Note: This article appears in the February 2016 edition of Barnes & Thornburg LLP's Logistically Speaking e-newsletter.

During 2015, courts across the country addressed a variety of transportation and logistics legal issues. This article summarizes some of those recent court decisions, which address federal leasing regulations, broker litigation and liability, and issues related to independent contractor status of drivers. 

Satellite fee was an unlawful forced purchase under Truth-in-Leasing regulations: Fox v. Transam Leasing, Inc. 101 F. Supp.3d 1066 (D. Kan. 2015). 

Independent truck drivers filed suit challenging a provision in Independent Contractor Agreements requiring payment of a $15.00 weekly satellite communications usage fee to the carrier. The court held that this provision violates 49 C.F.R. § 376.12(i), which states that, “a lease shall specify that the lessor is not required to purchase or rent any products, equipment, or services from the authorized carrier as a condition of entering into the lease arrangement.” It was not enough that the lease agreements included the provision required by the regulation. The carrier must in fact not require independent contractors to purchase or rent products, equipment, or services. The court rejected the carrier’s arguments that the fee was an allowable chargeback item, and that the fee was a “purchase” from the carrier even though the carrier paid a third party for the satellite service (charging only a portion of that fee to the contractors). The court distinguished cases involving insurance chargebacks because a carrier is legally mandated to purchase insurance, while satellite communications services are not mandatory. 

Note: This is not the first time a carrier has argued that the Truth-in-Leasing regulations govern only the lease’s content. For example, the argument was rejected in Mervyn v. Nelson Westerberg, Inc., 76 F. Supp.3d 715 (N.D. Ill. 2014), where the court stated. “That the regulation requires compliance with the lease’s terms is clear from its text; there is no other conceivable way to read it.” 

Broker has no standing to sue carrier for lost shipment under a contract, but has standing as the shipper’s assignee: Exel, Inc. v. Southern Refrigerated Transport, Inc., 807 F.3d 140 (6th Cir. 2015). 

Exel, a freight broker, entered into a Master Transportation Services Agreement (MTSA) with Southern Refrigerated Transport (SRT). Exel arranged for SRT to transport a shipment of pharmaceuticals for one of Exel’s shipper customers. Exel issued bills of lading with typical terms on behalf of the customer, and loaded the pharmaceuticals onto SRT’s container. In August 2008, a SRT truck transporting the customer’s pharmaceuticals was stolen, and the goods were never recovered. SRT paid a claim based on replacement cost. In November 2008 another truck was stolen and the goods were not recovered, resulting in a claim for $8.5 million, much larger than the prior claim. SRT rejected the replacement value claim, offering just under $57,000.00 based on a released valuation provision in the bills of lading. The customer assigned its rights to Exel, which filed suit against SRT. Exel asserted claims as the customer’s assignee, but also separate rights under the MTSA. Excel argued that the Carmack Amendment did not preempt Exel’s breach of contract claim, and the federal district court found that SRT was liable under the MTSA. The Court of Appeals disagreed, in an analysis concluding that the Carmack Amendment was enacted to protect the rights of shippers, not brokers. Therefore, Exel, a non-shipper, cannot sue under the Carmack Amendment for breach of the MTSA. But all was not lost for Exel because as an assignee standing in the shoes of its customer Exel could assert a damage claim against the carrier. However, the issue of whether the released valuation limits SRT’s liability is a question of fact for the trial court, where the case will return for further litigation. 

Questions of fact about contract terms and damages result in denial of broker’s summary judgment motion: Complete Distribution Systems, Inc. v. All States Transport, LLC, 2015 WL 5764421 (D. Oregon September 30, 2015). 

A shipper hired Complete Distribution Systems (CDS), a broker, to arrange for two shipments of vitamins from Washington to separate destinations in Florida. CDS hired All States, a carrier, to complete the shipments. Without telling the shipper or CDS, All States consolidated the shipments onto one truck which crashed in eastern Oregon. CDS paid the shipper for the resulting damages of nearly $170,000.00, and then asserted a claim against All States. The insurance carrier for All States paid part of the claim, and CDS filed suit against All States to recover the balance. A summary judgment motion filed by CDS seeking judgment in its favor without a trial was denied because 1) the damage documentation provided by the shipper was internally inconsistent and otherwise incorrect, 2) some damages may not have been foreseeable at the time of contracting and may not be recoverable, and 3) the contract documents were ambiguous, and one of the contracts relied on by CDS had never been signed by All States. A trial will be required on these issues to determine whether and to what extent CDS recovers for the uninsured part of the payment made to its shipper. 

$8 million verdict against logistics provider upheld on appeal: McHale v. W.D. Trucking, Inc., 396 Ill. Dec. 46, 39 N.E.3d (2015). 

Transfreight, Inc., a logistics provider, entered into a contract with its customer to arrange for the provision of “transportation and coordination of various commodities,” and acknowledged that time was of the essence in performing these services. Transfreight hired a carrier, Kiswani Trucking, under a contract stating that Kiswani was responsible for “just in time delivery.” The contract stated that Kiswani was an independent carrier with control over the manner in which services were provided, but the evidence showed that Transfreight exercised some control over the transportation process. Kiswani also required to maintain insurance, and to indemnify Transfreight and its customer. Kiswani had a contract with W.D. Trucking, under which W.D. hauled freight for Kiswani. Russell Kleppin, a driver for W.D., picked up an empty trailer and drove to meet a co-driver for a trip. On the way, Kleppin crossed the center line of the road, and struck and killed a woman standing beside her vehicle. The day before trial, the woman’s Estate was allowed to file amended claims alleging that Kiswani and Kleppin were agents of Transfreight. Both Kiswani and Kleppin admitted that they were negligent. The trial related to damages, and the agency issue. The jury heard substantial testimony from witnesses including experts, on issues including the control Transfreight exercised over Kiswani, and the promises of speedy delivery made to Transfreight’s customer. A jury verdict of $8 million was entered against all three parties, and a consolidated appeal followed. In a lengthy opinion, the court rejected all claims of error made by Transfreight and affirmed the verdict. 

Drivers of logistics company were employees, not contractors: Garcia v. Seacon Logix, Inc., 238 Cal. App.4th 1476, 190 Cal.Rptr3d 400 (2015). 

Seacon arranges transportation of cargo from a port to warehouses or other locations. A group of Seacon drivers filed suit seeking reimbursement of certain paycheck deductions, asserting that they were employees rather than independent contractors. The trial court agreed with the drivers, and the decision was affirmed on appeal. Seacon historically used drivers who owned their trucks and worked as independent contractors. After the port implemented a clean air program, Seacon bought trucks that were compliant with clean air rules. Although the drivers now operated company-owned trucks, Seacon continued to treat them as contractors. The court determined that the drivers were actually employees, based on evidence including 1) Seacon’s provision of insurance for the trucks, 2) Seacon giving the drivers permanent logo stickers to affix to the trucks, 3) a prohibition against personal use of the trucks, 4) requirements that the drivers arrive for work at 7:00 a.m. and call if they were going to be absent, 5) call and check-in requirements, 6) the exclusive nature of the relationship, in that the drivers had no source of income other than Seacon, and 7) weekly payments to the drivers, with no explanation of how the amount of pay was calculated. The court concluded that Seacon controlled the means, manner, and method of the drivers’ work, had the right to discharge them at will, and that the other indicia of employment weighed in favor of employee status. The result was liability to the drivers in an aggregate amount of approximately $110,000.00. 

Insurance audit results in reclassification of Michigan drivers buying trucks under a lease-to-buy program as employees for worker’s compensation purposes: Max Trucking, LLC v. Liberty Mutual Insurance Corporation, 802 F.3d 793 (6th. Cir. 2015). 

Max Trucking transports dry good throughout the United States. Six dispatchers based at company headquarters in Michigan coordinate with drivers for the transportation of loads. Approximately twenty of these drivers are based in Michigan. Liberty Mutual provided worker’s compensation to Max Trucking. In 2011, Liberty Mutual completed an audit and determined that 16 to 18 of the Michigan-based drivers who leased trucks from Max Trucking under a lease-to-buy program were employees, not independent contractors as classified by Max Trucking. After contesting a resulting premium increase, Max Trucking filed suit seeking a declaratory judgment to the effect that it is not required to carry worker’s compensation insurance for the affected drivers. The evidence at trial showed that the lease-to-buy program was established after several owner-operators lost their trucks during the economic downturn of 2008. Drivers make a down payment and lease payments on the trucks, and can purchase them for a dollar at the end of the lease term. No payments are refunded if the driver stops making lease payments or stops using the truck to transport freight for Max Trucking. In addition to the leasing program, the court evaluated the terms under which drivers transport freight, and the payment structure for that work. Liberty Mutual weighted most heavily the fact that Max Trucking owned the trucks, although Max Trucking’s CPA testified that Max Trucking held title because 1) a lease with a purchase for a nominal fee at the end is a loan, 2) the trucks were not carried as assets on Max Trucking’s financial statements, though the lease receivables were listed as assets, and 3) the drivers were able to claim depreciation on their tax returns. After considering all the evidence, a federal district court held that the Michigan drivers were employees for worker’s compensation purposes. Applying the statutory test under Michigan law, the appeals court affirmed. 

Uber drivers are presumptive employees under California law: O’Connor v. Uber Technologies, Inc., 82 F. Supp.3d 1133 (N.D. Cal. 2015). 

Uber is involved in ongoing litigation with drivers who allege they were misclassified as independent contractors. The drivers, who provide passenger car service for customers using a mobile phone application, seek the protections afforded to employees under the California Labor Code. Uber filed a motion for summary judgment, which the court denied. In its decision, the court reviewed Uber’s application process for drivers, the “city knowledge test” they must pass, the interview process, and the contracts signed by the drivers with Uber or one of its subsidiaries. Uber calls itself a “technology company,” but the drivers presented evidence that Uber has referred to itself as an “on-demand car service” and uses the trademarked tagline of “Everyone’s Private Driver.” After discussing relevant principles of California law, the court determined that the drivers are presumptive employees because they provide service to Uber. But the ultimate issue of whether the drivers are employees or independent contractors is a mixed question of law and fact for a jury to decide. Because facts relating to the critical issue of whether Uber has the right to control the drivers are in dispute, a trial will be required to resolve the issue.