A federal jury in Illinois awarded a multi-million dollar jury verdict in favor of a third party logistics company, Alliance 3PL Corporation, against a carrier, New Prime, Inc. (d/b/a Prime, Inc.), for back soliciting the customer of the 3PL but the award was reversed based on the language contained in the back solicitation clause of the contract.[1] The case highlights the care that should be taken in crafting an often overlooked contract clause prohibiting back solicitation that can save a business from losing profits to an unseemly practice in the transportation industry. The practice of back solicitation has long been part of the industry and given the complexities involved in most shipments of freight in today’s world, a well-crafted and defined clause prohibiting the practice should be part of every transportation agreement. The contract containing the back solicitation clause should also include a venue and choice of law provision that best suits the parties to the contract.
Back solicitation is understood to mean a practice where a delivering carrier or interline carrier obtains the freight business through another carrier, logistics company or broker and then uses the information obtained from this party to determine who the customer is and then solicits the business of the customer directly. The somewhat underhanded practice of back solicitation has been a part of the practice of the transportation industry for decades.[2] Historically carriers, brokers and logistics companies had a “gentleman’s agreement” against the practice.[3] A handshake or gentleman’s agreement will not protect a business anymore and a well drafted back solicitation prohibition should be included in all transportation contracts.
Although there is a dearth of case law regarding back solicitation agreements, the Alliance case offers a good example of the care that must be taken when drafting a proper back solicitation clause.
No Longer Can a Gentleman’s Agreement Protect Against Back Solicitation
In order to protect a customer relationship that a party has spent years establishing and thousands of dollars developing, a formal agreement must establish the prohibition against back solicitation. Further, when drafting the written agreement, care must be taken to properly define and clarify precisely what is prohibited and the parties involved.
Courts Perceive Back Solicitation Clauses as Restrictive Covenants
When a dispute regarding back solicitation ends up in litigation, the courts view the back solicitation prohibition clauses as non-compete agreements (or possibly nonsolicitation agreements) and accord the clauses an analysis under the state laws with respect to restrictive covenants. In most jurisdictions, and particularly Illinois, such agreements are strictly scrutinized by the courts.[4]
The Seventh Circuit Court of Appeals weighed in on the analysis of a back solicitation clause most recently when a logistics company brought suit against a carrier alleging the carrier had improperly solicited the customer of the logistics company.[5] Alliance 3PL Corporation as its name suggests is a third party logistics management company (“3PL”). The Seventh Circuit in the Alliance case described a 3PL as follows:
Alliance handles the transportation needs of its customers. It purchases transportation services from air, water, and land carriers, and it allocates this capacity to customers that need to move their own goods or supplies. Alliance may be able to consolidate multiple customers’ shipments into full loads, reducing the cost per ton-mile; even if it cannot do this, a transport-management service enables customers to concentrate on their core businesses and stop fretting about shipping. The 3PL business (for third-party logistics management) is an aspect of the division of labor.[6]
Alliance entered into an agreement with a shipper identified as Loders Croklaan USA (“Loders”) that shipped food industry products. In 2003 Loders hired Alliance to manage its transportation needs.[7] Alliance then contracted with motor carriers to haul Loders’ freight. One of the motor carriers that Alliance used was Prime, Inc. Alliance and Prime had a contractual relationship that pre-dated Alliance’s contract with Loders. Another complication to the case was the fact that Prime had previously hauled freight directly for Loders without any involvement of Alliance.
The contract between Alliance and Prime was entered into in 2000 and contained the following clause prohibiting back solicitation of Alliance’s customers:
Carrier [Prime] shall not solicit traffic from any shipper, consignee, or customer of Shipper [Alliance] where Carrier first knew the availability of such traffic as a result of Shipper’s efforts or the traffic of Shipper consignee, or customer of Shipper was first tendered to Carrier by Shipper.
At the trial court level the jury determined that Prime had in fact violated this clause by directly soliciting business from Loders. The jury awarded Alliance over two million dollars in damages. However, the Seventh Circuit reversed and found that the trial court should have entered judgment in favor of Prime.[8]
The Seventh Circuit’s analysis focused on the definition of the meaning of the word “traffic” as contained in the Alliance-Prime contract. The court in the Alliance case first determined that the clause as written was reasonable in scope and breadth, and then continued its analysis to determine whether the party seeking to enforce the back solicitation prohibition had an on-going business relationship with the customer (shipper) and further looked at what was involved in the business relationship. There are many instances where a broker’s customer has an on-going or prior direct relationship with the same carrier that is also getting loads from the broker. This is precisely what happened in Alliance. The result of any efforts to enforce the clause against a back soliciting carrier will be dependent on the precision of the language used in the agreement.[9] If the clause is too broad and does not define the lane of traffic or “traffic” as the case may be, and if a carrier had already known of and come into contact with the shipper well prior to any relationship with the broker, then the clause may not be used to effectively prohibit what in common sense seems to be a clear case of back solicitation.[10] Since back solicitation clauses are seen as restrictions against free trade, these clauses are subject to strict scrutiny since such restrictions are disfavored under the law.[11]
The Alliance case offers guidance to brokers and 3PLs as to how to draft an enforceable back solicitation clause. The Seventh Circuit noted that the trial court never defined the term “traffic” for the jury. The court found it important that the term could be construed as being “the existence of a shipper and the general nature of its needs…”[12]; the “volume of transportation services a (known) shipper requires”[13]; or “usage of trade”[14]. The addition of the word “such” as in “such traffic” could have saved the day for Alliance according to the Seventh Circuit had Alliance defined “such traffic” as an increase or change in traffic during the contract’s term.[15]
Without the definitions, the parties are left to defining the term by the use of experts or through the use of parol evidence. The contract should also include a liquidated damage provision and injunction provision so that the party seeking to enforce the back solicitation clause is not left with a nominal victory of having the agreement enforced but left with little or no money damages based on a perceived failure of proof. The ultimate point is that in order to protect your business, or “such traffic”, or a “lane of traffic”, the back solicitation clause should be well defined and not left to a jury or judge to fill in the blanks.
[1] Alliance 3PL Corporation v. New Prime, Inc., 614 F.3d 703 (7th Cir. 2010)
[2] Richards v. Nelson Freight Lines, et al., 810 F.2d 898 (9th Cir. 1987)
[3] Id.
[4] Cambridge Engineering v. Mercury Partners, 378 Ill.App.3d 437, 447 (1st Dist. 2008)
[5] Alliance 3PL Corporation v. New Prime, Inc., 614 F.3d 703 (7th Cir. 2010)
[6] Id., at 704
[7] Id.
[8] Id., at 707
[9] Alliance 3PL Corporation , 614 F.3d 703 (7th Cir. 2010)
[10] Id.
[11] Szabo v. The County of Cook, 160 Ill.App.3d 845, 848 (1st Dist. 1987)
[12]Alliance 3PL Corporation v. New Prime, Inc., 614 F.3d 703, 705 (7th Cir. 2010)
[13] Id.
[14] Id.
[15] Id., at 707