In the field of trucking and freight many issues are raised by brokerage, and especially sub-brokerage, of freight. For the uninitiated, a “broker of freight” or “freight brokerage” is an entity that serves as a middleman between one entity that has freight to ship, and another entity that engages in the act of shipping freight. Freight brokerage can, in some circumstances, be sub-brokered – that is, an entity that has contracted to carry freight may further contract with yet another entity to carry some or all of that freight. This is where companies can get into ruinous trouble.
1. Is Your Company Set Up Correctly? (Corporate Formalities)
In the case of sub-brokerage, at issue is usually a company generally in the business of contracting to, itself, carry freight. Faced with a shortage of trailers, or drivers, or time, or even simply a contract too large to readily carry out, that company seeks to keep the contract, but sub-broker the carriage that exceeds its capacity.
Ignoring all other legal issues, the decision to both carry freight and broker freight is fraught. What was one company has now effectively become two, a carrier and a broker. Problems arise when either the company, its customers (either for carriage or brokerage), or judges and juries still see only one company. “The focus of the court’s inquiry must be on [the entity’s] role in the specific transaction… and the nature of the relationship [among the parties]. Schramm v. Foster, 341 F. Supp. 2d 536, 2004 U.S. Dist. LEXIS 16875, 549, 31-32 (D. Md. 2003), cited with approval in, Jones v. C.H. Robinson Worldwide, Inc., 558 F. Supp. 2d 630, 638-639 (W.D. Va. 2008). If you have a carrier company and a brokerage working with the same employees in the same space at the same time, it may be unclear even to them whether they are working for the carrier or working for the broker. Worse, as discussed below, they may actually be doing both: “‘…the difference between a carrier and a broker is often blurry…’” TRG Holdings, LLC v. Leckner, 2006 U.S. Dist. LEXIS 70781, *5 (E.D. Va. 2006). The carrier company itself may invite the problem: are the carrier and the broker the same company? Does the company itself make any operational distinction between its carriage operations and its brokerage operations? If it looks like one company, one misstep by either side, brokerage or carriage, may expose all of it to liability and litigation. In some cases a company argues that it is a broker, but found to be a carrier, and vice versa. Nat’l Union Fire Ins. Co. v. All Am. Freight, Inc., 197 F. Supp. 3d 1376, 1382 (S.D. Fl. 2016) (Company argued it was a broker, but found to be a carrier in part because of signage calling itself a “total transportation service provider”), see, TRG Holdings, supra at *5-6 (Motion to dismiss denied so that discovery could be conducted to test claim that broker was, in fact, a carrier).
2. Is Your Company Compliant With Federal Law (MAP21)?
Freight brokerage is governed by the Federal Motor Carrier Safety Administration (FMCSA), a subagency within the Department of Transportation (DOT) established under the Motor Carrier Safety Improvement Act of 1999 (49 U.S.C. §113). It requires separate registrations for brokers and carriers; a broker that is not a carrier cannot carry, and a carrier that is not a broker cannot broker. If freight comes in to the carrier with paperwork specific to the carrier and your company can’t handle it all, so it transfers some to the brokerage side of the company to broker, didn’t the carrier just broker freight? At a minimum, didn’t it broker freight to the brokerage? An unlicensed broker may be liable for a penalty up to $10,000 per violation, and may be further liable “to the injured party for all valid claims incurred without regard to amount.” Corporate formalities are no protection, as subsection (d) of § 14916 extends liability “jointly and severally … to any corporate entity or partnership involved and … to the individual officers, directors, and principals of such entities.” A party injured by your carriage company’s unlawful brokerage can sue you and each of your partners, or codirectors, personally.
3. Contracts Can Be Traps
Traps may be embedded in your company’s contracts: Contracts may include liquidated damages provisions or other provisions requiring indemnity. For instance, some carriage contracts deem any subcontracted (“brokered”) carrier to be the “agent” of the contracted carrier. This may leave the contracted carrier liable to the freight owner for any incidents or actions chargeable to any company with which freight is brokered. Worse, this contract may be used as evidence by an injured 3rd party to show that any brokered carrier is an agent of the contracted carrier, leaving that carrier liable to the 3rd party. Illegal brokerage could also cost your company contracts, if not the contract you brokered improperly, any contracts that otherwise might have come afterwards.
Do your company’s contracts allow brokerage or sub-brokerage? What, if any, additional requirements do those contracts have for sub- brokerage? Are you an additional insured on appropriate policies? If your contracts do have such requirements, how often does your company check to be sure they are being met? What happens if they aren’t?
Some jurisdictions recognize a claim for negligent hiring or retention of employees and contractors. See, Turner v. Syfan Logistics, Inc., 2016 U.S. Dist. LEXIS 51460 (W.D. Va. 2016). The criteria used for selection of brokers, and by those brokers for sub-brokers, should be ironclad. Likewise, the requirements for oversight, both of your brokers and sub- brokers and for any sub-brokers further on in the chain should also be clear. Finally, your contracts should have clear and obvious requirements for reporting – reporting further sub-brokerage, reporting of insurance for the broker and sub-brokers, reporting of hiring policies and practices for drivers, etc. Your company is assuming the risk whether it knows about that risk or not, so it might as well know about that risk.
4. Is Your Company Talking Itself Into Trouble?
A company’s means and methods of communications can be a key liability loophole in this area. As mentioned above, shared phones, cell phones, or URLs may lead to confusion or lack of clarity between a carrier and a broker. Even if not, the substance of your company’s communications may result in direct liability, either by demonstrating the absence of formalities between a carrier and broker arm, or by demonstrating that they were merely formalities and not actual separation. If you have any questions about whether your company is handling brokerage of freight correctly, please contact Steve Setliff at 804.377.1261.