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

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 v First Am. 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 Tr. 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 Transp. Assn., 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

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 that there are certain actions that are sufficiently remote or tenuously related to rates, routes, and services as to avoid preemption (see id. at 390), identifying routine breach of contract claims as such a peripheral cause of action as they enforce privately bargained-for obligations rather than further policy matters. Therefore, while the breadth of the ADA and FAAAA may preempt states “from imposing their own substantive standards with respect to rates, routes, or services, [it does not preclude] relief to a party who claims and proves that an airline dishonored a term the airline itself stipulated” (Wolens, 513 US at 232-233 ). Plaintiffs thus alternatively argue that their claims should proceed because they seek to hold DHL liable for breaching its self-imposed obligations under its agreement with the State. However, plaintiffs—who were not parties to the underlying agreement between DHL and the State—

cannot recover under a breach of contract action because they lack privity to enforce the benefit of the parties’ bargain. Indeed, their claims are premised solely on the FCA, as relators, and the Supreme Court has expressly ruled that causes of action that are “enlarge[d] or enhance[d] based on state laws or policies external to the agreement” are preempted (id. at 233).

Having concluded—as the lower courts did—that plaintiffs’ claims are within the scope of express statutory preemptions, we turn to the plaintiffs’ primary argument that the market participant doctrine exception is applicable here. Generally, the market participant doctrine recognizes the important distinction between the actions of a state in its dual regulatory and proprietary capacities. “[W]hen a state or municipality acts as a participant in the market and does so in a narrow and focused manner consistent with the behavior of other market participants, such action does not constitute regulation subject to preemption” (Cardinal Towing, 180 F3d at 691 ). However, a governmental entity does not escape federal preemption, even when assuming the role of private actor, if it “us[es] its power in the marketplace to implement governmental policies” (Matter of Council of City of N.Y. v Bloomberg, 6 NY3d 380 , 395 [2006]). Indeed, “a state acts as a regulator, not a proprietor, when it uses its bargaining leverage as a means of attaining policy ends” (Council of City of N.Y., 6 NY3d at 395 , citing Building & Constr. Trades Council v Associated Builders & Contractors of Mass./R.I., Inc., 507 US 218 [1993]). Put another way, “courts have found preemption when government entities seek to advance general societal goals rather than narrow proprietary interests through the use of their contracting power” (Cardinal Towing, 180 F3d at 692 ).

Facially, it is evident that the State procured services from DHL in its proprietary capacity, however, plaintiffs’ reliance on the FCA, which establishes public policy goals and is thus regulatory in nature, renders the market participant exception inapplicable to this case. State Finance Law § 189 (1) (g) provides, in relevant part, that a finding of liability under the statute may result in “a civil penalty of not less than six thousand dollars and not more than twelve thousand dollars, plus three times the amount of all damages, including consequential damages.” Thus, rather than redressing the harm actually suffered, the statute’s imposition of civil penalties and treble damages evinces a broader punitive goal of deterring fraudulent conduct against the State. That is, instead of

encourage a general policy rather than address a specific proprietary problem” (State of N.Y. ex rel. Grupp v DHL Express [USA], Inc., 28 Misc 3d 973 , 983-984 [2010] [emphasis omitted], quoting Cardinal Towing & Auto Repair, Inc. v City of Bedford, Tex., 180 F3d 686 , 693 [5th Cir 1999]). I would answer both questions in the affirmative.

The New York False Claims Act, mirroring the federal government’s False Claims Act, subjects “any person who . . . knowingly presents, or causes to be presented a false or fraudulent claim for payment or approval” by the State, or “knowingly makes, uses, or causes to be made or used, a false record or statement material to” such a false or fraudulent claim, to civil liability including treble damages (State Finance Law § 189 [1] [a], [b], [g]). Furthermore, the New York False Claims Act allows “relators” to blow the whistle on a government contractor’s fraudulent claims by bringing a qui tarn civil action on behalf of the State of New York (State Finance Law § 190 [2]). It is the intent of the statute to be applied broadly to almost any situation where state dollars are involved.

Here, the complaint alleges that DHL fraudulently charged the State jet fuel, rather than diesel fuel, surcharges on Next Afternoon and Second Day shipments that it in fact transported by ground, a claim that directly relates to the State’s efficient procurement of needed shipping services. The relators’ action was specific to one particular package delivery company. The relators sought not to regulate shipping rates, but to address a very narrow instance of alleged fraudulent overcharging of the State. That is, for the State, a “specific proprietary problem,” and I see no evidence of any regulatory impulse.

The majority, in its brief discussion of the market participant doctrine, cites Matter of Council of City of N.Y. v Bloomberg ( 6 NY3d 380 , 395 [2006]), in which we held that the market participant exception does not apply when the State acts with an interest in setting policy. In Council of City of N.Y., we ruled that New York City law preventing agencies from contracting with providers that did not offer domestic partner benefits to their employees clearly set policy, and was subject to preemption. The present case could not be more different. The State’s role with respect to the action is as a buyer of DHL’s services on the open market, rather than as a policymaker.

Although the majority accepts, as it must, that “the State procured services from DHL in its proprietary capacity” (majority op at 286), it attempts to avoid the market participant doctrine by

suggesting that plaintiffs’ reliance on the False Claims Act renders the exception inapplicable (id. at 286). For this conclusion, the majority offers only one reason—that the False Claims Act imposes civil penalties and treble damages to deter fraudulent conduct against the State (id.). In my view, this reasoning is insufficient. An action under State Finance Law § 189 (1) is not designed to regulate and set policy, but rather to protect the State’s interest in cost efficiency. That the action will have benefits outside itself does not take away from the fact that the law exists to protect state proprietary interests. As the New York State Senate Introducer’s Memorandum in Support of the False Claims Act notes, its purpose is to “help to protect taxpayer dollars by deterring the submission of false claims, enhancing the ability to recover amounts defrauded from the state and local governments, and imposing appropriate civil penalties upon those who have engaged in such illegal activities.” (Mem in Support of 2006 NY Senate Bill S3895.) In allowing an action to be brought under this statute, the State is not regulating an industry; rather it is taking part in the activity of the market.

Chief Judge Lippman and Judges Graffeo, Read and Smith concur with Judge Jones; Judge Pigott dissents in a separate opinion in which Judge Ciparick concurs.

Order affirmed, with costs.