Billing penalties add up

Billing penalties add up       The need to understand the details of invoices for even routine shipments was pointed up in a recent court decision in a dispute where billing penalties outstripped the actual cost of transportation for a shipper (Data Manufacturing Inc. v. UPS Inc., Eighth Circuit No. 08-1646, March 4).
      DMI makes retail gift and debit cards for customers, including First Data Corp. First Data required DMI to use UPS as the carrier for any gift cards it manufactured, and First Data initially agreed to pay all shipping charges.
      DMI had an open account with UPS and originally UPS would bill DMI weekly and then First Data would reimburse DMI for the amount attributable to shipping the gift cards.
      In March 2005, however, DMI began to ship the cards using First Data's account number and the shipping charges were billed directly to First Data. At some point thereafter, First Data began to reject these UPS third-party billings, and UPS charged DMI's account for First Data's rejected billings. DMI was not initially aware that First Data was rejecting the charges because the UPS billing statements did not include specific shipment information, but instead merely summarized hundreds of shipments.
      DMI eventually learned that UPS was also adding a $10 charge for each billing rejected by First Data and then rebilled by UPS to DMI's account. This was included on the invoice in a category labeled 'chargebacks,' which also included various other charges. It did not specifically disclose the $10-per-transaction rebilling charges. DMI did not discover these charges until August 2006.
      The rebilling charges, which totaled $366,910, actually exceeded the total cost of the shipments from March 2005 through August 2006 for the First Data gift cards.
      DMI sued UPS in Missouri state court, alleging the rebilling charges were wrongful, and also sought a declaration that the rebilling charges were void and against public policy. UPS removed the matter to federal court, and filed a motion to dismiss, arguing DMI's claims were pre-empted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA). The district court agreed and dismissed the amended complaint.
      DMI appealed the case to the Eighth Circuit, which noted under the Federal Rules of Civil Procedure, the factual allegations of a complaint are assumed true and construed in favor of the plaintiff, 'even if it strikes a savvy judge that actual proof of those facts is improbable.'
      In the FAAAA, Congress sought to equalize competition between air and motor carriers by uniformly preempting economic regulation, but not safety regulation, of their activities. The Eighth Circuit said that according to the FAAAA, DMI's claims are preempted if they are both 'related to' UPS's prices, routes or services, and derive from the enactment or enforcement of state law.
      Because the Supreme Court has broadly interpreted the phrase 'relating to,' the Eighth Circuit said it found the $10 charge is part of UPS's 'operations' and falls into both the price and service categories.
      'Certainly shipping is the main component of UPS's business and service, but it is disingenuous to suggest that UPS's billing procedures are not a necessary component of its business operations,' the court said.
      It was not moved by DMI's argument that there was no 'service' in this case because the cost of reassigning each of the numerous rejected billings was minimal, and did not cost UPS $10 per transaction. Regardless of how much it actually cost UPS to rebill the shipping charges for each transaction, the Eighth Circuit said it was certainly part of its pricing and services to do so, and therefore it met this element of the preemption test.
      The Eighth Circuit then turned to the question of whether DMI's claims derive from the enactment or enforcement of state law. DMI argued its claims are 'sound in the common law of contracts,' and therefore do not derive from the enactment or enforcement of state law.
      In a 1995 decision, American Airlines v. Wolens, the Supreme Court carved out an exception to the general preemption statute found in the Airline Deregulation Act (ADA) for strictly 'routine' breach of contract claims.
      In Wolens, the plaintiffs sued AA for both fraud and breach of contract in connection with its frequent flyer program. They argued the airline wrongly modified the program, thereby devaluing credits they had already earned. AA argued the action was preempted by the ADA's preemption clause. The Supreme Court said the ADA preemption clause reads very much like the FAAAA's preemption clause and held that the fraud action, based on an Illinois consumer fraud statute, was preempted.
      But the Supreme Court found the contract action was not preempted. It held the preemption clause could not shield the airline from answering for the 'alleged breach of its own, self-imposed undertakings.' The court emphasized the distinction between an action based solely on the agreement between the parties, and an action enlarged or enhanced by state laws or policies.
      To determine whether DMI's claims derive from the enactment or enforcement of state law, the Eighth Circuit looked at the assertions in the amended complaint.
      In the first count, DMI alleged it was 'implicit' in DMI's contract that UPS would not charge the unlawful penalty of a $10 rebilling charge, and that DMI did not agree to the charge, which was undisclosed, unenforceable and void as against public policy. It claimed UPS breached the contract and DMI suffered damages for the total amount of the rebilling charges. In counts two and four, DMI alleged fraudulent and negligent misrepresentation; the third count alleged the rebilling charge was an unenforceable penalty and therefore UPS had money in its possession that rightfully belonged to DMI. The fifth count asked the court to declare the fee void as against public policy.
      The circuit court said counts two through five derived from the enforcement of Missouri state law and were 'outside of the four corners of the contract between UPS and DMI.' Likewise, the court said it failed to understand how most of the first count also did not require a resort to the laws of Missouri for its adjudication. 'Determination of whether such a fee is a penalty, unlawful and against Missouri's public policy, by definition, requires the court to apply Missouri law.'
      But it said another DMI assertion that the rebilling fee was not actually part of its contract with UPS was more compelling. While UPS argued that the rebilling charge is part of its standard policy when shippers use third-party billings, DMI asserted it never agreed to such a fee.
      That made it 'a four-corners claim solely between the parties that does not derive from the enactment or enforcement of state law.' The circuit said DMI could proceed with its contract claim that it did not agree to the $10 rebilling charge.
      The circuit court    remanded the one portion of the first count to the district court for proceedings consistent with its opinion.