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The UPS Store, Inc. v. Hagan

United States District Court, S.D. New York

August 2, 2017

THE UPS STORE, INC., et al., Plaintiffs,
v.
ROBERT HAGAN, et al., Defendants.

          OPINION & ORDER

          WILLIAM H. PAULEY III, United States District Judge.

         The UPS Store, Inc., United Parcel Service, Inc., United Parcel Service of America, Inc., (the “UPS Parties”) and the twenty-one owners of Manhattan UPS stores (the “Manhattan Franchisees” and, collectively with the UPS Parties, “Defendants”), move for summary judgment on the sole remaining counterclaim of the original Defendants in this action-Robert Hagan, Thomas Hagan, and their associated corporate entities (“the Hagans”). That counterclaim is for false advertising under § 43(a) of the Lanham Act. Defendants' motion is granted, and the counterclaim is dismissed.

         BACKGROUND

         This Opinion and Order represents this Court's latest effort to sweep out the veritable Augean Stable that is the case of The UPS Store v. Hagan.[1] The UPS Parties' original claims against the Hagans for breach of contract and trademark infringement were adjudicated long ago. In April 2014, however, the Hagans filed a spate of counterclaims that sprawled over a 210-page pleading. (See ECF No. 12.) This Court dismissed those counterclaims with leave to replead only one, the Hagans' claims under New York General Business Law § 349. See The UPS Store, Inc. v. Hagan, 99 F.Supp.3d 426, 442 (S.D.N.Y. 2015). The Hagans retained new counsel and filed amended counterclaims, adding a count for false advertising under Lanham Act § 43(a). (See ECF No. 74.) In 2015, this Court granted Defendants' motion to dismiss the § 349 claim but denied the motion as to the Lanham Act count. See The UPS Store, Inc. v. Hagan, No. 14-CV-1210, 2015 WL 9256973, at *7 (S.D.N.Y. Nov. 18, 2015). The parties proceeded to discovery on the Lanham Act claim, and this motion followed.

         The Hagans' Lanham Act claim arises from two alleged instances of false advertising by the Manhattan Franchisees and, by extension, the UPS Parties as franchisors. First, the Hagans claim that the Franchisees conducted a coordinated campaign to incorrectly inform customers that UPS Ground Service was not guaranteed in order to sell higher-margin Air Service instead (the “Ground Guarantee Claims”). Second, the Manhattan Franchisees allegedly conspired to consistently over-dimension packages in order to charge more for shipments priced by size and weight (the “Over-Dimensioning Claims”). The Hagans allege that they declined to participate in these schemes, and that customers who learned from the Hagans that Ground Service was guaranteed subsequently refused to do business with any UPS store-thereby causing the demise of the Hagan franchises.

         Discovery on these claims generated two key bodies of evidence. The first is the testimony of Robert Hagan, which the Hagans rely on to show that the Manhattan Franchisees' false advertising was the proximate cause of the Hagans' injury. On this point, Robert Hagan stated that many customers left his store in anger, never to return to any UPS franchise, after learning that Ground Service was in fact guaranteed.

         Next, the Hagans submitted a declaration from Paul Puccini, a hired investigator who oversaw a series of hidden-camera “secret shops” at the Manhattan Franchisees' stores (the “Puccini Evidence”). Puccini's employees entered each store with a pre-measured package and asked the clerk what the cheapest guaranteed service was for shipment to a particular location. Although Ground Service is guaranteed by UPS, the clerks in the secret shop videos consistently stated that Puccini's investigators should pay extra for Air Service if they want guaranteed delivery in the desired time frame. The Hagans argue that the Puccini Evidence reveals the Franchisees' coordinated campaign to misrepresent the Ground Service guarantee and over-dimension packages.

         DISCUSSION

         To establish standing under § 43(a) of the Lanham Act, the Hagans must show (1) “economic or reputational injury” to their business that (2) “flow[s] directly from the deception wrought by [Defendants'] advertising.” Lemark Int'l, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377, 1391 (2014). The latter prong is satisfied by a showing that “deception of customers cause[d] them to withhold trade from the plaintiff.” Lexmark, 134 S.Ct. at 1391.

         The Hagans' theory of liability under § 43(a) is that: (1) the Manhattan Franchisees, as part of a coordinated campaign to overcharge for shipping, told customers that Ground Service was not guaranteed and over-dimensioned their packages; (2) the Hagans, in an effort to comply with UPS regulations, did not participate in this scheme; (3) customers came to the Hagans' stores and were shocked to discover that they had been overcharged and misled about the Ground Guarantee at other UPS franchises; (4) these same customers became so incensed that they immediately swore off shipping with UPS forever, thereby costing the Hagans business. Defendants argue that the record cannot support this attenuated chain of events, and that accordingly the Hagans lack standing because they cannot point to any evidence of lost sales caused by the alleged false advertising.

         The viability of the Hagans' claim depends on the admissibility of Robert Hagan's testimony and the Puccini Evidence. See Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 310 (2d Cir. 2008) (a party opposing summary judgment must offer admissible evidence). Robert Hagan testified that he witnessed dozens of customers come into his stores, express shock at the Ground Guarantee and the Hagans' lower prices, and then leave his stores exclaiming that they would never ship with UPS again. As evidence of Defendants' coordinated scheme, the Hagans point to Puccini's secret-shop videos, which show clerks at the Manhattan Franchisees' stores consistently stating that Ground Service is not guaranteed. The Puccini Declaration also references receipts and shipping estimates that purport to reveal the over-dimensioning conspiracy.

         A. Robert Hagan's Testimony

         Robert Hagan's testimony is critical to the causation inquiry because the record does not contain a single statement by a former Hagan customer that (1) they felt deceived by the Manhattan Franchisees' misrepresentation and (2) for that reason ceased to do business with the Hagans.[2] A Lanham Act plaintiff “must submit specific evidence that the defendant's advertising causes direct harm to the product in which the plaintiff claims a pecuniary interest.” PDK Labs, Inc. v. Friedlander, 103 F.3d 1005, 1112 (2d Cir. 1997). As the Hagans do not offer any customer testimony or survey, Robert Hagan's testimony is the only piece of evidence that connects the alleged false advertising with his customers' decisions to stop doing business with UPS altogether.

         A few examples of Hagan's testimony frame this Court's analysis. After hearing about problems with his new “Transparency Sales Model” (under which his sales clerks were required to explain all of the customer's shipping options, including guaranteed Ground Service), Hagan stated that he visited the store and heard

customers saying, you know, it's funny . . . I've been shipping through UPS for a long time . . . and I didn't know that I would get [my package shipped] with UPS guaranteed there in that amount of time, and they've been charging me a lot more than that and that's bullshit. And I'm not, I'm taking my package, I'll see you and I'm not going to do business with you guys, meaning UPS stores[, ] anymore.

         (Declaration of Blair Fensterstock (“Fensterstock Decl.”), ECF No. 382, Ex. 5 at 147:24- 148:10.) On that same store visit, Hagan claims, “[m]ultiple dozens” of customers made statements to this effect. (Fensterstock Decl., Ex. 5 at 149:21.)

         Hagan also testified that another unidentified customer told him “I send this Christmas package all the time and I'm realizing now I could have gotten it there in a much cheaper way than they've been charging me for the last ten years . . . UPS is a bunch of con artists. You've been ripping me off and I'm never doing business here again.” (Fensterstock Decl., Ex. 5 at 157:20-158:20.) He could not recall the identity of any particular customer or the details of their shipping needs, but claimed that “that was the gist of” the many complaints he overheard. (Fensterstock Decl., Ex. 5 at 158:22-23.) Hagan also did not know where these anonymous customers heard that Ground Service was not guaranteed because he “[n]ever asked them.” (Fensterstock Decl., Ex. 5 at 153:14.)

         Defendants argue that this testimony is inadmissible hearsay. As a threshold matter, there can be no dispute that the customer complaints are hearsay; they are out-of-court statements offered for their truth, i.e. that the customer-declarants were misled by the Manhattan Franchisees and thus stopped doing business with UPS altogether. Accordingly, they are inadmissible unless otherwise permitted by the Rules of Evidence. Fed.R.Evid. 802.

         First, the Hagans argue in passing that Robert Hagan's testimony is admissible as an eyewitness account of “people being frustrated, confused, and leaving the Hagans' stores, all directly attributable to [Defendants'] false advertising.” (Opp. at 20.) The testimony is certainly admissible to prove the former-i.e. that Robert Hagan witnessed customers becoming frustrated in his stores and leaving without shipping their packages-but not ...


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