Arguments Shed Light on UPS Decision

Last week I reported on the Court of Appeals ruling in Samica v Mail Boxes Etc., affirming the district court decision in granting summary judgment to the franchisor. In reading the decision, I was baffled as to how 200 franchisees, who have been battling their issues in court for the past five years, could get it so wrong.

How could they not present enough evidence to show that they had relied on “untrue and misleading statements” allegedly made by Mail Boxes Etc. when converting their MBE franchise to United Parcel Services’ new model, The UPS Store.

With no help from attorneys on both sides and no response from corporate MBE, I looked for answers on the Ninth Circuit’s website and found an audio link to November’s hearing. The lawyers for the UPS Store franchisees and MBE argued in front of a three-judge panel, desperately trying to make their case on the important issues of the lawsuit.

In listening to the arguments, I was reminded of the history of this case and others in the Mail Boxes Etc system. I’ve been following this litigation from the beginning, and attended a hearing on the issues in San Diego. In my past reporting, I know that in 2008 attorneys signed a stipulation agreeing to a protective order that any court documents—depositions, answers to interrogatories, discovery material—deemed “confidential” and for “attorneys’ eyes only” were to remain sealed. 

Now I question if the sealed confidential documents are hiding many of the alleged misrepresentations or omissions that MBE and UPS do not want exposed to potential and existing franchisees, their attorneys and the public. If so, then by refusing to order the release of these documents the courts have created a star chamber where the evidence is secret and hidden from public view.

Because of the strategically placed disclaimers in disclosure documents, which protected MBE and UPS, it is hard to know what the company was really telling buyers. Were they sending the message, we want you to rely on this information, but you must understand that you are not relying on it?

In reading the seven-page appeals court decision, it is hard to decipher what the basis was for the judges’ ruling. The arguments presented last month might shed new light on that decision.

Attorney Hankes explained to the judges that the district court wrongly dismissed not one or two claims, but all 14. The prosecuting attorney states that the lower court repeatedly failed to use applicable law and examine the factual evidence showing the multiple misrepresentations and omissions and breaches of contract. 

Hankes stated that MBE had not addressed their claims. He explained that MBE sought summary judgment on misrepresentations and omissions by asserting a strong anti-argument that collapsed all franchisees’ claims into narrow claims focused on minimum prices, amount of discounts and incentives and drop off fees. Then MBE presented the franchisees’ claims as being a guarantee by the franchisor that the owners would be profitable in their business. It then asserted that any such guarantee was barred by disclaimers in franchise documents. 

Mail Boxes Etc. attorney Ruth Borenstein of Morrison Foerster took issue with Hankes allegations that MBE had not addressed franchisees’ allegations. “This has been a hard-fought case for five years. There were four amended complaints. There were four motions for summary judgment and I’m not entirely sure what Mr. Hankes meant in saying we did not address their claims. We marched through the allegations through each complaint and each cause of action to identify what was alleged.”

Borenstein said it boils down to two major contentions. “One is fraud, based on two or three statements of risks that the franchisees acknowledged they would face, and one statement describing the franchise business.” She said the fraud claim that UPS and MBE mislead the franchisees to believe the UPS Store could be a profitable model, was in fact acknowledged by the franchisees.

Competition was another issue argued. Hankes explained that the franchisor misdirected his clients regarding what they could expect as competition in operating their UPS Store business. Mail Boxes told them it would be coming from other UPS stores, omitting that their real competitor would be UPS’s desire to develop an Internet presence by utilizing their store as a drop off hub. “So when Your Honor is asking about reliance on competition issues for instance, there was so much information withheld from our clients that you couldn’t get to actual reliance on what was omitted.”

The attorneys also delved into the 2005 Boston Consulting Group survey, commissioned by MBE. Hankes said the results of the study showed 77% of franchise stores in the MBE network were at risk or worse, so, out of 4,500 that represented approximately 3,600 stores. With that report, Hankes declared that UPS did nothing.

Borenstein downplayed the report, saying the 77% of stores at risk “comes from some power point slides that some consultant that MBE and UPS retained at Boston Consulting Group.”  She said the survey showed that Gold Shield, the program used in converting the model to UPS Store, significantly improved network performance.  In explaining “at risk” in the BCG report, the attorney said it meant a profit of $55,000 or less. “That does not mean unprofitable. That means a profit of fifty percent or less.”

On the subject of profitability, Hankes explained how his clients agreed to fix their maximum prices at a certain level in exchange for MBE’s best efforts to continue to influence UPS to modify the discounts and incentives off their wholesale cost. But he said franchise owners never received discounts on wholesale prices. So, in looking at the disclaimers about profitability, Hankes said there are significant breach of contract issues, at least factual issues, on whether MBE did use its best efforts. And there is also a claim for breach in contract of the covenant of good faith and fair dealing as to whether or not UPS exercised its discretion in good faith.

Hankes told the judges that it was also important to examine the board of directors of Mail Boxes Etc., because it was made up of UPS officers. “Stuart Mathias was president of MBE and wasn’t even invited to the board meetings. So UPS is actually controlling the MBE board as a matter of fact. For UPS to say, well, if MBE had tried to do more it wouldn’t have made a difference, renders the whole lynch pin for this relationship illusory.”

In closing, Hankes pointed out that whether or not it was reasonable for his clients to rely on misrepresentations where there were disclaimers was a question of fact. Factual issues should go to a jury. One is left wondering if the Court of Appeals enforced these disclaimers by saying that franchisees had not submitted enough evidence to show reasonable reliance by the franchise owners on the misrepresentations and omissions made by MBE/UPS.

Related Articles:

• Court Affirms UPS Franchisees Claims Unproven
• US Court of Appeals Ruling on Samica Case
• UPS Franchisees Appeal after Judge Decertifies Class
• Amos Exposes Insider Information in UPS Acquisition of MBE
• Mail Boxes Etc. Remains Confident It Will Prevail in Court

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