A New Standard of Care for Brokers and Carriers from the Double Brokering Scourge

Much has been written lately about the nature and extent of double brokering within the transportation industry. My purpose here is to give perspective to potential resulting legal issues and the curative effect of our judicial system, by establishing new standards of care for brokers and carriers.

Logistics law is always forming and catching up to the highly dynamic nature of the 3PL sector. This is so for a rather ordinary reason. The 3PL sector changed the former dyadic relationship of shipper and carrier. After hundreds of years, the law of two players (shipper/carrier) moving, managing and storing goods was rather settled.

By adding a geometric increase in relationships necessary to accomplish third-party assistance to moving and managing freight, completely new issues were introduced for which the law has been asked to respond. It is always catching up, and usually does so with time.

Such will be the case for the double brokering. It will take some time, and some lessons learned in changing duties and standards of care, but in the end, the law of logistics, developed often one case at a time, will likely be the better answer than we have seen so far from bureaucracy and vested interest groups.

Paradigm changing economic impact to any industry sector is one of the most certain predictors of coming changes in the law.

I. Industry Self-Interest Groups and Bureaucratic Regulation Have Accomplished Little.

In 2020 various industry sources estimated that double brokering cost the transportation industry $100M per year. In December, 2023, during a hearing before the Highways and Transit Subcommittee several industry representatives and Congressman Mike Bost gave consensus estimates of the cost of double brokering now being $800M annually.

Unfortunately, that hearing, and others during 2023, including public comment on FMCSA rule-making, drifted off into vested interest groups offering simplistic analysis of causes and effects of double brokering, mostly centered on whichever group they happened to represent being least culpable.

TIA CEO Anne Reinke remarked, "There is no actor trying to stop it other than the broker community and, to some extent, the owner-operator community."

A predictable statement by one leading a broker organization, but not insightful as to what actually goes on when brokers are attempting to build carrier bases and/or trying to get a high-margin load delivered by Friday afternoon.

The answer, with which I have had considerable experience, and applying to none of my clients, is that they sometimes cut corners, violate process rules, and too often do not do proper due diligence of the carrier with whom they are about to place that load. Nor do they set up failsafe processes with their shipper to assure that the proper carrier shows up before the load is released, and pay no one until the proper carrier has been identified.

It is really no more complicated than that on the broker side, even though you would hear moaning and groaning about how time consuming such efforts are. Understanding that you are in a zero defects process business, is usually the first strategic realization by superior 3PLs. Those that never realize such focus on process just continue to churn transactions full of nonconformance, such as double brokering.

OOIDA took the rulemaking forum opportunity to offer a self-serving analysis that it is a "broker abuse and fraud" matter, wherein "motor carriers are victimized through unpaid claims, unpaid loads, double-brokered loads or load-phishing schemes on a daily basis." They also took another disingenuous swing at somehow it would be a good idea to require the brokers to reveal their margin on each transaction.

They did not mention the patent negligence by most carriers in being caught with a double brokered load. Without fail, they have the last clear chance to avoid accepting a double brokered load right at that shipper's loading dock. Many times they don't because they have fallen for the "golden goose rate" they have been provided by the fraudulent broker/carrier.

FMCSA, in classic bureaucratic fashion, took the year of hearings opportunity to clarify that "double brokering" is not a term defined by statute or regulation, therefore, they could not comment on it in a rule-making manner.

Notably they also did not comment substantively on 80,000 complaints having been filed with the National Consumer Complaint Database (NCCDB), without any action. But they did suggest that anyone now affected by such fraud, file yet another such complaint.

Finally, FMCSA took the entire calendar year to establish new regs for the Property Broker Bond of $75,000, touting it to be creating a higher threshold for fraudster brokers and carriers. Without taking the reader through a torturous full analysis of those regs (which I have done), I offer two questions:

1. "If you are clever enough to develop effective sham organizations intent upon getting your share of that estimated $800M, how quickly do you suppose you could come up with $75,000 in cash for your own asset funded bond, not subject to scrutiny by any trust or other commercial bond writer?

"2. "And then, after establishing such a bond, why wouldn't you be glad to keep that bond compliant, paying the small claims, while continuing to defraud for much larger sums, until finally losing your registration?"

The 2023 year of hearings and rule-making will go no further in solving the double brokering fraud, than did the now unenforced MAP-21 legislation, offered as a panacea in 2012.

II. Ultimately the Answer to this Issue Will Come from New Standards of Care Created by the Courts

One of the mistaken generalisms, usually involved in a double brokered transaction, is that even where there have been one or more breaches of contracts, the delivering carrier will get paid, regardless of how that carrier came to be in possession of the load.

That is certainly no longer true, if it ever was, except during the filed rate era. This notion of "the carrier gets paid" has stood in the way of carriers becoming more diligent in avoiding double brokering. It is an anachronism and must be better understood, as the courts develop new standards of care for brokers and carriers alike.

III. Understanding Double Brokering by Breach of Contract and Fraud

A. Double Brokering as Breach of Contract

"Double brokering involves the practice of a broker receiving a shipment from a shipper and subsequently tendering the shipment to another broker for movement by a motor carrier. It is frequently done without the shipper's knowledge or the motor carrier's knowledge. No written or even oral contracts exist between the shipper and the second broker or between the motor carrier ultimately used and the initial broker." Jets Prolink Cargo, Inc. v. Brenny Transp., Inc.; Millam v. Nothern Freight [full citations omitted]

While this definition has been used by the courts, the historical practice of double brokering has often included various combinations of the original broker brokering to either another broker, or a carrier, after which there might be one or more instances of further brokering among brokers and carriers, until the load was delivered by a carrier who by then would have no privity of contract with either the shipper, original broker, or consignee.

Until recently, most such transactions were accomplished without the intent to defraud any of the parties, even if by breach of contract not to further broker.

Such transactions would usually travel on the terms of a rate/load confirmation and a shipper's bill of lading, ultimately signed and remitted for payment of the transportation charges. In instances wherein the shipper had already paid the original broker, and that broker had paid the initial carrier, this could lead to a dispute as to whether the ultimate delivering carrier was entitled to payment for transportation charges by the terms of the original bill of lading, not intended for that carrier, and for which there was no privity of contract with the shipper or original broker.

Such disputes became known as issues over "secondary liability" on the part of the shipper and/or the consignee for potential double payment of the transportation charges. Where an unambiguous Uniform Bill of Lading was used in such transactions, allowing the parties a clear opportunity to specify terms of payment, the courts for the most part decided such issues by those terms, notwithstanding that the shipper might be responsible for a double payment of the charges, due to the intervening breaches of contract which allowed the double brokering.

1. Transitioning from a Common Law Presumption of Liability

A historical common law presumption of liability, on the terms of a proper bill of lading [emphasis added], arose as a result of regulation of motor carriers from 1935 until 1980. This continued with the requirement of all motor carriers filing and maintaining uniform, non-discriminatory rates, until the Trucking Reform Act of 1994 and the Interstate Commerce Commission Termination Act of 1995.

During this period, carriers were required to collect all rates filed with the ICC, by the terms of a bill of lading, without any discrimination by way of discounts. This general concept was known as the "filed rate doctrine".

Without a long discussion of this history, it is fair to say that the terms of a bill of lading (if properly executed) controlled over ancillary contracts to the contrary. Such historical bills of lading included the presumption that the shipper was liable to the carrier for transportation charges, unless clearly indicated to the contrary on the face of the bill of lading.

From 1980 through 1995 many cases were decided under the "filed rate doctrine" of absolute liability. These cases were mostly on the very narrow issue of a bill of lading having been properly executed, whereby a carrier was properly specified, and the rates were those on file with the ICC. The obligation of payment by the consignor or consignee to the carrier, of the rates on file with the ICC, was mostly assured by these cases. (This was the early basis for the later over generalization of the common law presumption of liability.)

"[T]he filed rate doctrine, deeply lodged in the complex history and turgid language of the Interstate Commerce Act dictates that the rate a common carrier duly files with the Interstate Commerce Commission (ICC) is the only lawful rate it can charge for its services, and that deviation from the filed rated [sic] is not permitted under any pretext." [Id.?]

The cases that followed during the filed rate era, until 1994, were a mixture of court decisions which added confusion for courts and lawyers alike with regard to whether they were being decided upon contract terms, the principles of equity, or explicitly under the filed rate doctrine. For our purposes here, it is enough to say that the courts went from the unfounded dictum of the Excel decision;

"The bedrock rule of carriage is that, absent malfeasance, the carrier gets paid" Exel (2003)

to; a closer and more discerning look at the many circumstances wherein the carrier might not get paid at all;

“But?Exel?cites no authority for such a rule, and the Court can find none.”?Spedag Americas, Inc. (2019)

to; a full consideration of the contractual intent of the parties; and, intervening factors such as either, or both parties, relying upon third party payment of carrier charges.

After a series of cases from 1994, until recently, the so-called "bedrock rule" of the Exel decision became more often the exception, rather than the rule, expressed as;

"Therefore, we agree with the "prevailing view" that "the parties involved in the transportation arrangement are free to contract among themselves as to the liability for the freight charges and this includes a carrier agreeing not to look to the consignee for payment—at least absent a federal statute or regulation to the contrary."?Western Home Transp., Inc.(2014)

"Only absent the clear intent of the parties would any common-law presumptions or defaults of liability apply." See?Wylie,523 N.W.2d at 399. (1994)

“Additionally, while the common law presumption may exist in some circumstances, it is only that: a presumption like other presumptions, it may be rebutted by contrary evidence.?”?Western Exp. v. Dollar Gen. (2007)

Accordingly, "while the consignor normally is responsible for [shipping] costs, if the parties intend, they can '[u]ndoubtedly' alter this arrangement so the consignor has no liability for shipment costs."?Landstar Express America (2017)

The reader should be reminded that intent of the contracting parties is only relevant wherein the courts find the necessary elements of a contract, such that there is apparent privity of contract. It is then that the courts turn to considering the mutual intent of the parties. Clearly, when a load has been double and triple brokered, privity of contract has long since been lost.

2. Intervening Breach(s) of Contract May Result in no Payment to the Carrier

The magnitude of the double brokering concept, as we now know it, did not exist during much of the time when cases on the filed rate doctrine and secondary liability were being adjudicated. But even then, our Supreme Court gave early guidance as to how the consignor might be exempted from paying transportation charges to the double brokered carrier.

“...unless the goods are received and transported under such circumstances as to clearly indicate an exemption for him [emphasis added], the carrier is entitled to look to the consignor for his charges." Southern Pac. Transp. Co.(1982)

Here, we must be reminded that double brokering "is frequently done without the shipper's knowledge or the motor carrier's knowledge. No written or even oral contracts exist between the shipper and the second broker or between the motor carrier ultimately used and the initial broker." Jet Prolink supra.

After the first breach of any contract of carriage by double brokering, resulting in abrogation of the terms of transport, privity of contract, and the intent of any bill of lading between the shipper and the ultimate carrier are lost.

“Where a carrier signs a bill of lading upon receipt, the court must review its terms to determine whether the parties intended for the bill to serve as a contract for carriage." In re Modern Bldg. Materials, Inc.

A bill of lading, like any contractual relationship, requires a meeting of the minds on all essential terms. See?Norfolk S. Ry. Co. v. Groves,?(11th Cir.2009).

The very nature of double brokering, where the original intended carrier is replaced by a carrier who ultimately receives a bill of lading by the unlawful double brokering, assures that there could not have been a meeting of the minds between the shipper and a carrier. The resulting carrier came into possession of such bill of lading, unknown and unintended by that shipper. Apex Capital LP v. Carnival Corp. (2013)

Once evidence rebutting the presumption of liability arising out of the bills of lading is presented, the bills cease to operate as agreements allocating liability for freight costs and are rendered mere receipts. ?Midwest Direct Logistics, Inc. (2016).

The carrier has a receipt, but if any right to payment, it should be against the fraudulent or negligent broker or carrier from whom he took the load. The carrier is perhaps innocent of knowing participation in the double brokering, even though negligent in accepting such a load. The shipper is certainly innocent of knowledge of the double brokering, and innocent in having paid the broker and/or intended carrier for the load.

Regrettably, this dispute falls into the category of cases where “one of two innocent parties will be the loser.”?Jackson Rapid Delivery Serv., Inc.. Because the bills of lading did not create privity of contract between the shipper and carrier, the carrier must bear the loss, or seek compensation from that party he negligently trusted to assign a double brokered load. Apex, supra.

The court cannot rewrite the parties' contracts because unforeseeable later events caused the [carriers] to suffer a loss from these contracts.? In re USA Motor Express, Inc.

Thus we see, by the solid nature of our courts' legal analysis, how the duty of reasonable care by all parties to such transactions may provide part of the ultimate solution much more readily than beaurcratic rule-making, or self-serving pronouncements by industry groups.

The carrier who believes in empty generalizations, (i.e., "The bedrock rule of carriage is that, absent malfeasance, the carrier gets paid"), will be less likely to understand his duty of reasonable care in accepting a double brokered load, than one who does not get paid for such negligence.

Likewise, the original broker in a double brokered series of transactions must come to understand that they too have a duty of care owed, and may be responsible to parties affected by their negligence, to include the ultimate carrier.

B. Double Brokering by Fraud

The nature and extent of double (treble) brokering is no longer the product of parties merely breaching contracts forbidding further brokering. It now occurs on a larger scale driven by absolute criminal fraud. If FMCSA and the Justice Department had the enforcement resources available, there are sufficient statutory provisions (MAP-21; inter alia, 49 USC §13902 and 49 USC 14916.) to address the problem. They do not apparently have the resources, are not enforcing the statutory prohibitions, and the perpetrators know that.

In the interim, our civil courts must provide new standards of analysis and remedy for the parties involved. As discussed above, all parties who participate in the otherwise efficient method of brokering freight, absent contract breaches and fraud, must now realize that there are standards of care expected.

The standard of care and method of addressing mere breach of contract is different from remedies sought resulting from negligent or purposeful participation in fraud. Space here does not allow that discussion. It is sufficient to say that the reasoning of the courts has always differed in addressing remedies for each.

Brokers and carriers alike must be more vigilant in detecting fraud. Most brokers and carriers are savvy enough to detect blatant fraud in a brokered transaction (i.e., recent carrier authority with one power unit, methods of contact, lack of communication, other brokers and carriers noted on load confirmations/bols, etc.)

Unfortunately, in their haste or lack of process management, they are not diligent enough in detecting and preventing fraud. Such lack of diligence will ultimately be addressed by the courts, in an effort to find fairness consistent with contract law and equity.

In addition to the analysis for double brokering occurring as a result of breach of contract discussed above, the courts will, in the extreme instances of fraud, go further in applying law and equity to reach a proper result.

There is a long history of the courts applying equitable standards to issues of who gets paid for transportation charges. "Equitable estoppel can be raised as an affirmative defense to claims for recovery of freight charges from a consignee."?Southern Pacific Transportation Co. v. Campbell Soup Co.,?(8th?Cir. 1972).

One view holds that the doctrine of equitable estoppel bars carriers from recovering freight charges where the shippers were justified in believing that the carriers have been paid for their services.?National Shipping Co. of Saudi Arabia

Under an alternative, "equitable estoppel" view, when a shipper pays freight to a consolidator and the consolidator subsequently fails to forward the payment on to the carrier, the shipper does not remain liable to the carrier...Olsen Distrib.

The nature and extent of current fraud being perpetrated upon shippers, brokers and carriers, will require that the courts look again for a new equitable standard in deciding among otherwise innocent parties, who shall ultimately be paid, or not, depending upon individual roles in allowing fraudulent double brokering to be accomplished.

Brokers, and especially carriers, who fail to notice obvious signs of fraud, only to bite for the bait of a highly favorable promised rate, either place undue confidence in bogus documents and authorities, or they knowingly participate in the fraudulent double brokering. Either way, they, and not the shipper, are enabling fraudulent double brokering.

In so doing, especially where significant sums are at issue, such brokers and carriers will have the courts rule on who, of two "innocent" parties (i.e., shipper or broker/carrier), should suffer the loss of either double payment by the shipper, or loss of transport charges by the carrier. This scenario will allow the courts to invoke equitable estoppel by applying yet another equitable maxim that has long been used by courts in such a situation.

The Supreme Court long ago recognized such a result. “In such case we think the principles which underlie equitable estoppel place the loss upon him whose misplaced confidence has made the wrong possible." National Safe Deposit Sav. T. Co.?v.?Hibbs (1913)

Likewise, the federal circuits and state courts fully recognize this principle.

"This court is committed to the doctrine that, 'where two parties to a fraudulent transaction are equally innocent, and the loss must fall upon one, it should fall upon the one who, in law, most facilitated the fraud.' Farm Bureau Co-op. Mill v. Blue Star Foods

IV. CONCLUSION.

So it is that double brokering by negligence, breach of contract, and fraud has grown out of control, trending toward an industry cost of $1B per year. As with other issues in our history, where neither the executive nor legislative branch responds appropriately, our courts stand ready by reasoned analysis and judicial opinion to call all parties to account.

All those who participate in the brokering of freight should take heed of the historical direction now indicated by those courts, hopefully summarized above enough to at least provide 'a word to the wise'.

"Double brokering happens all the time. It is often the result of negligence and poor decision-making in a competitive industry with slim margins and rapidly changing freight rates."? e Capital

In an extreme scenariio, brokers and carriers could shut the double brokering down in one dramatic day of eliminating the negligence and poor process management, never breaching a contract not to double broker, and refusing to accept a load laden with signs of fraud.

The fraudsters are not there for lack of impotent bureaucratic rule-making, or strident positions taken by special interest groups. They are there feeding every day off of inattention, poor decisions, and faulty process management.

If it is not eliminated, the courts must decide and impose standards of care far more equitble than, "[t]he bedrock rule of carriage is that, absent malfeasance, the carrier gets paid" Exel (2003)

Such reasoning by one court twenty years ago is now anchronistic when applied to the typical facts of double brokering.