Scopelitis

The United States Supreme Court is set to hear argument on March 24, 2010 in the companion cases of Union Pacific Railroad Company v. Regal-Beloit Corporation and Kawasaki Kisen Kaisha v. Regal-Beloit Corporation.  The issue before the Court is whether the Carmack Amendment to the Interstate Commerce Act (49 U.S.C. § 11706 for rail carriers and § 14706 for motor carriers) applies to the inland rail portion of an international, multimodal import shipment governed by a “through” bill of lading (i.e., a bill of lading that covers the shipment from origin to destination), where the bill designated the Carriage of Goods by Sea Act, 46 U.S.C. § 30701 et seq., as the law to govern the carriers’ responsibility for cargo loss and damage claims during the entire shipment.

COGSA governs the rights and liabilities of parties to an international maritime bill of lading; and allows parties to extend COGSA liability terms by contract for the entire carriage - including any inland leg of the journey.  The Carmack Amendment supplies the default liability regime for rail and motor carrier transportation within the United States.  The Interstate Commerce Act authorizes both common carriers and contract carriers to contract out of Carmack's default rules (49 U.S.C. § 10709).  The question presented to the Court, therefore, is how to reconcile the potentially conflicting statutory frameworks under the facts of the cases.
 

The FMCSA just released the website for the upcoming Pre-employment Screening Program (PSP).  This signals the next phase of the CSA 2010 roll out despite the uncertainty of various of its features.  As mentioned in our recent CSA-2010 webinar, the PSP is a new database developed by the FMCSA that can be accessed by motor carriers to obtain accident and roadside inspection data for individual drivers.  The website is available at: http://www.psp.fmcsa.dot.gov. 

The database is only available to motor carriers and, based on the FAQ included on the website, can only be used for pre-employment purposes.  In other words, carriers cannot use the database to access information on currently employed or leased drivers.  Carriers wishing to access the PSP must sign an Enrollment Agreement and pay both an annual enrollment fee ($25 for small carriers of less than 100 power units and $100 for larger carriers) and a $10/record fee.  Also, before accessing the records of a particular driver, carriers must obtain a written consent (a sample is included in the Enrollment Agreement) from the driver authorizing such access.  This may be how the FMCSA plans to monitor the improper use of the site – by tracking motor carriers that are checking current driver force rather than checking for drivers applying for employment.  Individual drivers can obtain their own report for a fee of $10.   Carriers might wish to start using the site to obtain a sense of how such data will impact driver recruiting, for example, how many more drivers will be found to be unemployable.
 

In the current economy, as more and more shippers and/or logistics companies with broker authority file bankruptcy, the firm has seen a marked increase in the number of preference claims filed against transportation service providers.  Preference claims seek to avoid payments made by the bankrupt entity in the 90 days prior to its bankruptcy filing. When the bankrupt company is a shipper, logistics company, or property broker, the resulting preference claims can affect common carriers, contract carriers, and transportation brokers.  Recently, in the Quebecor bankruptcy the trustee filed over 1,700 preference claims -- approximately 300 of which are against transportation service providers. Defenses to preference claims include that the payments received were made in the ordinary course of business and that additional unpaid services were provided to the debtor after the allegedly preferential payment(s). In addition, in some cases the freight broker regulations or a critical vendor order approving payments to certain transportation service providers may provide additional defenses. Quick analysis of historical data and the assertion of both traditional and transportation specific defenses can potentially limit exposure to preference claims.
 

Tax proposals released in conjunction with the Administration's FY 2011 Budget contain provisions relating to the use of Section 530 of the Revenue Act of 1978.  The new proposal would permit the IRS to reclassify workers on a prospective basis, and would permit the IRS to issue generally applicable guidance about the proper classification of workers.  This is in direct contravention to current Section 530 protections.

New enforcement activity would likely focus on obtaining proper worker classification prospectively, recognizing that in many cases the proper classification of workers may not be clear.  Additionally, the proposal provides for reduction or elimination of penalties in the case of small employers where the employer agrees to prospective reclassification. 

Effective January 1, 2009, both Ontario and Quebec began requiring that commercial motor vehicles operating within those provinces be equipped with speed limiters set at 105 km/h, which equates to 65 mph.  The regulations were subject to an educational period of soft enforcement, but are now being enforced in both provinces.  Importantly, the rules are not limited to vehicles based in either province.  Thus, for instance, a U.S. based vehicle operating in either province pursuant to Canadian authority is subject to the commercial vehicle safety measure.  Fines vary in each province.  The regulations will be enforced by enforcement officers that will plug a portable testing device into the vehicle's Electronic Control Module. 

Cargo loss and damage claims against common or contract carriers for damages to interstate shipments have long been governed by the Carmack Amendment. Further, courts have routinely held the Carmack Amendment preempts state law claims for negligence, breach of contract and tort claims.  In other words, since federal law provides the exclusive remedy for cargo loss or damage on an interstate shipment, the claimant can not assert state law claims. 

Earlier this month, a Texas federal court followed this long line of authority and held the Carmack Amendment preempts state law claims – even when those state law claims are for the intentional tort of conversion.  See Tran Enterprises LLC d/b/a Nutrition Depot v. DHL Express (USA), Inc., 2010 LEXIS 2092, at *2 (S.D. Tex. January 12, 2010).  In this case, the plaintiff alleged DHL converted COD checks it collected at the time of delivery, failed to tender these checks to it, and was liable for conversion under state law.  The court held intentional tort claims under state law, like the plaintiff's conversion claim, are preempted and Carmack remains the shipper's exclusive remedy. 

Whether involved in class action defense, truck accident litigation, or cargo loss and damage claims, a recent order from a New York federal court will likely impact transportation litigation going forward.     

Six years ago, Judge Shira A. Scheindlin, of the Southern District of New York authored the Zubulake decision.  The Zubulake decision provided the basis for current law and rules regarding the discovery of electronically stored information (“ESI”).  Recently, Judge Scheindlin has issued another decision involving ESI that will likely be looked to by other courts when addressing similar issues: The Pension Committee of the University of Montreal Pension Plan, et al., v. Banc of America Securities, et al., 05-civ-9016, (S.D. N.Y. January 10, 2010)(as corrected on January 15, 2010)(collectively, the “Order”).

In her order entitled “Zubulake Revisited: Six Years Later,” Judge Scheindlin found that – although the case did not present any egregious examples of purposeful destruction of documents – the plaintiffs failed to timely institute written litigation holds and were careless and indifferent in their preservation and collection of documents after the duty of preservation arose.  Judge Scheindlin sanctioned the Plaintiffs, with an instruction to the jury allowing the jury to assume missing documents were bad for Plaintiffs, requiring Plaintiffs to pay certain attorney’s fees and costs to Defendant, and ordering Defendant to search backup tapes for additional information.

This case is interesting because most cases addressing discovery of ESI, particularly those awarding sanctions, involve egregious behavior.  The facts of this case, however, are much more pedestrian – a party that didn’t instruct all persons with electronic documents relating to a matter in litigation to preserve all those documents with a formal litigation hold letter; gathering relevant documents was largely left to operational employees without supervision; together with other factors that led the court to describe the party’s ignorance and indifference towards discovery (including the search for and preservation of electronic documents).

Courts have previously held that failure to instruct relevant employees to preserve documents constituted gross negligence.  Likewise, courts have previously held issuing a litigation hold memorandum and delegating the task of identifying relevant documents to operational level employees is not enough. 

However, this court clarifies that instructions to employees to provide the company’s counsel with relevant documents via phone, e-mail, a memorandum, and in a monthly litigation update are not sufficient to satisfy the duties of preservation and production – since the employees were not instructed to preserve all relevant documents and there was little supervision over the preservation and collection. 

The concepts forming the basis for the Order are not novel or new.  But because these concepts were used to justify an award of sanctions where there was no intent to destroy documents or other shocking behavior, and because the author of modern law on this subject spends 87 pages laying out the rules that justify these sanctions, it is increasingly likely other courts will follow suit.