On Friday, March 15, 2024, the United States Court of Appeals for the Second Circuit affirmed the 2022 decision of the United States Maritime Administration (“MARAD”) that the charter (lease) of the 386-passenger U.S.-documented river cruise vessel VIKING MISSISSIPPI from her owner, River 1, LLC, a citizen of the United States (“River 1”), to her charterer (lessee), Viking USA LLC (“Viking”), a non-citizen, is a time charter permitted by the Shipping Act of 1916, 46 U.S.C. § 56101 et seq. (the “Shipping Act”), and MARAD’s standing blanket approval of time charters at 46 C.F.R. § 221.13.

The pending case in American Cruise Lines v. United States[1] was the subject of an article, Maritime Cases to Watch: American Cruise Lines v. United States, No. 22-1029 (2d Cir. Mar. 6, 2022), that appeared in the July 2023 edition of this Newsletter.  Please click here to read that article.

The Second Circuit’s decision in American Cruise Lines was in response to a petition by American Cruise Lines, Inc. (“ACL”), a Viking competitor, requesting that the Second Circuit vacate (annul) or remand (require MARAD to reconsider) MARAD’s decision on the grounds that the decision was “arbitrary and capricious, without evidence to support key findings, and contrary to law.”[2]  The core of ACL’s argument is the distinction between a vessel time charter, in which the owner of the chartered vessel is in control of the vessel, and a bareboat charter, in which control rests with the charterer.[3]  ACL argued that the Viking charter transfers too much control over VIKING MISSISSIPPI to her non-citizen charterer,[4] Viking, which would be typical of a bareboat charter not qualifying for the standing blanket approval at 46 C.F.R. § 221.13, and leaves insufficient control with her citizen owner, River 1, to qualify as a time charter and the standing blanket approval.

Had the Second Circuit decided to annul the decision, Viking, a non-citizen and wholly owned subsidiary of global river cruise giant Viking Cruises (Switzerland) AG,[5] would have been effectively prohibited from competing with ACL in the rapidly growing U.S. river cruise business using the arrangement between River 1, as owner, and Viking, as charterer.[6] 

The decision is significant for the owners and non-citizen charters of U.S. documented vessels because of its interpretation of what constitutes impermissible non-citizen control of a U.S. documented vessel for the purposes of the Shipping Act and similar U.S. federal maritime statutes, including the Passenger Vessel Services Act and the Jones Act.

Non-Citizen Control of Vessels in U.S. Coastwise Trade

One of the purposes of the Shipping Act and U.S. coastwise laws such as the Passenger Vessel Services Act and the Jones Act is to ensure that vessels engaged in U.S. coastwise trade, including the transportation of passengers and merchandise between ports and points in the United States, always remain under the control of U.S. citizens so they may be available as a naval or military auxiliary for the national defense of the United States or national emergencies.[7] 

The Passenger Vessel Services Act of 1886, as amended, provides that, with limited exceptions, “a vessel may not transport passengers between ports or places in the United States . . . unless the vessel . . . is wholly owned by citizens of the United States for purposes of engaging in the coastwise trade”[8] and satisfies certain other requirements, including, in most cases, having been built in the United States.[9] For a corporation or a partnership, or by extension, a limited liability company like River 1 or Viking, to be a “citizen of the United States” for purposes of engaging in U.S. coastwise trade, including the transportation of passengers between ports or places in the United States, at least 75% of the controlling interests in the corporation, partnership or limited liability company must be owned by citizens of the United States.[10]

The citizenship of River 1 and Viking was never in dispute in American Cruise Lines. Rather, the dispute was whether the Viking charter transfers an impermissible amount of control of VIKING MISSISSIPPI from her owner, River 1, which ACL did not dispute is a citizen, to her charterer, Viking, which Viking conceded,[11] and none of the parties appeared to dispute, is not a citizen.

Section 9 of the Shipping Act of 1916, as amended, provides that, with certain exceptions, “a person may not, without the approval of the Secretary of Transportation [in this case acting through MARAD] sell, lease, charter, deliver, or in any other manner transfer, . . . to a person not a citizen of the United States, an interest in or control of [a U.S.-] documented vessel owned by a citizen of the United States . . . .”[12]  MARAD has granted standing blanket approval for time charters of U.S.-documented vessels from citizens to non-citizens,[13] but bareboat charters of vessels engaged in U.S. coastwise trade to non-citizens are excluded from the standing blanket approval[14] because, as was argued by ACL, a bareboat charter would in such cases transfer too much control of the chartered vessel from the citizen owner to the non-citizen charterer.[15] 

Neither Arbitrary Nor Capricious

But to affirm MARAD’s ruling, and deny ACL’s petition to vacate or remand the ruling, the Second Circuit did not need to agree with MARAD’s ruling, but needed only find that the ruling was not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law,”[16] or in more simple terms, unreasonable.  An agency’s decision is arbitrary and capricious only if “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.”[17]  

Ignoring ACL’s other claims, including that MARAD did not follow the proper procedure when giving the public notice of its proposed decision and an opportunity to comment on it, the Court was obligated to affirm the MARAD decision unless the Court found it to be, in effect, unreasonable. 

The Second Circuit found against ACL on its other claims and affirmed MARAD’s decision on the grounds that it was neither arbitrary, nor capricious, nor an abuse of discretion, nor otherwise not in accordance with the law.  In her opinion for the Court, Judge Myrna Pérez wrote that, on the facts presented to the Court, the Court “cannot not say that MARAD’s final decision was arbitrary and capricious.  MARAD conducted a careful, fact-intensive analysis of the proposed agreement between River 1 and Viking and applied blackletter maritime law and analogous regulations to reach a reasonable conclusion:  that the agreement constituted a time charter subject to the 46 C.F.R. § 221.13 standing blanket approval and that the [charter] would not result in an impermissible transfer of control to a foreign corporation.”[18]

Consistent with a Time Charter

To reach this finding, the Second Circuit examined the distinctions between a bareboat charter and a time charter.  “Under a time charter, the charter engages for a fixed period of time a vessel, which remains manned and navigated by the vessel owner, to carry cargo [or, in this case, passengers] wherever the charterer instructs.  By contrast, the fundamental characteristic of a . . . bareboat charter is the shifting of the exclusive possession and control of the chartered vessel from the owner to the charterer during the charter period.”[19]

A typical vessel time charter is in many respects like hailing a taxi or ordering a car service.  The charterer (passenger) pays charter hire (fare) and instructs the vessel owner (driver) where to go, but the vessel owner (driver) operates and is at all times in control of the vessel (taxi).  A typical vessel bareboat charter is more like a rental car agreement.  The charterer (rental car customer) still pays charter hire (rent) to the owner of the vessel (rental car company), but the charterer (customer) is also responsible for operating and is in control of the vessel (rental car).

The Court noted that the Viking charter “does not grant Viking exclusive possession and control of the cruise ship in any way that blackletter maritime law recognizes as sufficient to create a bareboat charter. . . . River 1 is responsible for providing the crew for the ship, and River 1’s ‘vessel master’ will oversee the ship’s operations.”[20] Although the charter gives Viking the ability to remove the vessel master (captain), Viking’s ability to do so only in the context of unsatisfactory performance and River 1’s right to name replacement masters are sufficient to establish that MARAD had not acted unreasonably in deciding that Viking’s ability to remove the master does not result in an impermissible transfer of control to Viking.[21]  The Court also noted that “River 1 bears primary responsibility for the ship’s day-to-day maintenance and care,”[22] the vessel master’s “power to decline any Viking request that she deems unreasonable or determines could create a safety risk,”[23] and “Viking’s ability to set the itinerary”[24] as being consistent with the maritime law definition of a time charter.

No Improper Transfer of Control to a Non-Citizen

Turning to MARAD’s own regulations, the Court noted that, “[a]lthough it has done so with respect to some other Jones Act provisions, MARAD has not promulgated regulations for evaluating whether a charter of a passenger vessel to a non-citizen represents an impermissible transfer of control,”[25] so for additional authority to support its decision, MARAD looked to regulations it had promulgated under the American Fisheries Act (the “AFA”), which imposes similar citizenship restrictions on the ownership and control of certain U.S.-flagged commercial fishing vessels.[26]  These regulations set forth two kinds of indicia of the impermissible transfer of control of a of U.S.-flagged commercial fishing vessel:  absolute or per se indicia, each of which by itself is deemed to be an impermissible transfer of control,[27] and contributing indicia, which in combination with other elements of non-citizen involvement, may be deemed to be impermissible control.[28]

ACL argued that the Viking charter contains not only individual provisions that constitute separate absolute or per se impermissible transfers of control, but other provisions that taken together, also amount to an impermissible transfer of control.[29]  As evidence of the absolute or per se impermissible transfer of control to Viking, ACL focused on the charter provisions requiring Viking to absorb certain operating costs and business risks,[30] and again on the charter provisions permitting Viking to remove the vessel master.[31] As additional evidence of impermissible control, ACL pointed to contributing indicia in a number of charter provisions,[32] including those requiring Viking to prepay charter hire that ACL argued enabled River 1 to advance funds for the construction of VIKING MISSISSIPPI.[33] 

The Court was not persuaded by these arguments, finding MARAD’s analysis of the per se and contributing indicia “reasonable and well supported,”[34] and noting that the Court “cannot say MARAD erred notwithstanding these arguments.”[35] The Court found that “MARAD reasonably found that that the liability and operating costs were distributed between [River 1 and Viking] in a manner that did not vest Viking with an impermissible level of control,”[36] “River 1 retains the exclusive authority to appoint an independent substitute vessel manager”[37] even if Viking removes the vessel master, and MARAD had not relied on and was entitled not to apply[38] MARAD’s own regulations in deciding that Viking’s prepayment of charter hire did not constitute an impermissible transfer of control to Viking.

On the basis of these findings and its interpretation of the blackletter law distinctions between bareboat and time charters, the Court ruled that MARAD had not acted arbitrarily or capriciously in deciding that the Viking charter is a time charter, but in her opinion for the Court, Judge Pérez noted that the Court was not suggesting that, “as a matter of law, charter arrangements such as [the Viking charter] are per se legal under the Passenger Vessel Services Act of 1886, the Shipping Act of 1916, or other Jones Act provisions.”[39] Instead, the Court “merely conclude[d] that, based on the record before it, MARAD did not act in an arbitrary and capricious manner in confirming that this particular arrangement constituted a valid time charter and was not an impermissible transfer of control of a vessel to a non-citizen.”[40]

The Impact of American Cruise Lines on U.S. Coastwise Trade

The industry most obviously affected by MARAD’s 2022 ruling and the subsequent decision of the United States Court of Appeals for the Second Circuit in American Cruise Lines is the U.S.-flag cruise industry.  Viking is not the only cruise company owned and controlled by parent companies and investors that are not citizens of the United States, and it is almost certainly not the only non-citizen cruise company with an interest in the U.S.-flag cruise market.  These non-citizen cruise companies will likely see the Second Circuit’s decision in American Cruise Lines as creating an opportunity to expand their operations to the United States using charter arrangements similar to the one between River 1 and Viking.

The decision may also open other U.S. coastwise markets to competition from outside of the United States.  The most likely competitors are non-citizen operators in specialized coastwise industries that, like the river cruise industry, are heavily dependent on or driven by brand recognition or expertise other than in vessel navigation.  Offshore wind energy might be one such industry, although most of the vessels used in that industry will still need to be built in the United States, and be owned by and remain under the control of citizens of the United States.  A significant barrier to entry to the construction of U.S. coastwise-eligible wind turbine installation vessels (“WTIVs”), in addition to the uncertain demand for these vessels, has been the limited number of U.S. shipyards with the ability to build these vessels and the very high cost of building these vessels in the United States.  Non-citizen owners with years of accumulated experience and expertise in the operation of non-U.S.-flagged WTIVs and other offshore wind energy installation and maintenance vessels may now be able to charter similar U.S.-built vessels from U.S. owners and use that experience and expertise to take market share from U.S. operators. 

It also remains to be seen whether MARAD will stick to its guns and decide that similar or more aggressive charter arrangements are time charters qualifying for its standing blanket approval at 46 C.F.R. § 221.13.  MARAD might also use the opportunity to clarify what constitutes a permissible transfer of control of vessels engaged in Passenger Vessel Services Act, Jones Act and other coastwise trades by promulgating new regulations expanding on those already applicable to U.S.-flagged commercial fishing vessels.

The impact of American Cruise Lines may not yet be fully known, but will likely be felt across the U.S. coastwise shipping industry for years to come.