that authority is not

absolute and the agency's determinations must be reasonable. See id. at 1313 ("[T]he Director might be entitled to a good deal of deference ..., but that does not mean the Director could make such decisions unreasonably. For example, it would be presumably arbitrary and
capricious for the Coast Guard ... to change its standards ... without explanation."). Indeed, even defendants appear to concede that the agency's choices must be "rational" and "within the

parameters of sound administration of a vague statute." Defs.' Mem. in Supp. of Mot. to Dismiss
27. Jurisdiction therefore exists to review the challenged agency action.
III.

The parties' cross-motions for summary judgment address the merits of whether the Coast Guard correctly issued a certificate of documentation with a coastwise endorsement to the

M/V MokihanaTM Specifically, at issue in this litigation are the validity of two determinations
that formed the basis for the Coast Guard's conclusion that the M/V Mokihana was still eligible

13 The summary judgment standard is well established and requires little, if any,
elucidation here. In essence, summary judgment is appropriate only where, on the basis of the undisputed material facts, the moving party is entitled to judgment as a matter of law. Celotex v. Catrett, 411 U.S. 317,322 (1986). A court may consider "the pleadings, the discovery and disclosure materials on file, and any affidavits" submitted, and must draw all reasonable inferences in favor of the nonmoving party. George & Co., LLC v. Imagination Entm 7 Ltd., 575 F.3d 383, 392 (4th Cir. 2009) (quoting Rule 56(c), Fed. R. Civ. P.). In any event, the parties have not identified any disputed material facts; this judicial review of the Coast Guard's foreign rebuilt determination under the APA is on the administrative record.
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for a coastwise endorsement, despite the work that had been performed overseas in a Chinese

shipyard: first, the Coast Guard found that no foreign-built "major component" had been added

to the vessel; and second, it found that no considerable part of the vessel's hull or superstructure had been built upon or substantially altered abroad because the work performed on the hull or
superstructure represented less than 7.5% of the vessel's steelweight prior to the work. The
reasonableness of each determination is considered in turn.
A.

The Second Proviso to the Jones Act states that if any major component of a vessel's hull
or superstructure was constructed abroad, the vessel is deemed to have been rebuilt outside the United States and is no longer eligible to engage in coastwise trade. See 46 U.S.C. §§ 12101,

12132. The implementing regulation tracks this statutory provision by stating that "a vessel is deemed rebuilt when a major component of the hull or superstructure not built in the United
States is added to the vessel." 46 C.F.R. § 67.177(a).

In applying for a final determination, Matson told the Coast Guard that no foreign-built

"major component" had been added to the vessel because "[t]he largest item lifted on the Vessel in the China shipyard weighed approximately 26.9 metric tons, or 0.22% of the discounted steelweight of the Vessel." A.R. 70. The Coast Guard agreed. This determination rested upon the Coast Guard's interpretation of the word "major" in the statutory phrase "major component of the hull or superstructure." 46 U.S.C. § 12101 (a); see also 46 C.F.R. § 67.177(a). As the

agency stated it in its final determination, "by long-established practice of the Coast Guard, only
components added to the vessel which amount to 1.5 percent or more of the vessel's steelweight,

prior to the addition, are considered major components." A.R. 243. Applying this weight

-17-

threshold to the M/VMokihana's rebuild, the Coast Guard concluded--based on Matson's
representation of the maximum lifting capacity of the Chinese shipyard--that no "major
component" was added to the vessel's hull or superstructure abroad.

Plaintiffs challenge this determination as arbitrary and capricious, contending that at least one component of the M/VMokihana's hull or superstructure was "major" and constructed in the
Chinese shipyard. Although plaintiffs maintain that other foreign-built major components were added to the vessel, they focus their challenge on the construction in China of the vessel's second

deck, which weighs 254.6 LT, or 2.1% of the discounted lightship weight, according to the
calculations contained in Matson's request for a final determination.
1.

In the Seabulk Trader case, Shipbuilders Council ofAm. v. U.S. Coast Guard (The

Seabulk Trader II), 578 F.3d 234 (4th Cir. 2009), the Fourth Circuit had occasion to review the
Coast Guard's interpretation of 46 U.S.C. § 12101 (a) and 46 C.F.R. § 67.177(a) and its application of the major component test. Because the Fourth Circuit's controlling decision is

dispositive of plaintiffs' claim that the Coast Guard erroneously determined that no major component was added to the M/V Mokihand's hull or superstructure in China, it is appropriate
here to recount briefly the facts and holdings of that decision.

The Seabulk Trader, an oil tanker, is owned by Seabulk Energy Transport, Inc. and

Seabulk Petroleum Transport, Inc. (collectively "Seabulk"). At Seabulk's request, the Coast Guard, by letter dated May 20, 2005, issued a preliminary determination that installation of the
vessel's "inner hull" in a Chinese shipyard would not constitute a foreign rebuilding under the

Second Proviso and 46 C.F.R. § 67.177(a). Following completion of the foreign work, the Coast

-18-

wmmmmmmm

Guard issued a certificate of documentation with a coastwise endorsement on May 9,2007.
According to the Coast Guard's May 20,2005 letter, the subject of plaintiffs' APA challenge, "the inner hull is not a separable component because it was constructed 'by adding steel, which was then built upon steel piece-by-piece,'" and therefore the major component test did not apply.

The Seabulk Trader I, 551 Fed. Supp. 2d 447,454 (E.D. Va. 2008) (quoting Def. Opp'n, at 19).
Instead, the Coast Guard reasoned that the major component test applied only where '"a large

and discrete component... [is] added to the vessel.'" Id.; see also id. at 454 n.9 (quoting intervenors' memorandum, which argued that "[t]he major-component test applies only when a module, section, or other such component is constructed or fabricated outside the U.S. apart from
the vessel and then 'added to' the vessel."). Accordingly, under the Coast Guard's letter ruling,

where the component affixed to a vessel was separable and complete prior to its addition, the Coast Guard applied the major component test and the 1.5% weight threshold; by contrast, where the steel added was not a discrete component--that is, inseparable--prior to its addition, the
Coast Guard applied the considerable part test and the weight thresholds found in 46 C.F.R. §
67.177(b) (setting forth 7.5% and 10% steelweight bands to guide foreign rebuilt

determinations). Under this regulatory scheme, even though the Seabulk Trader's inner hull
would have constituted a major component had it been assembled dockside and then affixed to
the vessel, the inner hull in that case was deemed not to be a major component because it was

assembled piecemeal aboard the vessel.

Applying SkidmoreTM deference, the district court rejected the Coast Guard's
separable/inseparable distinction as unpersuasive and "unfaithful to the text, history, and purpose

14 Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
-19-

of the Second Proviso." The Seabulk Trader I, 551 Fed. Supp. 2d at 456. The court first
acknowledged that the Coast Guard had authority, in the absence of a statutory definition of
"major component," to develop a reasonable metric for determining when a component was

"major." Yet, it nonetheless found the metric used by the Coast Guard--namely, whether the

component was assembled before its addition to the ship, or added piece-by-piece--to be
irrelevant and thus an unreasonable basis for evaluating the major component test's applicability.
In addition, the court reasoned that the separable/inseparable distinction would result in arbitrary application of the Jones Act. In particular, the Coast Guard's regulatory scheme was seen as

allowing shipowners to "easily frustrate the entire operation of the Second Proviso simply by dictating the manner of installation" because "although a deck or a component of the hull can be
added to a vessel as one discrete pre-constructed structure, it surely can be added piece-by-piece,

beam-by-beam, and rivet-by-rivet." Id. at 455. This "loophole" was deemed contrary to the statutory scheme, and accordingly the Coast Guard's rebuilt determination was remanded to the

agency for further proceedings.15
On appeal, the Fourth Circuit, by a unanimous panel, upheld the Coast Guard's

"separable/inseparable" distinction and reversed the district court's decision. See Shipbuilders

Council ofAm. v. U.S. Coast Guard (The Seabulk Trader II), 578 F.3d 234 (4th Cir. 2009).16 In

15 It is worth noting that the district court also found the Coast Guard's explanation why
the installation of the Seabulk Trader's inner hull was not a "foreign rebuilding" under the considerable part test to be inadequate because the Coast Guard failed to consider factors other than the steelweight calculation. See id. at 457. This portion of the district court's holding was
not addressed by the Fourth Circuit.

16 Importantly, the Fourth Circuit did not resolve the applicable level of deference
afforded to the Coast Guard's determination; rather, it simply reviewed the district court's decision under the Skidmore standard, which had previously been applied. Id. at 242-43.

-20-

particular, the Fourth Circuit held that "the separable/inseparable distinction is a necessary part of
[the Coast Guard's] holistic interpretation of the regulation" because a contrary view would
create a regulatory scheme in which "separable and inseparable components would be assessed

identically and a 'major component' would include any work on the vessel in excess of minimal maintenance." Id. at 244-45. In short, the district court's holding requiring the Coast Guard to
measure separable, constituent parts of a major component against the 1.5% weight threshold
"eviscerated] the considerable part test," thereby contravening the "rule against superfluities,"

which states that all provisions of a statute must be given effect. Id. (citations omitted). Accordingly, the Fourth Circuit concluded that

the agency's interpretation offers a holistic vision of the regulation that gives effect to each of its provisions, and the Coast Guard's interpretation comports with the plain language of the regulatory and statutory schemes. The interpretation is longstanding, has been consistently applied in the same manner,
and comports with the congressional intent of the governing statute.

Id. at 245. In sum, the Fourth Circuit's holding that the Coast Guard's separable/inseparable distinction is not arbitrary and capricious controls here. It allows the Coast Guard, by excluding

from weight calculations separable components assembled aboard the vessel, to apply the major
component test only when a component is essentially constructed dockside before being lifted as an integral, inseparable component onto, and affixed to, the vessel.
2.

Before applying the Fourth Circuit's decision in the Seabulk Trader case to the Coast
Guard's issuance of a certificate of documentation with a coastwise endorsement to the M/V
Mokihana, it is first necessary to determine the appropriate level of deference afforded to the

-21-

Coast Guard's interpretation of the Second Proviso and 46 C.F.R. 67.177(a). Specifically, the

question is whether the Coast Guard's construction of "major component" in a rebuilt
determination is entitled to deference under Chevron U.S.A. Inc. v. Natural Resources Defense
Council, 467 U.S. 837 (1984), in which case the agency's interpretation of an ambiguous statute

receives substantial deference, or whether it should receive deference based on its "power to

persuade" under Skidmore v. Swift & Co., 323 U.S. 134,140 (1944).17 Notably, the Fourth
Circuit declined to reach this issue in the Seabulk Trader case. See The Seabulk Trader II, 578
F.3d at 242-43.

Addressing the question of when the Chevron framework applies, the Supreme Court has
held:
[An] administrative interpretation of a particular statutory provision qualifies for Chevron deference when it appears that Congress delegated authority to the

agency generally to make rules carrying the force of law, and that the agency
interpretation claiming deference was promulgated in the exercise of that
authority.

U.S. v. Mead Corp., 533 U.S. 218, 226-27 (2001); see also A.T. Massey Coal Co. v. Holland,472 F.3d 148, 166 (4th Cir. 2006) (citing Mead for principle that "[Chevron] deference is limited to circumstances where (1) Congress has given the agency authority to make rules carrying the force

of law and (2) the agency's interpretation is rendered in the exercise of that authority"). In Mead,
the Court addressed the level of deference properly afforded to a statutory interpretation
contained in a tariff classification ruling issued by the U.S. Customs Service. Although the Court

17 Additionally, considerable deference is afforded to an agency's interpretation of its own
ambiguous regulation under Auer v. Robbins, 519 U.S. 452 (1997). As the Coast Guard concedes, however, Auer deference does not apply where, as here, the "underlying regulation does little more than restate the terms of the statute itself." Gonzales v. Oregon, 546 U.S. 243,
257 (2006).
-22-

recognized that an "overwhelming number of our cases applying Chevron deference have

reviewed the fruits of notice-and-comment rulemaking or formal adjudication," it emphasized that "[t]he fact that the tariff classification here was not a product of such formal process does
not alone, therefore, bar the application of Chevron." Id. at 230-31. Nonetheless, the Court
concluded that Chevron deference was not appropriate, reasoning in part that the U.S. Customs

Service did not appear to intend for its classification rulings, issued as letter rulings following
informal adjudication, to have the force and effect of law: It is difficult, in fact, to see in the agency practice any indication that Customs ever set out with a lawmaking pretense in mind when it undertook to make classifications like these [T]heir treatment by the agency makes it clear that a letter's binding character as a ruling stops short of third parties; Customs has regarded a classification as conclusive only as between itself and the importer to whom it was issued.
Id. at 233. Yet, although the Court concluded that Chevron deference was not appropriate for classification rulings, the letter rulings were nonetheless entitled to Skidmore deference--that is, "a respect proportional to its 'power to persuade.'" Id. at 235 (quoting Skidmore, 323 U.S. at
140).

These principles, applied here, compel the conclusion that the Coast Guard's

interpretation of "major component" contained in its final rebuilt determination is entitled to

Skidmore, not Chevron, deference. It is true that--just as the U.S. Customs Service possessed
general rulemaking power--Congress has delegated general rulemaking authority to the Secretary of DHS with respect to several statutes, including the Jones Act and its Second

Proviso; in turn, the Secretary has delegated this authority to the Coast Guard. See 46 U.S.C. §§
2103-2104. Yet, there is no indication that the Coast Guard issued its final determination for the

M/VMokihana in the exercise of its authority to make rules carrying the force of law. The fact

-23-

that rebuilt determinations are not the product of notice-and-comment rulemaking or formal adjudication does not, of course, necessarily make them ineligible for Chevron deference. See

Mead, 533 U.S. at 230-31. Nonetheless, Coast Guard rebuilt determinations should not receive
Chevron deference because the Coast Guard does not appear to have "set out with a lawmaking pretense in mind" when it made determinations about whether or not a vessel had been rebuilt abroad. Id. at 233. Significantly, the Coast Guard's rebuilt determinations come in private letter

rulings, which are not published and therefore not readily accessible to third parties. Moreover,
the Coast Guard has made it clear that "every rebuilt determination is evaluated on a case-by-case

basis." 60 Fed. Reg. 17290, 17291 (Apr. 5,1995). Although prior rebuilt determinations may be

instructive to third parties to the extent they indicate the principles that guide the agency, "a letter's binding character as a ruling stops short of third parties." Mead, 533 U.S. at 233. Accordingly, Coast Guard rebuilt determinations--like the classification rulings at issue in
Mead--"are beyond the Chevron pale." Id. at 234.

The Coast Guard's arguments to the contrary are not persuasive. The Coast Guard first asserts that Mead has been significantly clarified by Barnhart v. Walton, 535 U.S. 212 (2002).
Yet, the two paragraphs of the Barnhart opinion that address Chevron's applicability serve primarily to reinforce Mead's point that the lack of notice-and-comment rulemaking is not

dispositive, a factor already taken into consideration here. See Barnhart, 535 U.S. at 221-22. Further, although the Coast Guard correctly notes that courts in other circuits have relied on
language in Barnhart as a basis for giving Chevron deference to interpretations found in letter

-24-

rulings,18 the Supreme Court has more recently reaffirmed that Mead still provides the test for
determining when Chevron applies. See Gonzalez v. Oregon, 546 U.S. 243, 255-56 (2006) ("Deference in accordance with Chevron, however, is warranted only 'when it appears that

Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that
authority.'" (quoting Mead, 533 U.S. at 226-27)).

As a result, the Coast Guard's interpretation of "major component" in its private letter

ruling is not entitled to deference under Chevron;19 rather its interpretation should receive
deference under Skidmore, which recognized "that an agency's interpretation may merit some

deference whatever its form, given the 'specialized experience and broader investigation and information' available to the agency." Mead, 533 U.S. at 234 (quoting Skidmore, 323 U.S. at
139). Where, as here, Skidmore deference is applied, an agency's interpretation receives weight in proportion to its "power to persuade," as measured by factors like "the thoroughness evident in its consideration, the validity of its reasoning, [and] its consistency with earlier and later
pronouncements." Skidmore, 323 U.S. at 140.
3.

18 See, e.g., Mylan Labs., Inc. v. Thompson, 389 F.3d 1272, 1279-80 (D.C. Cir. 2004)
(using Barnhart to support application of Chevron deference in case where agency did not act by
notice-and-comment rulemaking).

19 Even if Chevron deference were applicable here, the result reached here would likely be
the same. Under Chevron, courts first ask "whether Congress has directly spoken to the precise
question at issue" and, if not, courts then determine "whether the agency's answer is based on a

permissible construction of the statute." Chevron, 467 U.S. at 842-43. As explained here, the

Coast Guard's interpretation of "major component" is persuasive under the less deferential
Skidmore standard, and thus aforiori would pass muster under the more deferential Chevron standard.
-25-

The arguments plaintiffs make in this case with respect to the Coast Guard's application
of the major component test are identical to those raised and rejected by the Fourth Circuit in the Seabulk Trader case. Indeed, SCA and defendants were parties in that litigation, and Matson

submitted an amicus brief as well. Accordingly, because the Fourth Circuit's decision controls
here, and the material facts of the Seabulk Trader case are indistinguishable, plaintiffs claims are again without merit.

As a threshold matter, plaintiffs argue that the Coast Guard incorrectly states that its
"long-established practice" was to evaluate whether a component was "major" by considering its

weight prior to addition to a vessel. Although plaintiffs agree that the Coast Guard has consistently used a 1.5% threshold to determine whether a foreign-built component is major, they assert that the Coast Guard, with no explanation or rationale, introduced an unprecedented

"lifting test" by suggesting that an item must represent 1.5% of the vessel's steelweight before
being added in order to qualify as a major component. To be sure, prior letter rulings reveal that

the Coast Guard has determined that there are at least some situations when it is appropriate to evaluate whether a component is "major" only after its pieces have been assembled on the vessel.20 Nonetheless, the Fourth Circuit, citing numerous Coast Guard rebuilt determination
letters, has expressly held that the Coast Guard's practice of calculating steelweight prior to

20 In one letter ruling, for example, the Director of Field Activities for the Coast Guard
stated that although the 1.5% guideline is usually applied "in the context of the consideration of single, usually large and certainly discrete components," a component can also consist of

hundreds or thousands of pieces and that, in such instances, the weight of the pieces should be
aggregated to determine whether the component is major. Coast Guard Priv. Ltr. Rul. 16713/5-3,
at 3 (Dec. 30, 2003). But see Coast Guard Priv. Ltr. Rul. 16713/5-2, at 1 (May 24, 2006) ("The

Coast Guard has declined to apply [the 1.5%] threshold, however, to each individual piece of

multiple pieces making up a larger component, such as individual plates comprising a vessel's
outer skin ...."). -26-

assembly aboard the vessel "is longstanding, has been consistently applied in the same manner,

and comports with the congressional intent of the governing statute." The Seabulk Trader II, 578
F.3d at 245-46.

Moreover, the Fourth Circuit's decision in the Seabulk Trader case makes pellucidly clear
that the Coast Guard did not act arbitrarily or capriciously in determining that the work done to
construct the M/V Mokihana's second deck did not violate the major component test.

Specifically, in this case, the Coast Guard, following supplemental investigation and referral to the NAD, determined that the Chinese shipyard which performed the work was incapable of lifting more than 26.9 tons at once. See A.R. 245. Indeed, the Chinese shipyard confirmed that
no lifts of more than 26.9 tons were made. See id. As this figure represented only 0.22% of the

M/V Mokihana's discounted lightship weight, it falls well short of the 1.5% weight threshold
used by the Coast Guard in making foreign rebuilt determinations under the major component
test. That the second deck, assembled piece-by-piece aboard the M/V Mokihana, weighed far

more than 1.5% of the vessel's discounted lightship weight is irrelevant, as no constituent,

separable part of the second deck exceeded the weight threshold when it was hoisted aboard the vessel. Furthermore, the Coast Guard's reliance on the lifting capacity of the Chinese shipyard is
not unreasonable, as the shipyard's limitations provide conclusive proof that no major

component could have been added to the M/V Mokihana. Accordingly, the Coast Guard's

determination that the M/V Mokihana was not rebuilt overseas under the major component test
was neither arbitrary nor capricious.
In response, plaintiffs attempt to distinguish the Seabulk Trader case by contending that

the Coast Guard made its final rebuilt determination as to the M/V Mokihana using a novel

-27-

"crane lifting test" or "economic test," rather than using the separable/inseparable distinction
validated by the Fourth Circuit. Plaintiffs' argument, distilled to its essence, essentially asserts that plaintiffs should not be penalized because the "cheapness of Chinese labor" allows Chinese
shipyards to use less powerful cranes in comparison to other countries' shipyards. This argument

plainly fails to persuade. The fact that the Chinese shipyard, which performed the work on the
M/V Mokihana, was incapable of lifting more than 0.22% of the vessel's discounted steelweight is a factual predicate to the Coast Guard's legal determination that no major components were

lifted onto the vessel. It is not, as plaintiffs argue, a new interpretation and application of the Second Proviso or 46 C.F.R. 67.177(a). In addition, the Coast Guard's application of the major
component test does not, as plaintiffs suggest, turn on the foreign nations' economic realities or

foreign nationals' business decisions; rather, this objective test is based solely on mathematical calculations of steelweight and shipweight. The objective nature of the test, and the Coast Guard's reliance on the separable/inseparable distinction, is made clear by the Coast Guard's
final determination letter: [t]he largest item lifted on the Vessel in the China Shipyard ... is well below the

1.5% of discounted steelweight that has been established by longstanding practice of the Coast Guard as the threshold for the determination of whether 'major component' had been added to the vessel in a foreign shipyard.
A.R. 244-45. This application of the major component test, which calculates the steelweight of a

component's pre-assembly separable parts, is indistinguishable from the calculation method validated by the Fourth Circuit in the Seabulk Trader case.
In sum, the Coast Guard's practice of measuring a component's steelweight prior to its addition to the vessel has been deemed reasonable in this circuit. Because in this case the M/V

-28-

Mokihana's second deck was built piece-by-piece, with no piece exceeding the 1.5% discounted
lightship weight threshold, this second deck is not a disqualifying major component.
Accordingly, the Coast Guard correctly concluded that the M/V Mokihana was not rebuilt foreign under the major component test, and the Coast Guard's interpretation and application of 46 U.S.C. § 12101(a) and 46 C.F.R. § 67.177(a) is neither arbitrary nor capricious.
B.

Plaintiffs also challenge the Coast Guard's issuance of a certificate of documentation with
a coastwise endorsement based on its determination that the M/V Mokihana was not rebuilt foreign under the considerable part test. Specifically, the Coast Guard found that no considerable part of the vessel's hull or superstructure was built upon or substantially altered abroad because
the work performed on the hull or superstructure represented less than 7.5% of the vessel's

steelweight prior to the work. See 46 C.F.R. § 67.177(b)(3). This determination must be upheld
unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law." 5 U.S.C. § 706(2)(A). Under the arbitrary and capricious standard, '"the court must

consider whether the decision was based on a consideration of the relevant factors and whether

there has been a clear error of judgment.'" West Virginia v. Thompson, 475 F.3d 204, 212 (4th
Cir. 2007) (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402,416 (1971). Although the scope of judicial review under this standard is narrow, courts nonetheless examine
the following:

whether "the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an
explanation for its decision that runs counter to the evidence before the agency, or

is so implausible that it could not be ascribed to a difference in view or the
product of agency expertise."

-29-

Id. (quoting Motor Vehicle Mfrs. Ass 'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,43 (1983)). Additionally, to the extent the agency's determination turns on its interpretation of the regulation, that interpretation is "controlling unless plainly erroneous or inconsistent with the
regulation." Auer v. Robbins, 519 U.S. 452,461 (1997).

Plaintiffs argue that the Coast Guard's finding that the M/V Mokihana had not been

rebuilt foreign under the considerable part test was arbitrary and capricious. Specifically, they
assert four specific challenges to the finding's validity: (i) that the Coast Guard erroneously

failed to include the Chinese shipyard's installation of auto platforms and ramps in its calculation of the work performed on the vessel's hull or superstructure and, more generally, abdicated its

responsibility by failing to verify independently that Matson's representations regarding the foreign work were accurate; (ii) that the Coast Guard erroneously failed to include both removed
and added steel in its calculation of the work performed on the vessel's hull or superstructure;

(iii) that the Coast Guard relied upon an incorrect calculation of the vessel's discounted lightship
weight prior to commencing construction; and (iv) that the Coast Guard incorrectly applied its

considerable part test by failing to include the portion of the project completed in the Alabama shipyard. In response, defendants and Matson argue that the Fourth Circuit's acknowledgment of
the agency's expertise in the Seabulk Trader case includes a generous grant of discretion in
making rebuilt determinations under the considerable part test. Yet, the Fourth Circuit's decision

did not reach the district court's analysis of the considerable part test, and thus defendants may
not infer that the Coast Guard's rebuilt determinations are presumed correct. Nor can the Fourth Circuit's decision be read to confer essentially unfettered discretion on the Coast Guard because,
as noted above, there is no lack of "judicially manageable standards to guide meaningful review"

-30-

of the agency's rebuilt determinations. Menkes v. Dep't of Homeland Sec, 486 F.3d 1307, 1311

(D.C. Cir. 2007). Accordingly, it is appropriate to consider plaintiffs' challenges in turn.
1.

Plaintiffs first complain that the Coast Guard acted arbitrarily and capriciously when it
accepted Matson's exclusion of auto platforms and ramps from the calculation of work

performed on the hull or superstructure. Although Matson, in its request for a preliminary
determination, had initially included the weight of these items in its calculation of the overseas

work that would be performed on the hull or superstructure, it later excluded these items from its

calculation in its request for a final determination, stating that "independent car deck panels below the Second Deck (auto platforms 1,2,3, in Exhibit 2) and ramps have all been determined
by previous Coast Guard rulings not to be part of the hull or superstructure for purposes of the

rebuilding analysis." A.R. 70. Specifically, Matson cited letters from the Coast Guard dated May 3,2005, and June 8,2005, in which the agency informed Matson's engineers, albeit without explanation, that it considered "hoistable car decks," "prefabricated ramps," and "independent
'liftable' car deck panels for some of the auto decks" to be "outfitting." As a result, installation
of these items would not be deemed part of the work on the hull or superstructure. See A.R. 11,

15,26.21

21 Plaintiffs challenge Matson's reliance on these Coast Guard letters to support its
exclusion of the auto platforms as "outfitting," arguing that the challenged auto platforms are neither the "hoistable car decks" nor the "independent 'liftable' car deck panels for some auto

decks" that the Coast Guard approved as "outfitting." It appears, however, that the challenged
auto platforms were made up of the car deck panels found to be outfitting, and therefore are

covered by the Coast Guard letters of May 3,2005, and June 8,2005. This conclusion finds further support in NAD's statement that "the NVDC subsequently determined that the platforms are considered 'outfitting' and not subject to the steel weight limitation." A.R. 248.
-31-

The Coast Guard's final rebuilt determination accepted Matson's representation of the amount of work that had been performed on the vessel's hull or superstructure abroad, thereby implicitly accepting that the addition of auto platforms and ramps constituted outfitting rather
than work on the hull or superstructure. In this respect, the Coast Guard made no clear error of

judgment; this work was appropriately excluded from the calculation of the work performed on
the vessel's hull or superstructure called for in 46 C.F.R. § 67.177(b). When the Coast Guard first proposed the current regulation, it stated that "many items involved in outfitting and
maintaining the vessel that could be performed without affecting the structural and watertight
integrity of the vessel are ... not included as parts of the hull or superstructure." 60 Fed. Reg. at

17291.22 This interpretation of the regulation is not "plainly erroneous or inconsistent with the
regulation." Auer, 519 U.S. at 461. Furthermore, under this deferential standard, the Coast

Guard reasonably concluded that the installation of the auto platforms and ramps--which were bolted in place and/or set in foundations, rather than being welded to the hull--did not constitute work performed on the hull or superstructure. The exclusion of the weight of the auto platforms and ramps, therefore, is neither plainly erroneous