IP Law Daily, TRADE SECRETS—D. Utah: Misappropriation-of-trade-secrets case against Postal Service trimmed to permit only contract claims, (Sep 19, 2023)

By Robert B. Barnett Jr., J.D.

A complaint asserting that the Postal Service engaged in anticompetitive behavior was significantly reduced to its breach-of-contract claims for lack of jurisdiction.

In a suit by a postal reseller alleging that the U.S. Postal Service engaged in anticompetitive behavior when it terminated the reseller agreement, the Utah federal district court has agreed to dismiss all claims sounding in tort for lack of subject matter jurisdiction because the Postal Rate Commission had exclusive jurisdiction over one claim, because two claims are intentional torts that had sovereign immunity, and because four claims fell within the Federal Tort Claims Act but the postal reseller failed to exhaust its administrative remedies. The court also ruled, however, that it had subject matter jurisdiction over the reseller’s claims sounding in contract (Rapid Enterprises, LLC v. United States Postal Service, September 14, 2023, Parrish, J.).

Background. The Postal Service contracts with private companies to act as third-party resellers of its services. The resellers are granted discounted shipping rates.

In 2013, Rapid Enterprises, LLC, doing business as Express One, entered into such a contract with the Postal Service. In April 2019, the Postal Service informed Express One that it intended to terminate its reseller program. The Postal Service later reversed course and continued the program. When the agreement with Express One was renewed in 2020, the new agreement required that Express One provide the Postal Service with customer pricing and volume information. In June 2022, the Postal Service informed Express One that it was cancelling the agreement. On July 29, 2022, Express One appealed the decision to the Pricing and Classification Service Center (PCSC), which informed Express One that contract interpretations were beyond its scope (i.e., Express One appealed the decision to the wrong entity).

On September 23, 2022, Express One sued the Postal Service in Utah federal court, alleging that the Postal Service had canceled the agreement under false pretenses and had engaged in anticompetitive practices. Express One asserted, for example, that the Postal Service took the customer pricing and volume information from Express One, then used that information to poach customers and develop its own e-commerce platform.

First addressing Express One’s request for a preliminary injunction, the court denied the request for three reasons: (1) Express One lacked irreparable harm because the injuries could be compensated by money damages, (2) Express One failed to demonstrate a likelihood of success on the merits, and (3) forcing the Postal Service to run its business a certain way to accommodate Express One was not in the public interest.

Express One then filed an amended complaint, which asserted 10 claims: (1) breach of the 2020 agreement (which incorporated the anticompetitive allegations), (2) breach of the implied covenant of good faith and fair dealing, (3) breach of the implied duty to disclose superior knowledge, (4) misrepresentation in inducing Express One to enter the 2020 agreement, (5) unjust enrichment, (6) misappropriation of trade secrets in violation of the Defend Trade Secrets Act, (7) misappropriation of trade secrets in violation of state law, (8) common law misappropriation, (9) misappropriation of trade secrets in violation of the Fifth Amendment, and (10) equitable estoppel. The Postal Service filed a motion to dismiss claims 1, 4, 6, 7, 8, 9, and 10 for lack of subject matter jurisdiction.

Jurisdiction. The Postal Service argued that the court lacked subject matter jurisdiction because (1) this court lacks jurisdiction to hear allegations in claim 1 that the Postal Service engaged in anticompetitive behavior in violation of 39 U.S.C. §404a, (2) claims 4 and 10, couched as contract claims, are actually intentional tort claims that are barred by the Federal Tort Claims Act, and (3) claims 6-9 are subject to the Federal Tort Claims Act, but should be dismissed because Express One failed to exhaust its administrative remedies. Over the course of its analysis, the Utah district court would largely agree with the Postal Service.

§404a. The complaint sought recovery under §404a of the Postal Accountability and Enhancement Act of 2006. The complaint alleged that the Postal Service engaged in anticompetitive behavior by ending its reseller program and terminating the 2020 agreement prior to its conclusion. The jurisdictional requirements of §404a, however, are determined by 39 U.S.C. §3662, which confers exclusive jurisdiction over such claims to the Postal Rate Commission. The court ruled further that the claims could not be saved merely by couching the tort allegations as breach of contract claims. As a result, the court concluded, it lacked jurisdiction to hear the §404a claims.

The court then ruled that, to the extent that claim 1 pleads a breach of contract claim independent of the §404a claim, it would not be dismissed because the district court had jurisdiction to hear the claim. The court, therefore, granted the motion to dismiss claim 1 in part and it denied the motion to dismiss claim 1 in part.

Sovereign immunity. Turning to claims 4 and 10, the court noted that any claims for the intentional tort of misrepresentation would be barred by the Federal Tort Claims Act because the United States has not waived sovereign immunity for those claims. Express One sought to characterize the two claims as contract claims.

Under the Federal Tort Claims Act, the United States has partially waived its sovereign immunity for certain state law tort claims (28 U.S.C. §1346(b)(1)). The waiver, however, does not apply to intentional torts, which include misrepresentation. Express One argued that claims “founded upon a contract” were outside the scope of the Federal Tort Claims Act. The court rejected the argument as it applied to claim 4, noting that the duty alleged to have been breached arose in tort rather than in contract. As for claim 10, the result was the same. Claim 10 was best understood, the court said, as pleading estoppel by misrepresentation involving detrimental reliance upon a false or misleading representation made by the government, which makes it “conceptually duplicative of the Fourth Claim.” As a result, the court concluded, the claims were intentional torts that continued to enjoy sovereign immunity under the Federal Tort Claims Act.

The court, therefore, granted the Postal Service’s motion to dismiss claims 4 and 10 for lack of subject matter jurisdiction.

Misappropriation. The court next turned to the Postal Service’s contention that claims 6-9 are subject to the Federal Tort Claims Act, which requires an exhaustion of administrative remedies that never happened. The court began by agreeing with the Postal Service that claims under the Federal Tort Claims Act require an exhaustion of remedies.

To sidestep this requirement, Express One argued (1) the Federal Tort Claims Act did not apply to these claims because Express One initially requested injunctive relief rather than money damages, (2) the Federal Tort Claims Act does not apply to violations of federal statutes or the Constitution, or (3) even if the claims are covered by the Federal Tort Claim Act, Express One satisfied its requirement to exhaust administrative remedies because (a) it filed the appeal with the Pricing and Classification Service Center or (b) the Postal Service waived the compliance requirement. The court rejected all of the arguments.

While it is true that the Federal Tort Claims Act applies only to tort actions for money damages, the court said, Express One cannot accurately re-characterize its suit for damages as one for injunctive relief simply because it sought a preliminary injunction first. The fact that the case still exists is proof that it was not all about the injunction, given that the injunction was denied, the court noted.

Again, while it was true that the Federal Tort Claims Act is not the exclusive remedy for violations of federal law or the Constitution, this exception did not apply, the court concluded. The exception applies only to actions brought against an employee of the federal government, which is a condition that did not exist here. The court then examined each individual claim before concluding that none of them provided an independent basis for claims against the Postal Service.

Turning to the final argument, which involved assertions that either Express One had satisfied the exhaustion-of-administrative-remedies requirement or that the Postal Service waived the requirement, the court rejected both arguments. Express One appealed the original decision to the wrong entity, which hardly constitutes an exhaustion of remedies. To exhaust administrative remedies, Express One’s next move was to send a letter to the USPS National Tort center. Because Express One failed to take that step, it failed to satisfy its administrative remedies. Furthermore, the Postal Service never waived the requirement, which Express One asserted that it did by setting out a different notification requirement in the 2020 agreement. For one, the court pointed out, the Tenth Circuit has ruled that an agency cannot waive the Federal Tort Claims Act.

The court, therefore, ruled as follows in granting the motion to dismiss in part and denying it in part: (1) the Postal Reform Commission has exclusive jurisdiction over claims under 39 U.S.C. §404a; as a result, the court lacks jurisdiction over any claim 1 allegations under §404a, (2) the court lacks jurisdiction over claims 4 and 10 because they are intentional torts, which enjoy sovereign immunity under the Federal Tort Claims Act, (3) claims 6-9, which allege misappropriation of trade secrets, are covered by the Federal Tort Claims Act; because, however, Express One failed to exhaust its administrative remedies, the court lacks jurisdiction to hear the claims, and (4) the court has jurisdiction over claims 1, 2, 3, and 5 to the extent that the claims do not arise from the government’s prior representations or violations of 39 U.S.C. §404a.

The Case is No. 2:22-cv-00627-JNP-JCB.

Attorneys: Melinda K. Bowen (Snow Christensen & Martineau) for Rapid Enterprises d/b/a Express One. Amanda A. Berndt, U.S. Attorney's Office, for the U.S. Postal Service.

Companies: Rapid Enterprises d/b/a Express One

Cases: TradeSecrets UtahNews