State ex rel. Grupp v. DHL Express (USA), Inc.

• Decision Date: 26 April 2012
• Docket Number: No. 71,71
• Citation: 2012 NY Slip Op 03229
• Parties: State of New York ex rel. Kevin Grupp and Robert Moll, Appellants, v. DHL Express (USA), Inc., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

2012 NY Slip Op 03229

State of New York ex rel. Kevin Grupp and Robert Moll, Appellants,

v. DHL Express (USA), Inc., et al., Respondents.

No. 71

Court of Appeals of New York

Decided April 26, 2012

Daniel C. Oliverio, for appellants.

Edwin V. Woodsome, Jr., for respondents.

JONES, J.:

In this qui tam action, this Court is asked to consider whether plaintiffs' claims onbehalf of the State of New York, pursuant to the New York False Claims Act (FCA [State Finance Law §§ 187 et seq.]), are federally preempted by the Airline Deregulation Act of 1978 ([ADA] 49 USC § 41713 [b][1]) and the Federal Aviation Administration Authorization Act ([FAAAA] 49 USC § 14501 [c][1]). We hold they are and that the market participant doctrine is inapplicable.

Pursuant to a contract with the State of New York ¹ , defendant DHL Express (USA), Inc. (DHL) agreed to provide various courier services via air and ground transportation, including "Overnight Air Express," "Next Afternoon Service," "Second Day Service," and "Ground Delivery Service." Plaintiffs Kevin Grupp and Robert Moll own a trucking company and served as an independent contractor to DHL, providing ground shipping services to defendant within the state.

Plaintiffs, as relators, commenced an action on behalf of the State pursuant to the FCA, alleging violations of State Finance Law §§ 189 (1)(a), (1)(b) and (1)(c)² and seeking treble damages, penalties and costs ³ . They assert that from 2003 through 2008, DHL engaged in a persistent practice of misrepresentation, claiming that packages were delivered by air, when in fact, they were shipped via ground transportation. By doing so, the complaint alleges, DHL would impose a jet fuel surcharge even though "[a] substantial percentage of DHL Next Day and 2nd Day deliveries paid for by the State did not travel by air at all."⁴ It is further alleged that DHL billed the State a diesel fuel surcharge even when independent contractors, such as plaintiffs, "incurred the majority of fuel costs associated with DHL's ground transportationservice."

DHL moved to dismiss the complaint, arguing, in relevant part, that plaintiffs' action was preempted by the ADA and FAAAA. Supreme Court denied the motion, concluding that the market participant exception to federal preemption applied. Relying primarily on Cardinal Towing & Auto Repair, Inc. v City of Bedford, Tex. (180 F3d 686 [5th Cir 1999]), the court reasoned that the instant action pertained to the State's proprietary, and not regulatory, capacity. It remarked that:

"The overcharging of the State for goods and services provided by private companies is the prime ill that the [FCA] seeks to address — which is, for the State, a specific proprietary problem. But because the State is such a major consumer of goods and services, the [FCA] permits relators such as plaintiffs to bring to its attention and, taking the risk of nonrecovery, prosecute the State's claims against providers of false statements"

(28 Misc 3d 973, 984 [Sup Ct, Erie County 2010]).

The Appellate Division unanimously reversed, granting the motion and dismissing the complaint (83 AD3d 1450 [4th Dept 2011]). The court rejected the market participant doctrine, concluding that "the broad scope of the FCA demonstrates that its primary goal is to regulate the actions of those who engage in business with the State, and thus the statute enforces a general policy" (id. at 891).

This Court granted plaintiffs leave to appeal (17 NY3d 705 [2011]), and we now affirm.

Plaintiffs contend that the United States Congress, by encouraging states to pass fraudulent claim statutes such as the New York State Finance Law, could not have intended for those statutes to be preempted. Further, that the FCA is neither regulatory in nature nor related to the "price[s], route[s], or service[s]" of DHL. In the alternative, they argue that if preemption is found, then the market participant exception applies because the instant claims pertain to the State's proprietary capacity, as a private actor, in procuring courier services from DHL. We find these arguments unavailing.

Under the Supremacy Clause of the United States Constitution, federal laws "shall be the supreme Law of the Land" (US Const, art VI, cl [2]) and Congress is vested with the authority to supersede State statutory or regulatory law (see People ex rel. Cuomo v First American Corp., 18 NY3d 173, 179 [2011]). Thus, the primary concern of courts engaged in preemption analysis is "ascertain[ing] the intent of Congress" (Matter of People v Applied Card Sys., Inc., 11 NY3d 105, 113 [2008] quoting California Fed. Sav. & Loan Assn. v Guerra, 479 US 272, 280 [1987]). There is no plainer indication of preemptive intent than the express language of a statutory provision (see Doomes v Best Transit Corp., 17 NY3d 594, 601 [2011]; Balbuena v IDR Realty LLC, 6 NY3d 338, 356 [2006]).

The ADA provides, in relevant part:

"Except as provided in this subsection, a State, political subdivision of a State, or political authority of at least 2 States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service, of an air carrier that may provide air transportation under this subpart"

(49 USC § 41713 [b][1]). The FAAAA has a nearly identical provision that preempts the enforcement of state laws that relate to "any motor private carrier, broker, or freight forwarder with respect to the transportation of property" (see 49 USC § 14501 [c][1]).

The United States Supreme Court has had previous occasion to consider the scope of these provisions, ascribing them "a broad pre-emptive purpose" (Morales v Trans World Airlines, Inc., 504 US 374, 383 [1992]; see also American Airlines, Inc. v Wolens, 513 US 219 [1995]; Rowe v New Hampshire Motor Transport Association, et al., 552 US 364 [2008]). The Morales Court observed that Congress had enacted the ADA with the goal of deregulating the airline industry based on the rationale that "maximum reliance on competitive market forces would best further efficiency, innovation, and low prices as well as variety [and] quality . . . of air transportation services" (Morales, 504 US at 378 [internal quotation marks and citations omitted]). In conjunction with this purpose, the "relating to" language was construed to have expansive import ⁵ , preempting any form of "[s]tate enforcement actions having a connection with or reference to airline rates, routes, or services" (id. at 384 [emphasis added and internal quotation marks omitted]).

In light of the breadth of the ADA and FAAAA's preemptive language, we reject plaintiffs' contentions that their FCA claims only seek to enforce the State's proprietary interests against the fraud perpetrated by DHL's alleged pricing scheme and are based on general laws that do not prescribe the rates, routes and services of airlines and carriers. On these points, Morales and Wolens, where similar state fraud claims were federally preempted, are particularly instructive.

In Morales, the National Association of Attorneys General (NAAG), an organization composed of the attorneys general of all 50 states, adopted extensive guidelinesestablishing "standards governing the content and format of airline advertising," among other things (Morales, 504 US at 379). Pursuant to these guidelines, the attorneys general of seven states issued an advisory memorandum to major airlines, notifying them that the continued failure to disclose surcharges was "a violation of our respective state laws on deceptive advertising and trade practices"⁶ and could result in the commencement of "immediate enforcement actions" (id. at 379). Although the states' intended goal was "preventing the market distortion caused by false advertising" through the enforcement of state fraud and consumer protection statutes (id. at 389 [internal quotation marks omitted]), the claims were federally preempted because the state guidelines "related to" or bore a "reference to" airfares and rates. The Court also rejected the argument that general state fraud laws that do not prescribe rates, routes and services avoid preemption, concluding that such a construction "ignores the sweep" (id. at 386) of the preemptive language and "reads the words 'relating to' out of the statute" (id. at 385).

Similarly, in Wolens, — a case we find hard to distinguish from this appeal — the plaintiffs asserted claims under the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act), seeking monetary relief for the fraudulent devaluation of their earned rewards caused by the defendant airline's unilateral modification to its "frequent flyer" program (see Wolens, 513 US at 224-225). Although the plaintiffs' breach of contract claims were allowed to proceed, the Court found the Consumer Fraud Act to be federally preempted because it had similar effect as the NAAG guidelines in Morales; that is, "it controls the primary conduct of those falling within its governance" and "serves as a means to guide and police the marketing practices of the airlines," thereby infringing on the airline's ability to set its rates, routes or services (Wolens, 513 US at 227, 228).

Accordingly, as the lower courts correctly held, plaintiffs' claims are preempted by the ADA and FAAAA as they plainly have a connection with, or reference to, the rates, routes and services of DHL. Although the gravamen of plaintiffs' complaint pertains to fraudulent misrepresentations, like the state fraud actions in Morales and Wolens, the instant State Finance Law claims are premised on alleged practices that are directly related to the imposition of fuel surcharges for the offered shipment options and thus, reference, at a minimum, the rates billed by the courier.

Of course, the broad preemptive effect of the ADA and FAAAA should not be strained to encompass every asserted claim pertaining to the rates, routes or services of an airline or carrier. The Supreme Court observed...