Eliminating the Classification System?

Many Parcel readers may be asking ‘What’s this I hear about the classification system being eliminated? How would this affect our company?’

The short answers to these two questions are, first, the classification system isn’t going to disappear any time soon and, second, the recent developments relating to the classification system may create an opportunity for your company to lower a segment of its shipping costs by 10% or more.

By way of background, the National Motor Freight Classification (NMFC) is the product of the National Classification Committee (NCC). The NCC, along with several motor carrier rate bureaus, has previously been specifically exempted by federal statute (49 U.S.C. 13703) from other federal laws prohibiting antitrust activities. The rate bureaus used their immunity to establish collectively made rates. The NCC used its immunity to, amongst other things, publish the NMFC. (See Transportation, Logistics and the Law, Second Edition, pp. 48-54 for a detailed explanation.)

The NMFC is a way for carriers to address the problem that a truck trailer will ‘cube out’ before it ‘weighs out’, that is, be filled to cubic capacity before it reaches the highway weight limit. By using the Classification system for pricing, with less dense products paying more per pound and more dense products paying less per pound, a trucker can receive approximately the same gross revenue for a trailer moving from point A to point B regardless of the exact contents.

The essence of the NMFC is to place every product manufactured or transported in the United States into 1 of 18 classes ranging from Class 50 to Class 500. The four criteria used in determining a class are density, stowability, value and difficulty of handling. Thus, in the world of less-than-truckload (LTL) shipments the charges for a shipment are determined by a combination of the class rating of the product and the rates of the carrier (which could be either individually established or based on those of a tariff bureau).

The beginning of the end of all of this occurred on May 7, 2007, when the Surface Transportation Board (STB) issued a decision stating, in effect, that the benefits to the shipping public of continuing the antitrust immunity of the rate bureaus and the NCC were outweighed by the adverse effect of the antitrust immunity and the potentials for abuse. The original decision stated that the effective date would be September 4, 2007, however on June 27, 2007, the STB extended the effective date until January 1, 2008.

What would Augello say about this? Bill would say ‘good!’ with regard to the loss of the antitrust immunity. Bill’s main objection was that higher value products received a higher classification and thus increased rates and charges. This may have been appropriate prior to 1996 and the demise of the ICC, however, since then the LTL carriers’ tariffs have set ever lower limits of liability, e.g., $25 per pound or even less.

At this point, a Parcel reader may be saying ‘What does all this LTL mumbo jumbo have to do with our company?’ The answer is that although the NCC will presumably lose its antitrust immunity after all the legal dust has settled, there will still be a classification system in effect to do just what it set out to do ----- sort out the thousands and thousands of different products being shipped to a ‘simple’ system for pricing purposes.

Many package carriers such as UPS, FedEx and DHL also offer ground services which are operationally very similar to those of an LTL carrier. For pricing these services (which UPS calls ‘hundred weight service’ and FedEx calls ‘multi-weight service’) the package carriers use a tier system. For example, UPS Tier 4 includes the same products as those in Class 70 of the NMFC.

Concurrently, some LTL carriers are considering a shift from using the NMFC to ‘density pricing’. My prediction is that as we go forward in time the loss of antitrust immunity will be the catalyst for change resulting in the adoption of new pricing systems by the LTL carriers and further changes in the package carriers’ pricing structures. These changes will create opportunities for the small package shipper.

More specifically, products which are now best, i.e., cheapest, moved by a package carrier may in the future be cheaper to move by an LTL carrier. The opposite would also hold true.

To conclude, while it may not be of vital importance for the reader to track all of the legal developments relating to the STB’s recent decision, it is very necessary for the reader to continually monitor the pricing structures available. The critical task is to know how your product is classified or rated by a particular carrier for purposes of determining the applicable rates. A favorable or unfavorable change in the classification, tier, or ‘density factor’ can greatly affect the ultimate freight charges even though the rate itself remains unchanged. All for now!

P.S. : Don’t forget to send me your questions or ideas for future columns.

Brent Wm. Primus, J.D., has authored many articles and publications relating to transportation and litigation. Brent received the Transportation Lawyer of the Year Award from the Transportation Logistics Council. He is the co-author of the U.S. Domestic Terms of Sales and Incoterms 2000. He currently serves as the General Counsel for the Freight Transportation Consultants Association and is the CEO of transportlawtexts, inc. as well as the CEO of Primus Law Office, P.A. He can be reached at brent@primuslawoffice.com.