An important court battle that impacts parcel shippers continues to take shape in US District Court. As reported in PARCEL in October 2010 (“FedEx & UPS Policies Regarding Third Party Consultants: The Facts”), AFMS, LLC (“AFMS”), a parcel consulting firm based in Portland, Oregon, filed antitrust complaints against FedEx Corp. (“FedEx”) and United Parcel Service Corp. (“UPS”).

    Nearly a year later, the case was nearly dismissed before AFMS filed a second amended complaint, and the lawsuit is now headed to jury trial. Before I get into the details of the second amended complaint, let me provide some context.
    The lawsuit is the result of UPS and FedEx’s 2010 policies not to participate in bids or rate negotiations that involve third party negotiators (3PNs) like AFMS.

    Now the subject of an ongoing Department of Justice investigation, the allegations of collusion submitted by the Plaintiff raised quite a few eyebrows within the shipping community. For instance, both FedEx and UPS on the very same day released internal memos to its respective sales divisions that new policies had been implemented to circumvent 3PN participation. 

    You read that correctly: Two arch rivals – FedEx and UPS – issued very similar policies. On the same day (April 23, 2010). UPS’s internal memorandum is entitled “Procedures for Interacting with Third Party Negotiators and UPS Customers.” Released on the same day, the FedEx memo is entitled “Third Party Consultant Rules of Engagement for Field Sales.” 
    (Since these are documents now in the public domain due to the lawsuit, I will make available copies of the AFMS complaint as well as FedEx and UPS internal memos. Email address following article.)

    The AFMS complaint contends that “the competitive impact of either FedEx or UPS unilaterally terminating its dealings with third party consultants was so significant that neither company would have dared to give the other such a huge potential competitive advantage/opportunity without an understanding that both would terminate dealings with third party consultants at or about the same time – as they did.”

    In other words, if UPS refused to work with 3PNs, but FedEx would continue to do so, FedEx would have an enormous advantage in that it would likely be the beneficiary of any bid with only one bidder participating. Therefore, the only way UPS moves forward with that policy is if it was guaranteed that its rival would also do so.

    The complaint includes several examples of testimony and/or documents evidence wherein the defendants were in fact aware of the others intention to exclude 3PNs. 

    So why would two rivals work in concert to cut out 3PNs from participating in contract negotiations with its customers? 
    The AFMS complaint argues that carriers colluded to avoid revenue dilution. The lawsuit cites statistics from a Morgan Stanley “Shipper Best Practices Survey” and calculates that shippers that use 3PN expertise collectively have the potential to reduce costs as much as $2 billion/year. 

    In our analysis, the top six 3PNs alone force UPS and FedEx to take actual revenue dilution of $250 million annually.
    UPS and FedEx deny it’s about margin, but rather, they claim their representatives are best qualified to discuss rates and other value added solutions. 

    The carriers also claim it’s about protecting shippers from improperly disclosing rate and contract information to outside parties. 

    However, what’s good for the goose is rarely good for the gander. Has your UPS rep ever asked you for a copy of your FedEx rates (or vice versa)? So much for rate confidentiality.

    FedEx and UPS filed motions to dismiss the claims arguing that in order for AFMS to allege antitrust violations, AFMS would have to the same business of delivering letters and packages, and further prove that UPS and FedEx monopolistically violated the law resulting in lost profits and/or market share in the business of delivering letters and packages. 

    And of course, AFMS and other 3PNs don’t deliver packages, but rather offer consulting services to parcel shippers. As a result, the court granted dismissal motions on May 27, 2011.

    However, AFMS filed and served its second amended complaint on June 27, 2011. This time, and at the Judge’s suggestion, AFMS redefined the “relevant market” as consultation services – as opposed to shipping services.
    The legal refinement in the second amended complaint redefines the market, and thereby argues validates antitrust allegations within the context of the law: FedEx and UPS consultants and representatives use their market dominance to exclude other consultants from the market place, especially when those outside consultants threaten gross profit margins. 
    In other words, UPS and FedEx want customers to heed their consulting advice – which is always to use their own services at healthy profit margins – at the exclusion of other industry consultants including 3PNs. Plaintiffs argue that’s a form of price fixing (count one). In total, AFMS’s second amended complaint cites five violations of antitrust law. 

    Counts two and three argue that FedEx and UPS are selectively asking shippers to sign non-disclosure agreements that unreasonably restrain competition. Counts four and five allege that FedEx and UPS are engaged in a plan to achieve or maintain monopoly power.

    Plaintiff’s request a jury trial and argue the following injury at UPS and FedEx antitrust actions:
    1. Suppressed competition among and between FedEx and UPS 
    2. Diminished freedom of choice for shippers
    3. Suppressed competition among and between third party consultants
    4. Shippers are forced to pay higher prices

    So the case marches onward with a trial date scheduled for February 2012. Plaintiffs and defendants will be jockeying the rest of the year in preparation for trial (discovery, depositions, witness preparation, etc.). Parcel and Shipware will continue to follow this case closely and report on significant developments. 

    In the meantime, contact me to receive copies of the legal filings and court rulings on this case, or to further discuss the UPS and FedEx policies regarding 3PNs.

    Rob Martinez, MQC, CMDSS is President & CEO of Shipware, LLC. He welcomes comments and experiences from shippers, carriers and other 3PNs, and can be reached at 858-400-7471 Ext 114 orrob@shipware.com

    Follow