Brokers and Carriers: Gov…

Truck brokers and motor carriers play vital roles in the freight transportation industry, allowing the United States to overcome economic obstacles that have significantly hurt other countries. Producers need to ship their goods to buyers, and the carriers provide physical transportation of the goods. The brokers facilitate the connection between shippers and carriers.

Each model has its own set of advantages and disadvantages. Carriers face high capital costs and operational complexities but have the potential for higher profit margins and direct customer relationships. Brokers benefit from lower startup costs and greater flexibility but are reliant on carriers and face intense competition. Understanding these distinctions is crucial for shippers looking to move freight efficiently and for individuals considering entering the transportation industry.

Given the close dependent relationship between carriers and brokers, you would not expect much secrecy between the two. However, that is not the case. In fact, brokers have consistently imposed terms within their contracts with carriers that prevented the carriers from knowing information about the shipment. The move towards contractual restrictions came as a means of overcoming the carrier’s right to review the records of the transaction, provided under 49 CFR 371.3.

Why would brokers want to prevent disclosure of this information to the carriers? Brokers believe the asymmetrical information gives them flexibility to negotiate rates with carriers, which they have argued keeps costs down. Brokers have also expressed a fear that carriers could obtain confidential information about their competitors, leading to unfair competition and harm to the trucking industry.

Carriers have asked the government to remedy the current use of contracts that restrict their rights as provided in 49 CFR 371.3. The government has proposed an answer in the form of FMCSA-2023-0257, titled Transparency in Property Broker Transactions. The FMCSA would allow carriers to have visibility over transactional information that is normally only known to the brokers. If passed, the carriers would be able to see the names of the shippers, origin of the goods, buyers, destination, and even the applicable rates.

The goal of the new rule is to increase market competition, improve safety, and reduce fraud. The argument is that by providing motor carriers with more information about broker transactions, the rule could help to increase competition in the freight market. This could lead to lower rates for shippers and better rates for carriers. The carriers believe that the information could help them make more informed decisions about which brokers to work with, potentially reducing the number of accidents and injuries and helping them to identify and avoid fraudulent brokers. Carriers also argue that the proposed rules could provide a stronger foundation for rate negotiations and help reduce instances of fraudulent practices or mistaken chargebacks.

The rule would also lead to some possible changes in the industry's procedures. Brokers would be required to maintain transaction records in an electronic format, with disclosure within 48 hours. The records would need to contain detailed information on all charges and payments related to each shipment, including descriptions, amounts, and dates. The new FMCSA rule also proposes to reframe transparency as a “regulatory duty” imposed on brokers rather than a “right” given to carriers. This change aims to strengthen compliance and reduce the use of the previously mentioned contractual waivers.

Has the government moved to interfere with contractual freedom between parties, or are they merely stepping in to protect the carriers’ rights? The proposed rule has created friction between various parts of the industry, with factions falling on opposite sides of the debate. We will have to wait to see if the rule is enacted, and if so, how the industry will react to the proposed rule.

If you have questions about this article, or about brokers and carriers in general, please contact Michael Jacquez (mjacquez@setlifflaw.com) at (804) 377-1262 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.