Within an hour of the Supreme Court’s unanimous decision in Montgomery vs. Caribe II, opening the door to bringing in brokers as defendants when a carrier they hire is involved in an incident that leads to a lawsuit, the reactions began to pour in.
Nobody moves faster than Wall Street. And on a day when leading equity indices were up strongly, and trucking stocks were as well, the few brokerage-specific stocks trading on exchanges were all lower.
Even though C.H. Robinson was the company that led the charge trying to keep 3PLs protected under the Federal Aviation Administration Authorization Act (F4A), among three pure play brokerage companies (albeit a slightly altered model at Landstar), its stock had declined the least at approximately 1:30 p.m.
C.H. Robinson (NASDAQ: CHRW) was down 1.92% to $160.12, a drop of $3.14 when the S&P 500 was up
Meanwhile, RXO (NYSE: RXO) had dropped 8.83% to $18.07, a slide of $1.74, while Landstar (NASDAQ: LSTR) was down 1.72%, or $3.01, to $171.98.
Meanwhile, for reasons that are not necessarily related–carriers have brokerage units as well, and they can no longer cite F4A should those segments find themselves in a lawsuit–the truckload carriers were riding along with higher equity markets.
At about 1:30 p.m. EDT, Knight Swift (NYSE: KNX) was up 3.38%, J.B. Hunt (NASDAQ: JBHT) had risen 6.42%, and Schneider National (NYSE: SNDR) was up 11.07%. At about that time, the S&P 500 had risen just under 0.7%.
A surprising upside
The irony in the brokerage stocks getting hit is that large 3PLs can be seen to benefit from the Montgomery decision. They are the ones that will have the resources to better handle any higher insurance premiums; they will have more tools to vet carriers; and they’re the ones in the best position to prove the old adage that regulation is great for large incumbents and an absolute barrier to entry for smaller players.
RXO, in a prepared statement supplied to FreightWaves, suggested that it understood that roadmap.
“RXO does not expect this ruling to have a negative material impact on our business,” it said in the statement. “In fact, it underscores the importance of choosing a brokerage partner with rigorous carrier vetting processes and financial stability. We believe this ruling will accelerate industry consolidation, reinforcing the long-term competitive advantage of scaled players like RXO.”
In its statement, C.H. Robinson said it was “disappointed with the outcome.” But it also cited the statements by Justices Samuel Alito and Brett Kavanaugh in their separate concurring opinion.
“Importantly, the Court’s decision today should not be read to mean that brokers will routinely be subject to state tort liability in the wake of truck accidents,” the justices said. “As even plaintiff ’s counsel stressed, brokers should be able to successfully defend against state tort suits if the brokers have acted reasonably and arranged transportation with reputable trucking companies.”
Reaction in the states won’t be consistent
In a brief commentary, the trucking-focused law firm of Scopelitis looked to the concurring opinion of the two justices and said it shows that “state tort law can be unpredictable with litigation and insurance costs being passed on to consumers. Nevertheless, the decision underscores the importance to brokers of a sound and reasonable carrier vetting procedure that is faithfully followed.”
As an attorney involved in the case noted, being able to be found negligent or liable under Montgomery doesn’t mean such a finding is automatic.
C.H. Robinson’s statement also seemed to suggest it might come out stronger after this, much like RXO said.
“This ruling underscores the importance of working with a broker that offers the scale, technology and compliance processes needed to navigate this new freight landscape,” the company said. “C.H. Robinson will continue to select only carriers licensed by the Federal Motor Carrier Safety Administration (FMCSA) as required by law, support strong federal oversight, serve customers without disruption, and remain a trusted partner for shippers.”
The company’s prepared statement said the shipments it arranges “overwhelmingly move without incident, with just one serious accident claim filed for every 500 million miles driven on our customers’ loads. But even one accident is one too many.”
Wall Street bank surveys the wreckage
In a report that did not mince words, the transportation team at Deutsche Bank led by Richa Harnain, said its estimate was that 20% of the trucking industry “could face grave financial consequences on the back of this Supreme Court decision.”
But that’s not an estimate on the impact for brokerages; that’s the industry as a whole. Deutsche Bank got to that estimate by multiplying about 60% of the brokerage industry that is in peril, which in turn accounts for about 30% of the total market.
And as a result, in a statement that echoed what some of the bigger brokerages were saying, “That should therefore create more share gain opportunities for the larger, more insulated players.”
Deutsche Bank looked at the stock price selloff at C.H. Robinson and said it was “knee-jerk.” “We think the company already retains higher amounts of insurance than the average brokerage community,” it said. The analyst added that with 40% EBIT net margins in its truck brokerage arm, “the impact to profitability from additional insurance is relatively low. Hence, we think it is best positioned in the brokerage community.“
In its commentary, Deutsche Bank said it expected the impact of the Montgomery case to have long-term impact.
“We think this Supreme Court decision could create much more lasting discipline in the industry,” it said. “Brokers will be more diligent in terms of who they hire, showing a selectivity bias towards quality-operators, to avoid costly risk. Effectively this would further increase the barriers to entry for the industry, aside from just the added cost of insurance from doing business.”
And it asked a question that has been floating around in the industry for awhile as it awaited the Montgomery case to be settled.
“If brokers can be held liable when carriers they hire get into accidents….what’s to stop shippers from being held liable for brokers and/or carriers they hire next?,” Deutsche Bank said. “We think today’s decision makes this a fair question, which could further increase the quality-bias in the industry.”
Trade group “deeply disappointed”
Even as big brokerages may benefit, a lot of small ones likely won’t. And that is likely on the mind of the Transportation Intermediaries Association, the 3PL trade group which represents small and large brokers alike.
“We are deeply disappointed with the decision as the law and legal precedent for decades has given the federal government, not states, the responsibility for setting safety standards for motor carriers,” the TIA said in a prepared statement. “To date, carriers, not brokers, have been responsible for complying with these standards.”
Montgomery, TIA said, “imposes an impossible task on brokers — effectively asking them to evaluate the safety of a given motor carrier despite having been deemed safe to operate on public roads by the federal government. This is like asking travel agents to evaluate the safety of a given airline despite the fact that the airline has been licensed to fly by the federal government.”
The trade group knows it has its work cut out for it. “We are working with our members to assess potential next steps to mitigate the consequences of the Supreme Court’s decision,” the TIA statement said.
More articles by John Kingston
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At TIA meeting, freight brokers brace for Supreme Court decision
Strange bedfellows as states say brokers not protected under ‘safety exception’.
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