Imposter Theft - Can a Carrier be Liable?

Imposter Theft - Can a Carrier be Liable?

By George Carl Pezold

     Unfortunately, impostor thefts have become all too common, partly because it is all too easy for thieves to obtain information about high-value shipments and how to steal them from various sources: truck stops, load boards, rate quotes, websites, emails, insider tips, etc.

     The question is whether the carrier (or intermediary) can be held liable for the theft if caused by its security breach, namely the negligent failure to protect confidential information, thus allowing the thieves to drive away with the cargo?

     The scenario:  Shipper arranges with a carrier for the transportation of a high value shipment, and the carrier provides the shipper with a confidential booking number used to reference and identify the cargo to be shipped. A truck driver, claiming to be the carrier's representative, arrives at the shipper's facility and provides the confidential booking number for identification. Based on these statements and the booking number, the shipper loads the cargo onto the driver's truck, and the truck departs with the cargo.  Shortly after the driver leaves with the cargo, the carrier provides a second, additional tracking number and says the shipper should request the new number from whoever comes to pick up the shipment.  Of course, when a second driver arrives to pick up the cargo, it has already disappeared.

      A recent case in the United States District Court for the Southern District of Florida, Underwriters v. SeaTruck, 2012 WL 1555432 (S.D. Fla.) involved a fact pattern similar to the scenario above.  It involved an export shipment from the U.S. to Trinidad that was stolen by an impostor who picked it up at a warehouse in Doral, Florida.  The shipper, Circuit Zone, was paid for the loss ($243,208), and its insurer brought suit in a Florida state court, claiming that SeaTruck owed Circuit Zone a duty to prevent the booking number and pick-up time from being compromised, and a duty to immediately apprise the relevant parties trat a security breach had occurred.  It should be noted that the "smoking gun" consisted of a number of emails to the effect that the carrier was aware of a security breach, had initiated corrective procedures, but never told the shipper or its freight forwarder.

      The defendant removed the case to the federal district court on the theory that its liability was governed by its ocean bill of lading and the Carriage of Goods by Sea Act (which would have preempted state law causes of action such as negligence and limited its liability), and was therefore a federal question within the jurisdiction of the federal courts.  Since the theft had occurred before SeaTruck ever had possession or control over the freight, and had not issued any bill of lading, the federal court focused on these facts, stating:

               In this instance, the theft of the cargo undisputedly occurred outside of the default loading-to-delivery period of COGSA application. The essence of the present dispute is whether SeaTruck's standard bill of lading, which extends COGSA's application to a pre- loading period, should bind the parties under these circumstances. The questions before the Court are fairly straightforward: (1) Can COGSA apply by contractual extension to a pre- loading period before the carrier takes custody of the cargo; and (2) If so, does SeaTruck's standard bill of lading extend COGSA application to such a pre-loading, pre-custody period?

      Following its discussion of the arguments of the parties and the applicable precedents, the Court concluded:

This emphasis on the carrier's responsibility over or custody of the cargo is appropriate, as it provides a practical limit to contractual extension of COGSA beyond the scope of the carriage relationship which COGSA is meant to protect. By contrast, SeaTruck's interpretation of § 7 [of COGSA] does not contain any logical limits. SeaTruck essentially argues that the parties may contract to apply COGSA's provisions well before the actual carrier relationship begins. Allowing COGSA to extend beyond any physical custody of the cargo by the carrier would effectively mean COGSA claims against a carrier might arise out of factual scenarios indefinitely earlier and more attenuated from the carriage relationship than those presented here, such as when the cargo is clearly within the custody, control, and responsibility of other parties, before a carrier even begins its carrying obligations. In fact, this is precisely SeaTruck's position: that the provisions of COGSA should be extended to allow COGSA claims to exclusively cover an alleged failure to safeguard internal security information while the carrier had neither custody of nor ultimate responsibility for the cargo in question. To call such circumstances a loss of cargo in the course of shipment is something of a mischaracterization. The Court is not convinced that parties may extend COGSA to a pre-loading period before the carrier takes actual custody of the cargo.

     The case was remanded back to the Florida state court, where, according to the plaintiff's attorney, Michael Simon, it was settled on "favorable terms".

      Now the question is whether the reasoning of this decision would also apply to a domestic truck movement.

     The court decisions interpreting the "Carmack Amendment" (14 U.S.C. Section 14707) and COGSA have much in common.  Carmack requires a carrier to "issue a receipt or bill of lading for property it receives for transportation" and says that the carrier is "liable to the person entitled to recover under the receipt or bill of lading".  For liability as a common carrier to commence, a shipper must complete delivery to the carrier, and the shipment must be accepted by the carrier, see Freight Claims in Plain English (4th ed. 2009) at Section 3.1.

      Even though recent court decisions have greatly broadened the effect of Carmack "preemption" of state law remedies such as negligence and other tort causes of action, it would seem that Carmack cannot apply until the carrier actually receives custody and control of a shipment and/or issues a bill of lading or receipt.  Thus, there would be no federal question and no preemption of a claim for negligence where the carrier's breach of security causes or contributes to an impostor theft.

      There is one more statutory provision that could apply to a domestic surface movement, but was not considered in the SeaTruck decision discussed above, the FAAAA preemption provision, now codified at 49 U.S.C. § 14501(c)(1).  This statute provides in relevant part: ". . . a State, political subdivision of a State, or political authority of 2 or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier . . . or any motor private carrier, broker, or freight forwarder with respect to the transportation of property."

     Courts have increasingly begun to apply this statute to preempt state-law causes of action such as negligence, fraudulent or negligent misrepresentation, tortious interference with business
expectancies, civil conspiracy, etc.  The key here is whether a claim based on negligence, where the carrier's breach of security causes or contributes to an impostor theft, would be construed to be "related to a price, route, or service".  Most likely not.

      In conclusion, the SeaTruck decision suggests that a shipper may have recourse against a carrier if that carrier has negligently failed to implement or enforce adequate security measures to control confidential information, and its failure causes or contributes to an impostor theft.

      It should be observed that each case will turn on the specific facts, including whether there are intermediaries involved, whether the shipper itself failed to exercise due diligence in carrier selection, or have adequate security measures in place at its facility, etc.  Not all cases will have a "smoking gun" and detective work will often be required to find out how the impostor obtained the information needed toobtain accessto the cargo.