On Oct. 14, 2010, plaintiff AFMS, a parcel consulting firm, filed an amended complaint against defendants UPS and FedEx, stating violations of Sherman Acts 1 and 2. AFMS claims that UPS and FedEx have violated federal antitrust laws. Furthermore, it alleges the parcel carriers are engaged in monopolistic and collusive actions. The lawsuit is the result of UPS and FedEx’s 2010 policies to not participate in bids or rate negotiations that involve third-party negotiators (3PNs) like AFMS.
The evidence submitted by AFMS clearly raised quite a few eyebrows. On April 23 of last year, both FedEx and UPS released internal memos to their sales divisions stating that new policies had been implemented to circumvent 3PN participation. Yes, you read that correctly: Two archrivals issued very similar policies on the same day out of the blue following 20 years of collaborative and successful relationships with 3PNs.
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 and FedEx continued to do so, FedEx would have had an enormous advantage — it would 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 as well as documented evidence wherein the defendants were in fact aware of the other's intention to exclude 3PNs.
Why would rivals work in concert to cut out 3PNs from participating in contract negotiations with their customers? You guessed it. Most 3PNs are good at getting parcel carriers to lower pricing. How successful? The AFMS complaint cites potential savings of $2 billion a year. 3PN company Shipware estimates that the top six 3PNs alone force UPS and FedEx to take revenue dilution of $250 million annually.
UPS and FedEx deny it’s about margin. They claim their representatives are best qualified to discuss rates and other value-added solutions. Now there’s the fox minding the henhouse.
The carriers also claim it’s about protecting shippers from improperly disclosing rate and contract information to outside parties. Ever wonder to whose benefit it is for shippers not to share their rates? I’m always amazed when a carrier rep is able to hand out that line with a straight face.
Moreover, most 3PNs have always been willing to sign three-way nondisclosure agreements between the shipper, carrier and 3PN. Why is this important? We’re down to two national carriers, FedEx and UPS. With little competition, pricing is on the rise. Annual rate increases from 2005 to 2011 were the highest ever.
For the carriers, it’s all about margin improvement. Now they’re trying to take away the knowledge and leverage of professional parcel negotiators.
Back to the lawsuit. FedEx and UPS successfully filed motions to dismiss the claims, arguing that in order for AFMS to allege antitrust violations it would have to be in the same business of delivering letters and packages, and further prove that UPS and FedEx monopolistically violated the law resulting in lost profits and market share in the business of delivering letters and packages. Of course AFMS isn't in that business, and the court granted dismissal motions on May 27.
However, AFMS filed and served its second amended complaint on June 27. This time in a brilliant legal maneuver, AFMS redefined the “relevant market” as consultation services — as opposed to shipping services — which is comprised of those entities which advise shippers regarding the delivery and cost of parcel services.
The legal refinement is that FedEx and UPS consultants and representatives use their market dominance to exclude other consultants from the marketplace, especially when those outside consultants threaten gross profit margins.
In other words, UPS and FedEx want customers to heed their consulting advice — which, not surprisingly, is always to use their own services at healthy profit margins — at the exclusion of other industry consultants including 3PNs. The plaintiff argues that’s a form of price fixing (count one). In total, AFMS’s amended complaint cites five violations of antitrust laws. Counts two and three argue that FedEx and UPS are selectively asking shippers to sign nondisclosure 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.
The plaintiff has requested a jury trial and argues the following injury at UPS and FedEx antitrust actions:
- suppressed competition among and between FedEx and UPS;
- diminished freedom of choice for shippers;
- suppressed competition among and between third-party consultants; and
- shippers are forced to pay higher prices.
I anticipate the defense will take action to dismiss the second amended complaint, but don't expect it to be granted. Therefore, the rest of the year will be consumed with trial preparation — e.g., discovery, depositions, witness preparation and so on. The judge ordered the trial to begin in February 2012, but I expect it to start closer to May 2012.
My opinion of the outcome? AFMS will win counts one, two and three. I'll continue to follow this case closely and report on any significant developments. In the meantime, contact me at rob@shipware.com to receive copies of the legal filings and court rulings on this case, or to further discuss UPS and FedEx's policies regarding 3PNs.
- Companies:
- Federal Express
Rob Martinez is the CEO of Shipware LLC, a professional services firm that transforms businesses through intelligent distribution solutions and strategies. Rob has helped some of the world’s most recognizable brands reduce parcel shipping costs an average of 25 percent through contract negotiations, rate benchmarking, modal optimization, invoice audit and other savings vehicles. A cum laude graduate of UCLA, Rob has 20 years of transportation industry experience, including executive positions at DHL and Stamps.com, in addition to his work as an outside consultant since 2001.