Monday, April 06, 2015

terminated franchisee can sue UPS for false advertising by other franchisees

UPS Store, Inc. v. Hagan, No. 14cv1210, 2015 WL 1456654 (S.D.N.Y. Mar. 24, 2015)
I’m eliminating large chunks of this dispute involving a terminated UPS franchisee sued for trademark infringement and breach of contract.  The Hagans operated UPS franchise stores in New York City, agreeing that they would not charge customers more than the UPS Retail Rate.  A 2013 UPS investigation used undercover purchases at the Hagans’ stores and allegedly found a “widespread pattern of improper and dishonest conduct.” The Hagans agreed to focus on compliance and implement a “Transparency Sales Model,”  but a few months later UPS sent notices of default for nine of the Hagans’ eleven stores.
Before those notices of default, the Hagans launched their own investigation into other franchisees’ pricing practices, hiring a licensed PI to make undercover buys at over 40 Manhattan UPS stores. That investigation allegedly found other franchisees “overcharging customers by, for example, overstating the dimensions and weights of packages to increase their billable weight, and by misleading customers into unnecessarily selecting more expensive shipment options by misrepresenting which services were ‘guaranteed.’” Because the Hagans had stopped these practices, their shipping rates and services differed from those of other stores. When customers noticed these discrepancies, they allegedly declined to do business with UPS altogether.
The Hagans reported their findings to UPS; UPS terminated the franchise agreements and sued.  The Hagans counterclaimed, alleging various causes of action, including violation of New York’s consumer protection law.  The Hagans argued that they were whistleblowers unfairly targeted by UPS.
First, standing: The Hagans would have standing to bring a claim under the consumer protection law as long as there was harm to the public at large.  And the core of the claim here did involve harm to consumers, “even if that is not what concerns the Hagans the most” and wasn’t the source of their claimed damages.
A GBL §349 claim need not satisfy Rule 9(b), and does not require intent to defraud or mislead. Nor does it require proof of justifiable reliance.  The conduct at issue here was consumer-oriented and potentially affected similarly situated consumers, who were allegedly overcharged at nearly every UPS store in Manhattan. The alleged practices of price inflation, altering weight or dimensions of packages, and misrepresenting the availability of guaranteed shipment options were all prohibited by §349 because they serve to “undermine a consumer’s ability to evaluate his or her market options and to make a free and intelligent choice.”
Finally, the Hagans needed to plead actual injury caused by the misleading or deceptive act or practice.  Here, the alleged injury was that the Hagans lost business as a result of the continued deceptive practices of their peer franchisees, because customers stopped using UPS altogether when they were offered conflicting information about which UPS services were “guaranteed” at different stores. That was sufficient to plead injury, and therefore the claim as a whole was adequately pled.
The §349 claim alleged that UPS was culpable on an “aiding and abetting” theory.  UPS argued that the statute didn’t allow for such liability.  However, UPS allegedly uses a laser measurement system to find the actual weight and dimensions of packages, thus detecting and tracking overcharge. The overcharges allegedly stayed within the UPS network and were generally not refunded to customers. Thus, it was unnecessary to consider §349 coverage of aiders and abettors given the broad language: “Deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state....”

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