Why FEDEX lose?

Federal Express must follow Philippine Law on Public Utility Ownership, similar to those employed by AirAsia and Tigerair

31 August 2013

By Ricardo J. Romulo

It was a surprising pronouncement made by the Fourth Division of the Court of Appeals. Issued in its Jan. 23, 2013 consolidated disposition of the cases of Merit Freight International Inc. and Ace Logistics Inc. both against Federal Express Pacific Inc. (“FedEx”), which were respectively docketed as CA – GR Sp. No. 119658 and CA – GR No. 121661, the decision delivered a message of a different kind.

It was clearly an intended signal. In its resolution of June 6, 2013, of the motion for reconsideration of FedEx, the court remained adamant and held that “after a meticulous study of the arguments set forth…” it found “no cogent reason, to revise, amend, much less reverse,” its decision made a few months earlier.

The flow of the Fourth Division of the Court of Appeals’ syllogism appeared impeccable: FedEx was admittedly a “foreign corporation.” Ergo, it was disqualified under our Constitution and laws from operating as an “International Airfreight Forwarder.” Reason? Because it was, at least to the court, “clearly a public utility.”

The legal basis for the disqualification was Section 11, Article XII of our present Constitution. In its relevant portion, that provision states that “no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens…”

That mandate of the Constitution, though seemingly simple and familiar, was nevertheless subject of debate when we discussed it at the Constitutional Commission of 1986. In his sponsorship speech, Constitutional Commission member Bernardo M. Villegas, chair of the Committee on National Economy and Patrimony, admitted that “the Committee was divided” on “the question of foreign participation in the ownership of public utilities.”

On the floor of the commission, both during the period of interpellation and the period of amendments, the division was very palpable.

But the division was focused mainly on how much foreign ownership of public utilities was to be allowed. The members of the Committee on National Economy and Patrimony, at their level, riding with the tide of nationalism that was prevalent at the commission, had agreed to raise the then prevailing 60-percent Filipino minimum ownership under the 1973 Constitution to 66 percent and 2/3 percent.

Commissioner Jose Luis Gascon, during his turn to interpellate, pushed the envelope and asked if it was possible, in the interest of ensuring the common good, to further suggest, during the period of amendments, the increase of such minimum to 3/4 percent.

When everything was said and done, however, at the final voting, the old rule on the ownership of public utilities prevailed: at least 60-percent Filipino and no more than 40-percent foreign ownership, the same as it was, going back as early as the 1935 Constitution.

So, what was the surprise sprang by the recent Court of Appeals decision on FedEx? It is this: All along, most of us at the commission, myself included, had presumed that what was meant by “public utility” in the rule limiting foreign ownership was a “public utility” that was operating within the Philippines.

The place where the public utility operated was the bedrock of our conviction that it was prudent, for the protection of the Filipino public in the Philippines, who were the ones being served by the utility, to insist that the significant ownership of that utility be in the hands of Filipinos.

Our premise was accepted by those who implemented the law. The Department of Justice, on Nov. 9, 2004, in a letter addressed to then Civil Aeronautics Board executive director Tomas T. Mañalac, thought it timely to issue “a definitive opinion… after a careful and exhaustive review of the aforecited opinions, considerations of sound public policy and national interest, side by side with the pertinent constitutional and legal provisions, as well as doctrinal pronouncements on the matter.” Dispelling doubts that had been spawned by certain wayward opinions, then Justice Secretary Raul Gonzalez unequivocably opined that the nationality requirement applied only to domestic air commerce and/or air transportation and, to stress, it did not apply to international air freight forwarders.

Similarly, the general counsel of the Securities and Exchange Commission, Vernette Umali-Paco, in her letter, dated Oct. 29, 2008, to lawyer Agerico T. Paras rejected the idea that a foreign corporation, in the business of air freight forwarding, could bypass the constitutional requirement and conduct its business in the Philippines by simply “buying space” from domestic shipping lines and airlines.

Such a notion that it was just “buying space” (and not doing business) could not ignore the fact that the foreign corporation would in a sense be acting as a public utility in the Philippines.

It is clear that the demarcation line, observed by the implementers of the law, that distinguishes a utility serving the public domestically from a utility that terminates its services once it unloads or uploads in the Philippines, is a crucial one. It is a point of balance that must be maintained, between our being open to the world of commerce beyond our borders and our objective to be in control of public utilities (i.e., PAL Cargo, LBC Express, Air 21 and Cebu Pacific Cargo) offering their services to the domestic market.

Ricardo J. Romulo is a senior partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles.