Intermediaries – Protecting Your Interests

1. Intermediaries – Protecting Your Interests “Who Am I, and What Have I Done?”: The Shifting Role and Status of Freight Intermediaries in Cargo Claim Litigation Eric Larson Zalud Benesch Friedlander Coplan & Aronoff LLP 200 Public Square, Suite 2300 Cleveland, OH 44114 Main: (216) 363-4500 Direct: (216) 363-4178 ezalud@beneschlaw.com www.beneschlaw.com 2013 TLSP&C/TLC Annual Conference San Diego, California April 22-24, 2013

2. “Who Am I, and What Have I Done?”: Importance of Determining Role of Each Party • Broker vs. Carrier • Carmack Liability; Physically transports; Interstate Commerce • Broker vs. Freight Forwarder • Carmack Liability; Arranges transport but can break bulk & consolidate 49 U.S.C. § 13102(8) • 3PL, 4PL, warehousemen – Plaintiff’s Trial Tactics Revealed! • ‘The logistics manager functions as a broker, a freight forwarder and a customs broker. Normally, logistics managers are not responsible for safe delivery unless they have held themselves out as a carrier by either promising safe delivery or issuing their own airway bill (for air cargo). Pan AmericanWorld Airways Inc. v. CF. Air Freight Inc., 23 Av.Cas. (CCH) §17,189 (S.D.N.Y. 1990). • Subrogated Insurers: Steps into Shoes – assigned claims, but need assignment 1

3. “Who Am I, and What Have I Done?”: Importance of Determining Role of Each Party • How, and When, is Role Determined? • Depends upon facts of particular freight scenario. Constructors Tecnicos v. Seafood Serv., Inc., 945 F.2d 841, 846 (5th Cir. 1991) • Other indicia: • Registration • Lading Documents • Contracts • Insurance/Loss Payee; Covered Parties • Website • Public Filings • What actually happened 2

4. Theories of Broker Liability/Remember:Presumed – Not Liable • Brokers – Not Liable for Freight Loss and Damage – except!: • Arrange for transport by motor carrier 49 U.S.C. §13102(2) • No physical contact with cargo or transport/consolidation capabilities • Exception One: Agreement to be liable via written contract • Express Agreements • But limitations of liabilities (clearly stated; notice) • Indemnification Provisions • “acts of agents, subcontractors” • Anti-indemnification statutes (specifically/expressly applied to motor carriers) • Do they apply to brokers? (transitive policy argument: against public interest to relieve entity of liability for own negligence) • Variations in every state (39 states – most recent – Idaho, Montana) • Applicable law under the contract or otherwise/Choice of law and Forum 3

5. The Other Exception – That May Swallow the Rule: Negligent Selection: Choose Carefully, and Document • Failure to check insurance • Split case law – Always check! • No more BMC-32 to help check • Failure to assure insurance coverage/appropriate for specific cargo • Exclusions: Careful and read the fine print! • Extraordinary value: Electronics; Wine & Spirits • Temperature damage, unless caused by mechanical break-down of reefer • Rust/moisture damage • Theft/Mysterious Disappearance/unattended vehicle – Critical • No actual MVA • Scheduled Vehicle Policy – Check particular vehicle • Amount of Insurance • Value of Cargo/Underinsurance ($100,000/$250,000 dichotomy) 4

6. Sperl v. C.H. RobinsonDon’t Own The Potatoes! • 2004: Jewel Food Stores began remodeling supermarket DC’s and looking for alternative / temporary distributor • Jewel entered into contract with Robinson, whereby Robinson would actually buy the produce, store it, and broker transportation to various groceries (CH Robinson was federally licensed seller of produce and fruit) • CH Robinson enters into broker-carrier agreement with Dragonfly Express • Dragonfly enters into lease agreement with Henry, and owner-operator (Henry can operate with Dragonfly’s authority) • March 2004: Henry contacts CH Robinson and requests load and Robinson tenders load of potatoes that Robinson purchased in Idaho • Henry causes catastrophic accident • Plaintiffs sue everyone for wrongful death/injuries 5

7. Sperl v. C.H. Robinson Don’t Own The Potatoes! • Jury Finds: Robinson is liable for $23,775,000.00 for negligent selection • Theory: Despite contractual language, motor carrier is “agent” of Robinson, the broker • Court’s Rationale – Jury’s Verdict not Against Manifest Weight of Evidence: • Control Factors • Nature of Work /Relationship to General Business of Principal • Right to Discharge • Method of Payment • Provision of Necessary Equipment • Deduction of Taxes • Skill Level Required 6

8. Sperl v. C.H. Robinson Don’t Own The Potatoes! CONTROL • Broker required carrier to have refrigerated trailer of specified length • Load Confirmation Sheet dictated special instructions concerning load: • pick up load at particular time • make daily check calls • stay in constant communication with broker • notify broker if accident occurs • continuously monitor temperature and contact broker if no temperature 7

9. Sperl v. C.H. Robinson Don’t Own The Potatoes! CONTROL • Broker enforced special instructions with system of fines that applied regardless of Hours of Service • System “created pressure” on driver to get to destination when she could not get to destination w/o violating Hours of Service 8

10. Sperl v. C.H. Robinson OTHER FACTORS • Broker controlled method of payment (driver was dispatched by Broker rather than Motor Carrier) • Broker paid driver directly • Broker provided potatoes for delivery (actually owned the potatoes (but barely!) and requested the service) 9

11. Practical Take-Aways • Segregate Your Warehousing, Carrier, and Brokerage Operations; Segregating different service offerings in different entities forces an operator (and its sales force) to think clearly about the services that it is offering and to document those services accordingly; also helps profit and loss analysis • Review not only your contracts but your practices for indicia of “control” if you are brokering loads • Fines • Monitoring of Driver • Constant communication with Driver But See Haywood v. C.H. Robinson, Ill. App. 2012 (CHR Not Liable – no direct contact with driver, instructions on load confirmation similar to shipper to Carrier instructions. No “control factors” 10

12. Avoiding Carrier Selection Liability:Do’s & Don’ts • 3PL/Shipper can get involved to some extent in day to day operations relating to shipments of freight under its contracts (including some direct contact with driver). • If it gets too involved, to extent of frequent operational contact with driver, providing directions and directives on daily or more regular basis, status could be converted for liability purposes. • Contracting can make a difference. Courts refer to monikers ascribed to contracting parties in various contracts involved in 3PL/interline shipping scenario, in effort to assess liabilities amongst those parties. • Important to memorialize contractual relationships to properly designate contracting parties. • Insurance coverage matters. Insurance coverage is often analyzed by courts in these situations, not only for purposes of recompense, but in effort to determine stats of entities involved, and liabilities as between those entities. • Acts of driver and clerical mistakes on bill of lading will generally not alter contractual status and liabilities. • Even voluntary acceptance of responsibility, in some form, for freight claims and existence of insurance that may provide some coverage, generally not enough for 3PL to be found to be a carrier, for purposes of personal injury claims. 11

13. THE ERA OF THE SELECTION PROTOCOL • Important for both brokers and shippers to have written process to qualify motor carriers, and to adhere to written process at all times. Take holistic approach choosing a carrier. If carrier has any indicia of safety problems (i.e., problematic safety rating) avoid carrier or, at very least, conduct additional due diligence. • Any negative factors or detrimental ratings should be red flags. • Carriers should be avoided unless broker or carrier conducts additional due diligence to satisfy itself that the carrier is adequately safe. 12

14. The Era of the Selection Protocol • Basic Carrier Information— • Obtaining “Company Snapshot,” which is available through FMCSA Website. • Whether the carrier: • Previously operated under different company name or MC number; • Operates under any other name; 13

15. The Era of the Selection Protocol • Currently is owned by or controlled by someone who has had relationship with any other FMCSA licensed entity, such as through percentage of stock ownership. • Is otherwise affiliated with any other carrier. • To ensure that carrier is not manipulating its business practices to avoid unsatisfactory safety ratings. 14

16. The Era of the Selection Protocol • Broker/Shipper should maintain internal database of not only carriers with whom it does business, but also the carrier’s principal owners, managers. • During carrier qualification process, and during renewals, broker or retaining carrier should check database to see if due diligence also required on any owners, managers, or affiliates. 15

17. The Era of the Selection Protocol • Duty to exercise reasonable care in selecting motor carriers does not end at the time of hiring. • Continuing duty to inquire into ongoing competency and safety of hired motor carriers. • Renewal qualification should be implemented as frequently as practicable (i.e., every six months). 16

18. The Era of the Selection Protocol • For any carrier, no matter what the SMS rating: • Seek references and contact those references. • Research any reported accidents; • Obtain FMCSA inspection reports; • Investigate compliance with record keeping and hours of service regulations; and • Maintain current file on carrier, updating it on regular basis. 17

19. Other Theories of Broker Liability/Broker as Carrier/Wearing Too Many Hats • Broker a “Carrier” • Holding self out as carrier • Authority • Website • Brochures (truck photos) • Terminology 18

20. Brokers as Carriers – Examples from the Caselaw • Travelers Ins. V. Panalpina, Inc., No. 08 C 5864, 2010 WL 3894105, at *5-6 (N.E. Ill. Sept. 30, 2010) (finding that company was motor carrier when delivery order established obligation to transport container and company fulfilled that obligation by contracting with another company to make delivery) • AIOI Ins. Co. v. Timely Integrated, Inc., No. 08 Civ. 1479 (TPG), 2009 WL 2474072, at *3 (S.D.N.Y. Aug. 12, 2009) (finding that defendant qualified as “motor carrier” because it arranged for shipment of goods by contracting with third party to provide actual physical transportation, court being persuaded by fact that defendant held itself out to shipper as carrier of goods, that agreement between defendant and shipper authorized defendant to transport goods, and that defendant was legally bound to transport shipment). 19

21. Mach Mold Inc. v. Clover Assocs., 383 F.Supp.2d 1015 (N.D. Ill. 2005)/Brokers as “Carriers” • “Motor carrier” and “Transportation” are broadly defined, a broker or 3PL that intended to provide brokerage services, may be considered a “carrier” by the courts. • “[W]hether a company is a broker or a carrier/freight forwarder is not determined by how it labels itself, but by how it holds itself out to the world and its relationship to the shipper.” Custom Cartage, Inc. v. Motorola, Inc., 1999 WL 965686 (N.D. Ill. Oct. 15, 1999). 20

22. Mach Mold Inc. v. Clover Assocs., 383 F.Supp.2d 1015 (N.D. Ill. 2005)/Brokers as “Carriers” • Clover, agreed to transport machine for plaintiff, Mach Mold. • Mach Mold informed Clover that it preferred to use “union carrier” to transport machine. • Clover contacted Kingman, a “union carrier,” to transport machine and Mach Mold agreed to use Kingman as carrier. • During transport, machine was damaged. • Mach Mold filed suit under CarmackAmendment alleging that both Clover and Kingman were acting as motor carriers. • Clover argued that it was acting as broker. 21

23. Mach Mold Inc. v. Clover Assocs., 383 F.Supp.2d 1015 (N.D. Ill. 2005)/Brokers as “Carriers” • The court held that Clover was a motor carrier, stating that: Ownership of the vehicles used to transport the machine does not determine whether Clover was providing transportation or merely selling the transportation of another carrier. The mere fact that Clover did not use its own motor vehicles in transporting the machine does not preclude it from being a motor carrier for the purposes of the ICA. Id. at 1029. 22

24. But It Wasn’t Me! Broker Liability Where a Consignee Has Rejected an Entire Truckload of Food Product.Contessa Premium Foods, Inc. v. CST Lines, Inc., No. CV 10-7426, 2011 WL 3648388 (C.D. Cal. Aug. 18, 2011) • Shipper, Contessa Premium Foods, Inc. entered into Motor Carrier Agreement with CST Lines, Inc. to transport 48 pallets of frozen food from Contessa’s plant in California to Indiana warehouse. • CST agreed to provide temperature-controlled transportation for shipment, and to maintain food at minus 10 degrees Fahrenheit. • CST subsequently engaged Far East Carrier to pick up, transport and deliver shipment, pursuant to broker/carrier agreement. • The lawsuit arose after frozen food was delivered to Indiana at elevated temperature, thereby causing damage to shipment. • Parties each moved for summary judgment with respect to whether CST could be held liable as motor carrier under CarmackAmendment. 23

25. But It Wasn’t Me! Broker Liability Where a Consignee Has Rejected an Entire Truckload of Food Product.Contessa Premium Foods, Inc. v. CST Lines, Inc., No. CV 10-7426, 2011 WL 3648388 (C.D. Cal. Aug. 18, 2011) • The court determined that CST was motor carrier, within definition of Carmack, based upon three key pieces of evidence: • 1: CST had identified itself as “Carrier” in motor carrier agreement between CST and Contessa. • The agreement also imposed liability on CST “for any and all or damage to . . . . shipment.” • Applying AIOI Ins. v. Timely Integrated, Inc., No. 08 Civ. 1479, 2009 WL 2474072, at *3 (S.D. N.Y. Aug. 12, 2009) and Land O’ Lakes, Inc. v. Superior Serv. Transp. Of Wis., Inc., 500 F. Supp.2d 1150, 1154 (E.D.Wis. 2007) (recognizing that a party can accept responsibility and become liable under the Carmack by signing a Motor Carrier Agreement that identifies the party as a “motor carrier”. 24

26. But It Wasn’t Me! Broker Liability Where a Consignee Has Rejected an Entire Truckload of Food Product.Contessa Premium Foods, Inc. v. CST Lines, Inc., No. CV 10-7426, 2011 WL 3648388 (C.D. Cal. Aug. 18, 2011) • 2. Court found no evidence that CST Lines had acted like “broker” within purview of Carmackstatutory definition. • No evidence that CST sold, offered, or held itself out to Contessa as arranging for shipments by others to serve as carriers. • Instead, CST held itself as “carrier” for shipment of goods, in both Motor Carrier Agreement and bill of lading, which referenced CST lines as “motor carrier.” • CST directly invoiced Contessa for carrier services. See Delta Research Corp. v. EMS, Inc., 2005 WL 2090890 at *6 (E.D. Mich. Aug. 29, 2005) (finding direct invoice by broker to shipper for entire loading and transportation process was circumstantial evidence of carrier status). 25

27. But It Wasn’t Me! Broker Liability Where a Consignee Has Rejected an Entire Truckload of Food Product.Contessa Premium Foods, Inc. v. CST Lines, Inc., No. CV 10-7426, 2011 WL 3648388 (C.D. Cal. Aug. 18, 2011) • 3: Court found that CST had exerted sufficient control over Far East such that it could be considered CST’s agent. • After booking shipment with Contessa, CST faxed a load confirmation document with specific handwritten instructions regarding manner and means by which load should be carried. • Instructions directed Far East to transport load at a specific temperature, make daily check calls to CST , and sign all papers using CST’s name. • After determining that CST was motor carrier under Carmack, court granted summary judgment and damages in favor of Contessa. 26

28. But It Wasn’t Me! Broker Liability Where a Consignee Has Rejected an Entire Truckload of Food Product.Suntopia Global Organic Ingredients, Inc. v. C.H. Robinson Worldwide, Inc., No. CV-10-311-LRS, 2011 WL 1532063 (E.D. Wash. Apr. 21, 2011). • SuntopiaGlobal Organic Ingredients, Inc. contracted with C.H. Robinson as cargo broker to arrange to transport apple juice concentrate from Wilmington, Delaware to Omak, Washington, in temperature controlled truck transport. • CHRengaged J & L Trucking as motor carrier to provide the actual transportation. • Upon delivery, the consignee rejected shipment because seals had been broken and concentrate appeared to have spoiled. • The primary issue for the court was whether CHR, as broker, could be held liable for J & L Trucking’s negligence. • Suntopia alleged that CHR, in its capacity as broker, was vicariously liable for J & L Trucking’s actions as its agent, particularly because CHR identified itself as the “Carrier” for the shipment on its “Shipment Detail.” Suntopia voluntarily dismissed its federal claim under the Carmack Amendment. 27

29. Stop Thief! Coverage under Broker’s Liability Insurance Policy for Cargo Theft by Imposter Carrier • Intransit, Inc. v. Travelers Property & Casualty Co. of Am., 2012 WL 5208170 (D. Or. Oct. 22, 2012). • Broker brokered a load to an imposter carrier who then picked up and stole the load • Broker filed claim with insurance provider; claim denied; broker sued for coverage • Court concluded that the terms of the coverage grant, exclusions, and endorsement in the policy were ambiguous and susceptible to more than one plausible interpretation, and, therefore, must be construed against the insurer and in favor of insured • Held, construing policy I favor of insured, the policy granted coverage to broker for property loss resulting from an imposter carrier’s cargo theft, and the policy’s exclusions and endorsement did not encompass imposter or fraudulent carriers • The court emphasized that the insurer could have easily clarified the scope of the coverage grant, exclusions, and endorsement by including express provisions relating to imposter and fraudulent carriers (e.g., by defining “carrier” in the coverage grant to only include authorized, legitimate, or licensed carriers; or by drafting the policy to specifically exclude coverage for cargo theft by fraud, false pretense, or trickery by imposters). • FST Logistics, Inc. v. Markel Am. Ins. Co., No. 10CVH-11-16975 (Ohio Ct. Common Pleas Oct. 13, 2011)(where broker brokered load to imposter carrier that stole the cargo and insurer denied broker’s claim for property loss, held, broker failed to satisfy the requirements for coverage under its policy and, therefore, could not recover under the policy for property loss caused by imposter’s cargo theft). 28

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33. MAP-21 Changes for Motor Carriers, Forwarders, and Brokers Changes that took effect October 1, 2012 • Entities that provide multiple services will be issued one registration number for each authority that they hold (motor carrier, broker, forwarder). • Each time the entity engages in a service requiring registration, it must provide in writing the authority that it will be operating under. 32

34. MAP-21Changes for both Freight Forwarders and Property Brokers Changes that become effective October 1, 2013 • Freight forwarders and property brokers must provide a $75,000 surety bond (an increase from the previous requirement of $10,000). • Freight forwarders dealing with ground transportation, motor carriers, and others are forbidden to broker or otherwise tender freight to a motor carrier unless they have registered with the FMCSA as a property broker and maintained the requisite $75,000 bond. • FMCSA has authority to require freight forwarders and brokers to give proof of financial security. The financial security is used to pay for claims arising from a failure to pay freight charges if: 1) the broker consents to payment; 2) the broker does not respond to a notice of claim and the surety provider determines that the claim is valid; or 3) the claim is reduced to judgment. 33

35. MAP-21Changes for both Freight Forwarders and Property Brokers Changes that took effect October 1, 2012 • Freight forwarders and property brokers will be required to employ an officer who has at least three years of relevant experience with the relevant rules, regulations, and industry practices, or provide FMSCA with satisfactory evidence of the individual’s knowledge. • It is unclear whether the requirement will apply to currently licensed logistics providers prior to renewal of their registration or, if so, how the requirement will be enforced. 34

36. Here Come the Feds! The Preemption Gambit AmeriswissTechnology, LLC v. Midway Line of Illinois, Inc., U.S. 888 F.Supp.2d 197 (D. N. H. 2012) • Shipper’s non-contractual claims against its broker were impliedly preempted by the Carmack Amendment and expressly preempted by Interstate Commerce Commission Termination Act (“ICCTA”). • Title 49 U.S.C. § 14501(c)(1) originally enacted as provision of Federal Aviation Administration Authorization Act of 1994. • It provides that: a [s]tate . . . may not enact or enforce a law, regulation, or other provision . . . related to price, route, or service of . . . any motor private carrier, broker, or freight forwarder with respect to the transportation of property. 35

37. Here Come the Feds! The Preemption Gambit AmeriswissTechnology, LLC v. Midway Line of Illinois, Inc., U.S. 888 F.Supp.2d 197 (D. N. H. 2012) • Ameriswiss, hired broker, C.H. Robinson, to arrange transportation of its machinery by carrier, Midway. • The machines were destroyed when Midway’s truck was involved in an accident. • Ameriswissfiled suit against both Robinson and Midway alleging that Robinson was negligent for failing to select a competent carrier and breached its contract by failing to safely transport the machines. Robinson argued that Ameriswiss’s claims were preempted by federal law. • The court stated that, even if Robinson was a broker, any state negligence claim against Robinson was impliedly preempted by the Carmack Amendment. 36