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LOS ANGELES – A California court of appeals has ruled that some 3,000 former Mail Boxes Etc franchisees can go to jury trial to prove their claims against United Parcel Services. The jury will determine whether UPS, in purchasing the MBE franchise system, made false statements and concealed facts in order to induce franchisees to convert their MBE stores to its new model The UPS Store.
The class action lawsuit alleges it was the shipping giant’s intent, when acquiring the packaging and mailing franchise chain in 2001, to turn the franchised stores into UPS shipping centers. By doing so, thousands of locations would be available for the convenience of UPS customers. Not only would customers be able to ship items at mandated UPS rates, they could drop off packages at no charge and make returns on purchases, all to the detriment of the franchisee’s bottom line.
Specifically, franchisees assert that the full and accurate results of “market and brand tests” performed by UPS in 2002 were never fully disclosed. While UPS touted that those tests showed The UPS Store model was financially superior to that of Mail Boxes Etc, franchise owners believe otherwise.
Franchisees have claimed for years that their profitability has declined since the takeover, and they can prove it. Now going to jury trial, owners say their class lawsuit will show that when UPS used an outside consultant to assess the profitability of The UPS Store network in 2005, it found that 77% of the converted UPS Store franchises were at financial risk.
The conversion came about when UPS purchased Mail Boxes Etc. in April 2001. MBE was a well-established packaging/shipping company that began franchising in 1980, under the leadership of Tony DeSio. Prior to the shipping giant acquiring the retail chain, James H. Amos replaced the MBE’s founder/executive. Amos has been credited with instigating and piloting the UPS take over.
Beginning in September 2002, Mail Boxes Etc., under UPS, began conducting its “Gold Shield” program testing three marketing scenarios in different cities. Out of the testing evolved the new franchise model The UPS Store, which had been readied to be sold to MBE franchise owners. In February 2003, MBE offered franchisees the Gold Shield amendment to their MBE franchise agreements. More than 3,000 owners, or approximately 90 percent of MBE’s system, joined UPS Gold Shield program.
As part of the conversion, owners agreed to display UPS logos and colors, and to use only UPS shipping. The franchisor terminated their relationships with all other carriers. They also signed UPS’s Incentive Program Contract Carrier Agreement, offering greater incentives than previously offered to MBE franchisees.
Under the Mail Boxes Etc model, franchise owners set their own retail prices and offered a wide choice of carriers. They were also allowed to give customers “add-on” services, such as parcel pick up services, to better serve their communities.
Franchisees were required under the new UPS Store amendment in their franchise agreement not to charge customers more than the maximum retail prices designated by UPS for UPS shipping. In doing so, they also signed a UPS Carrier Agreement.
After attending one of UPS/MBE’s “road show” presentations promoting The UPS Store model, Denise Woodard signed her “Gold Shield” agreement with UPS on April 2, 2003. She had been a franchisee with Mail Boxes Etc. since 1997. At that time, UPS officially declared the MBE model as “broken.” Under MBE’s new president Stuart Mathias, UPS made the decision to only sell franchises in the United States under its UPS Store model.
A complaint was filed against UPS and MBE, as well as numerous company executives on April 25, 2003. Franchisees claimed UPS through its new Mail Boxes Etc franchise violated state franchise laws. The owners accused the UPS of unfair business practices, tortious interference with contracts and other violations.
By 2006 the lawsuit, D.T. Woodard v Mail Boxes Etc, grew in the number of participants, all alleging they had been induced by UPS to rebrand their MBE stores to The UPS Store model. They contend that they relied on the tactics and false representations used by UPS when they signed on to the new model. The lawsuit was then granted “certification” in 2007 to become a class action lawsuit, representing over 3,000 UPS Store owners.
The UPS Store franchisees stand firm on their claims that UPS had coerced over 3,000 Mail Boxes Etc owners to accept the conversion under its “Gold Shield” test program. They adamantly declare UPS “effectively destroyed the MBE brand through that program.
But last September franchisees took a devastating blow when Superior Court Judge William Highberger ruled in UPS/MBE’s favor. He determined that the owners failed to show false statements were made by UPS, which were relied upon in converting their stores. Even if there was wrong doing, the judge also ruled that franchisees failed to show evidence of damages caused by the misrepresentations of their franchisor.
Through attorneys Gordon & Rees, the franchisees filed their appeal with the 2nd District Court. The high court ruled on January 12, 2012, to reverse Judge Highberger’s decision. Franchisees are seeking rescission of their franchise agreements, injunctive relief, and damages from UPS and Mail Boxes Etc. They also ask for attorney fees and costs, prejudgment interest and the cost of the lawsuit.
In reversing the trial court decision, the California Court of Appeals now states that franchisees have substantial issues that can actually be tried by a jury. The judge also found that UPS failed to prove that the franchisees had not relied on the franchisor’s misrepresentations. Finally, the court found the disclaimers that UPS put in its test market summaries were not effective to wipe out the fact that franchise owners did rely on the misleading and false information they were presented in rebranding their stores.
Howard Spanier president of The Platinum Shield, a group in litigation who did not convert to the UPS Store model, commented on the latest decision. “UPS dreads jury disclosure of the real bottom line that as a franchisor they have done little to improve the business of their franchisees.”
Spanier said UPS certainly does not want the story out of how they have forced franchisees from success to desperation so that UPS could have 4,000 “staffed” drop boxes for UPS pre-paid parcels. “The jury will evaluate franchisee belief that as UPS Store franchisees they are not more than indentured servants for one of their vendors,” he said.
Amy M. Darby of Gordon & Rees, M.D., co-lead counsel for the franchisee plaintiffs said they will be remitting the case back to the trial court shortly. “The appellate court decision demonstrated that we have sufficient evidence to proceed to trial, so we will be seeking a trial date for our class action,” she said.
Edward Kushell, principal of Franchise Consulting Group, said the appeals court decision is wonderful news for the franchisees and for franchising. He said there are several reasons. “First, a franchisee who buys a certain business model has a right to expect that it will continue, as opposed to the changes that UPS made to the model when the franchise company was acquired.” Kushell, who was a former expert witness for the franchisees in some of the MBE litigation, feels very strongly that the store owners bought the rights to either transfer or renew their businesses. He said, “Yet both of those options were taken away by UPS.”
Repeated telephone calls and emails to Mail Boxes Etc and their outside counsel were not answered. United Parcel Services corporate in Atlanta also did not respond to a request for an interview.
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