XPO unit sues YRC Freight for allegedly poaching top executives

XPO Logistics Freight Inc., which was known as Con-way Freight before XPO Logistics Inc. bought Con-way's parent last year, has sued YRC Freight, the long-haul, less-than-truckload (LTL) unit of YRC Worldwide Inc., charging the unit schemed to steal key XPO Freight employees, misappropriate its rival's trade secrets, encourage current XPO Freight workers to breach their fiduciary duties, and deliberately interfere with contractual nondisclosure agreements.

The suit, filed Wednesday in Delaware Chancery Court, requested that YRC be blocked from employing or retaining seven key former XPO Freight executives for at least one year from the date of an order. Among them were Chet Richardson, who ran the former Con-way Freight's highly regarded line-haul operation, and Paul Lorensen, who headed its Central region operations. Their departures are at the core of the animus that has existed between the LTL carriers since the XPO unit's parent closed its $3 billion acquisition of Con-way Inc. on Oct. 29.

According to the complaint, both men resigned from XPO on Nov. 9 without prior notice and immediately went to work at YRC, in similar positions to those they held at the former Con-way Freight. Both men had unfettered access to very sensitive XPO information, which they took with them to YRC, the complaint charged. YRC announced their appointments in a Jan. 26 press release.

According to the complaint, YRC informally offered Lorensen a position by Sept. 19, 2015, at the latest. That date would have been 10 days after XPO announced on Sept. 9 its proposed purchase of Con-way. Though Lorensen immediately accepted the offer, his attorney asked YRC to postpone the tendering of a formal offer letter from Oct. 6 to Nov. 3 because the attorney said it "would be safer this way," according to the complaint. The 27-day delay gave Lorensen more time to access XPO Freight's confidential information, the complaint alleged.

Soon after accepting the offer, Lorensen was encouraged by YRC to help persuade Richardson to jump ship, according to the complaint. Richardson was highly sought after because of his operational acumen, and because he and his team had access to proprietary algorithmic software models that analyzed and selected the most efficient route for a customer's loads from among the countless alternatives on XPO Freight's network, according to the complaint.

The complaint alleged that last September, Lorensen and Sean Saunders, YRC's senior vice president of human resources and safety, said that Richardson's hiring was critical to YRC because of his knowledge of the models and his relationships with the IT community. YRC began targeting Richardson around that time, and he informally accepted YRC's offer by Oct. 6, at the latest, the complaint stated. As with Lorensen, YRC delayed the timing of Richardson's formal offer until Nov. 3, the complaint alleged.

After accepting the offers from YRC but before leaving XPO Freight, Lorensen and Richardson participated in high-level XPO meetings where critical information was exchanged, the complaint said. Among the material was a report prepared by consultancy McKinsey & Co. outlining a 15-step plan to transform the LTL business. The McKinsey report was distributed to high-level executives, including Lorensen and Richardson, on Nov. 6, according to the complaint. Three days later and with the confidential intelligence in hand, the men abruptly resigned and joined YRC, the complaint alleged.

The complaint charged that top YRC Freight executives, including President Darren Hawkins, conspired with Lorensen and Richardson to identify other XPO Freight employees to "hire for strategic reasons, including for their knowledge of the (company's) confidential information and trade secrets." According to the complaint, Saunders, the HR executive, told Richardson that he was "just trying to figure out how many XPO employees [he] can recruit."

YRC Freight and its parent company declined comment, according to Mike Kelley, a YRC Freight spokesman.

The suit was one of twin headaches besetting Overland Park, Kan.-based YRC this week. After the market closed yesterday, the company posted fourth-quarter and full-year results that didn't sit well with Wall Street, which took down the stock $3.24 a share today to close at $7.47 a share. In the quarter, YRC Freight's operating revenue fell to $733.7 million, from $795.5 million, while the unit swung to a $21.4 million operating loss from a $24.5 million operating profit. Tonnage per day dropped 6.8 percent, and operating ratio, a ratio of revenues to expenses and a key metric of a carrier's efficiency, rose 600 basic points, to 102.9, meaning that the unit spent $1.02 for every $1 in revenue.

The unit's revenue per every 100 pounds hauled—known in trucking as revenue per hundredweight—rose 4.4 percent, excluding the impact of fuel surcharges, and fell 1.5 percent when surcharges were added in. The quarter-over-quarter decline reflects the dramatic fall in diesel fuel prices during the period.

YRC's three-carrier regional unit posted a 3.1-percent drop in quarterly revenue and a 10.4-percent decline in operating income. Its operating ratio rose 0.2 percent. Tonnage per day dropped 2.6 percent. Revenue per hundredweight rose 3.4 percent without fuel surcharges, and dropped 2 percent when surcharges were added in.

In a statement accompanying the results, James L. Welch, the parent's CEO, acknowledged that results were impacted by demand weakness in end markets, especially in the industrial sector where LTL carriers generate much of their business. Most observers believe the industrial economy is in recession and won't rebound until the second half of the year at the earliest. "We would obviously like for the freight environment to be better and improve throughout 2016," Welch said.

David G. Ross, analyst for investment firm Stifel, said in a note today that tonnage at both units ended the quarter weaker than it started. Ross added that January tonnage did not pick up from year's end, a trend that must be watched given that other LTL carriers are reporting that tonnage trends, while still sequentially negative, are moving in the right direction.

One bright spot, Ross said, is that current contract renewal rates are up 3 to 5 percent, a sign that pricing remains rational. "Of course, YRC will need to grow volumes at some point in 2016 ... to see margins head back in the right direction," he added.