On September 22, 2018, Bill (SB-1402) was signed into law in California to become effective January 1, 2019. That law will make a “Customer” that engages or uses “a port drayage motor carrier” jointly and severally liable with that port drayage motor carrier if that carrier is listed on the Internet Web site maintained by the Division of Labor Standards Enforcement. This ominous list will identify port drayage motor carriers which have been found liable to a “port drayage driver” for unsatisfied court judgments, assessments, orders, decisions, or awards, for port drayage services performed for which the drivers have not been paid or expenses for which they have not been reimbursed, plus damages, penalties, and interest.

The reason why this Bill is not as tentative as it sounds is that The California Labor Commissioner’s Office, Division of Labor Standards Enforcement, has awarded in excess of $45 million in unlawful deductions from wages and out-of-pocket expenses to more than 400 drivers, and that drivers have seen little of those awards.

So Who is a Customer That Faces These Liabilities? “Customer” in the California statute is defined as a business entity that directly engages or uses a port drayage motor carrier to perform port drayage services on the Customer’s behalf. “Customer” is also defined as one who indirectly engages or uses a port drayage motor carrier through the use of an agent. An “Agent” in the language of the statute includes, “but is not limited to freight forwarders, motor transportation brokers, ocean carriers, or other motor carriers.” Therefore, from the language in Bill (SB-1402), these “agents” are by definition not a “Customer” who would be directly held jointly and severally liable pursuant to this statute. The unescapable conclusion is that a “Customer” would most likely be a “shipper” (importer/exporter) on whose behalf cargo is delivered to or picked up at maritime terminals in California. Intermediaries such as ocean freight forwarders, FMCSA property brokers, and Customs brokers arranging motor carriage subsequent to Customs clearances, are clearly not “Customers” subject to the joint and several liabilities described herein. The one possible exception as to intermediaries which conceivably could be considered a “Customer” subject to the liabilities described herein are NVOCCs since NVOCCs by definition are “shippers” vis a vis ocean carriers. On the other hand, those intermediaries such as ocean freight forwarders, FMCSA Property Brokers, Customs brokers arranging drayage to/from a California port on behalf of Customers are not directly covered by the Bill. However, there may be other repercussions to these entities that may be derived from the agent/principal relationship that will need to be addressed contractually to minimize or to allocate risks relating to this exposure. See Exposure of Other Transportation Intermediaries below.

Parties Excluded From the Definition of Customer.  The Bill excludes the following from the definition of “Customer”, and thereby from the damages and penalties risk of the Bill:

(i) A business entity with a workforce of fewer than 25 workers (it is not clear from the Bill whether this means a workforce located in California or nationwide for a specific company);

(ii) Government entities which are shippers.

(iii) A business entity, including, but not limited to, a marine terminal operator, who is not a Customer, and who, incidental to the transportation of the freight for the Customer, receives, makes available, or exchanges intermodal equipment, loaded or unloaded, or conducts any other transaction of equipment subject to an equipment interchange agreement with a motor carrier who is a signatory to an equipment interchange agreement.

Parties Covered. Therefore, from the language of the Bill itself, the parties which clearly are considered “Customers” and not specifically excluded by the Bill and are directly subject to the damages and penalties of the Bill include importers, exporters, NVOCCs (to the extent that these arrange for pick up or delivery to/from California ports). Other Port entities which are intended to be included in the term “Customer” and share liability pursuant to this Bill can be inferred from the definition of “Port drayage services” in the Bill. These activities strongly suggest that ocean carriers, possibly chassis and other equipment leasing companies, and others involved in maritime activities to and from marine terminals included in the defined term “port drayage services” are covered in the “Customer” definition.

The NVOCC Dilemma.  As noted before, an NVOCC is a carrier to its customer and a shipper vis a vis the underlying ocean carrier. On full container load transactions routed inbound through a California port NVOCCs could structure these for delivery at the California port and pass on the port pick up function to the importer. On the other hand, this option would not be possible for inbound consolidated cargo where an NVOCC would still need to pick up the container on its own account at the California port to take to its deconsolidation locations for delivery to LCL importers. NVOCCs, as compared with other transportation intermediaries, will have the greatest incentive as potential direct violators of the provisions of this Bill to incorporate diligent IT processes to timely vet port drayage motor carriers against the list. While NVOCCs have direct exposure to the penalties and damages in the Bill, other intermediaries are not out of the woods.

Exposure of Other Transportation Intermediaries: The Race to Formal Structuring of Agent Relationships. There are many variations of how intermediaries structure relationships with their shipper customers and other intermediaries for among, other things, the pick up or delivery of equipment/cargo from/to California ports. It is our opinion, as has been already noted herein, that intermediaries, other than NVOCCs in the context discussed above, are not directly impacted by the Bill as “Customers”, and have been specifically identified as “agents” in the Bill. Therefore, the damages and penalties imposed on “Customers” would not be directly applicable pursuant to subject Bill to those agent intermediaries, e.g., ocean freight forwarders, property brokers, Customs brokers, and others who arrange inland transport to or from ports in California.  However, intermediaries that arrange motor carrier transport have contractual obligations or will have obligations imputed to them to vet motor carriers. Such intermediaries have a duty to select motor carriers that are qualified, properly licensed, in good standing with state and federal regulatory bodies, and now pursuant to the Bill, that the motor carriers they retain are not included on the Internet Web site list maintained by the California Division of Labor Standards Enforcement.

• “Customers”, including shippers, NVOCCs, ocean carriers (under certain circumstances), and others deemed “Customers” and Agents of Customers should take the following steps immediately:
• Review currently existing contracts for port drayage services and if at the time a port drayage motor carrier with whom Customer or Agent has contracted is initially listed on January 1, 2019, and thereafter, on the Division of Labor Internet Web site, we strongly urge the termination of the agreement. Take into consideration the terms offered by the Bill with respect to the terms of waiver relating to the applicability of joint and several liability to Customer in that circumstance. The Bill to encourage termination alters timelines for applicability of the Bill if the Customer is in the process of terminating an agreement with a drayage motor carrier.
• Enter into agreements with port drayage motor carriers which are financially viable and willing to indemnify Customers or Agents of Customers in the event that they should prospectively appear on the list; and, require port drayage motor carriers to notify the Customer of existing unsatisfied judgments in favor of port drayage drivers, and of any new judgments within 30 business days of the entry of such judgment(s) ( a requirement of the Bill).
• It would be reasonable to expect that shippers entering agreements with “Agents” will be demanding the same indemnifications from these—i.e., that these “Agents” represent and warrant that they will not arrange transport with port drayage motor carriers which are on the infamous list.
• The final effect of the above will require all players (Customers), including Agents, to be especially vigilant of the identity of port drayage motor carriers posted on the list from January 1, 2019 and onward.
• Ocean Freight Forwarder/Shipper Relationships. In the ocean freight forwarder context Shippers Letters of Instruction and other agreements between forwarders and shippers will be adding additional provisions underscoring the concerns with this California Bill. Shippers on the one hand will be insuring that they are covered while ocean freight forwarders will be attempting to minimize or reallocate risk.
• Customs brokers arranging transport from the Port to importer. It is somewhat common for Customs brokers to arrange for delivery of goods after they are Customs cleared. Customs brokers usually issue Delivery Orders which is their document on their letterhead which memorializes the transaction. The DO is presented to the terminal operator representing the ocean carriers for release and delivery of cargo. The DO also identifies the motor carrier that is authorized to pick up the cargo and the importer to whom the cargo will be delivered. Two admonitions to Customs brokers in California: a) if you are arranging delivery of cargo from California ports (or any other U.S. ports), you should have a Property Broker permit to formally establish your agent status[1], especially if this cargo is going to cross state or international borders; and, b) have some method of vetting whether the motor carrier you are contracting for the transport is on the infamous list. We would also suggest entering indemnification agreements with motor carriers you are contracting with in the event that they are on the list.
• Property broker have to revisit their broker to broker, broker to shipper, and broker to motor carrier agreements.

The Elephant in the Room. As a final comment, we need to address the elephant in the room. It is somewhat unusual for a State to be involved in resolving commercial disputes between commercial parties by making third parties who had no involvement in the specific facts which resulted in unsatisfied judgments liable as joint and several parties with the errant port drayage motor carriers. If the involved parties were to act practically and reasonably one would expect that financially viable port drayage motor carriers would settle their unsatisfied judgments by January 1, 2019. Generally, port drayage motor carriers on the list which are not financially viable, will either fold their business or intend to proceed at their own risk and the risk of “Customers”. These, for obvious reasons, pose the biggest danger to “Customers”.  One would expect that Customers and/or their Agents would be sufficiently vigilant to not do business with them after January 1, 2019. On the other hand, one can also expect that matters do not always move along on reasonable paths, and that there is a good chance for mischief wherein the State will end up as the collection agent in pure commercial matters where the parties from whom they will be collecting were not parties to the acts which gave rise to the judgments—i.e., innocent Customers. It would be too cynical to conclude that the State did not think that the port drayage motor carriers could afford these judgments, and, therefore, were searching for those deep pockets that could. Just a lingering thought!

[1] We have had cases where Customs brokers have been sued as motor carriers due to fact that for drayage to port moves motor carrier waybills are rarely issued. The Property Broker permit is invaluable to Customs brokers as proof of the agency relationship.