Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. N.Y.: Former franchisee’s deceptive practices claims proceed against UPS, (Mar 27, 2015)

By Linda O’Brien, J.D., LL.M.

A former franchisee of shipping and freight services provider UPS alleged sufficient facts to pursue deceptive business practices counterclaims against the franchisor for engaging in practices aimed at inflating the prices of shipments charged to consumers, the federal district court in New York City has ruled. However, the franchisee’s breach of contract, franchise sales violations, and unfair competition counterclaims were dismissed (The UPS Store, Inc. v. Hagen, March 24, 2015, Pauley, W.).

In 2008, Robert and Thomas Hagan entered into franchise agreements with UPS to operate 11 separate franchise stores in New York City. Pursuant to those agreements, the Hagans agreed not to charge customers more than the UPS retail rate, which established maximum pricing models for UPS ground and air services. In July 2013, UPS investigated the Hagan’s business practices and determined that they failed to comply with UPS pricing policies. The Hagans met with UPS executives and agreed to comply and implement a “transparency sales model”; however, UPS sent notices of default for the stores where UPS identified overcharges in its investigation.

The Hagans launched their own investigation into the pricing practices of other UPS franchisees and found that other franchisees were overcharging customers. Because the Hagans had discontinued the practice, their shipping prices differed from other stores and their stores lost sales. The Hagans reported their findings to UPS, which subsequently terminated their franchise agreements. UPS filed suit against the Hagans, alleging breach of contract and trademark infringement. The Hagans responded by filing counterclaims, in part, for breach of contract and violations of New York’s consumer protection law and Franchise Sales Act (NYFSA), and California’s Unfair Competition Law (UCL). UPS moved for dismissal of the counterclaims.

N.Y. consumer protection law. The court determined that the Hagans adequately pleaded that the defendants engaged in deceptive acts or practices. The Hagans’ allegations of the overcharging of customers in nearly every UPS store in Manhattan satisfied the consumer–oriented requirement that the conduct potentially affected similarly situated consumers. Moreover, their allegations that UPS and other franchisees engaged in practices aimed at inflating the price of shipments was the kind of deceptive practice prohibited by the statute. Finally, the Hagans’ allegations that they lost business as a result of the continued deceptive practices of their peer franchisees were sufficient to show that they suffered an injury caused by the misleading or deceptive practice.

Breach of contract. However, in dismissing the breach of contract counterclaim, the court noted that the Hagans relied on UPS’ Code of Business Conduct, which was a policy statement instead of a contract. Moreover, the Hagans failed to identify any contractual provision that was breached.

N.Y. Franchise Sales Act. The NYFSA regulates the registration of franchises and enumerates requirements for companies establishing, advertising, and selling franchises. In rejecting the Hagans’ argument that the general release included in their franchise agreement violated the NYFSA, the court stated that the NYFSA merely operated to void any such release and did not create an independent cause of action. Furthermore, the fraudulent conduct prohibited by the statute did not include disputes that arose during the course of the franchise relationship, and the Hagans failed to allege fraud in connection with an “offer or sale” of their franchise.

UCL. To state a claim under the UCL, a plaintiff must allege actual reliance on the deceptive or misleading statements. The Hagans alleged that a sales associate at a UPS store in California overcharged Thomas Hagan for a shipment by overstating the package dimensions and misrepresenting the available shipping options. According to the court, Hagan entered into the transaction as part of his own pricing policing efforts and did not rely on any deception. Therefore, the UCL provided no recourse and the counterclaim was dismissed.

The case is No. 14cv1210.

Attorneys: Mark R. McDonald (Morrison & Foerster) for The UPS Store, Inc., United Parcel Service, Inc., and United Parcel Service of America, Inc. Stephen J. Savva (Stephen J. Savva, Attorney at Law) for Robert Hagan, Ridge Assets, Inc., 3A, Inc., Ridge Pac, Inc., Tanmor, Inc., and Ridge Logistics, LLC.

Companies: The UPS Store, Inc.; United Parcel Service, Inc.; United Parcel Service of America, Inc.; Ridge Assets, Inc.; 3A, Inc.; Ridge Pac, Inc.; Tanmor, Inc.; Ridge Logistics, LLC

Cases: FranchisingDistribution StateUnfairTradePractices NewYorkNews