Freight Brokers and Logistics Companies Face New Liability and Arbitration Risks

By Hunter Bruton, David Pasley, and David Levintow

In two recent unanimous decisions, the U.S. Supreme Court clarified legal standards that could increase litigation, compliance, insurance, and contracting risks for freight brokers, shippers, carriers, and companies that rely on logistics networks.

The decisions address two recurring issues in transportation and supply chain disputes: when freight brokers may face state-law negligent hiring claims, and whether last-mile delivery drivers may be compelled to arbitrate their disputes with shippers.

Freight Broker Liability After Montgomery

In Montgomery v. Caribe Transport II, LLC, the Supreme Court held that federal law does not preempt state-law negligent hiring claims against freight brokers based on their carrier-selection decisions.

Freight brokers play a central role in the supply chain by connecting shippers with carriers to move goods. Many sellers of goods work directly with carriers to transport their goods. But other sellers work with freight brokers that act as intermediaries (or, as the Court described them, the industry’s “matchmakers”) in coordinating shipments on behalf of a seller by hiring a carrier to transport the seller’s goods.

Montgomery arose out of a highway crash involving a carrier that resulted in serious injuries to the driver of another vehicle. The injured driver sued the carrier, as well as the broker that had hired the carrier. The theory advanced by the injured driver was that the freight broker was negligent in hiring this particular carrier, because the carrier had a “conditional” safety rating from the Federal Motor Carrier Safety Administration at the time of hiring. In defense, the freight broker argued that the Federal Aviation Administration Authorization Act (FAAAA) preempted the driver’s negligent hiring claim.

The FAAAA preempts state law that is “related to a price, route, or service” of any carrier or broker “with respect to the transportation of property.”  But the FAAAA also contains an exception to that preemption provision, which does “not restrict the safety regulatory authority of a State with respect to motor vehicles.”

Interpreting the plain language of that exception, the Supreme Court determined that negligent hiring claims are not preempted because “requiring freight brokers to exercise ordinary care in selecting a carrier” straightforwardly “concerns motor vehicles—most obviously, the trucks that will transport the goods.” So, the Court held that the negligent hiring claim was not preempted by federal law and could proceed. As a result, freight brokers may face state-law negligence claims based on how they vet and select carriers.

Litigation Risks for Last-Mile Delivery After Flowers Foods

Two weeks later, in Flowers Foods v. Brock, the Supreme Court held that the Federal Arbitration Act’s transportation worker exemption can apply to last-mile drivers who deliver goods that moved in interstate commerce, even if the drivers themselves do not cross state lines.

Last mile drivers are a type of carrier. Generally, they contract directly with sellers to transport the seller’s goods from a warehouse to local businesses or other destinations. Up to that point, the seller will have engaged a different carrier to transport the goods from some other point (such as a port of entry or manufacturing facility) to the warehouse. For that reason, the good itself travels interstate but the last mile drivers are only responsible for the “last mile” of intrastate shipping.

Flowers Foods involved a last mile driver that delivered bakery products from a warehouse in Denver. The driver only delivered the products to destinations within the state, but the products arrived at the Colorado warehouse from “bakeries in 19 States.”  The driver initiated a class action in federal court against the bakery company on the theory that the company had underpaid him and similarly situated drivers in violation of federal and state law. The company sought to compel arbitration because its distribution agreement with the driver contained a binding arbitration clause.

The Federal Arbitration Act (or FAA, not to be confused with the FAAAA) generally requires federal courts to enforce arbitration agreements. But the FAA contains an important exemption in Section 1, providing that “nothing” in the statute shall be used to compel arbitration in disputes involving “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  Thus, the question presented was whether the driver, who delivered bakery products exclusively within Colorado, was still engaged in interstate commerce because the products he delivered had traveled through interstate commerce.

The Supreme Court answered that question in the affirmative because transportation workers do not need to “cross state lines” to be engaged in interstate commerce. And the exemption of Section 1 does not “turn on a game of tag with vehicles that do.”  Like in Montgomery, the Flowers Foods Court looked to the plain language of the FAA and found nothing that would require “an individual to cross state lines or interact with a vehicle that does” in order to be engaged in interstate commerce.  As a result, the driver could not be compelled to arbitrate his claim against the bakery company.

What Logistics Companies Should Consider Now

Shippers, freight brokers, carriers, investors, and companies that provide services to logistics businesses should consider how Montgomery and Flowers Foods may affect risk allocation, contracting, due diligence, and dispute strategy.

Key considerations include:

• Freight brokers may face increased negligence claims. Brokers can expect plaintiffs to scrutinize carrier-selection practices, including how brokers evaluate safety ratings, insurance, compliance history, and other risk indicators.
• Insurance, compliance, and litigation costs may rise. The availability of negligent hiring claims may increase diligence expectations and could lead to higher costs that are passed through the supply chain.
• Carrier safety ratings may receive greater attention. The Court did not decide whether hiring a carrier with a conditional safety rating is enough to establish negligent hiring. State courts will likely address that question, and varying standards may emerge.
• Contracts may need fresh review. Freight brokers may seek to allocate risk through indemnity provisions with shippers or carriers. The enforceability of those provisions will depend on governing law and any applicable anti-indemnity statutes.
• Shippers may revisit broker relationships. Companies that currently hire carriers directly may consider whether using brokers could help reduce exposure tied to carrier-selection decisions.
• Arbitration agreements involving transportation workers may require closer analysis. Flowers Foods leaves open questions about how directly a worker must be involved in interstate commerce to qualify for the FAA exemption.
• Independent contractor and distribution agreements may face new challenges. The Court did not resolve whether a distribution agreement held by an independently operated company qualifies as a “contract of employment” under the FAA.

How Smith Anderson Can Help 

The Smith Anderson team is monitoring developments following Montgomery and Flowers Foods. We are available to assist clients with:

• reviewing and strengthening broker, carrier, shipper, distribution, and logistics agreements;
• assessing carrier-selection practices and safety-rating diligence;
• evaluating indemnity, insurance, and risk-allocation provisions;
• conducting due diligence on broker, carrier, and logistics-related investments; and
• resolving transportation, supply chain, and logistics disputes in or out of court.

For additional information, please contact Hunter Bruton, David Pasley, David Levintow, or your regular Smith Anderson lawyer.