Forwarding and Logistics Startups Must Be Wary of U.S. Licensing, Registration and Compliance Requirements

Recent reports indicate that a number of new entities are organizing and raising capital to respond to opportunities arising from the COVID-19 crisis and related developments. This week, Beacon, a United Kingdom-based forwarding startup that "aims to act as the booking agents between importers and exporters while facilitating trade logistics and finance" according to its website, has signed on a $15 million investment from Jeff Bezos. Beacon investors already include top executives from Uber, Google and other companies in the surrounding supply chain, transport and logistics space.

There are also a significant number of other new and well-capitalized players in the forwarding and third-party logistics (3PL) business, offering innovative services to match suppliers and buyers, and to move goods in global commerce more quickly and easily, with more pricing options for traders at all levels. Many of these services offer to move almost anything, from personal items to trade goods, from one place to another globally at very competitive prices, with simple transaction structures and simple on-line booking.

When such businesses offer to move goods in U.S. import or export trade, especially by ocean container transportation, including less than container load (LCL) packages, they are quite likely to be subject to license, registration, bonding, tariff publication and other regulatory compliance requirements under U.S. law and federal regulations. Comparing the service offerings of a number of these companies with the list of licensees and registrants on the Federal maritime Commission (FMC) list, it seems likely that some of these new players may not be aware of applicable regulatory requirements – or perhaps interpret them differently than the government does. Some may be operating unlawfully.

As for motor carrier transportation, several companies are attempting to take the load board concept of connecting shippers with trucking capacity and improve upon it with sophisticated technology to better match loads and provide additional services, which will be collectively be referred to as "Advanced Freight Matching." Although the Federal Motor Carrier Safety Administration (FMCSA) has not issued any formal guidance as to whether or not such operations are regulated, depending on the services offered, such operations may be considered freight brokerage, which requires registration with the FMCSA, and is subject to federal regulation. Some of these Advanced Freight Matching services are registered as brokers, while others are not.

FMC Regulation of Ocean Transport Intermediaries

The FMC regulates ocean freight forwarders and non-vessel operating common carriers (NVOCCs), collectively referred to as "Ocean Transport Intermediaries" (OTIs), which are the two categories into which many of these new logistics service entrants fall. Under the Shipping Act of 1984 and the FMC regulations at 46 CFR Sections 515-532, forwarders and NVOCCs handling outbound shipments from the U.S. to foreign destinations must have an FMC license, which can be obtained only if one of their officers is a "Qualifying Individual" approved by FMC as having adequate experience in the ocean logistics business. They must also have a bond, publish a freight tariff and may only enter contracts with shippers in certain forms that comply with FMC's rules. NVOCCs handling inbound cargo to the U.S. must register with FMC and publish a tariff as well as comply with bonding and contract format requirements, but do not need a license.

Operating as a forwarder or NVOCC without a license is a violation of the Shipping Act, and fines range up to $25,000 per violation for knowing and intentional actions. Because the fines can be assessed per bill of lading or shipment, and each day constitutes a new violation for continuing unlawful activity, the stakes can be high. FMC collects a number of large fines and settlements from improper forwarding and NVOCC operations annually.

Additionally, and significant for any startup business, it is unlawful for licensed forwarders and NVOCCs, as well as vessel operators, to accept bookings from unlicensed forwarders and NVOCCs.

What Is "Forwarding"?

The FMC defines "Freight Forwarding" as the dispatching of shipments on behalf of others in order to facilitate shipment by a common carrier, which may include but are not limited to, the following activities:

1. Ordering cargo to port
2. Preparing and/or processing export documents, including the required "electronic export information"
3. Booking, arranging for or confirming cargo space
4. Preparing or processing delivery orders or dock receipts
5. Preparing and/or processing common carrier bills of lading or other shipping documents
6. Preparing or processing consular documents or arranging for their certification
7. Arranging for warehouse storage
8. Arranging for cargo insurance
9. Assisting with clearing shipments in accordance with U.S. government export regulations
10. Preparing and/or sending advance notifications of shipments or other documents to banks, shippers or consignees, as required
11. Handling freight or other monies advanced by shippers, or remitting or advancing freight or other monies or credit in connection with the dispatching of shipments
12. Coordinating the movement of shipments from origin to vessel
13. Giving expert advice to exporters concerning letters of credit, other documents, licenses or inspections, or on problems germane to the cargoes' dispatch

Companies may do some or all of these tasks for their own shipments of goods without needing a license. Also occasionally providing one or more of these services for a third party as part of an import or export transaction may not trigger characterization as a forwarder requiring a license. However, offering to provide these services on a regular basis for exporters and shippers, especially making bookings with carriers, handling documentation, collecting payments and paying the carrier or subcontractors, and keeping a fee for such services, is highly likely to constitute "Forwarding" in the FMC's view.

What Is an NVOCC?

FMC regulations define NVOCC services as the provision of transportation by water of cargo between the United States and a foreign country for compensation without operating the vessels by which the transportation is provided, and may include, but are not limited to, the following:

1. Purchasing transportation services from a vessel operating common carrier and offering such services for resale to other persons
2. Payment of port-to-port or multimodal transportation charges
3. Entering into affreightment agreements with underlying shippers
4. Issuing bills of lading or other shipping documents
5. Assisting with clearing shipments in accordance with U.S. government regulations
6. Arranging for inland transportation and paying for inland freight charges on through transportation movements
7. Paying lawful compensation to ocean freight forwarders
8. Coordinating the movement of shipments between origin or destination and vessel
9. Leasing containers
10. Entering into arrangements with origin or destination agents
11. Collecting freight monies from shippers and paying common carriers as a shipper on NVOCC's own behalf

The hallmark of an NVOCC operation is that an entity that does not operate a vessel purchases space aboard a liner vessel offering regular sailings in a trade lane (e.g., from Asia to the U.S. West Coast) and resells such space to a shipper, contracting and charging a marked-up price to move the goods from the named origin to a named destination. The NVOCC does not act as the agent for the shipper or vessel operator, booking the goods aboard a vessel on the shipper's behalf. Instead, the NVOCC is the carrier, undertaking to provide the transportation to the shipper for a price and hiring the vessel operator, marine terminals and inland transport service providers (railroads and truckers) as its subcontractors.

As with forwarding, the issue of what constitutes an NVOCC is somewhat subjective. Just doing one or two of the items on the list may not trigger NVOCC status; for example, just leasing containers without providing more services would not make a company an NVOCC. However, most any arrangement in which an OTI contractually obligates itself to provide ocean transportation to the shipper, rather than just acting as an agent to book the shipper's goods aboard the vessel, with the vessel operator issuing a bill of lading or sea waybill directly to the shipper, would constitute NVOCC service.

What is Not Considered Forwarding or NVOCC Service?

Companies that act as agents for forwarders and NVOCCs, steering them business or originating transactions in exchange for a fee paid by the (hopefully licensed or registered) forwarder or NVOCC, may not be engaged in forwarding or NVOCC activity. FMC has long held that parties acting as freight agents, earning a "finder's fee" from the carrier or forwarder for bringing them customers, are not subject to Shipping Act regulation. A number of logistics business advertising on the internet fall into this category. For example, they may assist the prospective shipper in selecting the best pricing option from a group of forwarders available to handle certain business. Other players in this space operate booking portals and similar arrangements without actually providing forwarding or NVOCC services themselves. But there can be a very fine line between acting as a finder or agent for a licensee and acting as an NVOCC.

Shippers associations are also not forwarders or NVOCCs, although they are also regulated by the FMC. Associations act as joint purchasers of transportation and logistics services, using their collective volume to negotiate favorable rates.

Customs brokers are also not forwarders. They represent the shipper and/or carrier in preparing documents and moving goods through customs at destination. There is a separate U.S. Customs and Border Protection license required for this activity. See 19 CFR § 111.

However, a number of business operating on line are clearly offering forwarding or NVOCC services but do not show up in the FMC's official list of licensed and registered ocean transportation intermediaries.

FMC's Enforcement Role

FMC proactively monitors the marketplace, especially advertising and websites, looking for unlicensed forwarders and NVOCCs. The agency's general approach is usually to contact a suspected unlicensed intermediary, investigate whether it actually engages in forwarding or NVOCC service and, if so, induce them to stop or, preferably, obtain a license or registration and enter into compliance. This is a common occurrence when a new startup entity is somewhat close to the line with its activities or is simply unaware what the requirements are. However, FMC can and does prosecute wrongdoers, especially if it determines the personnel with the unlicensed intermediary have been in the business awhile and should have been aware of the licensing requirements.

FMC regulations covering forwarders impose a number of administrative duties. The forwarder must display its FMC license number on its letterhead, invoices and shipping documents, may not collect forwarding fees on certain cargo movements and must make a specific certification on invoices as to its status as a forwarder. An NVOCC must also include its license number on letterhead, invoices and shipping documents, and may not "co-load" into vessel operator space under contract by a different NVOCC without certain tariff provisions and limitations.

OTIs also have to maintain records (which may be electronic) for their tariffs and transactions for five years. FMC occasionally audits OTIs to assure compliance with this requirement.

FMC also regulates contracts between NVOCCs and their shippers. An NVOCC can simply charge its tariff rates and follow its tariff rules on shipments without a contract (other than typically a house bill of lading). An NVOCC can also enter a "NVOCC Service Arrangement" (NSA) that does not need to be filed with FMC and can be easily amended without filing, but which contain a minimum volume requirement by the shipper and a minimum service requirement by the NVOCC. NVOCCs can also enter a "Negotiated Rate Agreement" (NRA) with shippers if the NVOCC's tariff provides for such contracts. NRAs do not need a minimum volume provision and usually cover rates for carriage of a specific amount of cargo for a stated time, but they cannot be amended.

Other Ocean Requirements

In addition to FMC licensing requirements, OTIs need to be aware of and comply with a small group of U.S. statutes that regulate their activity. In particular, the Carriage of Goods by Sea Act (COGSA) and the Carmack Amendment may prohibit an NVOCC from limiting its liability to the shipper below $500 per customary freight unit, and may require that the shipper be offered an opportunity to declare higher value and purchase cargo insurance in order to avoid a carrier liability limit.

FMCSA Requirements

The FMCSA regulates motor carriers, freight forwarders and brokers. Under federal regulation, a "broker means a person who, for compensation, arranges, or offers to arrange, the transportation of property by an authorized motor carrier. ..." (Note that "broker" has a slightly different definition under federal statute, but this is likely a distinction without a difference for this purpose). Compare49 USC § 13102(2) with49 CFR § 371.2(a).

The regulations further state that: "Brokerage or brokerage service is the arranging of transportation or the physical movement of a motor vehicle or of property. It can be performed on behalf of a motor carrier, consignor, or consignee." 49 CFR § 371.2(c). "Non-brokerage service is all other service performed by a broker on behalf of a motor carrier, consignor, or consignee." 49 CFR § 371.2(d). Brokers must be registered with the FMCSA and meet minimum requirements for financial security and insurance, among other requirements. 49 USC § 13901(a); 49 USC § 14916.

The crux of the definition of brokerage is arranging transportation. But "arrange" is not defined in the statutes or regulations. Traditional brokers often take a hands-on role in the transportation, often assisting with the bill of lading and other paperwork, dispatching transportation, facilitating freight claims and otherwise helping to facilitate the movement of goods. However, not all brokers are quite as hands on, and the statutes and regulations do not make clear whether it is only this more hands-on role that is meant by "arranging" transportation, or if any connection of a shipper with a carrier for compensation would constitute "arranging" transportation.

This distinction is important because Advanced Freight Matching offerings generally match shippers with trucking capacity and sometimes offer ancillary services as well. While offerings differ, typically the broker-like services that they offer are less hands-on and merely connect shippers with carriers, and it is up to the carrier and shipper to work out the details for the movement of goods.  The product could be seen as akin to a ride-sharing app or Airbnb. It should be noted that Uber Freight is registered with the FMCSA as a broker.

Load boards have existed for years. Dial-a-Truck (now DAT) started in 1978 as a means of connecting shippers with trucking capacity. The service primarily consists of posting available loads for carriers to select, sometimes with a rate and other times for the rate to be negotiated. In many ways, this is a useful analogy for Advanced Freight Matching. Several of the largest load boards are not registered as brokers with the FMCSA. However, this does not resolve the issue for a few reasons. First, in all the years of load board existence, the FMCSA has not issued any formal guidance on whether a load board is considered a broker. While there do not appear to have been any enforcement actions against the major load boards for operating an unregistered brokerage, it is possible that the FMCSA could determine that load board services require registration as a broker. Second, many Advanced Freight Matching services offer ancillary services to their products. Any of these additional services might qualify the service as brokerage.

The financial model of an Advanced Freight Matching service may also be relevant as a means of determining whether or not the service is brokerage. Traditional brokers charge the shipper a fee for the transportation, then have a separately negotiated price with the carrier and keep the difference as the broker's profit. Traditional load boards, on the other hand, typically charge a flat monthly subscription charge that is not dependent on the cost of any transportation. While the financial model of an Advanced Freight Matching service should not directly impact whether or not it is "arranging" transportation, whether the model is more similar to a traditional broker or more similar to a traditional load board might still impact which product is the closer analogy. Furthermore, while both models include payment, it is possible that the financial model would affect whether or not an entity is determined to be arranging the transportation "for compensation" on the theory that a subscription fee is for access to a platform, rather than compensation for arranging the transportation itself.

Registering with the FMCSA is not onerous. While there is some cost and ongoing compliance obligations, these too would not provide a substantial obstacle for many companies. Yet registering as a broker for non-brokerage service may come with its own potential risks, such as potentially adding to litigation risk for motor vehicle accidents. To this end, brokers and Advanced Freight Matching operators alike should consider the benefits and consequences of vetting carriers and other users of its services.

Conclusion

The prospect of new and technologically sophisticated product offerings in the transportation and logistics space is exciting to many in the industry, and the venture capital raised for such startups reflects the potential value of these offerings. It should be remembered, however, that this new technology must comply with the existing regulatory framework and that compliance should be carefully assessed to avoid violation.