THE EVOLUTIONARY FOUNDATION SUPPORTING AND NURTURING THE DEVELOPMENT - - PDF document

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THE EVOLUTIONARY FOUNDATION SUPPORTING AND NURTURING THE DEVELOPMENT OF CONTRACT RELATIONSHIPS IN MOTOR TRANSPORTATION: THE SHORT VERSION OF A LONG HISTORY The Historical Road Leading to Congress’s Mandate to “Commercialize” Surface Transportation1 By: William D. Taylor, Partner, Hanson Bridgett, LLP 1. INTRODUCTION Many of our colleagues can bear witness to the historical transformation from a common carrier focused practice to one based on significant contract relationships. This evolution was the product of a slow-moving interplay between statutory, administrative, social and economic forces which culminated in deregulatory initiatives to abandon restrictive common law principals in lieu of a recognition that as with any other commercial transaction, a shipper, carrier and, now, broker, should be able to mutually contract between themselves in order to establish the mutual terms and conditions that govern transportation relationships, rather than define the performance duties and obligations through statutory and regulatory mandates. This alternative business platform did not become a reality overnight. The grudging acceptance that all transportation need not be exclusively common carriage in nature was a long, but systemic process. In order to avoid confusion in terms, when used in this analysis, the word "contract" is not intended to refer to the classic, standard form of bill of lading (whether motor carrier, ocean

• r air) as the traditional form of contract between a shipper and carrier in a common carrier
• setting. Bills of lading have long been recognized as a standard form of agreement between

users and providers of transportation services.2 However, in the context of this presentation, "contract," as a defined term, means the broader and negotiated agreements wherein the parties mutually undertake to develop and perform pursuant to specific terms and conditions developed from a commercial perspective, beyond the traditional “contract” bill of lading normally associated with common carrier transportation. Instead of the traditional bill of lading, this presentation focuses on the reality of written agreements now sanctioned by law, as setting the standard commercial terms under which product is moved, arranged for shipment and, ultimately, delivered to end-users. Many of us were at the forefront of this transformation which motivated and nurtured the convergence of a statutory, regulatory, economic and practical reality that contracts should and did become the new norm in the transportation of freight through all modes, particularly, for our purposes, motor carriage.

1 The author would like to acknowledge the assistance of my partner and colleague, Paul Mello, in the preparation

• f this presentation.

2 See S. Rac. Transp. Co. v. Commercial Metals, 456 U.S. 336 (1982); Pomerene Bills of Lading Act, 49 U.S.C.

§ 80102.

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1.1 In the Beginning, Contracts Between Shippers and Carriers Were Disfavored Both before and after passage of the Act to Regulate Commerce of 18873 ("Commerce Act"), the ability of parties to ship product under a contract and outside of the bounds of the standard bill of lading, as well as a carrier's tariff, was intentionally circumscribed by common law principles against discrimination in services by carriers between customers.4 Instead, all carriage was viewed as common in nature, and available to the public without discrimination as to rates and/or services. Contracts were viewed as a per se form of preferential treatment to shippers. This notion was embedded in the Commerce Act. By this new law, Congress sought to curtail state action against railroads while, at the same time, creating the first federal administrative agency, the Interstate Commerce Commission (“ICC”), to govern certain

• perations of railroads. 5

The authority of the ICC was initially limited to governing certain business practices of U.S. railroads. This jurisdiction was enhanced through various amendments to the

• riginal Commerce Act. One of these, the Motor Carrier Act of 1935, extended the jurisdiction
• f the ICC to regulate the interstate activities of trucking companies. Eventually, bus, carriers,

household goods operators, and freight forwarders, 6 were swept into the regulatory ambit of the ICC. 1.2 Breaking Down the Barriers a. Motor Carrier Act of 1935 Consistent with and because of the anti-discrimination, common law aspects (basically viewed from the same perspective of public utilities) related to transportation companies, for many years it was illegal for shippers to contract with either railroads or motor carriers.7 This prohibition was firmly established so that, and except in very rare circumstances, such contracts were voidable.8 Congress eventually gave limited recognition to the reality of contract carriage when it created limited statutory provisions regarding such operations as part of the Motor Carrier Act of 1935.9 The ability to engage in contractor services was strictly proscribed

3 Act to Regulate Commerce of 1887, ch. 104, 24 Stat. 379 (1887) (codified as amended as Interstate Commerce Act

at 49 U.S.C.S. § 1, et seq. (2006)).

4 For a comprehensive historical analysis of the political, economic, social and legal conditions leading to the

passage of the Commerce Act, see Paul Stephen Dempsey, Transportation: A Legal History, 30 TRANSP. L.J. 235 (2003).

5 Id. at 265-68. 6 Pub L. No. 255, 49 Stat. 543 (1935). 7 See Chesapeake and Ohio Ry. Co. v. Westinghouse, Church, Kerr & Co., Inc., 270 U.S. 260 (1926); Feraco v. Ga.

Pac., 313 F.Supp. 660 (Del. 1970). The Commerce Act included provisions fostering access by and equal treatment of shippers, such as the "filed rate doctrine" which was intended to prevent discrimination in rates. 49 U.S.C. § 10762. See Commissions General Order of 1939, Cancellation of Participation in Agency's Tariffs, 4 Fed. Reg. 4440 (1939) for a discussion of the "filed rate doctrine." Contracts were viewed as a form of impermissible standards in the form of the Carmack Amendment, 49 U.S.C. § 17706. In terms of the preemptive effect of Carmack, see Adams Express Co. v. Croningen, 226 U.S.C. 491 (1913).

8 Cent. R.R. Co. of N.J. v. U.S. Pipe Line, 1 F.2d 866 (3d Cir. 1942). 9 See former 49 U.S.C. 203(a)(15)

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by and arbitrarily (some thought) enforced on the basis of limits as to the number of contracts a given carrier could have at any one time. This "number of shippers" condition was dictated by former Section 203(a)(15) which provided that a contract carrier could serve "one person or a limited number of persons," creating what became known as the "Rule of Eight" (i.e., no more than eight contracts otherwise the contract carrier was deemed to be an illegal common carrier). In enforcing this provision, the ICC and various federal courts were called upon in numerous proceedings to interpret and enforce this numerical limitation to protect common carriers against competition from those carriers using dedicated contract services to avoid the conditions imposed on common carriers.10 Ultimately, the ICC and Congress undertook to eliminate this numerical barrier in order to give broader recognition to the contract form of business in the transportation of freight by truck. As the economic and political climate changed dramatically in the late 1960s and early 1970s, the economic concept of deregulation became a reality. Presidential politics influenced agendas reflecting a “modern age,” free market economy, particularly as to those theories expressed by Professor Alfred Kahn.11 In this new economic and political climate, the ICC undertook to internally break down the rules against contracting through administrative and proactive decisions released by the agency. For instance, the ICC created its own administrative agenda to establish permissible conditions under which a carrier could contract with a shipper for particular services.12 The administrative activism of the agency led Congress to itself intervene in order to craft a new legislative policy regarding contracts in transportation.13 1.3 Motor Carrier Act of 1980 Responding to the drum beat of deregulation, and, at the same time, to curtail perceived “overreaching” by the ICC, Congress stepped in with a new legislative approach regarding contracts between shippers and motor carriers. Following on the heels of the Air Deregulation Act of 197814, (the first in a string of congressional initiatives to deregulate specific modes of transit), Congress extended its deregulation policy to the motor carrier and railroad industries in the form of the Motor Carrier Act of 198015 ("MCA") and the Staggers Rail Act of 1980 ("Staggers Act")16, respectively. Although defined and promoted as a means to implement deregulation, both the MCA and the Staggers Act retained the ICC's licensing authority, although stripping the agency

• f its safety jurisdiction which was transferred to the U.S. Department of Transportation

10 See In the matter of Filing Contracts by Contract Carriers by Motor Vehicles, 1 Fed. Carr. Cas. (CCH) 7405

(1939).

11 See Dempsey, supra note 8, at 333. 12 See Int'l Detective Serv., Inc. v. I.C.C., 613 F.2d 1067 (D.C. Cir. 1979). 13 Motor Carrier Act of 1980, Pub. L. No. 96-296, 94 Stat. 793 (1980). 14 Pub. L. 95-504, 92 Stat. 1705 (1978). The Air Deregulation Act of 1978 eliminated the administrative oversight

• f the Civil Aeronautics Board ("CAB"). As a result, domestic services were and are now subject to common

law rules rather than state jurisdiction. 49 U.S.C. § 1305(a)(1). International services are subject to the Warsaw Convention, as amended. 49 Stat. 3000 (1934).

15 Pub. L. No. 96-296, 94 Stat. 793 (1980). 16 Pub. L. No. 96-448, 94 Stat. 1845 (1980).

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("DOT"), along with certain other administrative powers.17 One significant aspect of the MCA's move away from a purely regulatory model as the basis to define the relationship between a shipper and carrier was Congress’s emphasis on contracts as an alternative to regulation. By creating a motor “contract carrier” operational category to distinguish such services from those

• f a common carrier, Congress opened wide the doors to contracts in the motor carrier

industry.18 Congress undertook to fostered and promoted the contract carrier industry beyond its prior "orphan" status, freeing carriers from the categorical limitations of the Motor Carrier Act of 1935 by eliminating the "Rule of Eight," as well as the impediments that precluded joint common and contract carrier services.. In sanctioning and encouraging extensive contract relationships, Congress put in place a statutory and regulatory scheme to define the nature of contract transportation. The strategy established the parameters for distinguishing contract type of services from traditional common carriage activity.19 Thus, an optional service product was now available to motor carriers and their customers in a more meaningful, competitive way, without the shackles of the prior prejudice against perceived discrimination created by so-called preferential and discriminatory contract services. Instead, parties were now openly encouraged to operate outside

• f the common carrier realm by deferring to written agreements as a means to define their

business relationship outside the umbrella of classic common carrier principles. Notwithstanding the push to deregulate the industry, transportation companies and their shipper customers were not quick to accept the contract alternative offered by Congress. From a practical point of view, early experiments in the contract arena were timid, reflecting an uncertainty by both carriers and shippers whether to venture beyond the traditional common carrier structures governing their business relationships. In fact, the initial written agreements intended to meet the statutory requirements of former 49 U.S.C. § 10102(15)(B) were more “boilerplate,” than substantive in nature. One or two page generic contracts were the norm. For the most part, the terms were still wedded to the common carrier principles by either incorporation and/or other agreed upon standards. Eventually, the industry began to take notice and advantage of the contract alternative. Two key factors contributed to a dramatic change in attitude. 2. DESPITE A SLOW START, CONTRACT RELATIONSHIP GRADUALLY PENETRATED THE SHIPPER/CARRIER MARKET The dramatic surge towards the greater use of contracts is largely attributable to two main factors: (i) the credibility and emergence of property brokers as transportation resources; and, (ii) the so-called “undercharge crisis.”

17 See Dempsey, supra note 8, at 326, 344. 18 See former 49 U.S.C. § 10102 (motor); 49 U.S.C. § 10704 (rail). 19 See 49 C.F.R. Part 1053.1. Congress also permitted a single carrier to operate as both a common or contract

• carrier. 49 U.S.C. §§ 10921-18923. See Cent. and S. Motor Freight Tariff Ass’n v. United States, 757 F.2d 301

(D.C. Cir. 1964), cert. denied, 474 U.S. 1019 (1985). The deferential distinctions between common and contract carriage are thoroughly examined in Regular Common Carrier Conference v. United States, 803 F.2d 1186 (D.C.

• Cir. 1986).

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2.1 Property Brokers: From “Mom and Pop” to Full Service Logistics Companies Although the MCA included oversight and licensing of property brokers,20 the industry, as such, was still nascent and viewed more from a principal-agent relationship, rather than as an independent enterprise. For the most part, the early pioneers in the business literally

• perated from backroom offices requiring basic office equipment, including, a desk, phone and
• Rolodex. The early perspective was that these enterprises were no more than marginal “Mom

and Pop” enterprises, with little credibility. Today, the brokerage industry has emerged from this shadow, becoming the foundation for today's substantial logistics market.21 With one decision, the ICC essentially launched the broker industry beyond its humble beginnings, and subsequent legislative foundation. The result sprang from the ICC’s decision in Dixie Midwest Express, Inc. Extension – General Commodities .22 On the heels of the deregulation of the 1970s, its jurisdiction under the MCA, and by virtue of the result in Dixie Midwest Express, Inc., the ICC enabled brokers to step beyond classic principal/agent relationships in order to directly contract with motor carriers as buyers of truck services in their

• wn name and right, not as an agent for the shipper.23 This metamorphosis forever altered the

classic carrier/shipper hierarchy. No longer were brokers to be viewed simply as agents of shipper principals. As a result of Dixie Midwest Express, Inc., brokers enjoyed a new status in the market, pursuing business opportunities by convincing manufacturers and other types of traditional shippers that, as brokers, they could better manage the distribution supply chain, in a more efficient, timely and cost effective manner. In occupying a third-party space, brokers relied

• n contractual relationships with the shipper customer, on the hand, and, on the other, the motor
• carrier. Each component of this business structure hinged on applicable contracts, eventually,

giving birth to what we now refer to as the logistics community. 2.2 Contracts as a Defense to Undercharge Claims While the broker industry was awakening to its new found status under Dixie Midwest Express, Inc., the shipper community faced its own reason to consider contract carriage as a safe-harbor, particularly when facing undercharge claims. As the proponents of the MCA predicted, deregulation opened the floodgates for new entrants into the transportation industry, increasing competition, the ultimate goal. However, the “land rush” to compete in the industry coincided with the significant downturn in the U.S. economy of the early 1980s, setting the stage for numerous carrier bankruptcies and

20 See former 49 U.S.C. § 13102(2); 49 C.F.R. § 371.2. 21 See James C. Hardman, Third Party Contract Issues Concerning Carriers, Brokers, and Shippers, 34 Transp. L.J.

• 307. Mr. Hardman reports at Note 1 that as of April 17, 2006, there were 16,930 brokers registered with the

Federal Motor Carrier Safety Administration, a sub-agency of the U.S. Department of Transportation.

22 132 ICC 794 (1982). 23 Id.

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• foreclosure. The economic calamity that followed became characterized as the “undercharge

crisis” which subsumed courts, attorneys, creditors and debtors for the at least five years.24 In order to survive in a highly leveraged and competitive environment, new and existing motor carriers resorted to drastic and steep rate discounting to attract freight in an industry sorely challenged by the economic downturn. As eventual business failures began to soar, a cottage industry was born which consisted of suing to collect undercharge payments based on a carrier's historic, but forgotten, tariffs which themselves were a vestige of the "filed rate doctrine" which remained intact under the MCA.25 As a result, shippers were faced with having to defend against millions of dollars of statutory-based claims without recourse to their customers who had long before paid for the product shipped to them.26 As the litigation progressed, courts began recognizing a contractual defense to undercharge claims.27 In other words, if the services were performed under a contract (no matter how "skinny"), rather than as a common carrier, the “filed rate doctrine” was not applicable mandate specific tariff rates which were significantly higher than the discount charges assessed to and paid by shippers. Instead, the contract terms would govern the rates charged and paid for such services.28 Seizing the opportunity to minimize exposure to common carrier rates, shippers readily turned to contractual relationships, by either contracting directly with motor carriers or through brokers. In the end, contracts became a refuge for shippers who eagerly converted from the prior common carrier environment. At the same time, Congress sought to proactively end the "crisis" by legislatively killing the "filed rate doctrine" pursuant to Trucking Industry Regulatory Reform Act of 1994 ("TIRRA"), which eliminated the mandate that carriers (other than household goods carriers) file and publish tariffs.29 2.3 The ICC Termination Act of 1995. In 1995, Congress again revisited the legislative landscape related to regulatory control of the transportation industry. Seeking to complete the deregulatory work left undone by the Motor Carrier Act of 1980, Congress passed the ICC Termination Act of 1995,30 which was, as the title suggests, the death knell of the ICC, after surviving for 108 years.

24 The foundation for this “crisis” was the “filed rate doctrine,” 49 U.S.C. §10762, subsequently repleaded by the

Trucking Regulatory Reform Act of 1994, Pub. L. No. 103-311, 108 Stat. 1683 (1994). In the heyday of the rate/undercharge litigation, civil and bankruptcy courts were inundated with a substantial number of cases challenging the application of post-bankruptcy claims for rates that were less than those specified in a carrier’s

• tariff. The deciding line between the obligation to pay became contract transportation. Transrisk Corp. v.

Matsushita Elec., 15 F.3d 313 (4th Cir. 1994). For a thorough and exhaustive analysis of the "undercharge crisis" and the defenses to such actions, including contracts, see Hani R. Kallas, The Undercharge Dilemma: How the Interstate Commerce Commission Has Aided Shippers Defending Against Bankrupt Carriers, 62 U. CIN. L. REV. 173 (1993-1994).

25 See, e.g., Maislin Indus., U.S. v. Primary Steel, Inc., 497 U.S. 116 (1990). 26 See Dempsey supra, note 8 at 350; Ex parte No. MC-208: Nonoperating Motor Carriers – Collection of

Undercharges, 8 I.C.C. 2d 742 (1992).

27 See, e.g., Transit Homes of Am., Div. of Morgan Driveaway, Inc. v. Homes of Legend, Inc., 173 F. Supp. 2d 1192

(2001); Regalite Plastics Corp. v. R. C. Freightways, Inc., 1996-2001 Fed. Carr. Cas. (CCH) ¶ 38,323 (1998).

28 Id. 29 Pub. 2. No. 103-311, 108 Stat. 1683 (August 26, 1994) 30 ????

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From a contract perspective, Congress sought to eliminate the definitional distinction between common carrier and contract carriers once and for all by creating a hybrid designation of "motor carrier," identified generically as a "person providing commercial motor vehicle . . . transportation for compensation."31 Notwithstanding this neutral term, Congress still gave statutory recognition to "contract carriage."32 Thus, Section 13102(4)(A) and (B) creates a distinction between Pre-ICCTA and Post-ICCTA contracts. With regard to the later, Congress defined "contract transportation" in accordance with 49 U.S.C. § 14101(b). For anyone who has drafted, reviewed and/or revised a post-1995 Act contract, you are no doubt familiar with the implications of Section 14101(b). On the one hand, Section 14101(a) imposes a duty on a "carrier" to provide "services on reasonable request" (the common law and Commerce Act principles of non-discrimination in transportation services). In contrast, by virtue of 49 U.S.C. 14101(b), Congress created an exception to the mandate of Section 14101(a) by permitting a carrier to "enter into a contract with a shipper" (except as to household goods), providing for "specified services under specified rates and conditions." In addition, under Section 14101(b), the parties may expressly waive, in writing, all "rights and remedies" under Part B of the ICA33 (emphasis added). The debate of whether or not to "waive" provisions

• f the ICA, particularly with regard to the Carmack Amendment (a common carrier remedy

related to freight loss and damage claims as set forth in 49 U.S.C. § 14106) is a daily due diligence discussion between parties to Section 14101(b) contracts. 3. THE CONTRACT CYCLE IS COMPLETE This short version of a long (and, in some minds, tortious) journey provides the basic foundation leading to today's commercialization of transportation, providing client opportunities as the contract products to meet the needs of clients have evolved into significant and complex terms and conditions to address and frame the business opportunities and the attendant risk management analysis embedded to define today's transportation relationships. Thus, the two or three page agreements created following the MCA, no longer exist. Instead, the sophistication of the broker-shipper, broker-carrier, carrier-shipper relationships compel multi-page, comprehensive contracts. In turn, this process has sustained unique and active practice

• pportunities. Some of us were at the forefront of this transformation which has now evolved to

provide a practice platform common-place when representing the buyers and providers of transportation services. In the end, we can reflect on this history creating significant

• pportunities to assist the parties to such agreements from a transactional and challenging

perspective, all within the frame work of advising and serving the broader and sophisticated logistics industry.

31 49 U.S.C. § 13102(14) 32 49 U.S.C. § 13102(4)(A) and (B) 33 The waiver right did not extend to the "provisions governing registration, insurance, or safety fitness."