Shipping War (the package kind, not the fanfiction kind)

How far does a franchisor have to go to help out a franchisee? That was the question asked in a recent case out of the Southern District of New York, The UPS Store, Inc. v. Hagan, 14cv1210 (behind paywall). This particular dispute between UPS and its franchisees the Hagans attracted a fair amount of online attention when it first erupted back in 2014. Now, UPS has been granted partial summary judgment on the contractual disagreements. 

UPS and the Hagans entered into a variety of contract carrier agreements, franchise agreements, and promissory notes in connection with the Hagans’ operation of eleven UPS franchises in the New York City area. The relationships between the parties eventually broke down, and accusations were flung back and forth between them. This federal lawsuit included trademark and trade secret allegations, in addition to breach of contract claims, and the Hagans counterclaimed alleging violations of New York’s deceptive trade practices act.

With regard to the breach of contract claims, the Hagans conceded that they failed to perform under the contracts, but alleged that their breach was excused by impossibility, impracticability, or UPS’s own breach of the implied covenant of good faith and fair dealing. The court, however, granted summary judgment to UPS, finding that the Hagans had impermissibly breached the contracts.

The Hagans’ main allegations revolved around UPS’s failure to police other franchisees, to allow the Hagans to bundle customer invoices, to provide the Hagans with better computer technology, and to negotiate with private investors who were funding the Hagans’ businesses in order to soothe them about the businesses’ profitability. But UPS was not required to do any of those things under the terms of the contract. Because they were not “basic assumptions” of the contract, the impractiability and impossibility defenses failed, and the alleged breach of the covenant of good faith and fair dealing was likewise doomed. The Hagans’ arguments essentially boiled down to a desire for UPS to take “affirmative action” to save the Hagans’ businesses as they began to fail. The Hagans termed this a “duty to cooperate” that was included in the covenant of good faith and fair dealing. But the court, applying California law, rejected this idea. Again, there was nothing in the contracts that required UPS to take the affirmative steps the Hagans desired, and the court declined to impose obligations on UPS beyond those agreed to under the contract. 

The franchise agreement between the parties contained a liquidated damages clause dictating that damages should be the amount of royalties paid to UPS the previous year multiplied by the number of years (not to exceed two) left in the contract term. The Hagans argued that this was an unreasonable estimate of UPS’s damages because UPS would recoup the lost royalties from the Hagans’ franchises through either issuing new franchises or increased business to the remaining UPS franchises in the area (which the Hagans showed were all less than half a mile from the Hagans’ locations, this being New York City). The court, however, found that, although maybe the Hagans might be right, that didn’t mean that the clause had been unreasonable at the time of execution of the contract, which was the relevant test. Therefore, the liquidated damages clause was enforceable.