Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir.: New York Franchise Sales Act claims by six delivery drivers were time-barred, (Nov 4, 2014)

By Peter Reap, J.D., LL.M.

The New York Franchise Sales Act claims brought by six of eight plaintiff delivery drivers against one or more corporations and their owner, Peter Glazman, were time-barred by the Act’s three-year statute of limitations, the U.S. Court of Appeals in New York City has decided (Kroshnyi v. U.S. Pack Courier Services, Inc., November 4, 2014, Carney, S.). Therefore, a judgment in favor of those six plaintiffs was reversed, and the dispute was remanded for a recalculation of the attorney fees awarded under the Act in light of the determination that only two successful plaintiffs remained.

In addition, the federal district court in New York City erred in ruling that the statute of frauds barred the plaintiffs’ breach of contract and New York Labor Law claims for unpaid commissions. Thus, the grant of summary judgment for the defendants on those claims was vacated and the case remanded for further proceedings.

Background

The plaintiffs contended that defendants systematically undercompensated them for their work, purporting to treat them as franchisees while reaping disproportionate profits at the plaintiffs’ expense. On that basis, the plaintiffs filed this action in 2001, alleging violations of the Fair Labor Standards Act (“FLSA”); the Federal Insurance Contribution Act (“FICA”); the New York Labor Law (“NYLL”); the New York Franchise Sales Act (“FSA”); and various contract-related claims.

The district court dismissed the plaintiffs’ federal claims under the FLSA and FICA, but elected to exercise its supplemental jurisdiction to adjudicate the remaining state law claims. The district court granted summary judgment to the defendants on the plaintiffs’ NYLL and contract claims for unpaid commissions, holding that the statute of frauds precluded any action premised on the defendants’ alleged oral agreements to pay those commissions. The plaintiffs then proceeded to trial on their FSA claims, which stemmed from the defendants’ alleged failure to comply with the Act’s registration requirements and alleged use of fraudulent and unlawful practices in connection with the franchise relationship. After trial, a jury awarded damages to eight plaintiffs on these claims, and the court awarded those plaintiffs their related attorneys’ fees.

The jury ultimately found the corporate defendants liable on almost all of the FSA claims. It awarded damages ranging from $3,180 to $27,839 per claim. The jury found Glazman not liable, however, on the claims made against him in his individual capacity.

New York Franchise Sales Act Claims

The FSA requires anyone who intends to sell franchises in the state to file an offering prospectus before sales of, or even offers to sell, franchises, the court noted. Thus, in July 1996, defendant USP Network filed a franchise offering prospectus with the New York State Department of Law. That franchise registration expired, however, on February 1, 1998. And although defendant USP Courier—USP Network’s successor—continued to sell franchises under similar terms, it never filed a franchise offering prospectus with the state.

The parties’ franchise agreement or Subscription Agreement (“SA”) required each subscriber to pay a $15,000 “subscription fee” in exchange for the right to receive delivery assignments through USP Network’s central dispatch, and entitled each subscriber to a weekly paycheck based on accumulated commissions earned for deliveries made. USP Network also charged subscribers a one-time “training fee” of $50, a $30 generic “weekly fee,” and a “beeper fee” of $5 to $7.50 per week. Moreover, according to the prospectus, subscribers were personally responsible for a host of operational expenditures.

On appeal, the defendants argued that the FSA’s three-year statute of limitations runs from the inception of the franchise agreement, thereby barring any recovery for six of the eight plaintiffs. The plaintiffs filed their complaint in this action on March 26, 2001, alleging that the defendants: (a) sold them franchises without having an offering prospectus registered with the state, in violation of section 683(1); and (b) committed fraud in connection with the sale of franchises, in violation of section 687(2), because they induced the plaintiffs to enter franchises with a false promise to pay 60% commissions for deliveries. As a result, the FSA claims of the six plaintiffs who purchased their franchises prior to March 26, 1998, fell outside the FSA’s three-year limitations period.

The plaintiffs made two arguments in support of their contention that the FSA claims at issue were nonetheless timely filed. First, they argued that the statute of limitations began to run anew when their franchises were “transferred” from USP Network to USP Courier in April 1999—less than two years before the plaintiffs filed their complaint in March 2001, and well within the three-year limitations period.

The plaintiffs’ transfer theory was without merit, the court ruled. Both the plaintiffs and defendant Glazman testified that there was no change in the day-to-day operations of U.S. Pack or its relationship with its drivers as a result of the transfer, the court observed. Further, the plaintiffs pointed to no evidence establishing that the alleged “transfer” from USP Network to USP Courier constituted the beginning of a new franchise agreement that would reset the statute of limitations, according to the court.

Second, the plaintiffs claimed that because most of them did not pay their franchise fee in a lump sum when they first entered an agreement with U.S. Pack, but rather paid the fee through weekly deductions from pay, the defendants committed a continuing violation of the FSA each time they deducted a franchise fee payment.

This argument also failed, the court held. Although the Second Circuit had not yet addressed the issue in a precedential opinion, at least one of the district courts in the Second Circuit has held (in a decision later affirmed by summary order) that under the FSA, “continuous violations do not toll the statute of limitations.” United Magazine Co. v. Murdoch Magazines Distribution, Inc., 146 F. Supp. 2d 385, 407 (S.D.N.Y. 2001) (“United Magazine”). The plaintiffs failed to point to any New York authority supporting a contrary interpretation, and the court saw no reason to depart from United Magazine’s reasoning under the circumstances presented here. Indeed, the result was congruent with the language and purpose of the FSA, which requires certain disclosures and prohibits fraud in connection with the “offer” and “sale” of franchises, but does not seek to regulate the ongoing operations of a franchise, the court observed.

Thus, the statute of limitations barred the claims of all of the plaintiffs who purchased franchises from U.S. Pack before March 26, 1998. The claims of only two drivers fell within the statute of limitations.

Remedies. The court considered, and rejected, U.S. Pack’s argument that the two remaining FSA plaintiffs were nevertheless barred from recovering damages on their FSA claims because the Act limited their remedies to rescission.

Even assuming arguendo that the defendants’ interpretation of the FSA was correct, and rescission was the maximum remedy available under the statute, there was no reason to disturb the jury’s verdict in favor of the two remaining plaintiffs on their FSA claims, the court determined. Indeed, because the district court instructed the jury in accordance with U.S. Pack’s own view of the law, the jury’s decision to award damages to these two plaintiffs under the FSA turned on the jurors’ implied factual findings concerning the calculation of the plaintiffs’ profits and losses over the course of their franchise arrangements—findings that were entitled to substantial deference on appeal.

The cases are Nos. 11-2789-cv, 11-4368-cv.

Attorneys: Richard G. Kass (Schoeneck & King, PLLC) for U.S. Pack Courier Services, Inc. Robert Wisniewski (Robert Wisniewski & Associates P.C.) for Jaroslav Kroshnyi.

Companies: U.S. Pack Courier Services, Inc.

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