Sector Workshop Blog Archive

Case Study: Cape Cod Sector Operating Agreement

Lawyer Don Kassilke, from Sher & Blackwell in Washington, DC, is up next. He apologizes -- Dan Holland and Joe Sullivan did a great job covering what he'd intended to talk about. He gets into the Cape Cod Hook Sector, and tells us about the history and requirements of this agreement.

A year prior to sector formation we have to submit a proposal, plus a whole host of other hurdles, that Dan explained well. There's a hard TAC, divided among sector members into monthly allocations, with rollover provisions (if you don't make your 8.3% in one month, you get the excess in the next month -- but if you go over in a month, the sector manager has discretion about how to reduce your later month allocations). Everything is governed by the hard TAC. So far, the sector managers have prevented a sector from going over the hard TAC, but members are subject

Each sector is an independent entity -- each sector is insulated from the fact that the common pool may have exceeded its TAC, or another sector has reached its TAC. TACs are determined by fish catches, year to year.

Once a vessel has signed into a sector, it's in. A fisherman can't withdraw and go back to the common pool. It's a big commitment, joining a sector. You need a really detailed monitoring and reporting plan, and Dan promises to tell us more about the Hook sector and the cod sectors shortly.

The Hook sector is a 501(c)5 nonprofit, with no dividends. Each member has one vote. There's a 7 or 9 member board, drawn from among the membership. That turns out to be important for member trust. There's a manager, who is critical to management, enforcement, and communication with governmental agencies -- if you don't have a good manager, you're sunk. (Erik, the manager of the Hook sector, is here with us, and we'll hear from him today.) Entrance to the the group depends on board approval, plus technical compliance (e.g. the right permits and equipment). Leaving is a big deal, though. The Hook sector began with a 3 year commitment, but it's been reduced to a yearly contract. You can leave, but if you leave there are big penalties -- you owe the sector $$, you can't rejoin for 5 years, and you can't rejoin the common pool with a multispecies permit. You can go scalloping or fish another fishery, but you've forfeited your permit rights for the remainder of the calendar year.

Members have to provide trip reports to the manager within 48 hours of offloading; manager passes these on to Nat'l Marine Fisheries Service. In addition, the members must sell to dealers/processers who have been approved by NMFS -- those dealers also provide reports, and the ability to compare these provides a sort of audit train for the manager.

Dan K reminds us of the biggest part of sector agreements: joint and several liability. This is in the regulations that provide for sectors, and is essential to operating agreements. This isn't so bad -- everyone is on the hook, and everyone has some skin in the game. Indemnity provisions are central to that, too.

[Q & A -- enforcement actions haven't been brought yet, and regulators would like to retain maximum flexibility in enforcement, but joint and several contractual liability sure does present some tricky enforcement issues. More conversation to come....]

Enforcement: there's an infractions committee, but any member, board member, or manager can ask for or begin an investigation. Annually, the infractions committee meets to structure the infractions penalty for the following year. Q: how do you get away with infractions penalties in contracts in states where the courts don't like to enforce them? A: I don't know. Liquidated damages are easier to justify if the damages can be monetized; here, sectors and their contracts are a delegation of regulatory authority from NOAA, so it seems more appropriate than in other contractual environments to have a penalty structure within the contracts. We'll see. The Hook sector has the right to impose penalties on top of any penalties imposed by the governmental regulators. Enforcement is shared -- range from monetary fines (e.g. a parking fine) to tens of thousands of dollars, to a "stop fishing order" (members agree to submit to injunctive relief), to expulsion from the sector (a Board-authorized penalty, with a 3/4 vote, that can be recommended by the manager). (If you kick someone out, you can reallocate their share.)

The Hook sector manager allocates 90% of the sector's allocation, and holds 10% in reserve -- that can be an end-of-year gift allocation to members.

A final word on antitrust: any time you have a collaboration among competitors, you run the risk of groups trying to do more, or overreach. The Hook sector so far has been an exclusive allocation group, but the risk of antitrust violations is something that needs to be constantly checked and monitored. Managers, regulators, and lawyers need to be alert to this -- if you're in the scope of the agreement, and you keep the agreement narrowly worded, your members could be okay.

Q: to facilitate monitoring and enforcement, a sector might wish to limit the dealers they can sell to. Does this create an antitrust issue? A: maybe. The Hook sector does this, but the limitation is broad (to dealers licensed by NMFS). Context is specific. The FCMA language talks about "unduly influencing the price" of the commodity -- maybe that's the limitation.

Q: What if people just up and leave? Are fisherman required to be adequately capitalized before they enter? Can you bond them, buy insurance?
A: there's a requirement that the permit and the vessel enter the agreement, but there's no remedy to protect against bankruptcy of member entities.
A: the Hook guys aren't bringing lots of assets to the sectors, but they are bringing their livelihood, which so far has turned into a big deterrent to bad actions.

Q: Have the Hook sector and the gilnet sector been determined cooperatives under the FCMA? A: no determination yet.

Q: One advantage of these arrangements is to avoid the race-to-fish and the effect of the glut on the market. Timing landings might have an impact on fish prices -- does that impact the antitrust issue?
A: I don't think so -- it's not anticompetitive.

Q: Are your members individual, corporate, LLCs? Are there restrictions in the agreements on membership type? A: most if not all members are corporate, but the agreements don't preclude individuals from joining.

Q: Enforcement monitoring: NMFS gets to choose whether to enforce against a member or a sector. A robust monitoring agent is an important defense for the sector -- look, we did everything we could to prevent this guy from doing bad things. A: I don't see NMFS giving sectors a "safe harbor" based on enforcement and monitoring structures, but I think it will be taken into consideration.

Posted at 08:44 AM

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