Domestic trucking in the United States consists of several players. These include the shipper, the motor carrier property broker, and the motor carrier. The owner of the goods, the shipper, can directly select and engage the motor carrier, the truck that transports the goods. Alternatively, the shipper may engage the services of a broker, which is a regulated intermediary that acts as a middleman in connecting the motor carrier and the shipper. Under federal law, a motor carrier broker is “a person . . . that . . . sell[s], provid[es], or arrang[es] for, transportation by motor carrier for compensation.” A recent litigation trend in the United States has involved plaintiffs in motor carrier personal injury and cargo loss and damage claims suing both the motor carrier and, if one is involved, the broker who selected the motor carrier. One reason for including the broker in the lawsuit is the fact that many motor carriers have either limited insurance coverage or insufficient assets to satisfy a judgment, whereas a broker may have such assets or insurance. Brokers have thus been included in litigation against motor carriers for an injury or loss caused by the motor carrier on a legal theory of negligent hiring of the motor carrier by the broker.
The U.S. motor carrier industry is subject to exclusive federal economic regulation under Title 49 of the U.S. Code. Pursuant to this regulatory scheme, certain state laws relating to motor carriers and brokers are preempted by federal law. The FAAAA provides that “States may not enact or enforce a law . . . related to a price, route, or service of any motor carrier . . . broker, or freight forwarder with respect to the transportation of property.” But the FAAAA also sets forth a “safety exception” that states that the federal preemption provision “shall not restrict the safety regulatory authority of a State with respect to motor vehicles.”
District courts in the United States have reached contrary conclusions as to when the FAAAA preemption applies to negligent hiring claims against brokers, especially as to whether the safety exception allows an otherwise preempted claim. Until 2023, the Ninth Circuit decision in Miller was the only appellate court case addressing the issue, finding against preemption of such claims. Both 2023 appellate court cases reached the opposite conclusion, finding that the safety exception does not apply to motor carrier property brokers and that negligent hiring claims against brokers are preempted under the FAAAA. The Eleventh Circuit found that such claims are preempted in the case of cargo theft (Aspen), while the Seventh Circuit found that such claims are preempted in a wrongful death case (Ye).
In Aspen, the legal issue was whether a broker could be sued under Florida state law for the negligent hiring of a motor carrier that turned out to be an imposter that stole the shipment. The plaintiff sued the broker, alleging that the broker did not follow its normal carrier-verification protocols when engaging the motor carrier. Affirming the lower court’s decision dismissing the claims, the Eleventh Circuit found that the preemption provisions of the FAAAA are an express preemption of state laws and that the state law claims against the broker alleging the negligent hiring of a carrier clearly involved the “services” of the broker with respect to the transportation of property within the scope of the preemption statute.
The Eleventh Circuit rejected the holdings of some district courts that negligent hiring claims are outside the scope of the FAAAA preemption because they are generally applicable state common law causes of action that are not targeted or directed to the trucking industry. The Eleventh Circuit found that these lower court rulings were contrary to Supreme Court decisions regarding the FAAAA preemption. In addition, the court found that these decisions failed to recognize that the claims being asserted against the broker were not general state law claims asserted against a member of the general public but instead were specific allegations regarding the selection of a motor carrier, and are thus related to the performance of the broker’s core transportation related services.
With respect to the safety exception to preemption, the Eleventh Circuit in Aspen found that Florida’s general state law negligence standards address public safety standards and that Florida law regarding negligent hiring clearly related to safety concerns. But it held that with respect to negligent hiring claims against brokers, the state law authority was not being exercised “with respect to motor vehicles.” The Eleventh Circuit found that this was a requirement for the safety exception to apply. It also found that a general negligent hiring tort claim only had an indirect connection to a motor vehicle, because under federal law the broker’s services are limited to the hiring of motor carriers that provide services related to motor vehicles. The Eleventh Circuit also rejected legal arguments that a distinction should be made with respect to the preemption of negligent hiring claims involving bodily injury claims as opposed to property damage claims, because both types of incidents involve safety concerns.
The Seventh Circuit subsequently made similar rulings in Ye that involved negligent hiring claims against a broker for the wrongful death caused by a motor carrier the broker engaged with. The Seventh Circuit found that allowing a claim against a motor carrier property broker recognizing common law negligence claims for the selection of a motor carrier would impose in the name of state law a new and clear duty of care on brokers that would have a significant economic effect on broker services. Such claims were thus expressly preempted by the FAAAA.
In reaching its decision, the Seventh Circuit acknowledged that “many courts” have agreed that a state’s tort law is part of its “safety regulatory authority,” so as to support an application of the safety exception to FAAAA pre-emption. But it concluded that it did not need to reach the issue because it agreed with the Eleventh Circuit that a negligent hiring claim against a broker does not satisfy the second half of the safety exception’s text that the claim is “with respect to motor vehicles.” The Seventh Circuit further noted that the safety exception contains no mention of brokers—only motor carriers and motor vehicles. The Court thus concluded that Congress viewed motor vehicle safety regulations separately and apart from the regulatory obligations imposed on brokers. Put differently, the Court found that “Congress required motor carriers—not brokers—to bear responsibility for motor vehicle accidents.”
The Seventh Circuit’s decision also directly addressed the Ninth Circuit’s 2020 ruling in Miller holding that the safety exception does apply to negligent hiring claims against brokers in motor vehicle highway accident injury claims. The Seventh Circuit criticized the Ninth Circuit’s decision as relying on a presumption against preemption and unduly emphasizing Congress’ stated deregulatory purpose in enacting the FAAAA, while not focusing on the plain meaning and import of both Section 140501(c) and Title 49 of the U.S. Code as a whole. The Seventh Circuit also disagreed with the Ninth Circuit’s holding in Miller that by selecting a motor carrier, a broker was indirectly involved with the vehicles of the motor carrier and thus the broker’s services could fall within the scope of the safety exception. Instead, the Seventh Circuit stated that based on the plain text and the statutory scheme, the safety exception did not save a state court negligent hiring claim from being preempted under the FAAAA.
On November 6, 2023, a petition for certiorari by the Plaintiff in Ye was docketed with the Supreme Court. In seeking Supreme Court review of the Seventh Circuit’s decision, the Plaintiff noted the conflict between the Ninth Circuit’s decision in Miller and the Seventh Circuit’s decision in Ye. In addition to arguing that the Seventh Circuit was wrong in its analysis of the FAAAA safety exception, the Plaintiff argued that the Seventh Circuit’s decision incorrectly placed an emphasis on the nature of the entity being regulated, and not the nature of the state authority being invoked. The plaintiff argued that, if allowed to stand, the Seventh Circuit decision would not allow plaintiffs to “hold a broker liable for its negligent hiring of an unsafe motor carrier even if the broker knew that the motor carrier would place dangerous motor vehicles on the road.” On January 8, 2024, the Supreme Court denied the petition for certiorir in Ye, similar to its 2022 denial of certiorari in Miller. It thus appears that the Supreme Court will wait for additional circuit courts to issue rulings on the interpretation and scope of the FAAAA preemption.
II. New Florida Tort Law
On March 24, 2023, Florida Gov. DeSantis signed into law the tort reform bill, numbered CS/CS/HB, 837 (HB 837). Because Florida is the venue for most cruise ship claims, any change to its tort laws have wide reaching impact. The Bill introduced major changes in the area of Comparative Negligence, Bad Faith Insurance Claims, Fee Awards, Medical Bills and Proof of Medical Damages, Contingency Fee Multipliers, Premises Liability, and, most importantly, the Statute of Limitations. In only ten months from coming into force, HB 837 spurred two developments in the Florida courts.
A. Statute of Limitations
HB 837 reduced the time to file provided by § 95.11(4), Fla. Stat., Limitations other than for the recovery of real property, from five and four years respectively, to two years. In particular, the amendments make the two-year limit applicable to actions founded on negligence, actions founded on professional malpractice, and actions for wrongful death. On May 31, 2023, the United States District Court for the Middle District of Florida decided a question concerning the statute of limitations in a civil rights complaint under 42 U.S.C. § 1983. Because Section 1983 does not contain a statute of limitations, the claims are governed by the forum state’s residual personal injury statute of limitations, which, in Florida, was four years when the action accrued. The Court declined to apply the new two-year statute of limitations, holding that the Amendment applies only to causes of action accruing after the Act’s effective date. This holding extends to all applications of the amending act and, therefore, applies also to shipping and international transportation actions in Florida. Unless specific limitations apply by international conventions or mandatory federal or state laws, all actions in Florida accruing after March 24, 2003, on negligence, wrongful death and premises, in the context of international shipping and transportation cases, will be subject to the new limit of two years.
B. Interaction of HB 837 with Admissibility of Medical Evidence
Well known for its advertising, the law firm Morgan and Morgan filed a negligence lawsuit on behalf of Sharon Sapp and Stacy Chaney. Within that action, the issue of proof of medical expenses became an issue as HB 837 stiffened the standards of proof for such cases. The issue in that case was the manner of proving medical expenses: whether under the sharp limits of the new law or the prior statute 768.0427.
On May 19th, Circuit Court Judge Anne-Leigh Gaylord Moe of Hillsborough County entered an order granting the defendant’s motion in limine, on the grounds that the new statute applies retroactively to lawsuits filed before HB 837’s effective date because the changes it made were procedural. Morgan & Morgan alone had filed 25,000 complaints prior to HB 837 coming into force as a protective measure, and the same has been done by other plaintiff firms. An appeal to the Florida Second District Court of Appeals appears likely. For cases filed in Florida (as is often required by the venue selection clauses of cruise passenger contracts), this change in the law, if upheld, will impact proof of damages in all cases. Attempts by plaintiffs’ trial attorneys to avoid the consequences of the tort reform in Florida may be in vain if the appeal by the plaintiffs is unsuccessful.
C. Comparative Negligence
This is arguably one of the major changes of the HB 837. Florida law had been a pure comparative negligence jurisdiction, meaning that the indemnity due by the tortfeasor would fall onto either party in the percentage proportional to their respective fault. With section (6) of HB 837, the revised percentage of fault section now reads: “In a negligence action to which this section applies, any party found to be greater than fifty percent at fault for his or her own harm may not recover any damages.” The consequence of the statutory revision in Florida is that now the victim of the tort would recover nothing if he or she contributed to the tort with more than fifty percent of their negligence. This change will have serious repercussions on the handling and planning of insurance liability for tort claims arising from cruise ships that are venued in Florida.
III. International Conventions
A. Beijing Convention on the Judicial Sale of Ships
On September 5, 2023, the United Nations opened for signature the Convention on the International Effects of Judicial Sales of Ships (“Beijing Convention on the Judicial Sale of Ships”). The ceremony was held in Beijing, attended by thirty plus Nations, and signed by fifteen.
Prepared by UNCITRAL and adopted by the United Nations General Assembly on December 7, 2022, the Convention establishes harmonized rules for the international effect of ships’ judicial sales, but carefully preserving domestic laws. This new regime may have good effects on the ship market, improving creditors’ expectations.
On June 26, 2023, Bangladesh deposited the instrument of accession to the International Convention for the Safe and Environmentally Sound Recycling of Ships, with the International Maritime Organization (IMO) Secretary-General, at the IMO Headquarters in London, thus setting the Convention entering into force on June 26, 2025. The aim of the Convention is to ensure that ships recycled at the end of their lives do not pose risks to human health and the environment.
IV. Rulemaking on Unreasonable Refusal to Deal or Negotiate With Respect to Vessel Space Accomodations
On June 16, 2022, President Biden signed the Ocean Shipping Reform Act of 2022 (OSRA22) into law. OSRA22 required the Federal Maritime Commission (FMC) to initiate a rulemaking defining unreasonable refusal to deal or negotiate with respect to vessel space under section 41104(a)(10). On September 13, 2022, the FMC issued a Notice of Proposed Rulemaking (NPRM) applying a requirement of OSRA22 to define “unreasonableness” under 46 U.S.C. 41104(a)(10) which restricts a common carrier, either alone or working in conjunction with any other person directly or indirectly, from unreasonably refusing to deal or negotiate with respect to vessel space accommodations provided by an ocean common carrier.
To establish a violation for an unreasonable refusal to deal or negotiate, the FMC proposed in the NPRM that complaints must meet each of the following 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. Moreover, the Commission proposed to define “vessel space accommodation” as “space provided aboard a vessel of an ocean common carrier for laden containers being imported to, or exported from, the United States,” and “unreasonable” as “an ocean common carrier’s refusal to deal or negotiate as prohibited under 46 U.S.C. 41104(a)(10).” The NPRM proposed to define “reasonable” based on three factors: (1) whether the ocean common carrier follows a documented export strategy that enables the efficient movement of export cargo; (2) whether the ocean common carrier engaged in good faith negotiations, and made business decisions that were subsequently applied in a fair and consistent manner; and (3) the existence of legitimate transportation factors such as factors that incorporate the genuine operational considerations underlying an ocean common carrier’s practical ability to accommodate laden cargo for import or export, and any other factors the Commission deems relevant. Once the three elements have been established, the burden of production shifts to allow for an ocean common carrier to establish why its actions in refusing vessel space were not unreasonable.
On January 25, 2023, the Commission announced the issuance of a Supplemental NPRM (SNPRM) in which it proposed to: (1) define “unreasonable” by stating a general principle and a non-exhaustive list of examples of unreasonable conduct; (2) establish the elements of a refusal of cargo space accommodations; (3) revise the definition of “transportation factors” to focus on vessel operation considerations; (4) clarify that vessel space services were already included in the definition of vessel space accommodations; (5) define “documented export policy” and add mandatory document export policy requirements; and (6) remove the voluntary certification provision proposed by the NPRM. In addition to the above, the SNPRM examines the correlation between 46 U.S.C. 41104(a)(3) and 41104(a)(10) and the elements required to establish a violation under each of these provisions.
While the SNPRM proposes elements that the FMC may consider when evaluating the reasonableness of an ocean common carrier’s refusal to provide cargo space accommodations, the elements vary contingent on whether a violation falls under 46 U.S.C. 41104(a)(3) or 46 U.S.C. 41104(a)(10). Section 41104(a)(3) applies when a refusal occurs at the execution stage such as after the parties reached a deal on service terms and conditions. Conversely, section 41104(a)(10) applies during the negotiation stage when the parties are initiating negotiations over terms and conditions of service. If a violation constitutes a 46 U.S.C. 41104(a)(10) claim, the Commission proposes that it may consider: (1) whether the ocean common carrier followed a documented export policy that enables the efficient movement of export cargo; (2) whether the ocean common carrier made a good faith effort to mitigate the impact of a refusal; (3) whether the refusal was based on legitimate transportation factors; and (4) any other factors relevant in determining whether there was a refusal in that particular case. If a violation falls under 46 U.S.C. 41104(a)(3), the Commission proposes that it may consider: (1) blank sailings or schedule changes with no advance notice or with insufficient advance notice; (2) vessel capacity limitations not justified by legitimate transportation factors; (3) failing to alert or notify shippers with confirmed bookings; (4) scheduling insufficient time for vessel loading so that cargo is constructively refused; (5) providing inaccurate or unreliable vessel information; (6) categorically or systematically excluding exports in providing cargo space accommodations; or (7) any other conduct the Commission finds unreasonable.
The SNPRM defines “unreasonable” for both 46 U.S.C. 41104(a)(3) and 41104(a)(10) claims as “ocean common carrier conduct that unduly restricts the ability of shippers to access ocean freight carriage services.” To demonstrate the type of conduct the Commission would deem to be unreasonable, the Commission proposed the following non-exhaustive list: (1) quoting rates that are so far above market as to render the quote not a serious negotiation; (2) categorically or systematically excluding exports in providing vessel space accommodations; and (3) any other interactions or communications with the shipper or other conduct the Commission finds unreasonable. The FMC proposes to define “transportation factors” to include only “weather related scheduling considerations” to guarantee that scheduling within the control of the ocean common carrier is not used as a factor. Therefore, legitimate transportation factors must exist, be outside the vessel operators’ control, and relate to the facts of a specific transaction or vessel.
The Commission sought to broaden the definition of “vessel space accommodations” to acknowledge that vessel space services are included in the proposed definition. As such, “vessel space accommodations” means “space available aboard a vessel of an ocean common carrier for laden containers being imported to or exported from the United States. In addition, “vessel space accommodations also includes the services necessary to access or book vessel space accommodations.” The SNPRM modifies the proposal made in the NPRM and proposes the mandate that ocean common carriers submit a documented export policy once per calendar year that includes pricing strategies, services offered, strategies for equipment provision, and descriptions of markets served. The SNPRM also removed the voluntary self-certification provision proposed previously in the NPRM. Currently, the FMC is considering the comments received from the SNPRM. It remains unclear when a Final Rule will be issued by the Commission.
V. Taxation of International Transportation
With respect to the taxation of international transportation, there are two model income tax conventions on which bilateral income taxation conventions are based: those published by the United Nations Organisation for Economic Cooperation and Development (OECD) and by the United Nations (UN). Article 8 of each of these provides, generally, that the international operation of ships and aircraft are subject to tax only in the jurisdiction where the entity providing the transportation is resident. This concept of full reciprocity for shipping and air transport is contained in approximately 3,500 bilateral income tax treaties. The UN Model Convention also contains an alternative provision, applicable only to shipping, that permits source-based taxation based on an appropriate allocation of profits. Some variation of this provision is contained in less than ten percent of bilateral income tax treaties.
A. Organization for Economic Cooperation and Development
Although the OECD has not announced plans for modification of its model convention, it has, since before 2013, been engaged in the “Base Erosion and Profit Shifting” (BEPS) project at the behest of the G20 countries. This project has resulted in fifteen separate actions, but one in particular, “Tax Challenges Arising from Ditalisation,” currently has, or will have, the greatest impact on international transportation. The OECD expanded participation in the BEPS project to all (currently) 145 members of the OECD/G20 Inclusive Framework (IF). The IF has agreed on what is known as the Two-Pillar Solution. Pillar One establishes taxing rights in market jurisdictions for a defined portion of residual profits. When Pillar One is adopted, multinational enterprises with revenue greater than €20 billion and profitability above ten percent will be required to allocate twenty-five percent of profit in excess of the ten percent threshold to jurisdictions in which it derives at least €1 billion in revenues. Under the current draft pronouncements, this allocated revenue (“Amount A”) will, in the case of international transportation, be allocated among countries based on i) place of discharge for passengers; and ii) fifty/fifty between place of loading and place of discharge for freight.
Pillar One also identifies an additional amount subject to local taxation (“Amount B”) which provides for the local taxation of “baseline” marketing and distribution activities under a simplified transfer pricing structure. Amount B is currently applicable only to the wholesale distribution of goods and, with this limitation, will be inapplicable to most aspects of international transport. Pillar One will be implemented through the adoption of a multilateral income tax convention, a draft of which has been developed and released by the OECD.
The second leg of the Two-Pillar Solution is the fifteen percent minimum tax of Pillar Two, also known as the Global Anti-Base Erosion (GloBE) Model Rules. Pillar Two contains an exclusion for international shipping subject to several preconditions. First, and likely most important, is that the “constituent entity” have its “strategic or commercial management of all ships . . . effectively carried on from within the jurisdiction where the Constituent Entity is located.” Thus, an entity formed in Country A, with crewing operations in Country B and technical maritime operations in Country C may not qualify for the exemption. Second, the exclusion divides income into two classes–International Shipping Income (ISI) and Qualified Ancillary International Shipping Income (QAISI). To be included within the shipping exclusion, the QAISI of all constituent entities can not exceed fifty percent of those entities ISI. QAISI includes income from short term bareboat charters, leasing and storage of containers, detention charges, provision of engineering, maintenance, cargo handling, and other services to other shipping enterprises, among other activities.
If an entity fails to qualify for the shipping exclusion under either the “management or control” test or the QAISI limitation, Pillar Two contains a Substance Based Income Exclusion (SBIE) which is designed to exclude from the minimum tax base a return on assets and labor. Initially, the exclusion will be the sum of five percent of eligible payroll costs and five percent of the carrying value of eligible tangible assets. But eligible payroll costs and eligible tangible assets are only those located in a jurisdiction to which the income subject to tax is related. This will exclude any benefit for payroll and assets in transit outside the territorial limits of any jurisdiction.
How Pillar One will develop and if it will be adopted over the current objections of the United States are unresolved questions. Currently, 140 countries have committed to adopt Pillar Two but, due to their complexity, some countries have adopted only a portion of the OECD rules and staged implementation is expected. The multilateral treaty to coordinate the rules is not yet in force.
B. United Nations
Unlike the OECD’s work on a project separate from its model convention, the United Nations has made and proposed changes to its model which, when adopted in bilateral conventions will impact the taxation of international transportation. The United Nations Committee of Experts on International Cooperation in Tax Matters (“the Committee”) has undertaken or is undertaking projects that impact the international transportation taxation norm. First, the Committee has adopted a change to the UN MC that created a “subject-to-tax” rule. Under this rule, Article 1 of the UN MC is amended to provide that it (and any bilateral convention including the provision) will not apply if the income is not subject to a minimum agreed statutory tax rate. Consequently, if the countries agree a minimum statutory tax rate of fifteen percent, a shipping country resident in the European Union and electing under its country’s tonnage tax system, would be considered to be taxed below the agreement minimum rate and ineligible for exemption of its earnings from source country taxation under Article 8.
Second, the Committee is considering a revision to Article 8, Alternative B. The local taxes to which Alternative B generally applies are often referred to as “freight taxes” although they generally apply to both freight and passenger transportation. In operation, they apply a country’s statutory tax rate to a defined amount of income. Most significantly, the proposed changes would expand Alternative B to air transportation. This proposed expansion of Alternative B and the potential application of source-based taxation was immediately noted by the airline industry. Finally, substantive changes to Article 8, Alternative B are suggested which, at this stage, do not integrate smoothly with freight taxes imposed globally.
Further than the changes to the UN MC initiated by the Committee, the General Assembly adopted a resolution which would initiate intergovernmental discussion on ways to strengthen the “inclusiveness and effectiveness” of international tax cooperation, including the possibility of developing an international tax cooperation framework or agreement. The UN initiative is due, in part, to the perceived limited effectiveness of the rules produced by the OECD to respond to the needs of the developing countries and the OECD procedural rules that prevent full participation by developing countries in the process.
How the UN action will interface with, or conflict with, the work performed by the OECD can not be predicted. But the transportation provisions currently included in the UN Model Convention can reasonably be expected to persist.
James Border, Committee Editor. Authors in order of appearance: Andrew M. Damas (Federal Pre-Emption of State Law Negligence Claims Against U.S. Motor Carrier Brokers), Attilio M. Costabel (New Florida Tort Law and Conventions), Nicholas L. Webb (Rulemaking on Unreasonable Refusal to Deal or Negotiate), James Border (Taxation of International Transportation).
