U.S. law recognizes three different types of regulated entities that may be involved in interstate truck transportation: motor carriers, brokers, and surface freight forwarders. (49 USC § 13102).

The differences between motor carriers and the two intermediary entities are clear. Motor carriers actually provide transportation using trucks and equipment. Intermediaries do not own or operate trucks and instead arrange for transportation via independent third-party motor carriers. Less clear are the differences between surface freight forwarders and brokers, which are both engaged in the same activity of arranging transportation by using third-party motor carriers. The differences, though subtle, can have significant legal implications on 3PL’s and shippers.

[For purposes of this article, I also refer to surface freight forwarders as “freight forwarders” or simply “forwarders.” Surface freight forwarders should not be confused with companies that arrange international air or ocean shipping, which are commonly also called “freight forwarders.” Surface freight forwarders do not necessarily have any involvement in arranging air or ocean shipments.]

1. Determining if a particular company operates as a broker or forwarder will depend on a number of factors, including whether the company holds themselves out to the public as providing transportation, physically handles the cargo before or after shipment, or assumes responsibility for the cargo. The definitions of a broker and freight forwarder are in 49 USC § 13102:

(2) Broker: The term “broker” means a person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation.

(8) Freight Forwarder: The term “freight forwarder” means a person holding itself out to the general public (other than as a pipeline, rail, motor, or water carrier) to provide transportation of property for compensation and in the ordinary course of its business: (a) assembles and consolidates, or provides for assembling and consolidating, shipments and performs or provides for break-bulk and distribution operations of the shipments; (b) assumes responsibility for the transportation from the place of receipt to the place of destination; and (c) uses for any part of the transportation a carrier subject to jurisdiction under this subtitle.

While both brokers and freight forwarders arrange for transportation to be provided by third-party motor carriers, freight forwarders provide additional services by physically assembling or consolidating shipments and/or providing distribution operations for shipments. Freight forwarders also hold themselves out to the public as providing transportation (rather than merely arranging) and “assume responsibility for the transportation,” usually by issuance of a bill of lading identifying the forwarder as the “carrier.” Brokers are generally discouraged from “issuing” bills of lading identifying themselves as the performing carrier. Also, brokers traditionally do not accept liability for cargo loss or damage. These practices do occur but are often discouraged, because doing so blurs the line between whether a 3PL is operating as broker or freight forwarder /carrier.

A notice issued by the Federal Motor Carrier Safety Administration (“FMCSA”) in 2006 provides some additional clarity on how the agency distinguishes between the two intermediaries, focusing on how forwarders physically handle cargo at origin and/or destination, issue bills of lading, and assume liability for cargo claims:

Brokers generally do not handle the freight and do not assume legal liability for cargo loss and damage . . . Freight forwarders assemble small shipments into larger shipments, tender them to motor carriers and ensure that the larger shipment is disassembled into smaller shipments upon delivery. Freight forwarders may take physical possession of the shipment in carrying out these functions. Freight forwarders issue bills of lading and assume liability for cargo loss and damage. (Registration of Brokers and Freight Forwarders of Non-Household Goods, Notice of Determination).

2. The U.S. Department of Transportation (“DOT”) requires brokers and forwarders to obtain operating authority through the FMCSA. The actual registration requirements for brokers and forwarders are substantially the same. The company must:

• Submit an application to the FMCSA (an OP-1 for brokers and OP-1(FF) for freight forwarders);
• Obtain and file with the FMCSA a surety bond or trust fund agreement in the amount of $75,000;
• Designate a process agent in every state in which it conducts business or maintains an office by filing a BOC-3 with the FMCSA; and
• Obtain the required insurance, if any (brokers and non-household goods freight forwarders are not required to obtain cargo or other insurance).

While there may be compelling reasons to separate broker and forwarder operations into two separate legal entities, a single entity can hold multiple authorities. If a single legal entity has both broker and forwarder authority, only one $75,000 bond or trust fund is required (though two filings need to be made to the FMCSA).

There can be penalties for operating without the proper authority. A broker or forwarder that knowingly provides interstate brokerage or forwarding services without FMCSA authority is subject to a civil penalty of up to $10,000 per violation (49 U.S.C. 14916(c)). The statute also provides for a private cause of action, and the individual officers, directors, and principals of the non-registered company are jointly and severally liable along with the offending corporate entity. Note that there are some limited exceptions to the registration requirement for non-vessel operating common carriers (NVOCC’s), ocean freight forwarders, indirect air carriers (IAC’s), and customs brokers. (Registration and Financial Security Requirements for Brokers of Property and Freight Forwarders).

3. A company’s operations may warrant the company having both forwarder and broker operating authority. In practice, a logistics company’s operations (and therefore the type of authority required) can vary depending on the specific services provided to each of its shipper-customers. Indeed, this can even change on a shipment-by-shipment basis if the company provides a multitude of services to the shipper.

Take the case of a 3PL that provides brokerage services in addition to operating cross-docking, transloading, or warehousing facilities. Assume the 3PL primarily provides traditional brokerage services to the shipper, but no warehousing services. However, when occasionally requested by the customer, the 3PL uses one of their cross-docking facilities to bring in the customer’s freight and build outbound shipments, which the broker then arranges with contracted motor carriers. A case could be made that, by physically handling cargo to build loads for which it then arranges transportation, the 3PL is engaged in freight forwarding activity for those particular cross-docked shipments. This is especially the case if the broker issues a bill of lading for the outbound shipment.

As the above example illustrates, a 3PL may actually be acting in two different capacities for the same customer – as a broker when it only arranges shipments, but also as a forwarder when physically handling the shipments it arranges. The consequences of this can be considerable, as discussed below. When making a determination of whether a 3PL was acting as a broker or forwarder, courts will look to how the company holds itself out to the world and its relationship to the shipper, rather than merely relying on how the company labels itself. (See Lumbermens Mut. Cas. Co. v. GES Exposition Services, Inc., 303 F.Supp.2d 920 (N.D.Ill. 2003)).

To avoid civil penalties and other legal implications, a 3PL should obtain the proper authority(ies) for all the services it provides. Logistics companies are also required to provide written notice to each customer specifying the authority under which the transportation services will occur. (49 USC § 13901). This is best done in a written contract with the shipper. Companies should check with legal counsel before deciding which authority to obtain and whether to separate multiple authorities into different legal entities.

4. The Carmack Amendment applies to freight forwarders but not brokers. One of the most common risks that brokers and forwarders face is loss or damage to the transported cargo. On this subject, the difference between forwarders and brokers is critical.

The Carmack Amendment is the federal statute that makes “carriers” liable for the actual loss or damage to cargo moving in interstate commerce. (49 USC 14706).  Under Carmack, “carrier” is defined as “a motor carrier, a water carrier, and a freight forwarder.” (49 USC § 13102(3)) (emphasis added). Therefore, Carmack applies to carriers and freight forwarders, but not brokers.

Carmack essentially creates a strict liability regime for cargo loss and damage, subject to a few uncommon exceptions. The plaintiff does not need to prove negligence. If the loss or damage occurred during transportation, the forwarder or motor carrier will be liable. Carmack allows for recovery of “the actual loss or injury to the property.”  Case law differs as to whether “actual loss” means the replacement cost or market value of the goods. Punitive, special, and consequential damages are generally not recoverable under Carmack.

A common misconception is that brokers are not liable for cargo loss or damage since Carmack does not apply to brokers. This is not the whole story. While brokers are not liable under Carmack for cargo loss or damage, a claimant may still assert state or common law claims against a broker under any number of potentially applicable theories, including tort and breach of contract. However, since these state law claims typically require the plaintiff to prove wrongdoing by the broker, recovery is more difficult than under Carmack. In addition, some jurisdictions have held that Carmack, 49 U.S.C. § 14501, or both, preempt state law claims against a broker for cargo loss or damage in interstate commerce. (See, e.g., Ameriswiss Technology, LLC v. Midway Line of Illinois, Inc.; Chatelaine, Inc., v. Twin Modal, Inc.; and Frey v. Bekins Van Lines, Inc.).

Because proving a claim under Carmack is generally easier than succeeding on a state law claim, and because some state law claims may be preempted by federal law, shippers can be incentivized to argue that a broker was actually acting as a forwarder or motor carrier on the shipment giving rise to the cargo claim. (See AIOI Insurance Co. v. Timely Integrated, Inc.). If the broker was engaged in forwarder activity (such as issuing bills of lading or physically handling cargo), the broker may unknowingly have subjected itself to an argument for Carmack liability. For unwary 3PL’s this can be an especially precarious position. Due in part to the misconception that brokers are not liable for cargo claims, many brokers operate without applicable contractual terms. If there is no contract between the shipper and 3PL limiting cargo claims, and Carmack is deemed applicable, the 3PL will be strictly liable for the full actual loss to the cargo. On the other hand, unsuspecting shippers could be left holding the bag for a claim by wrongly assuming that all transportation entities are subject to the same carrier liability standards, which is not the case.

Of course, the best way for shippers and 3PL’s to manage this uncertainty is to have a written contract clearly defining the services being provided, the liability standards for cargo claims, an applicable cap and other limitations, and a cargo valuation clause.

5. Freight forwarders are more likely to engage in activity that increases their exposure to third-party tort claims. The seminal case of Schramm v. Foster from 2004 found that freight brokers could be liable for third-party tort claims caused by the underlying motor carrier. Since Schramm, a number of other courts have followed suit. Plaintiffs generally put forward two legal theories under which brokers can be liable for third-party injuries caused by a motor carrier: vicarious liability and negligence. Under the vicarious liability theory, a plaintiff will assert either that the broker exerted so much control over the carrier, or that the broker was acting so similarly to a carrier, that the broker should be held liable for the acts of the actual carrier. Under negligence, plaintiffs argue that the broker did not exercise reasonable care when selecting the carrier, and that the hired carrier was unsafe or unfit.

An analysis of the numerous factors courts consider under either theory is beyond the scope of this article. However, some are relevant to a discussion of the differences between a freight forwarder and broker. Under the vicarious liability theory, plaintiffs will point to facts that show a 3PL was actually acting as a motor carrier despite only being an intermediary. Examples include:

• Signing a contract in which the 3PL is identified as a carrier or the transportation provider;
• Signing a contract that places typical motor carrier obligations on the 3PL (such as requirements that the 3PL must provide or maintain equipment, supply drivers, or ensure safety and hours of service compliance);
• A bill of lading designating the 3PL as the “carrier”; and
• The 3PL identifying its hired motor carriers as subcontractors, agents, or some relationship other than as independent contractors.

3PL’s are typically advised to avoid the above activity to reduce the risk of vicarious liability. However, forwarders often engage in one or more of these factors in the ordinary course of business, and often do not realistically have the option to avoid doing so because of how forwarders contract, operate, and market themselves. Forwarders represent themselves as providing transportation and sign corresponding contracts, issue bills of lading as carriers, and their hired motor carriers are more likely to be deemed subcontractors or agents.* This makes it all the more important for forwarders to take other risk mitigation steps, like a strong motor carrier vetting program and obtaining broker liability / contingent auto insurance.  While brokers are certainly susceptible to these risks as well, avoidance can be a bit easier because of differing industry standards.

[*This may especially be the case where the forwarder is also engaged in international air or ocean forwarding as an IAC or NVOCC, respectively.  As between the 3PL and shipper, IAC’s and NVOCC’s are principal carriers as a matter of law, and also represent themselves and act as carriers in every way except for actually operating transportation equipment.]

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This article focuses on the implications that can arise from the legal distinction between U.S. trucking brokers and forwarders. While the differences may seem technical or administrative in nature, there are very real potential consequences to shippers and 3PL’s that may hinge on the distinction. Readers should not confuse this discussion of surface freight forwarders with freight forwarders that are engaged in international air forwarding as Indirect Air Carriers (IAC’s) or ocean forwarding as a Non-Vessel Operating Common Carriers (NVOCC’s). International forwarding is governed by separate laws, regulations, and standards that have little overlap with surface freight forwarding in the U.S.

If you have any comments or questions about this post, please feel free to reach out to me at keith@logisticslaw.net.

Keith Waters May 31, 2022