FedEx drug lawsuit threatens higher costs, analyst says

| Jul 21, 2014 4:45PM EDT

The U.S. government “could add meaningful costs and delays to an already overburdened U.S. transportation network” if FedEx and other carriers are forced to stringently examine or refuse packages on the grounds they may contain illegal goods, a Wall Street analyst warns.

“Without sharper regulatory guidelines, imputing liability for failing to generally determine the contents of a package could be a slippery slope,” Stifel Managing Director David G. Ross said in a July 21 note to investors on a federal indictment charging FedEx with drug trafficking.

A federal grand jury last week charged FedEx with conspiring with Internet pharmacies to distribute drugs ordered without valid prescriptions. According to the indictment, FedEx and FedEx employees knew the businesses were distributing prescription drugs illegally.

The indictment seeks as much as $820 million in damages from the company — twice the gross gained by FedEx from the alleged offense, according to the Department of Justice. FedEx officials have been summoned to appear in the San Francisco federal court July 29.

FedEx denies the charges and plans to plead not guilty. The $44.3 billion company claims the charges strike at the privacy of its shipper customers and would, in effect, make its package delivery drivers, sales force and other workers responsible for enforcing the law.

“The government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day,” the company said in a statement last week. “The privacy of our customers is essential to the core of our business.”

FedEx rival UPS, the largest U.S. parcel delivery company, settled a similar challenge from the government last year by paying $40 million in a non-prosecution agreement and setting up a program to deny illegal pharmacies access to its distribution network.

Ross said he believes the potential impact of any liability or legal settlement in the FedEx case “is likely to be relatively immaterial” to investors, but warned of a potential regulatory burden that could fall on the package-shipping business, squeezing carriers and shippers alike.

“Especially where packages containing regulated substances are unlabeled or improperly labeled, requiring broad-based inspection is not only detrimental to customer privacy but could also degrade service levels and increase costs,” he said in the investment note.

Contact William B. Cassidy at wcassidy@joc.com and follow him on Twitter: @wbcassidy_joc.