FedEx Ground ousted its largest contractor hours after suing him. Here's how a months-long fight for a better deal turned into a legal battle.

• FedEx and its largest contractor are locked in a contentious battle over how to handle rising costs.
• The acrimony increased Friday when FedEx filed suit against Spencer Patton's company.

On Friday, FedEx filed a lawsuit against what was its largest delivery contractor, Spencer Patton.

Hours after filing suit seeking "permanent injunctive relief and monetary damages" related to "false and misleading statements" about FedEx Ground, the Memphis company terminated all contracts with Patton.

"I am being forced to pull our small businesses out of the communities we serve, but we are working hard to re-home our employees," Patton said. The logistics part of Patton's business has 225 employees in 10 states. The lawsuit is directed at Patton's consultancy for the delivery businesses Route Consultant Inc., which the case claims is the true beneficiary of all Patton's efforts to date.

"We can confirm FedEx Ground exercised its rights to immediately stop contracting with a small number of service provider businesses owned by one individual," a FedEx Ground spokesperson said in a statement. "While those businesses operate in several locations, they constitute less than 0.5% of the approximately 60,000 total routes across the FedEx Ground network. We have contingency plans in place and do not anticipate any impact to service based on these contract actions."

Friday's events are the most dramatic yet in a fight that got serious in July, when Patton warned that FedEx Ground's unwillingness to address the concerns of the 6,000 independent contractors who deliver its packages was driving many out of business and putting its network in "peril."

Since then, Patton has moved to form a trade group to represent contractors and talked about getting the small businesses franchise status. He has encouraged his fellow contractors to be wary of FedEx's pay offerings for the upcoming holiday season and said that if FedEx didn't make operational and contractual changes by November 25, he would shutter his delivery service — a threat that is now null.

FedEx has said the Ground network is sound and that it will consider any attempt at collective bargaining a breach of contract.

Here's how the contentious partners got to this point:

Unhappy holidays

FedEx Ground contractors have various long-standing grievances. High on the list is FedEx's move to seven-days-a-week service in May 2019 — many say there's not enough demand on Sundays to make it profitable.

But things got worse last winter when FedEx overestimated package volume for the 2021 holiday season. The disconnect between projections and reality meant many contractors didn't make enough to cover the cost of ramping up operations, and many told Insider they have still not recovered financially.

In January, 800 contractors signed a letter to FedEx Ground detailing their problems with rising costs, especially fuel, and diminishing returns. "We need help fast!" the letter read. Contractors said that from 2020 to the 2021 holiday season, their payouts decreased by 20%, although package volume was roughly the same. Vehicle costs were up $10,000, and wages 30% lower compared to one year ago, the letter said.

Fuel surcharges on the fire

In a March 18 letter to contractors, FedEx Ground's CEO, John Smith, said the company took a look at the gas and diesel compensation for contractors and decided no special action was necessary. "Our data indicates that service providers operating with either type of fuel are seeing weekly fuel-related payment increases that are commensurate with the recent market fuel price changes," Smith wrote.

"What really lit this powder keg," Patton told Insider last week, was "when FedEx released and highlighted in their earnings report that they had successfully passed through fuel surcharges to the US consumer, and then did not pass through the entirety of those to their contractors."

Summer of discontent

In late July, Patton published his first video plea to FedEx, raising the alarm about contractors' financial health. He called for increased pay and promised to have his fellow contractors elect a 10-member committee to represent their interests.

Contractors who participate in the September vote will join what Patton calls the Trade Association for Logistics Professionals. He later said that as a last resort, the body could pursue getting FedEx contractors reclassified as franchisees.

In a response to Patton's tactics, Smith said that any contractors who attempt to bargain collectively would be in breach of contract.

In a mid-August talking points memo for staff, obtained by Insider, FedEx said it has "multiple contingency levers available" to keep service consistent despite claims that contractors are failing.

As to the franchise threat, the document says every business "must determine whether membership in any trade association is in their organization's best interest." It also says the current service-provider model "does not align with a franchisor/franchisee relationship."

Patton threatens FedEx's sacred cash cow

Last week, more than 4,000 FedEx contractors — representing roughly two-thirds of the FedEx Ground network — convened in Las Vegas for the conference Patton hosts every year. He used the venue to declare that he would shut down his delivery service if he didn't see operational and contractual changes by Thanksgiving.

Patton also encouraged his fellow contractors to take a hard look at FedEx's contract offering for the holidays, calling the deal a chance for the company to "restore the faith of their contractors." If a critical mass of contractors rejects the deal, that could affect FedEx's capacity to cash in on its busiest season. "It is one of the most powerful forms of leverage that me and my independent business is able to exercise with FedEx Ground," Patton said in a conference session last week.

"My heart is in this to see FedEx Ground make lots of money," Patton said during one of two keynotes he gave at the conference. "I just need to see the contractors make money as well."

FedEx strikes back

In its lawsuit, FedEx accused Patton of creating a "fictionalized crisis" between FedEx Ground and its contractors "as an advertisement for the purported need for Route Consultant's consultancy and other services."

In a statement issued after the suit was filed, Patton said, "I am not afraid of a lawsuit from FedEx." He also told Insider in July he knew that losing his contracts was a possibility.

"For years FedEx Ground has used bullying tactics when interacting with their contractors to create an environment of intimidation," he said Friday evening. "This move to cancel our contracts is a clear case of a $60 billion corporation silencing anyone with a voice."