DC Velocity - August 2014

newsmakers

www.dcvelocity.com AUGUST 2014 DC VELOCITY 17 as the government intensified its crackdown on illegal online pharmacies, FedEx ordered that all online pharmacy accounts be placed on restricted credit terms and that applicants provide FedEx with a security deposit or a bank letter of credit, according to the indictment. The purpose of the policy tightening was to stanch the flow of lost revenue arising from FedEx’s shipping large quantities of drugs only to be left holding the bag as pharmacies operating illegally were put out of business, the indictment said.

FedEx’s policies also put its drivers in harm’s way, according to the indictment. Starting in 2004, FedEx drivers reported customers demanding packages or jumping on the vehicles to demand the package. Drivers would be threatened if they didn’t relinquish a package on the spot, according to the indictment. In response, FedEx began holding high-risk packages for pickup at designated stations rather than deliver them to the respective addresses, according to the indictment.

FEDEX’S REPLY

FedEx issued a statement declaring its innocence and vowing to vigorously fight the allegations. In the statement, Patrick Fitzgerald, FedEx’s senior vice president, marketing and communications, said the company would immediately shut off shipping privileges for illegal pharmacies once the government provided it with a list of those companies. Although it has asked for such a list, none has been provided, the company said.

FedEx framed its argument largely as a privacy issue, saying it has no authority to invade its customers’ privacy. In a controversial statement, FedEx said the government has suggested the company assume “criminal responsibility” for the legality of the contents in each of the 10 million packages it carries each day.

In March 2013, UPS Inc., FedEx’s chief rival, paid $40 million in what is known as a “non-prosecution agreement” with the government to settle charges similar to those leveled against FedEx. In the aftermath of the settlement, UPS beefed up its compliance and training programs, according to Susan L. Rosenberg, a company spokeswoman. UPS also joined the Center for Safe Internet Pharmacies, a coalition of large Internet, e-commerce, and credit card companies tasked with promoting the use of safe online pharmacies through education, enforcement, and information sharing.

Rosenberg said the charges brought against UPS were not as detailed as the allegations in the FedEx case.

Unlike FedEx, UPS does not believe the issue of online pharmaceutical distribution is built around privacy concerns, Rosenberg said. “It’s a matter of supply chain integrity,” she said. Rosenberg added that she doesn’t recall any worries at UPS that it was being asked to police the contents of its customers’ shipments.

Satish Jindel, president of consultancy SJ Consulting, said the indictment does little but demonstrate the government’s desire to grandstand in an effort to grab headlines. FedEx employs thousands of people all over the world, and low-level employees unaware of the circumstances could have carried out the alleged misdeeds, Jindel said. FedEx has a well-deserved reputation for integrity, and there is no way top management would have encouraged employees to break the law, he said. Jindel added that the company is not law enforcement and should not be responsible for determining what companies can operate legally and which cannot. He believes it will reach a settlement similar to that of UPS.

The financial markets have taken a largely sanguine view of the indictment. FedEx stock had dropped slightly more than $2 a share from July 18, the first day of New York Stock Exchange trading after the indictment was filed, through mid-day July 28. David G. Ross, who follows FedEx and the parcel industry for Stifel, Nicolaus & Co., said in a July 21 note that investors are dismissing the issue as “nonsensical” and immaterial to the company’s financial outlook. Ross said the company’s decision to hold certain packages at pickup locations reflects concerns over employee safety and customer privacy, and not a willingness to “turn a blind eye” to unlawful shipments.

The more significant impact, according to Ross, would be a greater regulatory compliance burden on transportation providers, which could cause shipment delays and further stress an already overtaxed U.S. infrastructure. “Without sharper regulatory guidelines, imputing liability for failing to generally determine the contents of a package could be a slippery slope,” he said.

—M.S.
go figure …

37%

The percentage of shipper respondents to a June survey that reported using six or more brokers that month. That compares with 30 percent two years prior. The data indicate shippers are relying more on brokers and that the typical respondent is doling out its spend to a larger number of intermediaries.