The Shipping Shell Game in Freight Broker Transportation Liability
In our last article, Nashville attorney Keith Williams talked about Busting Brokers and making sure they were help accountable for poor hiring practices in the event of a Tennessee truck accident. We also learned a little truck transportation lingo. In part 2 of our series, we're going to identify the players in the Shipping Shell Game, who they are, how they are involved, and what they do.
What is a Freight Broker and Who Else Is Involved?—the “Shipping Shell Game”
Federal regulations define a broker as follows:
- Broker means 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.
- Bona fide agents are persons who are part of the normal organization of a motor carrier and perform duties under the carrier’s directions pursuant to a preexisting agreement which provides for a continuing relationship, precluding the exercise of discretion on the part of the agent in allocating traffic between the carrier and others.
- Brokerage or brokerage service is the arranging of transportation or the physical movement of a motor carrier, consignor, or consignee. (49. C.F.R. § 371.2)
While the term “broker” typically brings to mind a mere middleman who gets paid for bringing two sides together to consummate a transaction—like a stock broker or real estate broker—a freight broker’s role typically involves more than that. Generally, a freight broker takes on the responsibility for getting a load delivered. The broker is not operating the tractor trailers themselves to deliver the loads, however. Instead, the broker is contracting with a shipper to arrange for delivery of the load. As a matter of practice, this is usually very different from other types of “brokers,” such as real estate brokers. In a real estate situation, typically the broker finds a buyer for the seller, but the broker never takes any “ownership” of the sale itself. In other words, a buyer’s broker does not tell the buyer “You agree to pay $100,000 to buy this house, and I agree to get it for you, regardless of what price the seller will agree to. If I can then get the seller to take less than $100,000.00 I get to keep the difference.” However, that is often precisely what happens when a freight broker agrees to arrange for a shipment. Typically, the broker has an established shipping client that needs to ship a load. Based on various factors, they will typically come to an agreed price for that shipment. The broker will then try to find a carrier that will agree to ship the load for an amount that is lower than what the shipper is paying the broker. This difference is commonly called the “spread” and represents the profit a broker will make on a particular load. Sometimes, however, the broker will not be able to find a carrier to haul the load for less than what the shipper paid. In that event, the broker is still contractually bound by the contract with the shipper to get the load delivered, so the broker will make no money or even have to take a loss on that shipment.
A motor carrier is an entity “providing motor vehicle transportation for compensation.” 49 U.S.C § 13102(14). Similarly, federal regulations provide that a motor carrier is an entity “engaged in the transportation of goods for compensation.” 49 C.F.R. § 390.5 Motor carriers and their officers, agents, representatives and employees responsible for the management, maintenance, operation, and driving of commercial motor vehicles, as well as hiring, supervising, training, assigning and dispatching drivers, must comply with the Federal Regulations. Thus, motor carriers are required to comply with the Motor Carrier Safety Regulations. A motor carrier is assigned a USDOT number from the Department of Transportation, and safety information can be obtained regarding the carrier using its USDOT number.
In order to avoid liability in the event of a serious wreck, shift operating costs, etc. the parties in the “shipping shell game” often set up a house of cards operational shell. In this situation, the official “carrier” has no real assets and is essentially just a “paperwork” company that uses its operating authority from the Department of Transportation as a vessel for truckers to haul freight. Take for example the following diagram:
In this diagram, the “Carrier” is a company with official operating authority from the USDOT. It owns no actual trucks, though. See if you can follow the many and varied relationships in this “shipping shell game” example. The Carrier has a master agreement with the Broker that governs their business relationship generally. Thus, the Carrier is in the Broker’s “stable” of potential carriers it can use to ship loads for its shipper clients. The Carrier does not own trucks, but it needs tractors to haul loads, and loads for those trucks to haul. This is where the “Agent of Name” comes in. The Agent of Name is a separate company that acts as the Carrier’s agent to, among other things, find truck owners to haul freight under the Carrier’s authority, find loads for those trucks to haul, and dispatch the loads it finds for those trucks. When the “Agent of Name” finds a truck to haul for the Carrier, the truck owner leases the truck to the Carrier. Under the lease with the Carrier, the truck owner must provide the driver and is responsible for all operational costs and maintenance of the truck. The driver is considered an independent contractor of the truck owner, and receives a 1099 form at the end of the year. The Carrier qualifies the driver that is provided by the truck owner, and receives all operational paperwork from the truck owner as it completes its loads. The Agent of Name, however, obtains the loads that are given to the truck owner, deals directly with the broker (and other shippers/brokers) to obtain the loads, and communicates directly with the driver in dispatching the loads. All of this is done under the cloak of the Carrier’s operating authority, even though other companies are in effect doing all the work. The Carrier is required by Federal Regulations to carry a minimum of $750,000 in liability insurance ($1,000,000 for Hazardous Materials). Often, this is the only source of recovery from the Carrier, since it has no assets. The Carrier has no real motivation in this situation to run a clean and safe operation. If it is involved in a serious accident and faces liability beyond its limits, the Carrier will simply shut down operations, and the people running it will then pop up later under a new company name with a new USDOT number.
Does your head hurt yet?
This demonstrates why Broker Negligence is so important! Brokers play a huge role in determining what carriers are hauling freight on our roads. The carriers have no incentive to be safe as long as brokers are still willing to put them on the road. They make more money by scrimping on safety and violating hours of safety regulations as their normal course of business. If something goes wrong, they just shut down, move on and reopen under a different name to continue doing the same thing. By holding brokers liable for negligently hiring unsafe carriers, we can force them to put only safe carriers on the road. As a result, the unsafe carriers are forced to either improve and become safe, or go out of business for good because they cannot get loads anymore.