Breaking up is hard to do

Ending relationships--whether with employees or third-party service providers--raises a host of legal issues. But careful planning at the contracting stage can head off some of the problems.

By Steven E. Salkin -- Logistics Management, 4/1/1999

It's a fact of business life: employees and employers part company. Sometimes, employees jump to competitors. Other times, employees are laid off when their companies decide to outsource some logistics functions.

Companies and their "outside employees" experience breakups as well. All too often, outsourcing--or third-party--relationships turn sour and are dissolved.

What's important to managers of logistics operations is while expecting the best, they should be prepared for the worst. Whenever and however the split occurs, understanding potential legal problems can help protect the company should disputes arise. And in third-party contracts, building in mechanisms for dispute resolution may even save the relationship.

Two recent court cases highlight the potential for legal conflict between an employer and employees. In one case, employees left to join a competitor; in the other, employees lost their jobs when their company decided to try outsourcing. Although the circumstances are very different, both cases demonstrate the need for logistics managers to prepare for possible legal disputes.

Outsourcing and Unions

Many of the legal issues cropping up in logistics stem from the increasing use of third-party services, whether for warehousing, trucking, or even an entire logistics operation. One such case arose when Coronet Foods decided to close its in-house transportation department and outsource that function.

Coronet's employees, convinced that the decision was prompted by a recent unionization drive, complained to the National Labor Relations Board (NLRB) that the department's closure amounted to an unfair labor practice. The NLRB, not surprisingly, agreed, as did the administrative law judge who heard the case. That judge awarded the dismissed Coronet employees back pay and ordered Coronet to reinstate its in-house transportation unit.

When Coronet appealed that decision, however, the Fourth Circuit Court of Appeals saw things differently. In a ruling last October, the appeals court held that it would be a "serious and undue hardship" to force Coronet to bring the transportation department back in house. The appeals process had taken nine years to complete, and the court noted that the logistics industry no longer operated the same way as it did when Coronet closed its department.

"[I]f Coronet is forced to reopen its transportation department," the court stated in its decision, "it will not be simply restoring the prior operation but will be obliged to create an entirely restructured department. To compel it to do this, where a total package contract can provide, and is providing, the very services it now wants, can only be described as a punitive rather than remedial order."

The court did, however, agree with the NLRB on one count. It upheld the board's ruling that Coronet must give the illegally terminated employees back pay.

What companies should learn from this decision is that when union membership--or potential membership--is involved, normally routine decisions must be handled very carefully. Problems like Coronet's may be minimized if union representatives are included from the beginning of the decision-making process. That is not to say that a union should have a vote in the decision to outsource, but its involvement can ease the transition for employees, especially those who soon may find themselves out of work. Furthermore, any employment law issues that may arise as a result of outsourcing can be dealt with up front, without the NLRB's involvement.

Jumping Ship

Sometimes, it's not the actual breakup that causes the problem but the way in which employees and their employers part company. A recent dispute centered on the inside knowledge two executives carried with them when they left J.B. Hunt to work for a new employer, Cardinal Freight Carriers.

The two executives had been brought to Hunt to develop a dedicated contract services division that would provide customized transportation and distribution systems for companies that outsource private trucking fleets. They subsequently left Hunt when the company terminated a bonus plan that was promised when they were hired. Both had signed a confidentiality agreement when joining Hunt but did not sign a non-competition agreement.

The information Hunt claimed was protected included the amount of profit Hunt made with certain customers, Hunt's margin of profitability, a Hunt customer's buying habits, Hunt's method of doing business, and Hunt's strategic plan. "Obviously, armed with such information, a competitor would have an edge in capturing some significant part of Hunt's customers and business," wrote the Arkansas Supreme Court, when it ruled that this type of information constituted a trade secret under the Arkansas Trade Secret Act. In essence, the court's decision prohibited the executives from using much of the information and knowledge obtained while working for Hunt at their new posts.

The decision, which was issued at the end of January, has implications that extend far beyond logistics. It takes what is normally considered any employee's right to take his or her skills elsewhere and limits that ability. By equating admittedly confidential information with the more highly protected trade secrets, the court virtually is forcing the executives to comply with a non-competition agreement they had not signed. There's no word on whether Cardinal will appeal the court's ruling.

Divorce and the Third Party

What about the breakups that occur between companies? In several highly publicized cases, shippers and their third-party logistics service providers (3PLs) have landed in court after they were unable to resolve their differences. The key to avoiding conflicts, say several prominent attorneys, is to anticipate as many contingencies as possible at the contract stage. (For a list of topics that should be covered in a contract, see the accompanying sidebar.)

But it is almost impossible to list all of the possible areas where the relationship can go sour. For that reason, it is common for logistics contracts to contain a provision for settling disputes arising out of the contract in some manner other than through the courts.

The most common type of "alternate dispute resolution" is arbitration. An arbitration clause within a contract typically states that any dispute between the parties arising from the contract will be settled through the American Arbitration Association (AAA--the "Triple-A" of the legal world). The AAA has set up a system that allows each party in a dispute to tell its side of the story to impartial panelists. The panel usually is composed of three people--one selected by each of the disputants plus a mutually agreed-upon "neutral" arbitrator.

This is not always the most cost-effective route, however, says Stephen Day, head of the Transportation and Logistics Law Practice Group with Seattle-based Betts, Patterson & Mines. "AAA arbitration is more expensive than a state court because it uses three arbitrators, and the decisions tend to be inconsistent," he explains. Two different panels of three may decide differently given the same facts.

Other methods exist to resolve disputes before going to court. One, says Dr. Jonathan D. Whitaker of Andersen Consulting, is to form an internal committee--a committee made up of representatives from the shipper and carrier. "It's really a dispute committee," says Whitaker, "and it's less costly than arbitration."

Another alternative is mediation, which is common in labor disputes. Similar to arbitration, there is only one mediator and he or she is selected by both sides.

Legal Aid

Many problems can be headed off early in the contracting process by involving an experienced logistics attorney--a practice that is seldom followed. Day says that most logistics agreements are formed over the telephone and then sent to a lawyer to review. The lawyer, however, doesn't know enough about the deal to structure the contract properly, leading to an agreement that contains terms that neither party really wants or understands and ultimately becomes mired in disputes.

"People are using corporate counsel or even salespeople to draw up contracts," Day says. "Salespeople are all 'happy talk'--they don't talk about disputes, while corporate attorneys see themselves as arbitrators and want to pass off risk and non-logistics attorneys focus on liability."

Day suggests bringing in a logistics attorney during the negotiation stage to allow him or her to become familiar with the deal. "A lawyer should participate, not negotiate," he says. "The lawyer should sit in on the session but only speak up if there's a potential problem."

The objection to including lawyers early on has always been cost. Yet getting an experienced logistics attorney involved in a deal can save money in the long run by getting some potentially divisive issues out in the open and resolved during negotiations, not in court. It just might take some getting used to: a lawyer saving a relationship instead of being called in at breakup time.

Inclusions, exclusions

One of the big issues in logistics contracting is what a contract for logistics services should--and shouldn't--contain, says Brian Gibson, associate professor of logistics at Georgia Southern University in Statesboro, Ga. Although it's not possible to present an all-inclusive list here, a logistics-services contract should certainly include the following:

* Commitment clause. The shipper commits to a certain volume of freight and the carrier commits to providing the equipment necessary to move that volume. These clauses are especially important in cases where carriers need to lease or purchase special equipment to handle the shippers' loads, says Dr. Jonathan D. Whitaker of Andersen Consulting in Atlanta.

*Metrics clause. The parties should establish how performance will be measured, says Robert Spira of Van Aken, Withers and Webster in Cleveland, Ohio. Use of performance metrics, he notes, "[i]s one thing that distinguishes contracts for logistics services from trucking agreements."

* Pricing. How much will the logistics service provider charge? Will charges be per-shipment, or will a flat fee be charged for the contract's duration?

* Controlling law. Which state's law will govern the contract if there is a dispute? Contract language can be interpreted differently by different state courts, and some clauses are outright unenforceable in some states.

* Description of services. Spira calls this the "scope of work." What services are to be performed by the various parties to the contract? "Many deals fall through over this," Spira says, "mainly because the parties don't understand what the other expects them to do."

*Tender of goods. What constitutes "delivery?" What happens if the party receiving the goods refuses to accept the shipment?

* Liability. Who is responsible if goods are damaged during shipment? "Liability is something that is normally thought about [in drafting a contract]," Spira says, "but [few consider] how liability might change from mode to mode." Different modes of transportation carry different standards of care to live up to.

* Confidentiality. "A shipper has to give confidential information to a service provider and vice versa," explains Spira. A clause is needed to ensure that any information designated as "confidential" stays that way and is not shared with other shippers or providers.

* Length. How long will the relationship exist? What are the ramifications if one party wants to terminate the contract before it expires? An alarming number of agreements fail to address this question, both within and outside the logistics industry.