WelcomeMind The Gap

Broker Duties and LiabilityPanel: Pamela Johnston, Transplace;

Pat Gilroy, The Gilroy Law Firm;Wesley Chused, PretiFLaherty

Tuesday, October 27th, 2015San Antonio Marriott Rivercenter

San Antonio, TX 78205

TRUCKING INDUSTRY DEFENSE ASSOCIATION3601 EAST JOPPA ROAD | BALTIMORE, MD 21234 | T 410-931-8100 | F 410-931-8111

WWW.TIDA.ORG

Mind The Gap

Key definitions

• “Broker” – a person, “other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for or holds itself out by solicitation, advertisement, or otherwise as selling, providing or arranging for transportation by motor carrier for compensation.” 49 U.S.C. § 13102(2).

•

Mind The Gap

Key definitions

• “Motor carrier” – “a person proving motor vehicle transportation for compensation 49 U.S.C. § 13102(14).

•• “Motor carriers, or persons who are employees or bona fide agents of carriers,

are not brokers within the meaning of this section when they arrange or offer to arrange the transportation of shipments which they are authorized to transport at which they have accepted and legally bound themselves to transport.” 49 C.F.R. § 371.2 (a).

•• “A motor carrier may not broker transportation services (formerly known as

"convenience interlining") unless the motor carrier has registered separately as a broker . . . . ” 49 U.S.C. § 13902(a)(6).

Mind The Gap

Key definitions

• “Employee” – “any individual, other than an employer, who is employed by an employer and who in the course of his or her employment directly affects commercial motor vehicle safety. Such term includes a driver of a commercial motor vehicle (including an independent contractor while in the course of operating a commercial motor vehicle) . . . .” 49 C.F.R. §390.5.

•

Mind The GapThe Problem and How Did It Happen?• Aggressive plaintiffs, dissatisfied with the minimal cargo insurance ($750,000) mandated by the

FMCSA, seeking additional “deep pockets” under innovative theories of liability. •• Brokers ordinarily are not liable for the negligent conduct of the independent contractors they hire,

i.e. motor carriers. •• In recent years aggressive plaintiffs have concocted new theories upon which to fix liability on

transportation brokers for casualty losses: •

– Motor carrier violations of the FMSCRs– Common law negligence– Respondeat superior– Vicarious liability– Negligent hiring/retention– Negligent entrustment– Joint venture /alter ego

Mind The GapSchramm v. Foster, 341 F. Supp. 2d 636 (D. Md. 2004); • Classic example of “bad facts make bad law.”• Catastrophic accident involving shipment brokered to an unrated motor carrier with minimum

$750.000 insurance.• Seeking a “deep pocket” plaintiff also sued broker alleging numerous theories of liability:

– Federal private right of action under 49 U.S.C. §14704 (a)(2)– Negligence and vicarious liability – Negligent hiring– Negligent entrustment

• All claims except negligent hiring dismissed on summary judgment.• Court ruled broker’s “duty of reasonable care” required it to check the safety statistics and

evaluations of the motor carriers with whom it contracted • With virtually no subsintive legal basis behind it, court concluded the imposition of a common law

duty on the broker was not “onerous” because broker’s actions increased the risk to the public to whom it owed a duty of reasonable care in selecting carriers.

• No prior “negligent hiring” precedent as to cargo brokers existed. • Schramm’s unprecedented opening the door to “negligent hiring” theory opened the

floodgates to casualty plaintiffs seeking additional sources of recovery.

Mind The GapJones v. D’Souza, 2007 WL 2688332 (W.D. Va. 2007); Jones v. C.H. Robinson Worldwide Inc., 558 F. Supp. 2d 630 (W.D. Va. 2007)

• More bad law• Claims against broker for violations of the Motor Carrier Act and FMCSRs, negligence under

doctrine of respondeat superior, negligent hiring, negligent supervision and entrustment. • Broker had contract carrier agreement with motor carrier who had a conditional safety rating. • Statutory theories of liability were that broker had violated 49 U.S.C. §14101, which requires

motor carriers to provide “safe and adequate service equipment and facilities,” that broker violated that section because it knew the motor carrier was unfit to operate and that broker had violated 49 C.F.R. § 390.13 which prohibits any person from aiding or abetting a motor carrier in violating the FMCSRs.

• Court dismissed all theories of liability except negligent hiring on the basis of plaintiff’s allegation that broker knew or should have known the motor carrier did not have sufficient experience, had a deficient safety rating, was financially insecure and unfit to operate.

Mind The GapJones v. D’Souza, 2007 WL 2688332 (W.D. Va. 2007); Jones v. C.H. Robinson Worldwide Inc., 558 F. Supp. 2d 630 (W.D. Va. 2007)• Plaintiff argued broker should have investigated motor carrier’s safety program and its safety

ratings, which would have disclosed the motor carrier was an “at risk” carrier.• Court noted that the FMCSA maintains a public website with various categories of safety

information concerning motor carriers.• Found broker should have known of motor carrier’s deficient safety rating.• Citing Schramm, upheld the negligent hiring claim on the belief there is a “common law duty

upon third party logistics companies to use reasonable care in selecting carriers.”• All claims except negligent hiring claim dismissed on summary judgement.

Mind The GapSperl v. C.H. Robinson Worldwide, Inc., 408 Ill. App. 3d 1051; 946 N.E. 2d 463 (2011) • More bad facts make even more bad law.• Catastrophic accident involving brokered shipment where driver of defendant motor carrier

was driving on a suspended license and had falsified her logbooks.• Driver testified she believed she was acting as broker’s agent.• Plaintiff’s expert testified broker controlled driver during the course of transportation wherein

she communicated directly with broker and identified herself as a representative of broker.• $24 million verdict against broker upheld on appeal.

Some Signs of ImprovementKavulak v. Juodzevicius, 2014 U.S. Dist. LEXIS 4078(W.D.N.Y. 2014)

• Plaintiff alleged broker vicariously liable for negligence of motor carrier and its driver.

• No negligent selection claim. • Court dismissed vicarious liability claim under New York law, due to

absence of evidence that broker retained control over the manner and method by which driver operated the truck and delivered the shipment.

Some Signs of ImprovementScheinman v. Martin’s Bulk Milk Service, Inc., 2013 WL 6467525 (N.D. Ill. 2013)

• Severely injured plaintiff sued shipper and broker.• A “Shipper-Motor Contract Carrier Agreement” existed between shipper International Paper

Co. (“IPC”) and broker Universal Am-Can Ltd. (“UACL”), but the agreement did not prohibit UACL from using another motor carrier.

• A brokerage agreement existed between UACL and defendant motor carrier, Martin’s Bulk Milk Service (“MBMS”) under which MBMS agreed to operate as an independent contractor for shipments brokered by UACL.

• IPC did not direct or control carrier or its driver.

Some Signs of ImprovementScheinman v. Martin’s Bulk Milk Service, Inc., 2013 WL 6467525 (N.D. Ill. 2013)

• Plaintiff alleged vicarious liability claims against shipper IPC and broker UACL.• Plaintiff relied heavily on Sperl v. C.H. Robinson and alleged IPC was liable because a

principal-agent relationship existed as between IPC and MBMS’ driver.• Court dismissed the claim, finding no evidence of direct control or any obligation on

the part of IPC to control driver. • The fact that shipper monitored progress of its shipment “no more creates an agency

relationship than does the designation of overnight delivery on a Federal Express package.”

• Court dismissed plaintiff’s argument that because IPC required truck drivers to comply with safety regulations established control “because the driver had an independent duty under federal law and regulation to comply with those rules.”

• Court similarly ruled plaintiff did not show UACL had requisite control over driver to establish a principal-agent relationship.

Some Signs of ImprovementMcComb v. Bugarin, 2014 U.S. Dist. LEXIS 24157 (E.D. Ill. 2014)

• Wrongful death action against shipper, Central Steel, and motor carrier, ShandyTransportation, one of several motor carriers Central Steel used for many years and had handled between 12,000 and 20,000 loads for Central Steel prior to the one in question.

• Central Steel’s procedure in selecting potential motor carriers was to investigate their insurance, and verify FMCSA operating authority and that the carrier maintained a “satisfactory” safety rating.

• On date of the accident, motor carrier had a “satisfactory” safety rating, but it was 10 years old.

• Post-accident, discovered that all four trailer brakes were out of adjustment and that motor carrier’s vehicle maintenance score was 81.23, which Central Steel had not checked.

• Plaintiff did not allege the “application of deficient brakes” was a cause of the accident.

Some Signs of ImprovementMcComb v. Bugarin, 2014 U.S. Dist. LEXIS 24157 (E.D. Ill. 2014)

• Plaintiff’s expert, Dr. Thomas M. Corsi, opined Central Steel never should have hired the motor carrier with a poor safety score and maintenance rating which would have kept the truck off the road.

• Court granted Central Steel’s motion for summary judgement and explained the critical difference between “cause in fact” and “legal cause.”

• The fact that the motor carrier would have kept the truck off the road for maintenance issues “does not constitute legal cause…[T]here must be a showing that the contractor’s particular incompetence caused the accident.”

• “Plaintiff has failed to show that Central Steel’s selection of its contractors was even a ‘but for’ cause of Mrs. McComb’s death.”

• Court granted Central Steel’s motion for summary judgement, dismissing the Plaintiff’s negligent selection claim against shipper.

Some Signs of ImprovementBeavers v. Victorian, 38 F. Supp. 2d 1260 (W.D. Okla. 2014)

• Plaintiffs seriously injured when struck by tractor-trailer unit owned by defendant Victorian, an owner/operator leased to defendant Anthony B. Copeland d/b/a Trinity Delivery Service, an FMCSA-registered motor carrier.

• Shipper Owens Corning had hired defendant Bee-Line, a broker, to arrange the transportation.• Bee-Line brokered the shipment to Trinity. • A “shipping agreement” between Owens Corning and Bee-Line required Bee Line to “provide and

operate all motor vehicles and equipment” used to handle Owens Corning traffic and prohibited Bee-Line from acting as a broker or delegating its motor carrier responsibilities.

• Bee Line had a brokerage agreement with Trinity, identifying their arrangement as an “independent contractor” relationship.

• Plaintiffs claimed Bee-Line was (i) vicariously liable for Victorian’s negligence because Bee-Line was the “motor carrier” and had a non-delegable duty of care and (ii) liable for negligently hiring Trinity.

• Court granted Bee-Line’s motion for summary judgment on the vicarious liability claim because it found no legal authority making it liable for the negligent conduct of the independent contractor, Trinity.

Some Signs of ImprovementBeavers v. Victorian, 38 F. Supp. 2d 1260 (W.D. Okla. 2014)• Court also rejected plaintiffs’ argument that Trinity and its driver Victorian were Bee-Line’s

statutory employees under 49 C.F.R. § 390.5 because that regulation is “inapplicable to create a statutory employment relationship between Bee-Line and Trinity /Victorian because Bee Line neither owner nor leased the vehicle.”

• “Copeland could not be considered a statutory employee of Bee-Line, because he was the employer of Mr. Victorian, the employee operating the motor vehicle.”

• Not a total victory for the broker, however.• Court denied Bee-Line’s motion for summary judgment on the negligent hiring claim, finding

material facts as to the reasonableness of Bee-Line’s conduct in hiring Trinity since it only verified Trinity’s FMCSA operating authority

• Trinity had no safety rating and Bee-Line’s expert did not identify industry standards regarding such contracting decisions.

• Bee Line did not verify Trinity’s insurance or request information from Trinity regarding his safety or maintenance practices, the credentials or safety records of his truck drivers or the company’s trucking experience in Colorado.

• Courts upholding the negligent hiring theories of recovery against brokers and shippers, a la Schramm, Jones, Beavers, etc., make the slippery slope more slippery.

The Phantom “common law duty to use reasonable care in selecting carriers.”No Such Duty Exists

• There is no legal duty for brokers or shippers to go beyond FMCSA registration information in selecting motor carriers.

• Notwithstanding the misguided decisions cited above, courts are mistakenly imposing legal duties on brokers and shippers to drill down into the safety records of the motor carriers they hire and the drivers whom the carriers hire.

• It is commercially unreasonable and in practice unworkable for brokers or shippers (in what is typically only a matter of minutes) to thoroughly drill down into and evaluate the minutiae of a motor carrier’s and its drivers’ safety records beyond the FMCSA-published safety ratings (“satisfactory”, “conditional” or “unsatisfactory”) notwithstanding third-party services claiming to provide such security.

The Phantom “common law duty to use reasonable care in selecting carriers.”No Such Duty Exists• Courts must be taught that the federal motor carrier and broker regulatory scheme

established by Congress in the Motor Carrier Act vests in the FMCSA – not brokers, shippers or other users of transportation – the duty to qualify and register applicants as fit for operating as interstate motor carriers. 49 U.S.C. §§ 13901, 13902(a):

• “[T]he secretary shall register a person to provide transportation . . . as a motor carrier if the Secretary finds that the person is willing and able to comply with

• (A) this part and the applicable regulations of the Secretary and the Board; • (B) any safety regulations imposed by the Secretary and the safety fitness requirements

established by the Secretary under section 31144; and• (C) the minimum financial responsibility requirements established by the Secretary pursuant

to sections 13906 and 31138.” (Emphasis added) • The FMCSA – not brokers or shippers – is the gatekeeper and watchdog for applicants

seeking to register as interstate motor carriers under Title 49. • If a carrier were “unsafe” then why would it be registered with the FMCSA and in good

standing to operate?

The Phantom “common law duty to use reasonable care in selecting carriers.”No Such Duty Exists• It is not the broker’s or shipper’s job to double-check the FMCSA’s work. • It is not the broker’s or shipper’s job to drill down into the safety fitness and qualifications or

records of motor carriers whom the FMCSA has already registered and qualified to operate.• The FMCSA, not brokers or shippers, is the party charged with “finding” that the motor

carrier applicant is willing, capable and competent to comply with “the applicable regulations” and “the safety fitness requirements established by” the FMCSA.

“Judge, you need only look at the FMCSA’s application Form OP-1 to put to rest the plaintiff’s phantom ‘duty’ argument.”• The fact that transportation brokers do not have a duty of care in selecting motor carriers is

confirmed by the FMCSA’s Form OP-1 “APPLICATION FOR MOTOR PROPERTY CARRIER AND BROKER AUTHORITY.”

• The Application states, “Section IV-Safety Certification (for vehicle operating applicants only). Select only one.” (Emphasis added)

• Significantly, the FMCSA, the gatekeeper to interstate registration as charged by Congress, requires the Safety Certification only of motor carrier applicants, not brokers who complete and file the same application form.

• If the FMCSA imposes no safety certification requirements on brokers, why then have courts taken it upon themselves to create a safety “duty” on the part of brokers who hire independent contractor motor carriers?

• If Congress had intended to impose Schramm-style safety selection standards on brokers, the FMCSA would not have excluded them from the Form OP-1 Safety Certification.

Broker Created Gaps

Broker-Carrier Terms Conflict with Shipper Broker Terms• Limitations on Liability • Insurance Coverage - Additional Insured Requirements• Conflicting Standards and Duties• Master Transportation Agreement (Railroad-Intermodal)• Indemnification Clauses

• Anti-indemnification Statutes

Broker Vetting of MC and CSA• Broker Issues with Claims of Negligent Hiring and Vicarious Liability• Sperl, Heyl issues: "operational control" "joint venture" • CSA scoring methods inherently faulty and not reliable

– USGAO Study "several major challenges limit the precision of SMS scores" "serious challenges raise questions about whether CSA is able to identify target carriers at highest risk"

– Move toward a true SFD (Safety Fitness Determination) • H.R. 1120 (S.1454) "Transportation and Logistics Hiring Reform Act"

-Proposal to nationalize hiring standards of motor carriers. Freight forwarders, brokers, shippers, and receivers would be required to do the following before hiring a

motor carrier:-Ensure MC has current and accurate FMSCA registration-MC has the minimum amount of insurance required under law; and confirm MC does not have an "unsatifactory rating" for safety.

Federal Preemption of state law based claimsUse of FAAAA (ICCTA) preemption

• Prohibits states from enforcing laws, regs or provisions "having the force and effect of law related to price, route or service of … broker … with respect to the transportation of property"• Shippers claims defeated by broker use of FAAAA preemptionMarx Companies, LLC v. Western Trans Logistics, Inc., 2015 WL 260914 (D.NJ 2015)

• Freight broker immune from tort-based liability in cargo claimFalcon Express International, Inc., v DHL Express (USA), Inc., (U.S.SUP.CT. denied cert) June 2015

• Shipper immune from fraud and punitive damages award from reseller (Texas 1st Dist.)Midwest Trading Group, Inc. v. GlobalTranz Enterprises, Inc., et al., 2015 WL 1043553 (N.D. ILL . 2015)

• Broker immune from fraud or misrepresentation claim in failing to procure insurance• Court appeared to reason a brokers pretransportation conduct (securing insurance) are within the scope of an ICCTA-covered transportation service

Cargo LiabilityInsurance Requirement ≠ Limitation of Liability

•Contract with Shipper has a requirement of $100,000 cargo liability insurance.•No limitation of liability statement in the cargo loss section of the contract.

•Stated insurance requirement is not a limitation of liability

Cargo Liability

Gap in limitations

•Non-matching limitations in CR-BR and SH-BR.•Southern Refrigerated

Food Safety Modernization Act

Safe Transport of Human and Animal Foods

• Prohibits distribution of “adulterated” food (21 U.S.C. § 331(a))

• 21 U.S.C. § 342 states that food product will be deemed to be “adulterated”:

(a)(4) if it has been prepared, packed, or held under insanitary conditions whereby it may have become contaminated with filth, or whereby it may have been rendered injurious to health (emphasis added); OR

• (i) If it is transported or offered for transport… under conditions that are not in compliance with regulations …

Food Safety Modernization Act

Safe Transport of Human and Animal Foods

• What cargo is covered?o FDA-regulated human food including raw materials and ingredients o Animal food o USDA-regulated meat, poultry and egg products

– DOES apply if foods are fully packaged and require temperature control for safety or major quality (spoilage)

– Does NOT apply if foods are fully packaged and shelf stable FSMA – Customer provides load safety requirements to Broker and Broker doesn’t provide to Carrier.

Food Safety Modernization Act

Safe Transport of Human and Animal Foods

Key Impacts• Addition of express obligations• The parties are permitted to vary some of

them by written agreement• May affect cargo loss claims

Food Safety Modernization Act

Safe Transport of Human and Animal FoodsSOME OF THE EXPRESS OBLIGATIONS UNDER PROPOSED RULES:• Shipper will be required to specify, in writing, its sanitary requirements, such

as required temperature, to the carrier.• Carrier must show shipper and, upon request, receiver, that it has

maintained appropriate temperature control during transport for food subject to temperature control requirements. [Note: shipper can assume temp tracking responsibility in writing]

• Motor carriers will also have to provide shippers information about 3 previous cargos hauled in bulk vehicles and the intervening cleaning of those vehicles [Note: may agree in writing to vary this if always transport the same cargo, such as orange juice.]

Food Safety Modernization ActSafe Transport of Human and Animal Foods

Gap #1 – The Obligations•Shipper’s requirements must be communicated to the carrier.•Carrier’s prior-load information must be communicated to the Shipper.•Shipper assuming temperature tracking responsibility, if applicable.

• The Rules will establish criteria defining the conditions of “safe transport”.• Under the Rules, if a shipment is transported under conditions not

meeting the Rules, the cargo will be deemed “adulterated”.

• If Shipper establishes the conditions (e.g., a temperature range tighter than required by USDA) and the load falls outside of that temperature range, it may be “deemed adulterated” and, therefore, not saleable.

Food Safety Modernization Act

Safe Transport of Human and Animal Foods

Gap #2 –Food & Drug Acts:• Cannot distribute food deemed adulterated.

Carmack Amendment:• Carriers are only liable for actual loss or damage.

Food Safety Modernization Act

Safe Transport of Human and Animal Foods

Line 1

Line 2

•Other points•Conclusions and sum up.

Line 1

Line 2

•questions