Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Utah.: DHL unable to ship off breach of contract claims, (Jul 31, 2015)

By Michael Menzhuber, J.D., LL.M.

Global shipping company DHL Express was unable to avoid breach of contract claims brought by franchisee resellers on four discrete issues alleged resolved in prior litigation between the franchisor and DHL, the federal district court in Salt Lake City, Utah was decided. The court also granted in part and denied in part DHL’s motion for summary judgment on three of the franchisee’s counterclaims (Gulf Coast Shippers Limited Partnership v. DHL Express (USA), Inc., July 28, 2015, Shelby, R.).

Background. In 1994, Unishippers, a reseller of shipping services, and DHL entered into a National Account Agreement (agreement) which provided that Unishippers would promote DHL services in exchange for specific shipping rates that would be subject to periodic adjustment. Several provisions in the agreement expressly referred to franchisees. The agreement guaranteed that no other reseller would have equal or lower rates and provided that DHL would deal in “good faith” with all aspects of the agreement and provide shipping rates consistent with market trends and conditions.

In 2008, DHL launched an initiative that reduced its domestic shipping services in areas with low population density. DHL communicated the plan to Unishippers in advance of its shipping restructuring. DHL and Unishippers subsequently entered into Reseller Agreement which: (1) permitted Unishippers franchisees to use other shipping services than DHL; and (2) permitted DHL to terminate the agreement, without cause, by giving written notice.

DHL eventually terminated its agreement with Unishippers and issued demand notices to Unishippers franchisees for unpaid fees. The Unishippers franchises filed suit contesting DHL’s billing practices. The franchisees prevailed on their claims that DHL breached by the contract by: (1) failing to provide advance notice before terminating the agreement; (2) initiating its restructuring which reduced shipping services; (3) failing to provide Unishippers with the lowest reseller rates; and (4) failing to provide Unishippers a discount on assessorial fees. The jury also concluded that: (1) DHL was equitably estopped from relying on the notice period to limit damages; and (2) DHL failed to demonstrate waiver or equitable estoppel by preponderance of the evidence. The case was appealed and then remanded which resulted in a revised judgment award.

While the litigation was pending, 121 Unishippers franchisees filed suit against DHL. The plaintiffs alleged that DHL breached the agreement by: (1) failing to provide advance notice prior to terminating the agreement; (2) overcharging the plaintiffs for shipments; (3) giving other parties lower shipping rates; (4) not giving them a discount on assessorial fees. DHL counterclaimed that the plaintiffs failed to pay for shipping services.

Issue Preclusion. The plaintiffs moved for summary judgment on three contract claims under a theory of nonmutual offensive collateral estoppel. They noted that the appeals court had already concluded the DHL breached the agreement and maintained that the court should apply issue preclusion, grant summary judgment in their favor, and ask a jury to fix damages.

DHL conceded that it had participated in the prior litigation but argued that the franchisees could not prove the remaining issue preclusion elements: (1) identity of issues; (2) final resolution on the merits; and (3) full and fair opportunity to litigate the issue in the earlier action.

The court found that DHL’s failure to give a termination notice and the restructuring claim presented identical issues and the prior litigation. However, it determined that the plaintiffs did not demonstrate that the overcharge and waiver issues in the two cases were identical. Consequently, DHL was not precluded from challenging these claims.

DHL argued that disputed facts prevented the court from deciding whether issues were resolved on the merits in the prior litigation. The court disagreed, finding that, while the extent of the harm suffered might different from franchisee to franchisee, the issue of whether DHL breached the agreement, at least with respect to the issues of notice and White Space Restructuring claims, had been decided on the merits. The court also rejected DHL’s argument that, because damages are an element of a breach of contract claim, the plaintiffs could not invoke issue preclusion until they have demonstrated individualized damages for each franchise.

The court concluded that DHL had a full and fair opportunity to litigate the issue in a prior action because it: (1) participated in years of discovery; (2) argued its claims and defenses in motion practice; (3) presented its case to a jury; and (4) received the benefit of an appeal. The court further concluded that DHL did not show that specific procedural limitations in the prior litigation deprived it of a full and fair opportunity to litigate the subject issues.

Additionally, the plaintiffs could invoke nonmutual offensive collateral estoppel respecting issues resolved in a prior adjudication. The court noted that this doctrine does not apply when “a plaintiff could have easily joined the earlier action” or when “the application of offensive estoppel would be unfair to a defendant.” It determined that, because the plaintiffs’ motion to consolidate had been denied and DHL, in fact, had opposed that motion, the procedural history of the two cases favored permitting plaintiffs to invoke issue preclusion.

Motion for Summary Judgment on Plaintiffs’ Contract Claims. DHL’s motion for summary judgment on the franchisees’ contract claims raised two issues: (1) whether the plaintiffs could proceed under a breach of contract theory based on DHL’s purported “bad faith”; and (2) whether the plaintiffs’ claim for breach of the agreement failed as a matter of law.

The plaintiffs’ complaint alleged an express breach of the agreement under which DHL was contractually obligated to “deal with’ the plaintiffs in “good faith” in all aspects of the agreement. Because “good faith” was contractually provide for, Utah courts practice of not permitting recovery of punitive damages for “bad faith” did not apply. However, the Utah courts also do not permit recovery of punitive damages for intentional breach of contract and the court noted that the plaintiffs did not assert a claim for breach of the implied covenant of good faith and fair dealings. Consequently, the court concluded that, to the extent that the plaintiffs sought recovery of punitive damages, their “bad faith” claim was barred.

Overcharge Claims. DHL moved for summary judgment on contractual claims on the basis that the plaintiffs: (1) were not third-party beneficiaries of either of these provisions; and (2) could not present sufficient evidence of a claim for a breach. With respect to DHL’s third-party argument, the court found that the agreement’s language and structure demonstrated that the franchisees were third-party beneficiaries. It noted that DHL’s interpretation of the agreement created ambiguity as to the reach of the lowest rates provision but determined that extrinsic evidence demonstrated that the parties intended the franchisees to be third-party beneficiaries.

The court did determine, however, that DHL was entitled to summary judgment on the lowest rate claim. The plaintiffs failed to cite evidence sufficient to create a genuine issue of material fact for trial. The court noted that the plaintiffs, rather than citing or discussing specific evidence of rates given to comparable sellers, relied primarily on their argument that the overcharges issues was resolved in the prior litigations.

The case is No. 2:09-CV-00221

Attorneys: Andrea V. Timpa (Schonekas Evans McGoey & McEachin LLC), and M. David Eckersley (Prince, Yeates & Geldzahler) for Gulf Coast Shippers Limited Partnership, 10YJ LLC, Action Freight Systems, Advocate Logistics Group, and AEA Services. Blaine J. Benard (Holland & Hart) for DHL Express USA, and DPWN Holdings.

Companies: Gulf Coast Shippers Limited Partnership; 10YJ LLC; Action Freight Systems; Advocate Logistics Group; AEA Services; DHL Express USA; DPWN Holdings

Cases: FranchisingDistribution UtahNews