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Pete Kestner Attorney At Law

The Broker Defense

THE BROKER MODEL: THE TRUCKING INDUSTRY’S ATTEMPT TO PRIVITIZE ITS PROFITS AND SOCIALIZE ITS LIABILTIES.

You just signed up a new case where the plaintiff was injured in an accident with a tractor-trailer.  The plaintiff has suffered catastrophic injuries that will likely support a large recovery.  During your initial investigation you discover the tractor-trailer involved in the accident has only $750,000.00 in insurance coverage.  You acquire the bill of lading for the shipment at issue and learn that the tractor-trailer involved in the accident is different from the motor carrier listed on the bill of lading.  The bill of lading designates a very large and profitable trucking company as the motor carrier.  You bring that large company into the lawsuit and it brings a motion for summary judgment, claiming it was merely operating as a freight broker and therefore is not liable under traditional tort law for any wrongdoing by the independent contractor owner/operator involved in the accident.

In recent years, the transportation industry has increasingly used freight brokers, who function as a contact point between shippers and motor carriers.  Freight brokers essentially match motor carriers with shipments.  Some of these freight brokers are stand-alone logistics firms that operate as brokers in the strictest sense of the term.  In other instances, the freight broker is actually an arm of a transportation conglomerate also operating as a motor carrier.  Increasingly, companies that have both a broker and a motor carrier arm are using the broker defense to avoid legal liability in personal injury lawsuits.  In these cases, it is critical to understand the legal distinction between a motor carrier and a broker and to be able to identify strategies to overcome the broker defense.

A.        Historical perspective
 
Under traditional principles of tort law, an employer of an independent contractor is not liable for physical harm or damage caused to another by an act or omission of the independent contractor or his servants.  Restatement (Second) of Torts § 409.  By the early 1950’s, it was common for motor carriers to use this tort principle to create a legal shield from liability for the negligence of drivers who operated their vehicles as independent contractors.  With this arrangement, the motor carrier would hire an owner/operator to haul goods under an agreement as an independent contractor, thereby saving the cost of hiring an employee driver and purchasing and maintaining an additional tractor and trailer.  This strategy allowed motor carriers to leave the responsibility of compensating those injured by the negligence of the owner/operator to other parties.  In many cases, the owner/operators were financially insolvent with little or no insurance.   The people most impacted by this business strategy were unsuspecting members of the motoring public who were injured in an accident with a tractor-trailer.  The motor carrier responsible for putting the load and truck into the stream of commerce was protected by the independent contractor defense and therefore received the majority of the financial gain.  Injured people were left to see compensation for injuries only from the insurance and assets the owner/operator.

B.        Congress responds  

In 1956 Congress adopted amendments to the Interstate Motor Carrier Act to ensure, among other things, that the general driving public was protected from the negligent conduct of frequently insolvent owner/operator independent contractors.  The amendments authorized the Interstate Commerce Commission to promulgate regulations concerning leased motor vehicles being operated in interstate commerce and included regulations about the exclusive control and responsibility of leased vehicles. See 49 U.S.C. § 14102.  For a discussion of the conditions in the trucking industry that brought about the regulations concerning leasing arrangements, see American Trucking Associations, Inc. v. United States, 344 U.S. 298, 73 S. Ct. 307, 97 L. Ed. 337 (1953) and TransAmerican Freight Lines, Inc. v. Brada Miller Freight Systems, Inc., 423 U.S. 28, 96 S. Ct. 229, 46 L. Ed. 2d 169 (1975).

The current statute governing leased motor vehicles is 49 U.S.C. § 14102, and allows the Secretary of Transportation to require a motor carrier using non-owned vehicles to transport property under an arrangement with another party to:

(4) have control of and be responsible for operating those motor vehicles in compliance with requirements prescribed by the Secretary on safety of operations and equipment, and with other applicable law as if the motor vehicles were owned by the motor carrier.  49 U.S.C. § 14102(a) (4).
49 C.F.R. § 376.12 sets forth the written lease requirements of such an arrangement:

(c) Exclusive possession and responsibilities.

  1. The lease shall provide that the authorized carrier lessee shall have exclusive possession, control, and use of the equipment for the duration of the lease. The lease shall further provide that the authorized carrier lessee shall assume complete responsibility for the operation of the equipment for the duration of the lease.  49 C.F.R. § 376.12(c) (1), formerly 49 C.F.R. § 1057.12(c)(1).

Under these regulations, the motor carrier has both a legal right and a duty to exercise control of vehicles operated for its benefit under a lease agreement.  In order to protect the public, the employees of the lessor operating such equipment are deemed “statutory employees” of the motor carrier/lessee.  With the enactment of these laws, Congress essentially abolished the independent contractor defense that was available to motor carriers.  Simmons v. King, 478 F.2d 857, 867 (5th Cir. 1973); White v. Excalibur Insurance Co., 599 F.2d 50, 52 (5th Cir. 1979).  In addition,  and most importantly, these leasing regulations apply only to motor carriers and not to brokers.

C.        What is a broker?

A broker is:

[a] person, who, for compensation arranges or offers to arrange, the transportation of property by an authorized motor carrier.  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 and which they have accepted and legally bound themselves to transport. 49 CFR § 371.2.

A broker acts as a contact point between shippers and motor carriers and earns its fee by matching motor carriers with loads needing to be shipped. After bringing the parties together, the broker has little else to do with the transaction or the actual transportation of the freight.  Motor carriers, who also operate brokerage arms as part of their business, may attempt to avoid liability by claiming they are merely brokers of the load.

D.        Economic forces drive motor carriers to blur the line between broker and carrier.

Common and/or contract carriers establishing brokerage arms of business is becoming more common in the trucking industry.  According to Transport Topics’ “Top 25 Dedicated Contract Carriers” list, 13 of the top 25 contract motor carriers also have broker authority and operate brokerage units.  Three of those contract carriers have freight brokerage firms that are among the largest brokerage firms in the country.  This growing trend for carriers to operate brokerage firms is likely an attempt to control the rising cost of owning tractor trailer trucks and employing drivers. By utilizing a brokerage arm, the larger carriers are able to increase revenue while simultaneously insulating themselves from tort liability.

Large contract motor carriers relying on the creation and use of brokerage firms are attempting to dominate the industry and retain a competitive edge.  A large contract motor carrier will enter into transportation agreement with one of the country’s largest shippers.  It is common for a transportation agreement to require the motor carrier to handle all of the shipper’s freight.  Further, the transportation agreement will make the motor carrier responsible for all of the shipments regardless of whether the shipments are hauled directly by the motor carrier or by a third party contractor.  In many cases, a motor carrier does not employ enough drivers or operate enough tractors and trailers to handle all of the shipments that are contemplated in a transportation agreement with a large shipper.  Rather than not enter into a lucrative transportation agreement or breach the agreement by turning away shipments, the motor carrier relies on its brokerage arm.  The brokerage arm of the motor carrier works to find an independent contractor owner/operator to haul the load according to the terms of the transportation agreement.  The brokerage arm takes a percentage of the owner/operator’s compensation as a fee for arranging the load, thereby increasing the motor carrier’s profit and decreasing the
owner/operator’s profit.

The creation of a brokerage arm allows a motor carrier to enter into transportation agreements with terms it would otherwise be unable to meet.  Further, by acting as the motor carrier and broker, it retains the largest percent of dollars while keeping lucrative contracts.

E.        Large contract motor carriers use a broker defense in an attempt to avoid liability.

Under a typical transportation agreement, the motor carrier legally obligates itself to haul all shipments from the shipper and bear legal responsibility for the cargo whether or not the motor carrier hauled the goods or subcontracted the carriage of goods to another.  When a carrier receives a load pursuant to a transportation agreement and then “brokers” the carriage of the goods to an independent contractor, it is not acting as a broker, as defined by 49 CFR § 371.2, which states:

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 and which they have accepted and legally bound themselves to transport.

A plain reading of the statutory definition of “broker” makes clear that once a motor carrier contractually binds itself to haul a load it is not a broker under Federal law.  Allowing contract motor carriers with brokerage arms to avoid legal responsibility for the trucks and drivers it puts into the stream of commerce is inconsistent with the edicts of Congress.  Congress has been clear on its intent that a motor carrier should not be able to insulate itself from its responsibility to the motoring public through the use of independent contractors.

Given the current economic realities and the financial benefit of having a transportation agreement with a large shipper, it is unlikely motor carriers will voluntarily discontinue the practice of creating brokerage arms to avoid liability.  Transportation agreements with the largest shippers can be worth tens of millions of dollars.  In a recent case in which I was involved, the motor carrier/broker had a transportation agreement with a large shipper that was worth $25 million dollars per year.  A transportation agreement of that value creates a tremendous amount of pressure for the motor carrier to haul all of that shipper’s freight.  When the pressure of meeting a large shipper’s needs and the desire to keep expenses down meets, brokerage arms often hire owner/operators who are new entrants into the industry, who will work for lower pay, and who do not have the ability to maintain and service trucks in accordance with the FMCSR.

The Federal Regulations do not prevent a motor carrier from holding a brokerage license provided the rules set forth in 49 CFR Section 371 are followed.  Understanding and being able to identify the legal distinction between a broker and a motor carrier is a critical first step in the personal injury context.  Under the statutory employer doctrine, if the plaintiff can show the purported broker is legally acting as a motor carrier, the plaintiff can establish a direct line to motor carrier responsibility for the harms caused by its independent contractors.  Without this direct line, the road to establishing broker liability is more difficult and often must be based upon a negligent selection of carrier claim or a master/servant claim.

I highly recommend M&K, not only was the settlement much more than I anticipated, it was a pleasure to work with Pete and his staff. He is professional, polite and straightforward. His knowledge and litigation skill coupled with business manner, helped make the process easy and understandable. His analysis was thoughtful, honest and he explained complex concepts and procedures. I was very pleased with his expertise.
★★★★★ 5/5 Stars -Amanda

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