News Briefs

Pretrial Ruling Derails UPS-Mailboxes Etc. Showdown In Los Angeles Superior Court

Current and former franchisees of MailBoxes, Etc. (“MBE”) who are opposed to becoming franchisees of UPS will have to wait longer to get their day in court. A class action case that was supposed to go before Los Angeles Superior Court Judge William F. Highberger on April 26 was put in limbo on April 19 when Highberger issued an evidentiary ruling that excluded some testimony from one of the franchisees' expert witnesses. The 141 plaintiffs, who have been granted class action status, told the court that they do not want to proceed to trial in light of the ruling, and they will explore options for an appellate review.

It's the latest twist in Morgate LLC v. Mail Boxes Etc., Inc., which began more than seven years ago. UPS purchased MBE in 2001, and about a year after the purchase, UPS informed the approximately 3,400 MBE franchisees that it intended to convert them to the UPS brand. Many franchisees accepted an incentive package to covert their stores, but many other franchisees rejected the offer because they preferred the MBE business model and opposed the terms of UPS franchise contract. Among the key points of contention, the new contracts gave UPS the ability to set uniform retail prices nationally and required franchisees to purchase supplies only from approved vendors. They filed lawsuits in 2003 that became consolidated as Morgate.

“We want compensation because UPS destroyed a very successful national brand. There's only about 80 of us left who are operating as MailBoxes Etc. or as independent stores,” said Joe Wightman, who still operates his MBE franchise in New York City. Wightman is the president of the Platinum Shield Association, the affiliation of former MBE franchisees who are fighting against UPS.

“UPS bought MBE, and at the time, I supported it. I was a real cheerleader for it because they said we would keep our brand,” Wightman continued. “But a year later, they said our business model was broken, and they came out with 'Golden Shield.' That was a plan to convert us to UPS. There's no way a franchisee can make money under those conditions. They cut our retail margins, and said we'd make it up in volume, without having to add staff.“

However, from the perspective of UPS, the issue is “the right of UPS to offer our network the opportunity to convert their franchises,” said Rich Hallabrin, a spokesperson for UPS. “We are pleased with Judge Highberger's decision. We view this as validation of the position we're maintained all along that the rebranding to The UPS Store was in the best interest of the network and did not violate any franchise laws or terms of the franchise agreement. As we've stated on numerous occasions, we were confident that once the merits of the case were heard in court, we would prevail. This latest development follows three earlier rulings that substantiate that position.”

As Hallabrin observed, three courts have ruled in UPS's favor in the last seven months. In October 2009, Judge Linda Quinn of the State of California Superior Court (San Diego County) issued a summary judgment indicating that UPS and MBE did not violate the “fraudulent, unfair or unlawful” sections of California's Unfair Competition Law, California Franchise Investment Law, or the FTC Franchise Rule. In November 2009, the Los Angeles Superior Court found that UPS had the right to make changes to its mark and that the Gold Shield program did not violate the law. In February 2010, the federal court in Los Angeles granted UPS summary judgment that the Gold Shield conversion program did not violate the terms of the franchise agreement.

While acknowledging that UPS has won three court cases, Wightman said that a 2005 arbitration decision, placed under seal, resulted in UPS settling with one MBE franchisee for $5 million. “The arbitration complaint of that franchisee was very similar to the current complaint,” he said.

Fewer than 100 MBE franchisees remain today; the other stores have either converted to UPS or dropped their franchise affiliation when their 10-year MBE franchise contract expired. UPS continues to support existing MBE franchisees, said Hallabrin, and is prepared to do so until the last of the contracts expire in 2013.

Yet, some current and former franchisees are still unwilling to take up the UPS banner. “With MBE, I set my prices. I pick my vendors. I still run my own business,” said Wightman. “With UPS, you are mandated to buy from UPS-approved vendors. We're talking about cardboard boxes, not secret sauce.”

Later this year, Manitoba might become the fifth Canadian province to pass a franchise law. The Manitoba Bill 15, known as the Franchises Act, is modeled on The Uniform Franchises Act, which set guidelines Alberta, Ontario, New Brunswick, and Prince Edward Island have used in crafting their franchise laws. The Manitoba bill can be found at http://web2.gov.mb.ca/bills/39-4/b015e.php.

“Some of the changes that may be of interest to franchisors are the ability to enter into confidentiality or location agreements with prospective franchisees prior to the delivery of an FDD, and the ability to require deposits if they are fully refundable,” said Paul Jones (Jones & Co., Toronto). “There is also a provision that technical errors that do not affect the substantial compliance of an FDD with the Franchises Act will not invalidate the FDD. All of these provisions are not included in Ontario's law, either.

“Further, the bill does not require delivery of the FDD as a single document. This is intended to allow for wrap-around document for compliance according to a Manitoba government representative,” added Jones.

Jones added that Manitoba is not proposing an exemption for licensed units in department stores that has been granted in other provinces, except New Brunswick. But there is an exemption to accommodate product-distribution arrangements “arising out of an agreement for the purchase and sale of a reasonable amount of goods at a reasonable wholesale price, or the purchase of a reasonable amount of services at a reasonable price.”

The bill has yet to receive its second reading or public consultations, and its anticipated passage would likely be in the second half of 2010. “All in all, it may well be a couple of years before it is in force,” Jones said.

Pretrial Ruling Derails UPS-Mailboxes Etc. Showdown In Los Angeles Superior Court

Current and former franchisees of MailBoxes, Etc. (“MBE”) who are opposed to becoming franchisees of UPS will have to wait longer to get their day in court. A class action case that was supposed to go before Los Angeles Superior Court Judge William F. Highberger on April 26 was put in limbo on April 19 when Highberger issued an evidentiary ruling that excluded some testimony from one of the franchisees' expert witnesses. The 141 plaintiffs, who have been granted class action status, told the court that they do not want to proceed to trial in light of the ruling, and they will explore options for an appellate review.

It's the latest twist in Morgate LLC v. Mail Boxes Etc., Inc., which began more than seven years ago. UPS purchased MBE in 2001, and about a year after the purchase, UPS informed the approximately 3,400 MBE franchisees that it intended to convert them to the UPS brand. Many franchisees accepted an incentive package to covert their stores, but many other franchisees rejected the offer because they preferred the MBE business model and opposed the terms of UPS franchise contract. Among the key points of contention, the new contracts gave UPS the ability to set uniform retail prices nationally and required franchisees to purchase supplies only from approved vendors. They filed lawsuits in 2003 that became consolidated as Morgate.

“We want compensation because UPS destroyed a very successful national brand. There's only about 80 of us left who are operating as MailBoxes Etc. or as independent stores,” said Joe Wightman, who still operates his MBE franchise in New York City. Wightman is the president of the Platinum Shield Association, the affiliation of former MBE franchisees who are fighting against UPS.

“UPS bought MBE, and at the time, I supported it. I was a real cheerleader for it because they said we would keep our brand,” Wightman continued. “But a year later, they said our business model was broken, and they came out with 'Golden Shield.' That was a plan to convert us to UPS. There's no way a franchisee can make money under those conditions. They cut our retail margins, and said we'd make it up in volume, without having to add staff.“

However, from the perspective of UPS, the issue is “the right of UPS to offer our network the opportunity to convert their franchises,” said Rich Hallabrin, a spokesperson for UPS. “We are pleased with Judge Highberger's decision. We view this as validation of the position we're maintained all along that the rebranding to The UPS Store was in the best interest of the network and did not violate any franchise laws or terms of the franchise agreement. As we've stated on numerous occasions, we were confident that once the merits of the case were heard in court, we would prevail. This latest development follows three earlier rulings that substantiate that position.”

As Hallabrin observed, three courts have ruled in UPS's favor in the last seven months. In October 2009, Judge Linda Quinn of the State of California Superior Court (San Diego County) issued a summary judgment indicating that UPS and MBE did not violate the “fraudulent, unfair or unlawful” sections of California's Unfair Competition Law, California Franchise Investment Law, or the FTC Franchise Rule. In November 2009, the Los Angeles Superior Court found that UPS had the right to make changes to its mark and that the Gold Shield program did not violate the law. In February 2010, the federal court in Los Angeles granted UPS summary judgment that the Gold Shield conversion program did not violate the terms of the franchise agreement.

While acknowledging that UPS has won three court cases, Wightman said that a 2005 arbitration decision, placed under seal, resulted in UPS settling with one MBE franchisee for $5 million. “The arbitration complaint of that franchisee was very similar to the current complaint,” he said.

Fewer than 100 MBE franchisees remain today; the other stores have either converted to UPS or dropped their franchise affiliation when their 10-year MBE franchise contract expired. UPS continues to support existing MBE franchisees, said Hallabrin, and is prepared to do so until the last of the contracts expire in 2013.

Yet, some current and former franchisees are still unwilling to take up the UPS banner. “With MBE, I set my prices. I pick my vendors. I still run my own business,” said Wightman. “With UPS, you are mandated to buy from UPS-approved vendors. We're talking about cardboard boxes, not secret sauce.”

Later this year, Manitoba might become the fifth Canadian province to pass a franchise law. The Manitoba Bill 15, known as the Franchises Act, is modeled on The Uniform Franchises Act, which set guidelines Alberta, Ontario, New Brunswick, and Prince Edward Island have used in crafting their franchise laws. The Manitoba bill can be found at http://web2.gov.mb.ca/bills/39-4/b015e.php.

“Some of the changes that may be of interest to franchisors are the ability to enter into confidentiality or location agreements with prospective franchisees prior to the delivery of an FDD, and the ability to require deposits if they are fully refundable,” said Paul Jones (Jones & Co., Toronto). “There is also a provision that technical errors that do not affect the substantial compliance of an FDD with the Franchises Act will not invalidate the FDD. All of these provisions are not included in Ontario's law, either.

“Further, the bill does not require delivery of the FDD as a single document. This is intended to allow for wrap-around document for compliance according to a Manitoba government representative,” added Jones.

Jones added that Manitoba is not proposing an exemption for licensed units in department stores that has been granted in other provinces, except New Brunswick. But there is an exemption to accommodate product-distribution arrangements “arising out of an agreement for the purchase and sale of a reasonable amount of goods at a reasonable wholesale price, or the purchase of a reasonable amount of services at a reasonable price.”

The bill has yet to receive its second reading or public consultations, and its anticipated passage would likely be in the second half of 2010. “All in all, it may well be a couple of years before it is in force,” Jones said.