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Franchisees Allowed One Claim against The UPS Store on Charges of “Over-dimensioning” Packages and “Upselling” Services

NEW YORK – In a complex litigation between franchisee and franchisor, a federal judge has now dismissed all but one claim brought by store owners against franchisor The UPS Store and its parent company United Parcel Services, Inc. The surviving claim surrounds the issue of what's known in the shipping industry as "over-dimensioning" of packages and "upselling" of services on how packages will be shipped.

Judge William H. Pauley's memorandum and decision filed on November 18 explained what was involved, under the legal standard, for the franchisees to survive a motion to dismiss by The UPS Store and shipping giant UPS. He told that "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face."

The UPS Store and UPS filed the lawsuit, The UPS Store, Inc. v. Hagan, alleging franchisees Robert and Thomas Hagan, owners of eleven franchised locations, breached the franchise contracts and infringed on UPS's trademarks. That resulted in the Hagan's filing, what Judge Pauley describes as "a plethora of counterclaims against The UPS Store, UPS and other franchisees." The court dismissed all of Hagans' claims except one under New York General Business Law, Sect. 349.

After the Hagan franchisees hired new counsel, they engrafted a Lanham Act, Sect. 43(a) claim onto their surviving General Business Law claim. The UPS companies again filed to have the claims dismissed. In Judge Pauley's decision, he dismisses the General Business Law claim, and denies UPS's motion to dismiss the Lanham Act claim the Hagans had then filed.

As background, Judge Pauley explains that between 2008 and 2013, the Hagans operated a network of franchises in Manhattan under The UPS Store. He states, "Widespread compliance issues emerged in 2013 when other Manhattan franchisees urged the Hagans to implement bonus programs that rewarded employees for aggressive (and potentially unethical) sales practices." He said, specifically, the Hagans allege that at a series of 2013 meetings, two representatives for the "Manhattan Area Franchisees" informed the Hagans that "they were teaching their employees to "add an inch" when measuring packages for shipping." The Hagans refer to this practice as "over-dimensioning." Additionally, they allege that the representatives informed them that other Manhattan franchisees did "not sell [UPS Ground] as guaranteed service." They were telling customers that only UPS Air was guaranteed. The Hagans referred to that practice as "upselling."

The judge states, "The purported effect of both strategies was that customers paid more than was necessary."

When one of the representatives of the Manhattan group conducted a "mystery shopper" of each of the Hagans' stores, they allegedly discovered that the Hagans were overcharging customers. UPS then stepped in with a "cease and desist" order. As a result, the Hagans conducted their own "mystery shopper" investigation and found that approximately ninety percent of Manhattan-area franchisees of The UPS Store brand were "over-dimensioning" and "upselling" services.

When customers began hearing that the Manhattan-area franchisees were fraudulently deceiving them by up-charging on package shipping costs, the Hagans began experiencing financial difficulties. The UPS Store issued notices of default, and terminated their franchises. The company then filed its breach of contract and trademark infringement action against the franchisees.

After briefly presenting the background of the lawsuit, the judge stated that he would not repeat in his decision "the torturous saga of this litigation," as it was described in the original complaint. He said it was suffice to say that the only reason the franchisees' claim first survived was that UPS did not raise a federal pre-emption argument under the Federal Aviation Administration Authorization Act (FAAAA) motion. When the store owners then amended their counterclaims and third-party claims "to advance a Lanham Act false-advertising claim, UPS… got another bite at the apple." The judge adds, "This time they get to the core."

Comparing the Claims: Lanham Act v. General Business Law

The court decision explains that the FAAAA was enacted in part to deregulate interstate motor carriers such as UPS, much as the Airline Deregulation Act deregulated the airline industry. After citing various case law, it states the FAAAA's expansive language pre-empts General Business Law, Sect. 349 as applied to UPS's alleged misconduct. It can be enforced generally against any deceptive act or practice. The decision adds, "And if UPS misrepresented its shipping costs and fraudulently 'upsold' packages, any damages could affect the manner in which UPS regulates its 'prices, routes or services.' On these facts, enforcing a judgment under GBL, Sect. 349 would impose 'state substantive standards' on the offerings of national motor transportation entities in violation of the Federal Aviation Administration Authorization Act."

The judge explains that while the Hagans argue pre-emption should apply only against the transportation carrier entity, UPS, not The UPS Store, the FAAAA pre-emption applies when a state law would affect a motor carrier's prices, routes or services, regardless of who the parties are. And while the franchisees claim the FAAAA does not pre-empt state laws of general application, the Supreme Court held differently. It ruled that a parallel pre-emptive provision supersedes state consumer-fraud statutes.

Lastly, the Hagan's argued that UPS's alleged deception does not relate to "transportation of property" because employees' "misstatements" to consumers occurred before the UPS packages were shipped.

The judge disagreed.

Regarding the Hagan's Lanham Act claim, the judge said it relies on the same allegations as their GBL, Sect. 349 claim, that shipping charges and ground delivery guarantees were misrepresented. After a thorough explanation of case law, the judge stated that the Hagans adequately allege standing. ". . . the Hagans pled that 'their commercial interest in reputation or sales' was harmed. The Hagans claim that their customers, who 'felt deceived and/or confused' by conflicting representations between UPS franchises, lost confidence in the UPS brand generally, and by extension, the Hagan's business."

The franchisees' latest complaint alleges that "dozens of customers told Robert Hagan that they would never again return to a UPS Store because they felt cheated by UPS." While UPS argues that they did not say anything to consumers about the Hagans or their products, the judge determined that misrepresentations about the service offered by UPS generally, at other Manhattan-area stores, were by definition misrepresentations about the UPS services offered by the Hagans.

UPS argued that any statements made by its franchisees cannot be used against the UPS companies because the Hagans have not pled an aiding and abetting or vicarious liability theory. After presenting arguments on both sides, the judge stated: "Whether UPS might be vicariously (or even primarily) liable for its franchisees' misstatements will require discovery." He said the Hagans adequately pled that UPS and The UPS Store Manhattan area franchisees "actively trained" The UPS Store franchisees and employees to "over-dimension" and "upsell" UPS products. They taught their people to "add an inch" when measuring UPS boxes, and to not sell UPS Ground as a guaranteed service.

Another emphatic statement by Judge Pauley in his decision: "Furthermore, the Hagans pled that The UPS Store president Tim Davis emailed the franchise network stores to 'refresh' their 'upselling' skills. And as counsel for both sides acknowledge, 'upselling training could refer to a legitimate practice or a fraudulent one."

In the litigation, The UPS Store, Inc. and United Parcel Services is represented by Mark R. McDonald and Mark David McPherson of Morrison & Foerster. Franchisees Robert Hagan and Thomas Hagan are represented by William Brewer, III of Bickel & Brewer.


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About Janet Sparks

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Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.