Transportation & Logistics Blog

U.S. Export Controls May Apply In Situations That Are Wholly Domestic And/Or Unlikely To Be Recognized As International

Margaret Jones Hopson — Fri, 17 May 2013 00:00:00 -0500

Many U.S. companies are operating under the somewhat understandable, but very hazardous belief that they can disregard U.S. export control laws unless they deal with advanced, delicate or military related goods or technology. U.S. export control laws affect not only a wide range of international transactions, but also a host of activities that are wholly domestic and/or unlikely to be readily recognized as international in scope.

Would You Have Known That Export Control Laws Apply In The Following Scenarios?

· A company with no international activity may have to restrict foreign national employees’ exposure to certain technology.

· A company engaged in domestic sales of goods intended for subsequent export must comply with basic diligence, including running buyers through “bad boy lists” and including a destination statement in their commercial documents.

· A company engaged in exporting a wholly foreign-manufactured item, even if shipped from one foreign country to another foreign country,will have U.S. export control responsibilities if the item contains a de minimis amount of U.S. content, including development and design.

The maze of U.S. export controls is challenging; however, you can and must understand and comply with the obligations that apply to your activity. This post is intended to assist with recognizing what obligations may apply to you. The full reach of export controls is beyond the scope of this piece. Rather, this piece is intended to provide a basic understanding of the Export Administration Regulations (EAR).[i]

Enforcement of the EAR

Located within the Department of Commerce, the Bureau of Industry and Security (BIS) enforces the EAR to protect U.S. national security, foreign policy and economic interests. The regulations place responsibility on parties involved in transactions subject to the EAR by virtue of their: information regarding the transactions; authority to carry out the transactions; or actual involvement in them. This may include freight forwarders, carriers, consignees and others, in addition to the actual exporter. Even if the terms of sale are such that title changes in the United States and the American seller of manufacturer is not actually “exporting,” if the buyer/exporter is not American, the U.S. seller or manufacturer has compliance responsibilities.

Consequences of Violating the EAR

Consequences of violating the EAR include criminal and civil penalties. In October 2007, enhanced consequences became effective whereby civil penalties are the greater of $250,000 or twice the value of the transaction. For most administrative violations, there is no intent requirement. Criminal violators may be fined up to $1 million and/or face up to 20 years in prison. For both civil and criminal violations, export privileges may be denied.

Major Enforcement Areas

There is a myriad of ways in which the EAR may be violated. Some of the less commonly known, which may be a trap for the unwary, follow.

1. Failure to observe license conditions is an area of enforcement that often goes unrecognized. BIS adds conditions to almost all export licenses. Your job is not done when you receive the export license. You must comply with the conditions of that license. These conditions may restrict the way an item is used after export or may require certain reports to be made by the exporter.

2. The deemed export rule provides that a release of technology or source code subject to the EAR to a foreign national in the United States is deemed to be an export to the home country of the foreign national. That deemed export may require a license.

3. Embargoes are another issue. The United States maintains export controls against countries that have been designated by the Secretary of State to be sponsors of terrorism. These countries are often subject to partial or complete embargoes, so the export of even ordinary commercial items not typically controlled to other countries may require an authorization from BIS or the Office of Foreign Assets Control. Most exporters are familiar with the embargo of Cuba; however, there are others and U.S. law in this area is often changing. You should check the following websites for updates:

· OFAC: www.treas.gov/offices/enforcement/ofac

· BIS: www.bis.doc.gov/PoliciesandRegulations/regionalconsiderations.htm

Note that OFAC generally forbids even U.S. domestic transactions with persons on its Specially Designated Nationals or SDN list.

4. Freight forwarders also face enforcement issues. While primary compliance responsibility falls on the U.S. principal party in interest, often the U.S. seller, freight forwarders and other agents for the U.S. principal party are responsible for their own actions, including representations they make by signing an export declaration or other export document. Agents of exporters must also decide whether any aspect of a transaction raises a red flag and ensure that suspicious circumstances are not ignored.

5. False statements and misrepresentations of fact are another way to violate the EAR. A party to an export transaction may be subject to administrative and/or criminal sanctions for making false statements to the U.S. government in connection with an activity subject to the EAR. Common types of false statements are that an export does not require a license or statements that an export was shipped under a particular export license when, in fact, that license was used for another item,

6. Anti-boycott violations are likewise contemplated in the EAR. The anti- boycott provisions of the EAR prohibit U.S. persons from complying with unsanctioned foreign boycotts and require that U.S. persons report their receipt of certain boycott requests to BIS. The Arab League boycott of Israel is the principal foreign boycott U.S. persons must be concerned with today. However, these anti-boycott provisions apply to all boycotts of countries that are friendly to the United States.

7. Successor liability is a concern for those looking to acquire a business that may have violated the EAR. Recent administrative cases have made it clear that businesses can be held liable for violations of the EAR committed by companies that they acquire. A properly structured due diligence review can determine whether an acquired company has violated any export laws and should examine the following:

· Commodity classifications;

· Technology exchanges;

· Export licenses;

· End-users/end-uses;

· International contracts;

· Foreign employees with access to controlled technologies; and

· The target company’s export policies, procedures and compliance manuals.

Principles of an Effective Compliance Program

An effective compliance program can help an exporter avoid violating the EAR, and is also afforded great weight in the mitigation of a violation of the EAR. BIS employs nine guiding principles to assess the effectiveness of an export compliance program:

· Meaningful risk analysis

· Existence of a written compliance program

· Responsibility and supervision by senior company officials

· Adequate training of employees

· Screening of customers and transactions

· Compliance with recordkeeping requirements

· An internal system for reporting potential violations

· Internal/external reviews or audits; and

· Remedial activity in response to export violations

What to do if You Have a Potential Violation

The BIS encourages Voluntary Self Disclosures (VSD) when you believe you have violated the EAR. While most VSDs result in no penalty and are resolved with a finding of no violation or a warning letter, a word of warning is in order. Caution should be used in deciding whether to submit a VSD. Not only the facts you are disclosing, but your entire operation will be subject to scrutiny. If you discover a potential violation, you should consult with counsel before deciding to file a VSD.

Conclusion

There are many ways in which the unwary exporter can violate the EAR. However, by understanding the many ways in which the EAR may be violated and establishing an effective export compliance program, you can operate within the confines of the regulations. If you find an export violation may have occurred, you should fully investigate the circumstances of that potential violation and your overall export activity in deciding whether to file a VSD.

*Editor’s Note: Margaret is a partner in Strasburger’s San Antonio office, and practices primarily in the area of international trade regulation. She may be reached at 210.250.6001 or margaret.hopson@strasburger.com .

[i] 15 CFR §§ 730 – 774.

Another Government Agency That Wants to Help: Federal regulations on the transfer of radio licenses

John D. Heffner — Wed, 24 Apr 2013 00:00:00 -0500

How many clients realize that the two-way radios that they use for business communication are subject to regulation by the Federal Communications Commission (“FCC”)? Do they know that these licenses have a finite term and must be renewed or they will expire? Furthermore, how many realize that any transfer of control involving the holder of a radio license requires FCC approval? How many know that the FCC can and does fine licensees for unauthorized transactions when it discovers them? For example, the state-owned Alaska Railroad paid the FCC $50,000 in lieu of paying a fine for violating the FCC’s ex parte communication rules in connection with the use of its assigned radio frequencies.

For your information, there is a category of radio communications regulated by the FCC commonly known as “private land mobile radio.” These license holders include businesses that use radio frequencies in their day to day conduct of their activities. Typical examples include railroads, water carriers, bus and trucking companies, taxi and limousine companies, airlines, utility companies, mining and mineral extraction companies, oil rig operators, and local governments. The FCC has special provisions pertaining to frequencies used by maritime-related concerns and railroads.

Section 310(d) of the Communications Act of 1934 governs changes in control of FCC license holders of all types. It states as relevant:

“No construction permit or station license, or any rights thereunder, shall be transferred, assigned, or disposed of in any manner, voluntarily or involuntarily, directly or indirectly, or by transfer of control of any corporation holding such permit or license, to any person except upon application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby. Any such application shall be disposed of as if the proposed transferee or assignee were making application under section 308 of this title for the permit or license in question; but in acting thereon the Commission may not consider whether the public interest, convenience, and necessity might be served by the transfer, assignment, or disposal of the permit or license to a person other than the proposed transferee or assignee.”

In other words, a party can’t transfer a radio license from one entity to another without FCC approval and the agency may penalize the parties for an intentional unauthorized transfer, usually by imposing a fine. Similarly, one cannot transfer control of the entity that owns the license to another party without FCC approval. The FCC’s rules at 47 CFR §1.948 specify the procedures for applicants to follow in seeking agency approval for a transfer. Applications covering what it calls “industrial radio” fall into two categories: (1) substantial and (2) pro forma. The FCC defines a substantial assignment or transfer of control as “(1) a transaction involving the assignment of an FCC license to an entity that is not controlled by the same parties as the assignor or a change in controlling ownership interest of the licensee-entity or (2) a change in actual operating control of the licensee.” Thus when a party [corporate or otherwise] acquires control of another company through a stock purchase, the FCC would require the filing of a substantial application. Thus, when one holding company acquires control of another holding company that in turn holds licenses, a substantial application would be required.

More modest changes in control such as that involved in a corporate reorganization do not require the filing of a substantial application but rather a pro forma one. The FCC defines a pro forma transaction “as one involving a non-substantial change in ownership of the license or licensee entity.” Typical instances would include the change of an entity from a corporation to an LLC or vice versa. Similarly, an internal corporate reorganization which does not entail any change in the overall ownership would likely be eligible for FCC handling as a pro forma application. An example would be eliminating an intermediate holding company between the “senior” holding company at the top of the corporate chart and the individual license holder(s) below or changing the control of a subsidiary license holder from one entity to another with the result that licensee would still remain in the greater corporate family. See, FCC Q&A at ¶6.

The applicant initiates the approval process by filing an on-line application (a process that it technologically similar to filing an on-line college entrance application with which many parents are familiar or may soon learn about). The application must be accompanied by a fairly modest filing fee. Upon receipt, the FCC reviews the application for completeness and then publishes a notice of the filing on its website. Similar to some other federal agencies, potential opponents are given a limited amount of time to file an objection. Upon finding that a grant of the application will serve the public interest, the FCC will publish a public notice of approval. Id. at ¶¶3 and 8. After that, an opponent must file a petition for reconsideration to challenge a grant of authority. Regardless of whether a transaction requires the filing of a substantial or a pro forma application, it generally may not be consummated until the application is granted. However, where the application involves a request for temporary conditional authority for frequencies below 470 MHz, the parties may close a transaction upon filing form 601without waiting for FCC approval. Once authority is granted, the applicant has 180 days in which to notify the FCC of consummation, otherwise the authority lapses. 47 CFR §1.948(d).

Not infrequently, the transaction may involve the attempted transfer of either an expired license or one where the previous owner neglected to get some of the requisite authority. The FCC will not permit the assignment or transfer of an expired license under any circumstances. The typical remedy for an unauthorized transaction is to file a waiver petition under the FCC’s rules along with the requisite filing fee and any explanation.

The FCC takes very seriously unauthorized transfers of authority. The unauthorized substantial transfer carries a base forfeiture of $8,000 per violation while an unauthorized pro forma transfer carries a base forfeiture of $1,000 per violation. FCC Q&A at ¶15, 49 CFR §1.80. However, where the failure to obtain authority was inadvertent and the party has acted in good faith, the normal process is for the applicant to seek retroactive agency approval along with any waiver requests that may be necessary. Whether or not the FCC’s Enforcement Bureau will take any action on an unauthorized transfer is a function of a number of factors including how long ago the unauthorized transaction occurred, the number of licenses involved, and whether there was more than one unauthorized transaction that took place.

________________________________________________
1 This does not include any sort of citizens band or amateur radio.
2 The FCC has set aside a group of 97 frequencies for use by most railroads in the 160.110 to 161.565 Mhz band managed by the railroad industry trade association, the Association of American Railroads.
3 47 U.S.C. §310(d).
4 In an asset purchase involving a transfer of a radio license the applicant would seek permission to assign the frequency. In any sort of stock purchase or merger transaction the applicant would seek permission to acquire control. There is a question of whether certain federal transportation laws which exempt STB approved mergers and consolidations from the antitrust laws and all other laws including state and municipal laws cover the Communications Act. The FCC staff does not believe that this provision relieves license holders or their owners from an obligation to file form 603 if otherwise required; however, the FCC has not formally addressed this issue.
5 See FCC fact sheet dated 9/19/2000 cited as “FCC Q&A” at ¶6.
6 47 CFR §90.159(c).

Once More Unto the Breach [1]

Katherine T. Garber — Mon, 18 Mar 2013 00:00:00 -0500

In a recent opinion from the Southern District of Texas, one court has held that a breach of a material warranty provision in an insurance policy did not void coverage for the insured for a subsequent cargo loss by theft. W.W. Rowland Trucking Co., Inc. v. CRC Ins. Svcs., Inc., No. H-12-91 (S.D. Tex. Jan. 13, 2013). Although a victory for the trucking company, the facts of this case are such that others should not blithely rely on the opinion to save themselves from the adverse consequences of their own policy breaches.

W.W. Rowland Trucking Co., Inc. (“Rowland”) purchased motor truck cargo liability and theft insurance from Alterra America Insurance Company (“Alterra”) to cover its operations and various terminal facilities. In acquiring this insurance, Rowland represented to Alterra that its terminals were “100% fenced, gated, locked and lighted 24 hours per day, 7 days per week.” This representation was incorporated into the policy in the form of the following warranty:

Warranted that all eight (8) scheduled terminals are 100% fenced, gated, locked and lighted 24 hours per day, 7 days per week. Coverage is null and void otherwise.

While the policy was in effect, thieves stole a tractor/trailer rig loaded with $354,000 of video game consoles from a Rowland terminal that was not “100% fenced;” the facility had gaps in its fencing on the western and southern perimeters. However, investigation of the loss revealed that the thieves had cut and rolled back a large section of the fencing on the eastern side of the terminal, creating a hole which they used for both ingress and egress. Rowland presented the theft claim to Alterra, which denied coverage based on violation of the warranty provision. Rowland sued Alterra for breach of contract, and the parties filed cross-motions for summary judgment on the claim.

Citing various sections of the Texas Insurance Code, the presiding judge held that coverage under the insurance policy was not voided by Rowland Trucking’s “technical” breach of the warranty provision, notwithstanding the “null and void” wording contained therein, as Alterra did not meet its burden of proving that the breach was a contributing factor to the loss. As stated in the Code’s anti-technicality statute,

[u]nless the breach or violation contributed to cause the destruction of the property, a breach or violation by the insured of a warranty, condition, or provision of a fire insurance policy or contract of insurance on personal property, or of an application for the policy or contract:

(1) does not render the policy or contract void; and

(2) is not a defense to a suit for loss.

Tex. Ins. Code § 862.054 (2012). Alterra argued that the foregoing provision did not apply, as the stolen cargo was not Rowland’s personal property, but was that of a third party. Disagreeing, the court noted that Rowland, as a bailee for the cargo owner, possessed all rights and responsibilities of the owner, thereby triggering the statute’s application.

Rowland was fortunate in this instance—the breach of the insurance warranty was deemed “immaterial” only because evidence established that the existing fencing gaps on the western and southern sides of the terminal were not utilized by the theives either to enter or exit the property. Had the thieves entered the property through an existing breach, yet made their own exit, coverage may have been voided. Moreover, the existing gaps arguably made the terminal a “target” for theft by suggesting it lacked security—the very reason an insurer would have included the warranty in the policy in the first place.

Trucking companies and terminal operators should look upon the Rowland decision as a unique and fact-specific exception to the norm—more often than not, such policy violations will provide direct causal links to theft losses, thus resulting in the forfeit of insurance coverage. Thus, as they say in London, “mind the gap.”

[1] From the “Cry God for Harry, England, and Saint George” speech of Shakespeare's Henry V, Act III, (1598).

Pig or Prince? Cleaning up Your CSA Scores May Call for an Extreme Makeover

Stephen T. Dennis — Fri, 21 Dec 2012 00:00:00 -0500

How many times have you been confronted with this conversation? “I would love to use your services, but one of your Compliance, Safety, Accountability (“CSA”) BASIC scores has a yellow triangle with an exclamation point. My lawyer tells me that my company may be subject to potential liability if I use you. Clean up your BASIC scores and we can relook at a business relationship.” What can you do? Give up on ever having any more business prospects? No way!

There are numerous ways to clean up your CSA BASIC scores. This blog entry, however, is going to save that topic for another day. Instead, in some circumstances, it may make sense to start over and create an entirely new company. Sound difficult? Not really. But as with all “reincarnation,” you want to make sure your company comes back as a prince and not a pig.

The reincarnation god, also known as the Federal Motor Carrier Safety Administration (“FMCSA”), has set up new rules that you need to consider in making any decision to reincarnate. The intent of the rules is to prevent motor carriers from reincarnating when they engage in egregious instances of noncompliance and evasion related to the Federal Motor Carrier Safety Regulations.

The new rules were proposed as a result of a tragic incident. In this case, a 2008 fatal bus crash in Sherman, Texas spurred action. Investigation revealed that the motor carrier did not have operating authority from the FMCSA. Instead, it had an application for authority pending with the Agency. More importantly, the bus company turned out to be a reincarnation of another bus company which the FMCSA recently placed out of service. Not surprisingly, the FMCSA wanted to ensure this situation did not arise again.

To prevent tragic accidents from reincarnated motor carriers or their affiliates, the FMCSA invoked its power to issue out-of-service orders. Specifically, motor carriers, intermodal equipment providers, brokers, and freight forwarders determined to reincarnate or operate as affiliates to avoid enforcement action or a negative compliance history can be placed out-of-service. Of course, administrative review applies to any out-of-service order issued. In addition to being placed out of service, the FMCSA may also consolidate the compliance records of reincarnated carriers and their predecessor affiliated carriers. In other words, if your reincarnated company finds itself under FMCSA scrutiny, there is a strong chance that your new company will be placed out-of-service and will be stuck with your previous company’s safety record. Sounds like a pig to me.

Making sure your new company is a prince and not a pig takes some thoughtful action. As always, the devil is in the details. The FMCSA notes that a motor carrier who changes its operational model for a legitimate business purpose and not to avoid FMCSA regulation or enforcement is not prohibited by the reincarnation rule. Of course, the definition of a “legitimate purpose” and the meaning of “avoid[ing] FMCSA regulation or enforcement” remain to be seen. Nonetheless, there are some guiding principles that should be helpful.

Specifically, the FMCSA looks at the intent behind the motor carrier’s conduct. If a new motor carrier shows an attempt to avoid compliance with regulations or the consequences of past violations, then an out-of-service order may be issued. Conversely, if the totality of available information demonstrates a legitimate business purpose for the change, such as a corporate restructuring or the addition of a new or even somewhat different ownership structure, then it is likely that no order would be issued. The FMCSA will be using 13 factors to guide this determination. The factors are rather lengthy, but range from the consideration exchanged for assets purchased or transferred, to the commonality of drivers and other employees.

In addition to the FMCSA regulations, other practical considerations regarding reincarnation should be considered. For example, if you are seeking a fresh start and clean CSA scores, then you need to make sure that old habits that led to undesirable CSA scores are addressed and remedied. Failure to do this will likely put you back in the same position or will cause you to face even greater scrutiny from the FMCSA.

Another thought is that your reincarnated company will be a brand new carrier. Many customers may not be comfortable working with a “start up.” As a result, you may want to discuss reincarnation with your customers prior to reincarnating. After all, reincarnation may not make sense if your reincarnated company cannot find any business.

If you would like to discuss the new reincarnation rules or any other transportation related issues, the attorneys at Strasburger & Price, LLP are here to assist you.

To Broker, Or Not to Broker – That is the Question

Katherine T. Garber — Tue, 27 Nov 2012 00:00:00 -0500

On July 6, 2012, President Obama signed into law H.R. 4348, the “Moving Ahead for Progress in the 21st Century Act” (MAP-21). Sections 32915 through 32919 of MAP-21 are also known as the “Fighting Fraud in Transportation Act of 2011” or “FFITA.” Most of FFITA went into effect on October 1, 2012. Although the stated purpose of FFITA is to reduce marketplace fraud in the transportation industry, the language used by Congress may actually compound the confusion it attempts to correct.

Three areas of concern relevant to the land-based movement of cargo are as follows:

(1) The Act requires the issuance of separate and distinct registration numbers for services provided by an entity as a motor carrier and/or a broker. The purpose of requiring “distinctive” registration numbers is to allow those who deal with motor carriers and brokers (some of which act in multiple capacities) to readily recognize in what specific capacity that entity is acting in any given transaction. Under this new provision, motor carriers must have separate broker authority and a bond to re-broker freight to another carrier. Unless a motor carrier transports the goods on its own truck for at least part of the carriage, the handing off of goods to another carrier is now considered “brokerage” under the new law.

The stated purpose of the above provision is to end unauthorized re-brokering by motor carriers in situations where a motor carrier accepts the load but does not actually physically transport it in a vehicle that is owned, rented or leased by the carrier. Although it appears that the drafters of FFITA intended to allow continued interlining among carriers as long as each carrier performs part of the physical movement of the cargo, Congress unfortunately used the term “interchange” in lieu of “interline.” An “interchange” is defined in 49 C.F.R. 376.2(c) as “ [t]he receipt of equipment by one motor common carrier of property from another such carrier, at a point which both carriers are authorized to serve, with which to continue a through movement”. This definition does not extend to cross-dock interlining without the exchange of trailer equipment – a common practice among LTL carriers who call it “convenience interlining,” and use it to serve low-density areas by concentrating freight with a single regional carrier. Must motor carriers who engage in this practice obtain separate broker authority? Moreover, do those motor carriers who already hold separate broker authority have to reapply for “distinctive” registration numbers, or will the FMCSA simply issue these? And what happens if the FMCSA does not promptly do so?

(2) The Act also imposes new requirements on both brokers and freight forwarders.

In addition to having the proper authority, brokers and freight forwarders must increase their required surety bond amounts from $10,000 to $75,000. Unlike other provisions of the Act (which are already effective), the new bond requirement does not go into effect until October 1, 2013. This significant increase, although intended to offer additional security for shippers and to discourage “vanishing” intermediaries, may force smaller independent brokers out of the marketplace.

Add to this the experience requirement for freight forwarders’ and brokers’ officers – “three years of relevant experience” or “satisfactory evidence” of the individual’s knowledge of related rules, regulations and industry practices – and some fledgling intermediaries will simply not be able to comply. Note that the Act does not define “relevant experience” or “satisfactory evidence” for the purpose of satisfying this requirement. It is also unclear as to whether this requirement applies only to new applicants, or also to those who already hold broker and/or freight forwarder authority.

(3) Finally, the Act imposes Draconian penalties on those officers and directors of companies found to be engaging in unregistered brokerage (as redefined by the Act). Any person who “knowingly” authorizes, consents to, or permits a violation of the enumerated unlawful brokerage activities is liable to the United States Government for a civil penalty in an amount not to exceed $10,000 for each violation, and to the injured party for valid claims incurred without regard to amount. Such liabilities apply jointly and severally to both the entity involved and its individual officers, directors, and principals.

For motor carriers and others who fall within the ambiguities of the Act, unwittingly committing “unregistered brokerage” in connection with the carriage of goods carries potentially disastrous penalties, potentially including inadvertent waiver of Carmack liability limitations that might otherwise apply to a claim for freight damage. Until these issues are clarified by legislation, FMCSA interpretation and/or case law, those who fall within these gray areas should proceed with caution.

Got Tank Trucks? Got Drivers? The Shale Energy Industry Wants You (If You’re DOT-Legal)

Mark Andrews — Mon, 04 Jun 2012 00:00:00 -0500

A little-noticed side effect of the shale energy exploration and production boom is an explosion in demand for tank truck capacity to, from and within States such as Texas, Pennsylvania and North Dakota. Most hydraulic fracturing or “fracing” projects depend on constant availability of tank trucks to transport frac fluid and frac sand to production sites, and waste water from there to disposal wells or recycling facilities. Spot shortages of tanker capacity already are a fact of life in the States mentioned, and are spreading to other States and other industries as capacity migrates to the shale belts.

Small and start-up tanker fleets have expanded rapidly to try to meet this demand. But those fleets – and the E & P operators that use them – can get in big trouble with the U.S. Department of Transportation (“USDOT”) and its Federal Motor Carrier Safety Administration (“FMCSA”), as well as with state transportation safety regulators, if they ignore existing regulations on driver qualifications, drug and alcohol testing, driver hours of service, and equipment maintenance. Established truck fleets are well aware of these regulations, but this posting is intended as a heads-up for others who either are managing shale projects or interested in hauling for them.

Strasburger has lawyers who are thoroughly familiar with federal and state truck safety regulations, and we also have a network of non-lawyer consultants who can help you design an FMCSA compliance program. Based on our experience, here is a general checklist of the types of truck safety regulations that will apply to shale energy service fleets:

Driver Qualifications: To operate tank trucks with a gross vehicle weight rating (“GVWR”) over 26,000 pounds, a driver must have a single Commercial Driver’s License or CDL issued under FMCSA standards, and must undergo pre-employment, post-accident, reasonable-cause, periodic and random drug/alcohol testing. The driver must meet FMCSA medical standards, and the carrier must conduct periodic background checks on the driver. All of this data must be maintained in a driver qualification or DQ file meeting FMCSA requirements.

Driver Hours of Service: There are strict limits on the hours a driver can spend “on duty” and behind the wheel – generally 14 hours per day on duty, 11 hours per day driving, and either 60 hours on duty in a seven-day period, or 70 hours on duty in an eight-day period. These hours must be documented in a paper logbook, unless the driver operates only within a 100-mile radius of his/her home base or has an electronic logging system installed on his/her truck. The carrier must check and maintain various secondary records in order to combat falsification of logbooks. Drivers and carriers can and do get shut down for violating these rules. If a fatigued driver who is “out of hours” should kill someone in an accident, the driver and his/her boss can be looking at jail time – wholly aside from possible six-figure civil penalties assessed by FMCSA and possible seven- or eight-figure verdicts assessed by juries.

Vehicle Maintenance: Periodic safety inspections are required and the results must be maintained in carrier records. In addition, the driver must do a visual inspection or “walk-around” of his/her truck at the start of a shift, and written records of the walk-arounds must be kept.

Insurance: Every FMCSA-regulated fleet must maintain insurance or a bond providing at least $750,000 in coverage (combined single limit) for bodily injury and property damage (BI&PD). The policy must contain an FMCSA-prescribed endorsement designed to fill certain frequent coverage gaps.

Hazardous Materials: Generally speaking, waste water from fracing operations is not regulated as a hazardous material at this time. However, certain types of frac fluid and frac sand do qualify as “hazmat” depending on their chemical composition. Hazmat haulers must hold CDLs and must undergo drug/alcohol testing regardless of the GVWR of the vehicles they operate. Their BI&PD coverage must be $1 million or $5 million, depending on exactly what they haul.

Federal v. State Regulations: If a truck fleet operates entirely within the boundaries of a single State, and never is involved in a hand-off of freight moving out-of-state, it may avoid FMCSA jurisdiction but still will be subject to the truck safety regulations of that State. However, most States for most purposes have adopted FMCSA regulations to govern intrastate movements. In addition, hazmat movements are regulated by FMCSA even within a single State. Moreover, the courts have held that a fleet will be subject to FMCSA regulation if as little as four percent of its business involves interstate movements.

Enforcement: Despite the fact that federal rules largely occupy the field of truck safety regulation, state troopers and state DOT personnel account for the vast majority of truck safety enforcement along the Nation’s roadsides. FMCSA grants hundreds of millions of dollars to the States each year for this purpose. Roadside enforcement data is fed into FMCSA, which maintains and publishes it in detailed compliance data bases that anyone (including your competition and your customers) can inspect. Moreover, FMCSA does on-site compliance reviews (safety audits) at the headquarters of approximately 18,000 carriers every year.

The above checklist only scratches the surface. Anyone concerned with safety management of a truck fleet – especially if new to the transportation side of shale energy – is encouraged to contact any of the co-leaders of Strasburger’s Transportation and Logistics Practice for further information. The co-leaders are Mark Andrews (202.742.601 or mark.andrews@strasburger.com), Sam Hallman (469.287.3957 or sam.hallman@strasburger.com) and Mark Scudder (214.651.4654 or mark.scudder@strasburger.com).

Tainted Tilapia: How Much Can It Cost You?

Annie J. Jacobs — Fri, 27 Apr 2012 00:00:00 -0500

Crystal Cove Seafood (“Crystal Cove”) contracted with Orient Overseas (“Orient”) to transport frozen tilapia from China to Smyrna, Tennessee. The tilapia needed to be transported at -0.4 degrees Fahrenheit. The shipping container’s refrigeration unit malfunctioned and Crystal Cove refused to accept delivery. Orient brought suit for damages for wrongful refusal to accept delivery and demurrage fees, and Crystal counterclaimed under the Carriage of Goods by Sea Act (COGSA) for the market value of the entire shipment of tilapia.

Orient received the tilapia in good order and condition in China. The container was shipped overseas, and then transported via rail line to Memphis, Tennessee, where it was transported by truck to a storage facility. On August 1, 2009, Orient learned of a refrigeration malfunction on the container. Orient decided not to transfer the cargo into a working container (without a valid reason) and attempted to deliver the load on August 4, 2009. The cargo was rejected in full. The temperature in the container was 70 degrees Fahrenheit and emitting a horrendous smell. The load inspector randomly sampled boxes and the temperature was around 30 degrees in the sampled boxes. The inspector was afraid the stench would contaminate the entire warehouse.

Although Orient acted with due diligence prior to the shipment, Crystal Cove established that Orient was negligent in its handling of the shipment once it was notified of the refrigerator malfunction, and its negligence caused the damage to the cargo. The cargo was eventually transferred to a properly refrigerated container and (after months of arguing) sold for a salvage value of around $30,000. Crystal Cove, however, sought to recover the market value of the entire shipment of tilapia, around $60,000.

Generally, a shipper is obligated to accept delivery by a carrier, even if the goods are damaged, unless the damage renders the cargo practically valueless. However, a shipper does not always act unreasonably in rejecting an entire shipment, even if some is salvageable, especially when food products are involved. The Court concluded that Crystal Cove did not act unreasonably in rejecting the entire shipment, even though the tilapia ultimately had a 50% salvage value, because in this instance, the tilapia was practically valueless for human consumption. The stench from rotting food can render nearby bags or boxes of food, although not spoiled or rotten, valueless for human consumption. Crystal Cove was entitled to recover the market value of the entire shipment of tilapia.

In this case, one bad fish can, indeed, spoil the bunch.

Orient Overseas Container Line Ltd. v. Crystal Cove Seafood Corp., 2012 U.S. Dist. LEXIS 18447 (S.D.N.Y. Feb. 14, 2012).

To Sleep, Perchance to Fry: Debate Over Texas Anti-Idling Rules Heats Up - Literally

Katherine T. Garber — Mon, 04 Oct 2010 00:00:00 -0500

By Katherine T. Garber*

Recent changes in Texas law on idling truck engines have sharpened the conflict between two goals that few would question: improving air quality (which can get dangerously bad in the Texas summer heat) and enabling long-haul truck drivers to get their legally required hours of rest in a sleeper berth (which can be difficult in that same summer heat unless the truck’s engine is running to provide air conditioning). It therefore seems appropriate to review the current patchwork of Texas law on truck idling.

On December 9, 2004, the Texas Legislature enacted a law prohibiting vehicles larger than 14,000 pounds (such as a Ford F-450, or larger) from idling longer than five consecutive minutes during the summertime (defined as the period of April 1 through October 31 of each calendar year). The stated purpose of the law is to lower nitrogen oxide and other emissions from fuel combustion, thus improving air quality.

Despite the concerns regarding air pollution in a number of areas within the State, the law is not enforced statewide. Only those governmental entities which have signed a Memorandum of Agreement (MOA) with the Texas Commission on Environmental Quality (TCEQ) can enforce the rules and set the dollar amounts for fines. Thus far, only the following governmental entities in the general vicinities of Dallas and Austin have signed MOAs to enforce this law:

North Central Texas Area

    City of Arlington
    City of Benbrook
    City of Celina
    City of Colleyville
    City of Dallas
    City of Euless
    City of Hurst
    City of Keene
    City of Lake Worth
    City of Lancaster
    City of Mabank
    City of McKinney
    City of Mesquite
    City of North Richland Hills
    City of Pecan Hill
    City of Richardson
    City of Rowlett
    City of University Park
    City of Venus
    Town of Little Elm
    Town of Westlake
    Collin County
    Dallas County
    Kaufman County
    Tarrant County

Central Texas Area

    City of Austin
    City of Bastrop
    City of Georgetown
    City of Hutto
    City of Lockhart
    City of Luling
    City of Round Rock
    City of San Marcos
    Bastrop County
    Caldwell County
    Hays County
    Travis County
    Williamson County

Surprisingly, the law has not been implemented in Houston and Beaumont, both of which are classified as “non-attainment areas,” meaning that their air pollution exceeds EPA guidelines. Other parts of the State, such as West Texas and South Texas, simply have not bothered to sign MOAs with the TCEQ. As a result, large vehicles can freely idle in some parts of the State without penalty, but not in others.

As it was originally written, the law provided an exemption for truckers using sleeping berths for government-mandated rest periods. However, that exemption expired in September of 2009, and idling is no longer permitted for this purpose, thus understandably causing frustration for those in the trucking industry whose vehicles do not have a separate power source to regulate sleeper berth temperatures.

Vehicles currently exempt from the anti-idling rules are as follows:

1.   a motor vehicle that has a gross vehicle weight rating of 14,000 pounds or less;

2.   a motor vehicle forced to remain motionless because of traffic conditions over which the operator has no control;

3.   a motor vehicle being used by the U.S. military, national guard, or reserve forces, or as an emergency or law enforcement motor vehicle;

4.   the primary propulsion engine of a motor vehicle if the engine also provides a power source necessary for such purposes as operating a cargo refrigeration unit or a mobile crane;

5.   the primary propulsion engine of a motor vehicle being operated for maintenance or diagnostic purposes;

6.   the primary propulsion engine of a motor vehicle being operated solely to defrost a windshield;

7.   the primary propulsion engine of a motor vehicle that is being used to supply heat or air conditioning necessary for passenger comfort and safety in vehicles intended for commercial or public passenger transportation, or passenger transit operations, in which case idling up to a maximum of 30 minutes is allowed;

8.   the primary propulsion engine of a motor vehicle being used to provide air conditioning or heating necessary for employee health or safety while the employee is using the vehicle to perform an essential job function related to roadway construction or maintenance; and

9.   the primary propulsion engine of a motor vehicle being used as airport ground support equipment.

In addition, the law does not apply to the owner of a motor vehicle (such as a truck leasing company) when the vehicle is rented or leased to a person that operates it but is not employed by the owner.
Unless and until the law is revised and/or is adopted across the entire State, a trucker’s greatest challenge will be in keeping track of where he or she can sit or use a sleeper berth with the engine running within the April-to-October period, without risking a violation of this law and a resulting fine.

*Kathy Garber is a partner in the Houston office of Strasburger & Price. She can be reached at 713.951.5665 or kathy.garber@strasburger.com .

It's Not Just Trucking: Increased Scrutiny of Companies Using Independent Contractors All Across the Economy

Francine W. Breckenridge — Tue, 01 Jun 2010 00:00:00 -0500

By Francine Breckenridge*

Ms. Clasifyed has independent contractor agreements with all of her bakery delivery drivers. She also supplies the delivery trucks, gas, schedules the drivers’ work hours and pays the drivers by the hour. She knows that the twenty-factor common-law test (now found at IRS Rev. Rul. 87-41) to determine if a worker is an independent contractor or an employee is confusing and frustrating, and she really can’t tell by reading those factors which employment status category applies to her drivers. She understands that there is a chance that some authority might maintain that the bakery drivers are really “employees,” but she also knows that Section 530 of the IRS Revenue Act of 1978 provides a “safe harbor” provision. If she has a “reasonable basis” to support her independent contractor classification, then more than likely, no employment tax penalties will be imposed on her business for wrongfully classifying the drivers.

What Ms. Clasifyed does not know is that both state and federal governments are looking to companies like hers to fill their depleted treasuries. In fact, the Department of Labor (DOL), along with the IRS, announced that it anticipates collecting approximately $7.3 billion in the next few years by going after employers who are wrongfully labeling employees as independent contractors. In February 2010, the IRS began national audits of 6,000 businesses, randomly targeting companies and focusing on worker misclassification. The DOL is also launching a “Misclassification Initiative” in its efforts to recoup unpaid payroll taxes due to misclassification. The DOL’s targets include construction, manufacturing, food and home health care industries, as well as other problem industries. The DOL has allotted $10.9 million to a pilot program that rewards states that are the most successful or improved in detecting and prosecuting employers who fail to pay appropriate taxes due to worker misclassification.

In December of 2009, Senator John Kerry introduced legislation to close the current tax loophole, which is the safe harbor provision upon which Ms. Clasifyed relies. The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 amends Section 530 making it much more difficult for employers to classify workers as independent contractors and requiring employers to file supporting documentation with the IRS when labeling a worker as an independent contractor.

On April 22, 2010, the Employee Misclassification Prevention Act was proposed as an amendment to the Fair Labor Standards Act (FLSA), requiring employers to notify workers of their employment or independent contractor status and giving each worker the right to challenge the classification. It also imposes strict record-keeping requirements on employers who hire independent contractors and harsher penalties for misclassification. The proposed Act contains the following provisions:

Stricter penalties under the FLSA up to $1,100 per employee for first offenders;
$5,000 per employee for willful violations in instances where employers misclassify employees as independent contractors;
Administrative penalties under the Social Security Act for misclassifying employees or paying unreported employees without proper record keeping;
Required audits by state unemployment insurance agencies to identify employers who are misclassifying independent contractors; and
Targeted audits by the DOL focusing on employers and industries that frequently utilize “independent contractors.”

Given the potential liability for penalties, taxes, interest, overtime wages and unpaid benefits, it is critical for companies to understand the distinction between employees and independent contractors to ensure that their workers are appropriately classified. Employers should also engage in proactive self-audits reviewing, among other things, their payroll records and IRS Form 1099s to identify individuals who are paid as independent contractors and conduct an assessment of whether such individuals meet the requirements established by federal and state law. For further information concerning whether you have correctly categorized a worker as an independent contractor, contact Strasburger & Price LLP. Don’t become another Ms. Clasifyed and face the consequence of huge financial liability by treating your workers as independent contractors when, in reality, they are employees.

*Editor's note -- This article was first published in Strasburger's Labor & Employment Newsletter a few days ago. It presents a broader perspective on federal and state governments' efforts to discourage alleged misuse of the independent contractor model in trucking and many other industries. The article is authored by Francine Breckenridge, a labor and employment partner in Strasburger's Austin office. Francine can be reached at 512.499.3630 or francine.breckenridge@strasburger.com

Texas Federal Court Recognizes Federal Preemption of State-Law Claims Against a Broker

Katherine T. Garber — Thu, 13 May 2010 00:00:00 -0500

By Kathy Garber*

When Congress abolished the Interstate Commerce Commission in 1995, a little-noticed provision of the ICC Termination Act added transportation brokers to the scope of federal laws barring “price, route, or service” regulation of freight transportation providers by States. In Huntington Operating Corp. v. Sybonney Express, Inc., the federal district court in Houston held on May 11, 2010 that the broker preemption provision means what it says. This appears to have been a case of first impression in Texas courts, and is one of the few cases nationwide to recognize and construe broker preemption.

Plaintiff Huntington employed Transport Direct, a transportation broker, to arrange a shipment of perfume from Florida to Texas. Transport Direct hired Sybonney Express to transport the shipment from Miami to Houston. The shipment was stolen at a truck stop in Florida. Sybonney’s carrier denied coverage for the loss because the vehicle used to transport the cargo was not specifically scheduled on Sybonney’s cargo policy. Huntington sued Transport Direct for failing to ensure that Sybonney had adequate insurance to cover the cargo, alleging violations of the Texas Deceptive Trade Practices Act (“DTPA”), negligent misrepresentation, fraud, negligence, negligent entrustment, breach of fiduciary duty and breach of contract. Transport Direct initially moved for summary judgment on all of Huntington’s claims, arguing that its actions as a broker were not a producing cause of the shipper’s damages. The court granted that summary judgment as to the fraud and negligent entrustment claims, but found fact issues precluding summary judgment as to the DTPA, negligence, negligent misrepresentation and breach of contract claims; 2009 WL 2423850 (S.D. Tex. Aug. 3, 2009).

Via a second summary judgment motion, Transport Direct sought to dismiss all of Huntington’s remaining claims, except for breach of contract, arguing that these were state-law claims arising from the services provided by a broker with respect to the transportation of property and therefore were preempted by 49 U.S.C. § 14501(c)(1), “Federal authority over intrastate transportation.” In response, Huntington contended that its claims fell within the statutory exception to preemption as carved out by 49 U.S.C. § 14501(c)(2)(A). The court granted Transport Direct’s motion, finding that the provisions of 49 U.S.C. § 14501(c)(1), which closely paralleled those found in the Airline Deregulation Act of 1978 (codified at 49 U.S.C. §§ 41713(b)(4)(A) and (b)(4)(B)(i)), broadly preempted state law claims other than breach of contract. The court further found that the statutory exception relied on by Huntington, which referred to the ability of the states to define safety standards and insurance requirements, did not permit a private right of action. Accordingly, the court dismissed Huntington’s claims for violations of the DTPA, negligence and negligent misrepresentation, leaving only the breach of contract claim for trial.

*Editor's Note: Kathy Garber is a partner in Strasburger's Houston office, and represented the broker in this case. She can be reached at kathy.garber@strasburger.com or 713.951.5665

K-Line at the Supreme Court: Kirby Revisited After Rowe

Mark Andrews — Tue, 30 Mar 2010 00:00:00 -0500

By Mark J. Andrews*

To anyone in the carrier community who might have thought the U.S. Supreme Court would use the K-Line case[1] for a summary smackdown of Sompo,[2] the divergent views expressed by the Justices at the K-Line oral argument on March 23, 2010 must have been a disappointment. There will be no single-sentence reversal and remand with a citation to Kirby.[3] I doubt there will even be a unanimous opinion as in Kirby. But the carriers still might win this cargo liability fight because of Rowe,[4] a post-Kirby case which had nothing to do with cargo liability but sharpened the Court’s understanding of the need for a uniform law of the supply chain.

The common issue in Kirby, Sompo and K-Line is whether there can be a uniform set of binding cargo liability rules for both ocean and inland segments of containerized international cargo movements. Although Kirby endorsed such uniformity, it did not decide whether contractual inland extensions of the cargo liability limits in ocean bills of lading could override the Carmack regime of statutory liability governing U.S. rail and highway transportation.[5] The appeals court decisions in Sompo and K-Line effectively gutted Kirby by refusing to allow such overrides if the shipper insisted on Carmack terms, at least for rail movements. Because other courts had disagreed,[6] the Supreme Court took the K-Line case to resolve the split of authority.

The major issues discussed at the recent K-Line argument included (i) whether Carmack has any applicability at all to international commerce other than overland exports to Canada and Mexico (carrier counsel said no), and (ii) whether Carmack could apply to an ocean carrier transporting goods on a through bill of lading from east Asia or other overseas points to U.S. inland points (shipper counsel said yes, at least if inland deliveries were made by rail). The Court seemed equally cool to each counsel’s arguments that the “plain language” of the statute supported him.

On issue (i), the Court clearly was troubled that one part of the current statute suggests unlimited geographic application of Carmack while another part suggests that the overland-export limitation, which had been clear in prior law, was recodified in 1978 with no substantial change intended. On issue (ii), the Court seemed highly skeptical of shipper counsel’s claim that the ocean carrier becomes an originating or “receiving” rail carrier (and thus crosses the threshold for applicability of Carmack) merely by operating over a few miles of track in a port area or by providing containers and chassis utilized by a mainline railroad. Chief Justice Roberts was particularly incredulous: “So if I … own a container being pulled by somebody else’s train, I’m in the train business?”[7]

Judging from the relative reticence of Justice Scalia, the Court’s most zealous proponent of plain-language interpretation of statutes whenever possible, it appears likely that the Court will find ambiguity in the statutory language on the scope of Carmack, at which point legislative intent will come into play. And if that happens, the comments of Justice Breyer – who wrote a near-unanimous opinion for the Court in Rowe – may light the Court’s way to an outcome favoring the carriers’ position.

Rowe was all about uniformity. It held that certain federal preemption provisions in Title 49 of the United States Code[8] invalidated an effort by Maine to impose unique statutory burdens on a nationwide carrier’s delivery of tobacco products within that State’s boundaries. The Rowe Court was persuaded not only by the burdens imposed by the Maine statute itself, but also by the potential burdens of a patchwork of inconsistent rules that would result if every State were allowed to legislate on similar matters.[9]

Similar concerns on a global scale drove the decision in Kirby. The threshold issue there was whether an intermodal transportation contract including a significant U.S. inland segment should be reviewed by reference to state law or “general maritime law,” which of course is federal by reason of Article III, section 2, clause 1 of the U.S. Constitution. The Court declined to “undermine the uniformity” of general maritime law, noting that “confusion and inefficiency will inevitably result if more than one body of law governs” the meaning of “a single bill of lading for international intermodal transportation.”[10] Because “a maritime contract may well have been made anywhere in the world,” the Court held that “it should be judged by one law wherever it was made. *** Here, that one law is federal.”[11]

Of course, K-Line unlike Kirby and Rowe involves a conflict between two bodies of federal law – Carmack and the Carriage of Goods by Sea Act (“COGSA”)[12]. But Justice Breyer, who had joined in Kirby and had authored Rowe, appeared to recognize the importance of uniformity in K-Line as well. His questioning of shipper counsel during the K-Line argument revealed his concern that treating an ocean transportation provider as a “railroad” for Carmack purposes could “bring every international shipment in the world, no matter how small the American portion by rail and no matter how big the foreign part of this transport, … all within Carmack.” If bills of lading “issued by people throughout the world are all going to have to … meet the terms of the Carmack amendment,” he suggested that the result would be “a nightmare.”[13]

Of course, the nightmare scenario was disavowed by shipper counsel (who also had argued for the shipper in Kirby). But if Justice Breyer can attract four other votes for a construction of Carmack (as recently recodified into arguable ambiguity) that promotes uniformity of maritime contracts, comports with the original scope of Carmack, and avoids characterizing an ocean carrier as a railroad, this result would be a more than acceptable outcome for the domestic and global carrier communities.

______________________________________________________________________________________________________
[1] Regal-Beloit Corp. v. Kawasaki Kisen Kaisha Ltd., 557 F.3rd 985 (9th Cir. 2009), cert. granted, U.S. No. 08-1553, 08-1554.
[2] Sompo Japan Ins. Co. v. Union Pac. R.R., 456 F.3rd 54 (2nd Cir. 2006).
[3] Norfolk S. Ry. v. Kirby, 534 U.S. 14 (2004).
[4] Rowe v. New Hampshire M. Transport Ass’n, _____ U.S. _____, 128 S.Ct. 989 (2008).
[5] See Carmack Amendment as now codified at 49 U.S.C. §§ 11706 and 14706 for railroads and motor carriers, respectively.
[6] See, e.g., Altadis USA, Inc. v. Sea Star Line, LLC, 458 F.3rd 1288 (11th Cir. 2006).
[7] Oral argument transcript at 47.
[8] 49 U.S.C. § 14501(c).
[9] Rowe, 128 S.Ct. at 996. See also the author’s Strasburger Logistics Blog posting dated May 28, 2008.
[10] Kirby, 543 U.S. at 28-29.
[11] Id. at 29, quoting Kossick v. United Fruit Co., 365 U.S. 731, 741 (1961) (internal quotation marks and brackets omitted).
[12] See Note accompanying 46 U.S.C. § 30701.
[13] Oral argument transcript at 31.

*Mark Andrews is the Partner-in-Charge for Strasburger’s Washington, DC office. He can be reached at 202.742,8601 or mark.andrews@strasburger.com

News from Rotterdam on the Rotterdam Rules: Proponents of New Treaty on Maritime Cargo Liability Have a Selling Job Ahead of Them

Mark Andrews — Wed, 23 Sep 2009 00:00:00 -0500

By Mark J. Andrews*

The U.S. and 15 other countries stepped up today at Rotterdam, the Netherlands, for a signing ceremony showcasing the proposed “Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea.” The Convention, commonly known as the “Rotterdam Rules,” received approval from the United Nations General Assembly last December after 12 years of work by the United Nations Commission on International Trade Law (UNCITRAL). The Rules will take effect after 20 countries not only have signed them but have ratified them as a treaty under their internal constitutional processes.

In addition to the U.S. – long a vigorous UNCITRAL/Rotterdam proponent – the signers today included three European countries with major involvement in maritime transportation (Greece, the Netherlands and Norway), five other industrialized European countries (Denmark, France, Poland, Spain and Switzerland) and seven African countries (Congo, Gabon, Ghana, Guinea, Nigeria, Senegal and Togo). It is interesting to speculate on why more countries did not participate in the signing ceremony. One likely reason is that the world’s leading advocacy groups for cargo interests are sharply divided on the Rotterdam Rules. While the National Industrial Transportation League in the U.S. has strongly supported them, vocal opposition has come from the European Shippers’ Council and we understand that Asian shipper organizations will stay on the fence while a regional task force studies the Rules. This is surprising since it is commonly understood that many aspects of Rotterdam are more shipper-friendly than current international sea cargo regimes.

Also of interest is the fact that the U.S. right now is the only pro-Rotterdam country with a large continental landmass, and thus an extensive inland transportation network. Attitudes in Canada and Australia are said to range from skeptical to hostile. We understand that Brazil is on the fence, and that its trucking association is strongly opposed to Rotterdam. We had heard that China would sign, but this did not happen today. The positions of Russia and India are unknown at this time, but they were not heard from at the signing ceremony. A possible explanation is that the intermodal uniformity that energized early UNCITRAL efforts was largely negotiated away. The “Carmack” regime for inland cargo liability in the U.S. remains intact. (So do the CMR and CIM-COTIF conventions that respectively govern road and rail transportation within Europe.)

Thus, the large rail and trucking industries in the “continental” countries (and Europe) have little to gain from actively supporting Rotterdam. In fact, the Rules are opposed by the International Road Union, which is a worldwide organization made up of the national trucking, bus and taxicab associations in more than 100 countries – including the European Union, all the Western Hemisphere countries, most of Africa as well as the industrial centers in Asia.

Nevertheless, the list of initial signers may portend a better result for Rotterdam than for the 1978 Hamburg Rules, UNCITRAL’s prior effort to harmonize maritime cargo liability. Hamburg never was ratified by a single major seafaring or industrialized country such as the eight that have signed on for Rotterdam thus far. Over time, it may turn out that the U.S. and the seven European signers can leverage further support for Rotterdam in parts of the world that are staying uncommitted for now. The limited impact of Rotterdam on inland transportation may actually help in this regard.

The Strasburger Logistics Blog will continue to follow developments. For further information, please contact the author at 202.742.8601 or via e-mail at mark.andrews@strasburger.com .

*Mark Andrews is a partner in Strasburger’s Washington, DC office. Kenneth Siegel, who is Of Counsel in the same office, also contributed to this posting. He can be reached at 202.742.8602 or Kenneth.siegel@strasburger.com .

Update on Rotterdam (Formerly UNCITRAL) Convention: How Would These New Ground Rules for International Shipping Affect Article 7 of the Uniform Commercial Code?

Mark Andrews — Mon, 01 Dec 2008 00:00:00 -0500

By Mark Andrews

[Editor’s note: This posting is an update of a report prepared in June 2008 for the leadership of the ABA Section of International Law by a working group within the Section’s International Transportation Committee. The update is authored by Mark Andrews of Strasburger’s Washington, DC office, who headed the working group and is a co-chair of the International Transportation Committee.]

Introduction and Summary: In 2003, the American Law Institute (“ALI”, of which I am a member) and the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) adopted the first revisions in 52 years to Article 7 of the Uniform Commercial Code (“UCC”). Article 7 originally was entitled “Warehouse Receipts, Bills of Lading and Other Documents of Title,” but this was simplified to “Documents of Title” in the 1993 revision (hereafter, “New UCC-7”). The UCC, of course, has been highly successful in creating a harmonized legal environment for commercial transactions in all fifty States of the U.S. At this writing, New UCC-7 already has been adopted by 31 States and is pending in one other. A complete list of these States can be found at http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ucc7.asp.

The main focus of New UCC-7 is on the functions of negotiable bills of lading and warehouse receipts as documents of title. As described in an excellent NCCUSL summary of New UCC-7, “[t]he great addition to Article 7 … is the new rules” for creation, transmission, and negotiation of “electronic documents of title.” Secondarily, New UCC-7 recognizes recent trends toward reduced governmental regulation of transportation services when it eliminates various outdated “references to tariffs and regulations.” See discussions on pages 2 and 4 of document found at http://www.nccusl.org/Update/uniformact_summaries/uniformacts-s-ucc7.asp. Not mentioned by NCCUSL is a related innovation in New UCC-7: its explicit recognition that the UCC – which remains state law even though adopted by every U.S. jurisdiction – is subject to preemption by U.S. federal laws and ratified treaties. See New UCC-7, sec. 7-103(a). Although New UCC-7 also briefly covers liability standards for transportation providers and warehouse operators with regard to goods entrusted to them, these standards would apply only in the absence of more specific standards in other law at the federal or state level. See id. and secs. 7-204, 7-209.

By contrast, carrier liability under contracts of carriage is the primary concern of the “Draft convention on contracts for the international carriage of goods wholly or partly by sea.” While not yet a ratified treaty, this draft is the product of years of work and consensus-building by the United Nations Commission on International Trade Law (“UNCITRAL”) and its Working Group III on Transport Law. The primary thrust of the draft convention (recently renamed the “Rotterdam Convention”) is to resolve longstanding issues between shippers and carriers over the appropriate extent of carrier liability for loss of, or delay or damage to, international cargo moving by sea, while also establishing more uniform rules for extending that liability to related inland cargo movements. See, generally, Sturley, “Major Aspects of the UNCITRAL Draft Convention” (paper delivered at spring meeting of ABA Section of International Law, April 4, 2008). Secondarily, however, the Rotterdam Convention does parallel New UCC-7 by establishing (principally in Articles 8 through 10) a hospitable legal framework for creation, transmission and negotiation of electronic transportation documents.

At this writing, the United Nations General Assembly appears likely to approve the Rotterdam Convention within the next few months, and a signing ceremony in Rotterdam, The Netherlands, has been tentatively scheduled for the autumn of 2009. U.S. shipper and carrier interests appear sufficiently unified on this issue that ratification by Congress is believed to be a strong possibility shortly after the signing ceremony. Consequently, now is not too soon to examine whether anything in the Rotterdam Convention (if it becomes a treaty ratified by the U.S.) would conflict with the provisions of New UCC-7 that have made such gratifying headway through state legislatures in the past five years. Although the primary objectives of these two instruments are different as noted above, there is enough overlap in such areas as cargo liability and electronic documentation of title to make such an examination worthwhile.

For the reasons detailed in the remainder of this posting, I have concluded preliminarily that U.S. ratification of the Rotterdam Convention would not necessitate amendments to the black letter text of New UCC-7, principally because (i) its section 7-103(a) already recognizes the primacy of U.S. federal statutes and ratified treaties, (ii) most of its transportation-related subject matter is already covered by U.S. federal statutes with expressly preemptive effect, and (iii) most of its warehousing-related subject matter is not addressed either in Rotterdam or in preemptive U.S. federal law. True, there are limited areas where highlighting of inconsistencies between the Rotterdam Convention and New UCC-7 would be useful to transportation users and providers. For example, it might be useful to flag certain non-traditional terminology defined in Article 1 of the Rotterdam Convention, and to alert port warehouse operators that they might come under federal law for the first time by reason of being considered “maritime performing parties” under Article 20 of that instrument. These alerts, however, need not be inserted in the black-letter text of New UCC-7. They could be provided either through amended Comments to New UCC-7 (in States where the Comments do not form part of the enacted UCC text), or through pre-planned floor colloquies when Congress takes up ratification of the Rotterdam Convention.

Discussion: As a commentary on the lengthy gestation period of the Rotterdam Convention, it is interesting to note that earlier drafts of that convention are mentioned in at least four places within the 2003 drafts approved by NCCUSL and ALI for New UCC-7 and for conforming amendments to UCC Article 1. See reference to “other relevant law” following sec. 7-105; see “purposes” following sec. 7-302, and see respective revised definitions of “document of title” in paragraphs 15 and 16 of the Official Comments to Alternatives A and B for amendment of sec. 1-201. Without doubt, numerous potential conflicts were avoided by the fact that the drafters of New UCC-7 were proceeding in general awareness of the UNCITRAL project.

Despite this awareness and despite the differing primary objectives of the two instruments, my review of the respective texts and commentary has revealed at least the following areas of possible overlap:

Section references in New UCC-7

7-101(2): definition of “carrier” as “a person that issues a bill of lading.”
7-105: reissuance of an electronic document of title (“EDT”) in paper form, and vice versa.
7-106: “control” of an EDT, as a counterpart to endorsement and possession of a paper document of title (“PDT”).
7-301: misdescription of cargo; “said to contain”; “shipper’s load and count.”
7-302: through bills of lading; “performing” carriers.
7-303: diversion and reconsignment.
7-304: tangible bills of lading in a set (exception allowing same in “international transportation”).
7-307: carrier liens.
7-309: duty of care; contractual limitation of carrier’s liability.
7-403: carrier’s obligation to deliver; when excused.

Article references in Rotterdam Convention

1: definitions of “contract of carriage,” “carrier,” “performing party,” “maritime performing party,” “holder,” “transport document,” “electronic transport record” and “issuance” of such a record; no definition of “bill of lading.”
8-10: use and effect of electronic transport records; interchangeability with paper transport documents if negotiable.
11: general obligation of carrier to transport and deliver goods. Subsequent detailed articles defining carrier liability for loss, damage or delay – and limitations on same -- go far beyond anything in New UCC-7.
20: maritime performing parties (which could include warehouses in port areas) assume same obligations and can invoke same defenses as Rotterdam Convention provides for carriers.
47-49: carrier’s delivery obligations for goods covered by negotiable or non-negotiable transport documents or electronic transport records.
51: Convention does not derogate from carrier liens under Contracting States’ laws.
52-56: Diversion and reconsignment on instructions of a “controlling party.”
59-60: Transfer of negotiable transport documents or negotiable electronic transport records.

Although these areas of overlap may seem extensive at first glance, actual conflict is minimized by the fact that the UCC, wherever enacted, is a state statute rather than a federal one. Even as matters stand currently, the impact of New UCC-7 (or its predecessor where still in force) is extremely limited in the transportation sector because of express preemption under federal law. See, generally, 49 U.S.C. §§ 10501(a), (b) (as to railroads), 14501(c) (as to motor carriers, transportation brokers and surface freight forwarders), and 41713(b) (as to direct and indirect air carriers). See also Article III, section 2, clause 1 of the United States Constitution, which establishes the exclusive jurisdiction of federal courts over admiralty and maritime cases. Far from being a mere allocation of jurisdiction, this “maritime grant” endows federal courts with substantive “authority to make decisional law for the interpretation of maritime contracts.” See, e.g., Norfolk Southern Ry. v. Kirby, 543 U.S. 14, 22 (2004). Should the Rotterdam Convention be ratified by Congress, of course, it too will become part of the “supreme law of the land” to which the UCC must yield under Article VI, section 2 of the Constitution.

As to transportation, therefore, the deferential language of sec. 7-203(a) in New UCC-7 merely expresses what would be the case even in its absence: “This article is subject to any treaty or statute of the United States …” It is true that warehousing, unlike transportation, historically has been regulated almost exclusively by state law and is not within the scope of the preemptive federal statutes cited previously. Ratification of the Rotterdam Convention, however, would not change this fact because its provisions would have only peripheral impact on warehousing – with the possible exception of warehousing in port areas as discussed below.

For the foregoing reasons, I conclude that amending the black-letter text of New UCC-7 to acknowledge the primacy of a ratified Rotterdam Convention would be a mere exercise in surplusage. The same conclusion, however, does not necessarily follow as to the commentaries that accompany the black-letter text. (At least in Texas, Maryland, Virginia and the District of Columbia – the States with which I am most familiar – the commentaries are not part of the enacted statutory text, and therefore should be capable of amendment without formal legislative action.)

For example, an expanded commentary to sec. 7-102 of New UCC-7 could include comparisons of the definitions of “shipper” there and in the Rotterdam Convention; an explanation that the Rotterdam Convention dispenses with the term “bill of lading” in favor of the terms “contract of carriage” and “transport document,“ and an analysis of how the terms “performing party” and “maritime performing party” as defined in the Rotterdam Convention relate to the term “carrier” used throughout New UCC-7. Similarly, the commentary to sec. 7-302 of New UCC-7 should be amended to explain that the “performing carrier” referenced but not defined in the black letter text of sec. 7-302 is the same as a “performing party” under the Rotterdam Convention. Of course, all commentaries to New UCC-7 that currently refer to earlier UNCITRAL drafts should be amended with updated references, preferably including article numbers from the ratified instrument.

As a final example of a potentially useful amendment to the commentaries accompanying New UCC-7, I would point to numbered paragraph 2 of the “Purposes of Changes” commentary for sec. 7-204. That paragraph currently contains a blanket statement that “a warehouse may limit its liability for damages … to the goods by a term in the warehouse receipt or storage agreement.” Under article 20 of the Rotterdam Convention, however, this would not be true for a warehouse falling within the definition of a “maritime performing party” by reason of rendering services entirely within a port area (see article 1(7)). Article 20 makes a maritime performing party and the carrier equally liable to the shipper, and this Rotterdam-prescribed liability can be reduced only in the narrow range of circumstances described in Articles 81 through 83. In this particular instance, therefore, the rights of a warehouse under sec. 7-204 of New UCC-7 would be limited by overriding federal law for the first time if the Rotterdam Convention were ratified.

There may be other instances in which revised commentaries to New UCC-7 would play a useful role by highlighting differences in substance and terminology between that instrument and the Rotterdam Convention. The examples I have cited are products of my experience with cargo liability disputes and transportation contract negotiations; others dealing primarily with commercial transactions under New UCC-7 may be able to adduce additional suggestions from that perspective. At present, however, I would venture to suggest that the areas of disharmony between New UCC-7 and the Rotterdam Convention are surprisingly few and far between – which is a tribute to the foresight of the drafters of both instruments.

Editor’s note: Mark Andrews (mark.andrews@strasburger.com ) is the Partner-in-Charge of Strasburger’s Washington, D.C. office, a co-leader of the firm’s Transportation & Logistics practice team, and a member of the firm’s International practice team. He can be reached at 202.742.8601.

A Triumph of Fear Over Facts: Cross-Border Trucking on Life Support

Mark Andrews — Thu, 16 Oct 2008 00:00:00 -0500

By Mark J. Andrews and Kenneth E. Siegel

Almost 15 years ago, the United States and Mexico made a commitment to allow carriers based in each country to haul international freight throughout the territory of the other country. According to the North American Free Trade Agreement (“NAFTA”), all restrictions on this cross-border hauling were to be phased out between the beginning of 1994 (when NAFTA took effect) and the beginning of 2000.

As we all know, this did not happen. Publications ranging from SMU Law School’s The International Lawyer to the San Antonio Express-News have documented the unrelenting efforts of the Teamsters union, self-described safety advocates, independent-trucker organizations and their political allies to obstruct the border-opening process at every turn.

It was not until May of 2007 that the U.S. Department of Transportation (“USDOT”) took the first concrete step forward. It announced a “demonstration project” under which up to 100 Mexican trucking companies could operate throughout the U.S. (and up to 100 U.S. carriers could do the same in Mexico) after thorough scrutiny of their safety programs by regulators in the host country. Since then the project has dodged a hail of bullets from legislators and litigators. It took effect on September 6, 2007, and USDOT announced in August of 2008 that it plans to continue the demonstration project for two more years.

But the fight is not over. As recently as September, new efforts were being made in Congress to quash the demonstration project through a pre-election rider to some piece of “must-pass” legislation. A court challenge to the project continued as well in California. The same old arguments were trotted out again: Mexican trucks are unsafe; poorly-paid Mexican truckers will take away American jobs, and in any event, the carriers themselves have shown little interest in the program.

The facts are otherwise. According to USDOT records as of mid-August, Mexican carriers had made approximately 1300 trips into the U.S. without a single accident. In roadside safety inspections, 9.2 percent of Mexican-based trucks were put out of service, but the rate for U.S. trucks is 22 percent. As for job impacts, remember that the demonstration project is limited to international freight only. Mexican carriers cannot haul domestic freight from, say, Dallas to Denver any more that U.S. carriers can do so between Monterrey and Mexico City. The project also does not permit the participating Mexican carriers to transport hazardous materials.

As for the supposed disinterest in the project, obviously carriers of both countries will be leery of investing in a service that can be snuffed out by the stroke of a politician’s pen. After all, necessary investments include driver training, preparation of facilities for constant regulatory scrutiny, and sales efforts in an unfamiliar market. Even so, it is interesting to look at statistics showing growth in the program from March to August of 2008. The number of Mexican carrier participants has increased from 12 to 27, and the number of U.S. carrier participants has doubled from 5 to 10 (who have made 2443 border crossings) even with all the doubts about the staying power of the project. These figures suggest that despite the political barriers, the industry recognizes the efficiencies of single-truck cross-border service – replacing the cumbersome traditional system of transferring goods from long-haul carriers in one country to cross-border “drayage” truckers to long-haul carriers in the other country.

Although the attacks on the demonstration project stalled during the adverse economic developments in late September, renewed attacks can be expected after the election. If Congress and/or the courts do snuff out the demonstration project, the traditional cross-border trucking system will be enshrined along with all of its adverse impacts on traffic flow and air quality at the border crossings. But “safety” advocates will not achieve their objective of keeping Mexican trucks out of the U.S. Ironically, cross-border operations will continue not only by “drayage” trucks, but by U.S.-owned truck fleets based in Mexico, by Mexican carriers holding pre-NAFTA “grandfather” rights in the U.S., and by Mexican carriers transiting the U.S. to and from Canada. None of these trucks are subject to the intense safety scrutiny that has accompanied the demonstration project.

Also being ignored by project opponents is a decision issued in 2001 by a NAFTA dispute-resolution panel. It found that the U.S. prohibition on Mexican truck access violated the terms of the Agreement, and could subject the U.S. to billions of dollars in retaliatory tariffs and other damages if Mexico should decide to exercise those remedies. On top of that, the national association for the Mexican trucking industry has initiated another NAFTA complaint proceeding against the U.S. on behalf of its members.

It remains to be seen whether future deliberations on U.S.-Mexico cross-border trucking will be any more rational than what we have witnessed so far.

Kewill and Strasburger to Hold Export Compliance Program in Houston on September 17th

Susannah West — Wed, 20 Aug 2008 00:00:00 -0500

*The Export Compliance breakfast seminar scheduled for September 17 has been postponed due to Hurricane Ike and will be re-scheduled in the coming months.

Export compliance professionals in Houston, Texas are invited to attend an Export Compliance breakfast seminar on September 17, 2008 that is sponsored and presented by Kewill Trade & Logistics and Strasburger & Price, LLP. The program will be held from 9 a.m. to noon at Oracle USA's office in downtown Houston.

This program will feature a presentation by Strasburger partner Douglas N. Jacobson on Hot Topics in Export Controls Compliance and Enforcement, an overview of Kewill Trade & Logistics solutions presented by John McGurk, and a round table discussion of compliance issues facing U.S. exporters today.

The topics that will be covered include:

The Newly Issued Mandatory AES Regulation
IEEPA Enhancement Act and Export Enforcement Update
Deemed Export Advisory Committee's Impact on the "Deemed Export" Rule
Merger and Acquisition Due Diligence: Reviewing Compliance With Export Controls and Sanctions Laws
Elements of Effective Export Compliance Programs

For more information and to register, see the following site: www.tradepointsystems.com/marketing/breakfast/houston.html

Unraveling Patchwork Regulation - Little-Noticed Aspects of Supreme Court's Pro-Preemption Decision in Rowe Case

Mark Andrews — Wed, 28 May 2008 00:00:00 -0500

By Mark Andrews

Welcome to Strasburger’s new Logistics Blog. As one of my first postings, I'd like to share a few observations about the Supreme Court's landmark decision issued February 20, 2008 in Rowe v. New Hampshire Motor Transport Ass’n (2008 U.S. LEXIS 2010).

As you probably have read by now, the Court unanimously held that the federal preemption provisions of the ICC Termination Act (ICCTA) precluded Maine from regulating the tobacco delivery procedures used by motor carriers. The most widely reported basis for this decision was that States cannot force motor carriers to provide particular services that the marketplace doesn't demand and carriers don't want to offer (see 2008 U.S. LEXIS at 2010 *13). Behind the headlines (and headnotes), however, the Court made numerous other points that surface transportation providers can use to their advantage on a wide range of state regulatory issues. Here are some implications of Rowe that few observers seem to have noticed:

1. ICCTA preemption is not limited to areas of "traditional" economic regulation, such as the pricing, service and route controls formerly enforced by the old Interstate Commerce Commission (id. at *17). This was an implicit rebuff to a line of Ninth Circuit cases that have refused to enforce ICCTA preemption against state regulations that indirectly affected trucking prices and service, such as minimum wage orders and California's unique "meal break" rules. In all likelihood, the trucking industry will use this holding to attack the "clean air" trucking concession rules proposed by the Port of Los Angeles, if the port makes good on its threat to limit concessions to carriers using employee drivers (not owner-operators).

2. Professed good intentions will not save state restrictions that violate the plain preemptive language of ICCTA (id. at **21-22). This holding would appear applicable to the stated environmental goals of the Port of Los Angeles, just as it covers Maine's expressed desire to control underage tobacco use.

3. "Governmental commands" that carriers provide particular services are particularly unacceptable when "the State seeks to enlist the motor carrier operators as allies in its enforcement efforts" (id. at **13, 20). This holding appears to confirm the position I have argued on behalf of several clients when specialized "bounty hunter" auditing firms attempted to make them undergo multistate unclaimed property audits under the theory that any unapplied transportation revenues should be reported and ultimately escheated to the States. These bounty hunters are still around, and still attacking large carriers of all modes. The forced-enlistment language of Rowe should be very helpful if these people come after you.

4. A "state regulatory patchwork" of conflicting rules is especially "inconsistent with Congress' major legislative effort to leave [service-related] decisions, where federally unregulated, to the competitive marketplace" (id. at **15-16). The "patchwork" argument clearly applies to state unclaimed-property rules, among others.

5. Preemption should apply if a state requirement has a "significant impact" on "essential details of the carriage itself' (id. at **11, 16). The Court did not explicitly equate "significant impact" to significant economic impact, and instead held that significant governmentally-commanded services were enough to invoke preemption. The Court probably took this approach because the extent of the economic burden of Maine's rules was disputed on the record before it. On reflection, I think the Court actually did the industry a favor by declining to transform every preemption case into a battleground for dueling economic experts. In situations where the economic burden of the state rules is undisputed, the industry still can argue that the case for preemption is even stronger than in Rowe.

6. Finally, please recall that the expanded scope of preemption after Rowe is not limited to motor carriers. The statutory provision construed in Rowe (49 USC 14501(c)) extends as well to transportation brokers and surface freight forwarders, which often are "hats" worn by third-party logistics providers (3PLs). One of the corollaries of ICCTA preemption is that state-law theories of liability (arguably including negligent selection of underlying carriers) are preempted except to the extent that the transportation provider's contract with a customer voluntarily assumes a particular duty (such as a duty of care with regard to selection of carriers). See American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995). It would be appropriate for 3PLs to review their standard customer contract forms (if any) with this principle in mind.

If particular state-law issues are on your radar screen at the moment (for example, proposed restrictions on inner-city delivery times?), I would be happy to take a closer look at the potential for preemption in light of Rowe. Please feel free to contact me with questions about any of the foregoing points. My telephone is 202.742.8601 and my e-mail is mark.andrews@strasburger.com . Thanks and best regards.

Editor’s Note: Mark Andrews is the partner-in-charge of Strasburger’s Washington, D.C. office and a co-leader of the firm’s transportation and logistics practice team.

Transportation Security Administration Launches Certified Cargo Screening Program

Mark Andrews — Mon, 31 Mar 2008 00:00:00 -0500

By Mark Andrews and Laura Martino

The Certified Cargo Screening Program (“CCSP”) is a voluntary program that allows certified manufacturers, exporters and forwarders to screen air cargo before it is shipped. The Transportation Security Administration (“TSA”) is now deploying the CCSP in nine pilot cities— Atlanta, Chicago, Dallas, Los Angeles, Miami, New York, Philadelphia, San Francisco and Seattle. By the end of 2008, TSA expects to set up ten to fifteen facilities and deploy TSA Field Teams in each of the selected cities.

The CCSP is intended to ease compliance with the Implementing Recommendations of the 9/11 Commission Act of 2007, P.L. 110-53 (the “9/11 Commission Act”), which requires 100 percent screening of cargo carried on passenger aircraft by August 2010. Currently, air carriers perform most cargo screening. As a result of the increased screening required by the 9/11 Commission Act, much of the burden of cargo screening is likely to shift from air carriers to manufacturing and freight forwarding facilities.

The 9/11 Commission Act requires air cargo screening to reach the same level of security as screening of passenger checked baggage. This means that each individual item of air freight will be subject to some type of screening. To meet the 100 percent screening requirement, CCSP will enable certain facilities to voluntarily screen their own cargo before delivering it to the freight forwarder or air carrier. Eligible facilities must first become a Certified Cargo Screening Facility (“CCSF”). Manufacturers, 3PLs, warehouses and distribution centers may apply to TSA to become a CCSF if their facility directly tenders cargo to a freight forwarder or air carrier. Freight forwarders may also apply.

The benefit of becoming a CCSF is that manufacturers and exporters may screen cargo early in the air cargo supply chain. Under the program, CCSFs are able to screen their own cargo on their own schedule before acceptance at the freight forwarder or air carrier, and without potential damage from invasive screening by the airlines. Shippers using CCSFs may also avoid cargo screening fees. Although CCSP is a voluntary program, the only alternative available to shippers of air freight is to rely on airline screening. However, due to the increased security standard imposed by the 9/11 Commission Act, airline screening of cargo is expected to cause significant delays.

TSA has established “entity standards” for CCSFs. These standards require stringent security measures at participating facilities and throughout the supply chain. For example, CCSFs are required to permit onsite validations and periodic inspections by TSA, and to screen cargo at the piece level. CCSFs must also ensure cargo integrity through chain of custody measures. The following is a summary of the security standards CCSFs must maintain in order to participate in CCSP:

CCSFs must set forth procedures to prevent unauthorized entry to facilities where certified cargo is screened, prepared, and stored.
CCSFs must control employees, contractors and visitors and protect company assets.
CCSFs must screen prospective employees and contractors to TSA standards and periodically check current employees having continued access to passenger air cargo.
Certified facilities must erect physical barriers that guard cargo handling and storage facilities against unauthorized access.
CCSF must establish password protection of user accounts on automated systems, and be able to identify improper access.
Certified facilities must allow initial and ongoing validations by TSA.
CCSFs and supply chain participants must ensure that data is documented and accompanies each shipment.
CCSFs and supply chain participants must apply tamper evident devices to cargo packaging prior to departure.
Documentation must be authenticated upon receipt at each processing point in the chain of custody.

Shippers and carriers should note that the type of screening required for air cargo is left to TSA’s discretion in the 9/11 Commission Act, as long as the level of security is commensurate to that for passenger baggage. Because the 9/11 Commission Act requires TSA to publish implementing regulations in a final or interim final rule, TSA will likely propose a full regulatory framework for cargo screening over and above the multi-city pilot program in the near future.

Editor's Note: Mark Andrews is the partner-in-charge of Strasburger’s Washington, D.C. office and a co-leader of the firm’s transportation and logistics practice team. Laura Martino is an associate in the firm's Washington, D.C. office.