This article highlights significant legal developments relevant to international transportation law that took place in 2022.
In Travelers Property Casualty v. Ocean Reef Charters, a yacht was damaged by Hurricane Irma while moored. Extra mooring lines proved ineffective when the year-old dock piling gave way as the hurricane struck. The yacht drifted onto other pilings and hit the sea wall, before becoming holed and sinking, resulting in a total constructive loss. The boat did not have any crew onboard. The insurance policy contained two warranties: (1) a full-time professional captain approved by Travelers, and (2) one full-time or part-time professional crew for the yacht.
The insurer filed an action in admiralty against the insured yacht owner, seeking declaratory judgment that the owner breached the captain and crew warranties, and therefore the policy did not provide any coverage for total loss caused by the hurricane. Ocean Reef argued that Florida’s so-called “anti-technical statute” should apply, and that, under that statute, the breaches did not preclude coverage because they were unrelated to the loss. Expert testimony was presented that the failure to have a captain and crew did not increase the hazard to the M/Y My Lady, and that the yacht sunk due to the unforeseeable failure of the dock piling. The court addressed this argument drawing from Wilburn Boat with these words:
Wilburn Boat remains on the books, and we are bound by its treatment of warranties in marine insurance policies despite the ample criticism the decision has received. . . . Wilburn Boat instructs us ‘to look to see if the specific warranty at issue is (or should be) the subject of a uniform or entrenched federal admiralty rule.’
From this premise, the court found that there are warranties entrenched such as “navigational limits” but denied that “there is an entrenched federal maritime rule requiring strict compliance with all marine warranties” and went on to say that “The precise questions for us under Wilburn Boat are whether there exist entrenched federal maritime rules governing captain or crew warranties. The answer to those questions is no.”
Accordingly, the court found that Florida law, specifically Fla. Stat. § 627.409(2), governed the effect of Ocean Reef’s breaches of the captain and crew warranties and remanded to the district court to apply § 627.409(2).
The decision closes with a note of criticism of the current treatment of warranties in American law, and a praise of the novel United Kingdom Insurance Act of 2015 which abandoned the literal compliance rule, so that now “rescission is no longer the [automatic] remedy for breach of warranty.”
In its last words, the court expressed a wish: “Maybe, just maybe, this case will prove tempting enough for the Supreme Court to wade in and let us know what it thinks of Wilburn Boat today.’
The Supreme Court had the opportunity to wade in, but did not change the law, denying a petition to fashion United States law consistent with the new English law, in a case involving the application of the doctrine of “utmost good faith.”
In QBE Seguros v. Morales-Vazquez, the insurance company sought declaratory judgment that the policy was void ab initio under the doctrine of uberrimae fidei (utmost good faith) because the insured misrepresented his prior boating and loss history. The First Circuit granted declaratory judgment as a matter of law.
A petition for certiorari was filed to determine whether the Insurance Act 2015 (U.K.) should have any effect on the American law of marine insurance. That is, whether the doctrine of uberrimae fidei continues to apply in its strict form or whether it should be modified in conformity with the law of England. The petition was authored by Professor Sturley, with convincing arguments for the need to bring American law in harmony with business developments, adopting the model crafted by the English Law Commissions after a decade of studies.
The Supreme Court denied the petition, so uberrimae fidei remains in conflict, given that the doctrine is maintained in the First, Third, Ninth, and Eleventh Circuits, but in a limited form in the Second and the Eighth Circuits and is not recognized at all in the Fifth Circuit.
As a note to practitioners, we got information that in some policies issued in London for United States Risks, the Warranties and Representation clauses have been changed to make them work under the American rules, in derogation of the Insurance Act 2015 that would have been otherwise applicable.
There is news that cases are pending for alleged medical malpractice of land-bases hospitals having supplied alleged wrong telemedicine advice to cruise ships in connection with injuries to passengers still on board.
These cases present novel issues of telemedicine supplied to ships while on high seas: (1) Does admiralty jurisdiction depend on whether the tort was “committed on board?” (2) Does a telemedicine visit occur on board? (3) Does the Amclyde rule prohibit set off of the cruise line settlement against the telemedicine defendants? (4) Does vicarious liability apply, concursus of tortfeasors?
Under the Franza rule, negligence of ship’s medical personnel in treating passengers may be vicariously imputed to shipowner under doctrine of respondeat superior, and mere fact of physical separation between principals and agents does not inevitably defeat respondeat superior. If the Franza rule is applicable, the settlement should clear all tortfeasors and leave only indemnity action by the cruise line.
This may become a novel trend of litigation considering that Cruise Lines might have stand-by contracts of telemedicine with shore hospitals.
The Ocean Shipping Reform Act (P.L. 117-146) (OSRA22) was signed into law by President Biden on June 16, 2022. First introduced in the House of Representatives on August 10, 2021 as H.R. 4996, it passed the full House on December 8, 2021. The Senate companion bill, S. 3580 was passed on March 31, 2022; it passed the full House on June 13, 2022.
Severe disruptions ignited by the boom in import volumes in mid-2020 which caused congestion at U.S. ports spurred proponents of OSRA22, who hoped it would address inflation caused by carrier “price gouging” and trade imbalances caused by refusals of foreign-owned carriers to carry U.S. agricultural exports.
In March 2020, Members of Congress urged the then-Chairman of the Federal Maritime Commission (FMC) to take enforcement action to address allegations by agricultural exporters that carriers refused to accept their cargo or unreasonably delayed service. They expressed support for the FMC’s Fact-Finding No. 29 and its expansion to include the concerns of agricultural exporters. The Members asserted that “largely unrestricted access to American ports means trade opportunities should be reciprocal” and urged an investigation into whether ocean common carriers’ actions were “predatory or unreasonable in refusing to export . . . American agricultural products . . .” Reps. Garamendi (D-CA) and Johnson (R-SD) repeated these concerns at a June 15, 2021 hearing on the subject.
On August 10, 2021, H.R. 4996, The Ocean Shipping Reform Act of 2021, was introduced. Rep. Garamendi stated it would “better support American exporters by ensuring reciprocal trade to help reduce the United States’ longstanding trade imbalance [with] export-driven countries like mainland China” and noted the “considerable consolidation amongst the foreign-based ocean carriers, coinciding with the continued decline of the U.S.-flagged international fleet . . .”
H.R. 4996 was endorsed by the President on November 17, 2021, and moved directly to the Floor on December 8, 2021. Sponsors asserted “foreign businesses’ access to the American market and our consumers is a privilege, not a right” and Rep. Garamendi was “thrilled . . . awed . . . and amazed” that it would be adopted in less than four months. The bill, he said, would address “supply chain bottlenecks . . . promote American competitiveness . . . and hold [] accountable these foreign-flagged ocean carriers, which . . . are increasingly dominated by Chinese state-backed firms.” It passed by a vote of 364-60 and was delivered to the Senate on December 9, 2021.
S. 3580 was introduced by Sen. Cantwell (D-WA) on February 3, 2022, and passed by voice vote on March 31, 2022. The Senate bill passed in the House by an overwhelming margin of 369-42 and was signed into law by the President on June 16, 2022, less than a year from the original introduction of the House bill.
Section 3: revises 40502(c) by granting the FMC authority to require by rulemaking additional “essential terms” to be added to privately negotiated confidential service contracts.
Section 4: requires any shipping exchange (“platform that connects shippers with common carriers for the purpose of entering into underlying agreements or contracts for the transport of cargo, by vessel or other modes of transportation”) to register with the FMC.
Section 5: adds to 41102 a prohibition on refusals or threats to refuse otherwise-available cargo accommodation or take “any other unfair or unjustly discriminatory action” against a shipper, agent of a shipper, ocean transportation intermediary, or motor carrier,” for the reason that it has patronized another carrier, or filed a complaint against it, or for any other reason.
Section 7: prohibits unreasonably refusing cargo space accommodations when available, or resorting to any other unfair or unjustly discriminatory methods; revises 41104(5) by adding prohibitions against discrimination against any commodity group or type of shipment; revises 41104(10) to add a prohibition against refusals to deal or negotiate.
Section 7: prohibits “for service pursuant to a service contract, give any undue or unreasonable preference or advantage or impose any undue or unreasonable prejudice or disadvantage against any commodity group or type of shipment.”
Section 7: authorizes the FMC to apply penalties or order refunds for demurrage or detention invoices that are inaccurate or false (41104(d)(1)) and requires such invoices to accurately reflect certain terms.
Section 8: authorizes the FMC to award refunds (in addition to assessing civil penalties) for violations of the Act or its rules.
Section 10: requires the FMC to investigate all “information concerning complaints about charges assessed by a common carrier” in light of sections 41104(a) and 41102. 46 U.S.C. 41310 and requires it to provide the common carrier an opportunity to submit additional information but requires it to bear the burden of establishing the reasonableness of any demurrage or detention charge, as set out in the FMC’s Interpretive Rule; and requires the FMC to order a refund of the charges paid and civil penalties for non-compliance.
Section 13: gives the FMC authority to order “refund[s] of money.”
Section 18: requires the FMC to make findings as to whether an emergency situation exists and grants the FMC temporary authority (expiring 18 months after the enactment of OSRA22) to determine (by unanimous agreement) whether an emergency order requiring any common carrier or marine terminal operator to share cargo throughput and availability information.
On September 13, 2022, the FMC issued a Notice of Proposed Rulemaking (NPRM) applying a requirement of the OSRA22, notifying the shipping public and regulated entities of its intent to define what constitutes an unreasonable refusal to deal or negotiate with respect to vessel space accommodations by an ocean common carrier. Under the NPRM, a complainant alleging an unreasonable refusal to deal regarding vessel space accommodation must satisfy three elements: (1) the respondent is an ocean common carrier, (2) the respondent refuses to deal or negotiate with respect to vessel space, and (3) the refusal is unreasonable.
Although the Shipping Act defines ocean common carrier as a vessel operating common carrier (VOCC), other key terms such as “unreasonable,” “refusal to deal or negotiate,” and “vessel space accommodations” remain undefined. However, the Commission proposes to define vessel space accommodations as applying to containers, aboard an ocean common carrier, being imported to or exported from the United States and a “refusal to deal or negotiate” as a presumption that, for there to be a refusal, there must first have been something to refuse. Lastly, the Commission will consider three specific factors in considering whether a refusal to deal or negotiate is unreasonable: (1) whether the ocean common carrier is following a “documented export strategy,” (2) whether the carrier engaged in good faith negotiations and “made business decisions that were subsequently applied in a fair and consistent manner,” and (3) whether there were “legitimate transportation factors.”
The NPRM also advises of a burden shifting mechanism for new refusal to deal causes of action. The proposal warns that after the complainant or the FMC’s Bureau of Enforcement, Investigations, and Compliance has established a prima facie case that the three elements have been met, the burden would shift to allow for an ocean common carrier to establish why its actions in refusing vessel space were not unreasonable. Justification that may be considered by the Commission include whether the ocean common carrier followed a documented export strategy, engaged in good faith negotiations, and articulated legitimate transportation factors.
On October 7, 2022, the FMC issued a Notice of Proposed Rulemaking (NPRM) reinforcing the current demurrage and detention billing requirements pursuant to the OSRA22, broadening the scope and establishing new definitions on demurrage and detention invoices. The Commission broadly defines “demurrage or detention” to include all charges invoiced by VOCCs, non-vessel-operating common carriers (NVOCCs), and Marine Terminal Operators (MTOs). Additional definitions include “demurrage or detention invoice” to mean “any statement, printed, written, or accessible online, that documents an assessment of demurrage or detention charges,” “billed party” to include the person receiving the demurrage or detention invoice who is responsible for payment, “billing party” to mean the VOCC, NVOCC or MTO issuing the invoice. A “billing dispute” means any disagreement between the billed party and the billing party regarding the validity of the charges. Particularly, the Commission, by proposing new definitions, seeks to establish that the only parties responsible for paying demurrage and detention charges are those with a commercial relationship with the VOCC, NVOCC, or MTO.
Furthermore, the Proposed Rule requires new and additional information that billing parties must include on all demurrage and detention invoices. Such additional information includes the identifying information of “the bill of lading number(s); the container number(s); for imports, the port(s) of discharge, and the basis for determining why the invoiced party is the proper party of interest, and thus liable for the charge;” timing information detailing when the time period for charges apply, the due date for invoiced charges and specific dates when demurrage or detention was charged; rate information detailing the total amount due, and the applicable detention or demurrage rule; and dispute information with a URL linking the billed party to the VOCCs, NVOCCs, or MTO’s website containing detailed information regarding disputing the charges.
Finally, the Commission proposes that VOCCs, NVOCCs, and MTO must issue demurrage and detention invoices “within 30 days from the date charges stop accruing.” If a billed party disputes the validity of the charges, the billed party must “submit any requests for fee mitigation, refund, or waiver to billing parties within 30 days of receiving a demurrage or detention invoice.” Lastly, after receiving a dispute request, “a billing party must resolve the request within 30 days.” The purpose of the billing time frames, according to the Commission, is to provide billing parties with “certainty” in receiving a response from the billing party and to reduce the time it takes to receive a refund.
One area of significant U.S. litigation in 2022 was the proper analysis for courts to use in classifying employees as “transportation workers” engaged in interstate or foreign commerce entitled to the exclusion from enforcement of contractual arbitration agreements under the Federal Arbitration Act (FAA).
In Southwest Airlines Co. v. Saxon, the Supreme Court clarified the scope of the transportation worker exemption to the FAA by holding that the exemption does not apply to all employees of a transportation industry company but only to “transportation workers” who play a direct and necessary role in the free flow of goods across borders. Although the Court’s ruling in Saxon provided some guidance on the issue, subsequent 2022 court decisions interpreting Saxon indicated that there are still open legal questions as to how the FAA exemption is to be applied, especially as to last or final mile truck delivery services in transportation and non-transportation industries.
In Saxon, the Supreme Court held that notwithstanding having signed an arbitration agreement as a condition of employment, a supervisory ramp worker for Southwest Airlines could proceed with a class action lawsuit alleging that Southwest had failed to pay proper overtime wages to her and other ramp supervisors under the Fair Labor Standards Act of 1938. Although the Federal Arbitration Act recognizes the enforcement of contractual arbitration agreements, Section 1 of the FAA exempts from the statute’s ambit “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The district court hearing the employee’s claims ruled that the exemption only applied to those involved in “actual transportation” and not those who merely handled goods. The Seventh Circuit reversed, and the Supreme Court affirmed, resolving a conflict between the Seventh Circuit’s decision and a prior decision of the Fifth Circuit.
The Supreme Court reaffirmed its prior decisions that the FAA exemption is limited to “transportation workers” and, recognizing that those decisions had not provided a complete definition of a “transportation worker,” clarified that such a worker must at least play a direct and “necessary role in the free flow of goods” across borders. Put another way, the Court held that transportation workers must be actively “engaged in transportation” of those goods across borders via the channels of foreign or interstate commerce.
In reaching its decision, the Court rejected the employee’s argument that an industrywide approach should be applied, exempting all airline industry employee contracts from the FAA because air transportation as an industry is engaged in interstate commerce and the FAA statutory exemption references seamen and railroad employees. Such an approach, the Court ruled, was not supported by the language of the FAA, which it held speaks of “workers, not “employees” or servants.”
The Court’s ruling glossed over the statutory reference to railroad employees in the FAA. Instead, it held that the statute did not contemplate an industry-wide FAA exemption because the term seamen, as used in dictionaries from 1906 and 1925, contemplated persons who worked on ships at sea and was thus a subset of workers involved in maritime transactions. However, the Court also recognized that the statutory reference to railroad employees was ambiguous. It thus rejected Southwest’s argument that the reference to seamen meant that the statutory exemption only applied to those workers who physically move goods in foreign or interstate commerce. In finding that the ramp supervisor was a “transportation worker” under the FAA, the Court held that its case law for almost one hundred years was unambiguous that workers who load or unload goods that are traveling in interstate commerce are plainly involved in interstate commerce and are transportation workers subject to the exemption.
Although resolving in the negative the issue of whether all employees of a transportation industry company are “transportation workers” for purposes of the FAA Section 1 exemption, the Supreme Court declined to resolve the question of whether the FAA exemption applies to those classes of employees “further removed from the channels of interstate commerce or the actual crossing of a border.
Subsequent 2022 state court and federal appellate court decisions applying Saxon suggest that the Court’s decision did not fully resolve all questions related to the scope of the FAA exemption, especially in the context of whether delivery drivers providing last mile delivery services fall within the scope of the “transportation worker” exemption.
For example, in Bissonnette v. LePage Bakers Park St., LLC, a split panel of the United States Court of Appeals for the Second Circuit disagreed as to whether two independent distributors who delivered baked goods by truck were “transportation workers” within the scope of the FAA exemption so as to allow their class action lawsuit for alleged violations of the FLSA and Connecticut wage laws to proceed against the manufacturer of the goods that were being delivered.
The Second Circuit majority found that while Saxon clarified that not everyone who works in the transportation industry is a transportation worker for purposes of the FAA, the Saxon decision did not affect or set aside Second Circuit case law which held that the FAA exclusion is limited to workers involved in the transportation industries, not workers who incidentally transport goods interstate as part of their job in another industry. Recognizing that other circuits had reached different conclusions about which workers may be “transportation workers,” the Second Circuit majority held that it did not need to apply a Saxon analysis in Bissonnette because the plaintiff truck drivers in the case were not involved in the transportation industry but instead worked in the bakery industry. The court reasoned that since the companies' customers were paying for the baked goods themselves, and the transportation was a component of the total price, the commerce was not a transportation service. As such, the workers were not transportation workers. The majority decision in Bissonnette was rendered over a vigorous dissent arguing that it was clear that truck drivers are transportation workers both by the nature of their work and their industry and that multiple courts, including the Seventh Circuit, in the decision affirmed by the Supreme Court in Saxon, had stated that transportation worker need not work for a transportation company.
Rather than focus on the industry in which the delivery services were provided, other 2022 post-Saxon federal and appellate state court decisions instead examined the question of whether the local last mile delivery of goods was part of interstate commerce for purposes of determining whether the employee was a transportation worker for purposes of the FAA exemption.
The United States Court of Appeals for the Fifth Circuit applied Saxon to a local delivery driver who picked up and delivered uniforms from a local warehouse to local customers. Lopez v. Cintas Corp. The Fifth Circuit did not examine the issue of whether the employee or employer was in the transportation industry, but instead focused on whether a local delivery driver delivering to local customers after goods have already been delivered across state lines to an in-state warehouse was engaged in interstate commerce. Recognizing that other federal appellate courts had reached differing conclusions on the issue, the Fifth Circuit held that the local delivery drivers were not engaged in interstate commerce because once the goods had arrived in Texas and had been unloaded anyone interacting with the goods was no longer directly or actively engaged in interstate commerce, as required by the FAA exemption.
In Archer v. Grubhub, Inc., the Supreme Judicial Court of Massachusetts reached a similar conclusion. The court held that in determining whether the FAA exemption applied, “the question is not whether any individual worker was engaged in interstate commerce, but whether the class of workers to which the individual belonged was engaged in interstate commerce.” It then ruled that Grubhub delivery drivers did not qualify for the FAA exemption because while they performed transportation services, they only performed local delivery services and were not part of an ongoing and continuous interstate transit of the good to the customer who had ordered it.
VIII. FLSA Proposed Rule Change–Motor Carrier Employee versus Independent Contractor
The Fair Labor Standards Act (FLSA) requires covered employers to pay nonexempt workers (employees) at least the federal minimum wage per hour worked, provide overtime pay at 1.5 times the employee’s regular rate for each hour worked beyond forty hours in a workweek, and maintain certain employee records. Although specific motor carrier employees are exempt from the overtime provisions of the FLSA, other employees are not (e.g., employee drivers operating vehicles weighing 10,000 pounds or less in interstate transit).
Fundamentally, the FLSA’s wage and hour provisions only apply to employees, not independent contractors. Courts use an “economic reality test” (ERT) to determine if a worker is “dependent” on their employer (and thus an employee), or if they are “in business for themselves” (and thus an independent contractor). The ERT is conceptually based in “economic reality,” irrespective of the common law concepts of “employee” and “independent contractor, which emphasize control over the work.” Additionally, contract terms (such as those in a motor carrier operating or lease agreement) are not dispositive to the ERT. The classic ERT factors are: (1) the degree of the employer’s control as to the manner work is done, (2) the worker’s opportunity for profit or loss, (3) the worker’s investment in equipment or materials required for their task or their employment of others, (4) whether the service rendered requires a special skill; (5) the degree of permanency and duration of the working relationship; and (6) the extent to which the worker’s services are integral to the employer’s business. No one factor is controlling. Rather courts look “to all the circumstances of the work activity” to determine the economic reality of the working relationship.
On January 7, 2021, the Department of Labor (DOL) promulgated a final rule (the “2021 Rule”) which principally (1) narrowed the FLSA ERT to five factors by combining the “worker’s investment” and “profit or loss” factors, and (2) unbalanced the factors, giving more weight to “employer’s control” and “profit or loss,” stating that those two factors are “more probative [than other factors].” After the Biden Administration took office, the DOL instituted rulemaking to delay, and then withdraw, the 2021 Rule (the “Withdrawal Rules”). A legal challenge resulted in a Federal district court vacating the Withdrawal Rules on the basis that the DOL had not followed the proper rulemaking process. The 2021 Rule then went into effect, backdated to its original effective date of March 8, 2021. On October 13, 2022, the DOL published a notice of proposed rulemaking entitled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” (NPRM) in the federal register for public comment.
The stated purpose of the NPRM was to “modify Wage and Hour Division regulations to revise its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act to be more consistent with judicial precedent and the Act’s text and purpose.” Essentially, the NPRM: (1) eliminated the weight given to certain factors by the 2021 Rule; (2) returned “worker’s investment” as a standalone factor; (3) provided an analysis of control factor variables which do not limit “control” to control that is actually exerted; and (4) broadened the “integral to employer’s business” factor to include work which is integral to the employer’s business, rather than simply part of an integrated unit of production. The practical effect of the NPRM was to broaden the class of workers who will be classified as employees and subject to the FLSA.
The NPRM identified the trucking industry as an area of high worker misclassification, citing a report from the Economic Policy Institute (EPI Report) which suggests that up to 82% of workers in seaport haulers are “misclassified as independent contractors” (under the pre-2021 Rule factor analysis). While the NPRM’s reimplementation of worker investment as a standalone ERT factor may broadly weight in favor of classifying trucking owner-operators as independent contractors, the NPRM’s discussion of certain sub-elements of the control factor could weigh strongly against such a finding. Specifically, the NPRM identified “an employer’s compliance with legal obligations, safety or health standards, or requirements to meet contractual or quality control obligations” are an indication that the “employer is exerting control.” Industry experts have speculated that a motor carrier’s mere compliance with Department of Transportation regulations may now be probative to determining the FLSA status of their drivers. Additionally, technology such as GPS systems, electronic logging devices, and dashboard cameras may also weigh in favor of a finding of high employer control.
While the NPRM broadens the scope of the FLSA, it does not go as far as California’s AB5 law, which replaces the ERT with a three-prong “ABC test.” The ABC factors are: (A) the person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) the person performs work that is outside the usual course of the hiring entity’s business; and (C) the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Motor carriers have argued part B of the ABC test bars their employment of independent contractor drivers and owner operators, leading to increased costs for consumers. But the NPRM does not limit independent contractors from working for motor carriers quite as completely as AB5 does.
At the time of writing, the public comment period for the NPRM (ending November 28, 2022) has yet to close. The DOL will consider public comments and may modify the NPRM before promulgating a final rule.
James Border, Committee Editor. Authors in order of appearance: Attilio M. Costabel (Warranties, Utmost Good Faith and Telemedicine), Rebecca Fenneman (OSRA 2022), Nicholas L. Webb (OSRA Regulations), Andrew M. Danas (Revisiting what Constitutes a Transportation Worker), David French (FLSA Proposed Rule Change).
