Franchise, Antitrust, Distribution and Dealer Newsletter

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Spring 2016


MINNESOTA SUPREME COURT ADDRESSES THE RELOCATION OF A DEALERSHIP ISSUE UNDER THE MINNESOTA MOTOR VEHICLE SALE AND DISTRIBUTION ACT

One of the critical issues that motor vehicle manufacturers and dealers often face is the establishment or relocation of new dealership locations. Automobile dealers fight new dealership locations that appear to them to be too close to their dealership and potentially impinging on their business, while manufacturers seek to open new dealerships in new locations to expand their reach and marketing to the general public. The competing interests of dealers and manufacturers often lead to intense disputes regarding new dealership locations.

The Minnesota Motor Vehicle Sale and Distribution Act (MVSDA) sets forth various guidelines, restrictions and protections regarding these competing interests. In its pertinent part the MVSDA provides as follows:

      In the event that manufacturer seeks to enter into a franchise establishing an additional new motor vehicle dealership or relocating an existing new motor vehicle dealership within or into a relevant market area where the line make is then represented, the manufacturer shall, in writing, first notify each new motor vehicle dealer in this line make in the relevant market area of the intention to establish an additional dealership or to relocate an existing dealership within or in that market area.

Minn. Stat. §80E.14, subdivision 1. Under the statute, the “relevant market area” is defined as “the area within a ten-mile radius around the site of the previous franchisee’s dealership facility.” Minn. Stat. §80E.14, subdivision 3(b)(2). Within thirty (30) days of receiving the notice, the existing dealer may commence a legal action challenging the establishment or relocation of the new dealership. Minn. Stat. §80E.14, subdivision 1. Once the legal action is filed, the manufacturer cannot establish or relocate the proposed new dealership unless the court determines that there is good cause for permitting the establishment or relocation of the dealership. Minn. Stat. §80E.14, subdivision 1. Subdivision 2 of Minn. Stat. §80E.14 identifies nine factors that a court will consider to determine if good cause exists for establishing or relocating an existing dealer.

The statute contains a safe-harbor provision, known as the "5-and-5 rule," which exempts a manufacturer from the notice and good cause requirements of the statute under certain situations pertaining to the relocation of an existing dealer. This safe-harbor provision provides as follows:

      The relocation of an existing dealer within its area of responsibility as defined in the franchise agreement shall not be subject to this section, if the proposed relocation site is within five miles of its existing location and is not within a radius of five miles of an existing dealer of the same line make.

Minn. Stat. §80E.14, subdivision 1.

As one can see, the statute sets forth in great detail the process that both dealers and manufacturers of new motor vehicles must go through before a new dealership location can be established or an existing dealer can be relocated. The Minnesota Supreme Court recently jumped into the middle of this statutory process by issuing an opinion regarding how the statute should be interpreted and applied. Wayzata Nissan, LLC v. Nissan North America, Inc., 875 N.W.2d 279 (Minn. 2016). The case has a long and detailed procedural and factual background. The Supreme Court decision limits the potential applicability of the safe-harbor provision and emphasizes the importance of timing in the sale and relocation of a dealership.

Factual Background

Wayzata Nissan, LLC (Wayzata) operated a Nissan dealership located in Wayzata, Minnesota. Feldmann Imports, Inc. (Feldman) operated a Nissan dealership in Bloomington, Minnesota. In March 2014, Feldmann entered into an agreement to sell its dealership. Nissan North America, Inc. (Nissan), however, held a right of first refusal to purchase the dealership. Nissan exercised its right of first refusal and then assigned those rights and sold the dealership to Stephen McDaniels (McDaniels). McDaniels purchased property in Eden Prairie and intended on moving the dealership to Eden Prairie.

Wayzata heard rumors of the relocation/opening of the dealership in Eden Prairie and contacted Nissan as it was concerned about the impact the relocation would have on its business. The proposed site for the dealership in Eden Prairie was 7.6 miles from Wayzata’s dealership. On May 8, 2014, Nissan sent a letter to Wayzata informing Wayzata that it intended to allow Feldmann or Feldmann’s successor to relocate the Bloomington dealership to a location within 10 miles of the Wayzata dealership. The letter indicated that because Nissan was relocating an existing dealership it was not required to provide written notice as it was exempted under the safe-harbor provision of the MVSDA.

In July 2014, McDaniels entered into a sublease with Feldman and began operating the dealership in Bloomington with the understanding that the McDaniels would close the dealership and move to a new location. Feldman intended on using the property where the Bloomington dealership was located for a different business. On July 24, 2014, Nissan approved McDaniels as a dealer and approved the relocation of the dealership to Eden Prairie. McDaniels began operating the dealership in Bloomington on July 28, 2014.

Procedural Background

Pursuant to the provisions of the MVSDA, Wayzata filed a lawsuit in Hennepin County challenging the decision by Nissan to establish/relocate the dealership to a location that was 7.6 miles from Wayzata’s dealership. Under the provisions of the statute, Wayzata filed a motion for an injunction preventing the relocation/establishment of the dealership in Eden Prairie. Nissan argued that under safe-harbor provision of the statute it was exempt from being required to provide notice and establishing good cause because it was relocating an existing dealer to a location within five miles of its current dealership location and that the new location was not within five miles of the location of Wayzata’s dealership. There was no dispute that the Eden Prairie location was within five miles of the Bloomington dealership and that it was not within five miles of the Wayzata dealership.

Wayzata argued to the District Court that the notice and good cause requirements of the statute applied on May 8, 2014, when Nissan first intended to allow the dealership to relocate to Eden Prairie. Wayzata further argued that on May 8, 2014, McDaniels was not an existing dealer because he did not start operating the dealership until July 28, 2014. As such, Wayzata argued, the safe-harbor provision in the statute for the “relocation of an existing dealer” did not apply.

The District Court actually accepted both of Wayzata’s arguments. It held that the manufacturer must give notice once it develops a “sufficiently definite intention” to relocate a dealership. Based on these facts the District Court held that Nissan’s intention was developed on May 8, 2014, at the latest. It also held that McDaniels was not an existing dealer at that time. Nevertheless, the District Court denied Wayzata’s motion. The District Court held that the MVSDA uses “dealer” and “dealership” interchangeably. As such, the District Court held that the interpretation of the safe-harbor provision should not be strictly limited to the relocation of a “dealer.” The District Court held that even if McDaniels was not a dealer on May 8, 2014, Nissan intended to relocate an existing dealership from Bloomington to Eden Prairie and, therefore, fell within the safe-harbor provision and was exempt from providing notice and establishing good cause under the statute.

On September 26, 2014, Wayzata filed an appeal from the District Court’s decision. McDaniels relocated the dealership to Eden Prairie on November 1, 2014. On appeal, Nissan and McDaniels argued that the appeal was moot because the dealership had already been relocated to Eden Prairie. The Court of Appeals rejected this argument, holding that McDaniels could be enjoined from continuing operations at the Eden Prairie location if Wayzata ultimately prevailed on its claims. Wayzata Nissan, LLC v. Nissan North America, Inc., 865 N.W.2d 75, 79 (Minn. App. 2015). As to the merits of the appeal, the Court of Appeals affirmed the decision of the District Court, albeit on different grounds.

The Court of Appeals rejected the District Court’s conclusion that “dealer” and “dealership” are interchangeable as used in the MVSDA and rejected the District Court’s conclusion that the statute requires the determination of an “existing dealer” at the time the intention to relocate is developed. Instead the Court of Appeals held that the plain language of the statute requires the court to determine the “status of the relocating dealer at the time of the relocation.” Id. at 82. The Court of Appeals held that McDaniels was an existing Nissan dealer as of July 28, 2014, and, therefore, on November 1 when the Bloomington dealership was relocated to Eden Prairie, he was an existing dealer entitled to the protections of the safe-harbor provision of the MVSDA. As such, the Court of Appeals affirmed the decision of the District Court in holding that no notice was required and that Nissan was not required to establish good cause under the statute. The Minnesota Supreme Court granted Wayzata’s petition for review.

Minnesota Supreme Court Decision

The first issue the Supreme Court tackled was the claim of mootness. In affirming the Court of Appeals decision on this issue, the Supreme Court noted that in addition to injunctive relief, Wayzata, if it ultimately prevailed on its claims, could obtain damages under Minn. Stat. §80E.17 and, as such, since effective relief was available, the appeal was not moot. Wayzata Nissan, LLC, 875 N.W. 2d at 283-84.

Next, the Supreme Court addressed the issue of when the notice provided for under that statute was required to be sent. In interpreting the plain language of the statute, the Supreme Court held that the statute clearly requires “a manufacturer to notify a dealer of the ‘intention’ to relocate an existing dealership before the manufacturer ‘seeks to enter’ into a contract to relocate the dealership.” Id. at 285 (emphasis in original).  As such, the Supreme Court rejected the Court of Appeals decision and held that “notice is required on the date that manufacturer develops the intention to authorize a relocation, not on the date of the physical relocation of a dealership.” Id. at 286. In this case, that date was May 8, 2014, the date on which Nissan developed the intention to relocate the Bloomington dealership. Id. 

Once the notice date was established, the Supreme Court looked at whether the safe-harbor provision of the MVSDA applied on that date and exempted Nissan from providing the required notice and establishing good cause. In conducting this analysis the Supreme Court looked at whether the terms “dealer” and “dealership” are used interchangeably in the MVSDA or if they have different meanings. Interpreting Minn. Stat. §80E.03, subd. 3 of the MVSDA, the Supreme Court held that statutory definition of “dealer” is “a person or entity engaged in the business of selling new motor vehicles pursuant to a franchise with a manufacturer.” Id. at 287. As “dealership” is not defined in the MVSDA, the Supreme Court looked at dictionary definitions and determined that in the MVSDA the legislature used the word “dealership” to mean a “trading establishment” or “business.” Id. Using those definitions the Supreme Court held that the phrase “existing dealer” in the safe-harbor provision “refers to the person or entity that is operating a dealership on the date that the manufacturer develops a definite intention to relocate the dealership.” Id.  Based on this definition the “existing dealer” on May 8, 2014, was Feldmann and the relocated dealership was going to be operated by a new dealer – McDaniels. Accordingly, the Supreme Court held that the safe-harbor provision did not apply and Wayzata was entitled to receive notice and a good-cause hearing. Id. at 287-88. The Supreme Court reversed the Court of Appeals decision on this issue and remanded the case to the District Court for further proceedings consistent with its opinion. 

Conclusion  

The Supreme Court decision in the Wayzata Nissan case is an important cautionary tale for manufacturers and another potential defense/claim for dealers. The decision makes clear that manufacturers are required to give notice of establishing or relocating existing dealers as soon as they develop a definite intention to establish or relocate the dealership and cannot wait until the relocation actually occurs. The ruling potentially has a major impact on the applicability of the safe-harbor provision in the MVSDA.

For all practical purposes, the Supreme Court’s ruling in Wayzata Nissan makes it highly unlikely that a manufacturer will be able to invoke the safe-harbor provision in connection with the sale and relocation of a dealership. The fact is that in most cases if a dealer is going to sell its dealership to a third party who is going to relocate the dealership, the dealer is going to get approval from the manufacturer prior to the completion of the sale and/or the relocation. Under the Wayzata Nissan decision that means that the manufacturer will always be required to give the notice required under the MVSDA at that time – when it has developed an intention to relocate the dealership. With the sale not completed yet, the “existing dealer” under the MVSDA will be the current dealer, not the third party purchasing the dealership. The manufacturer will only be able to take advantage of the safe-harbor provision in the rare case when the existing dealer moves the dealership to the new location before the sale is completed. An unlikely scenario in most circumstances. Thus, manufacturers may find it much harder to take advantage of the safe-harbor provision in connection with the sale and relocation of a dealership.


LEGISLATIVE UPDATES

Wisconsin Passes Law Addressing Joint Employer Issue

Wisconsin has joined several other states that have enacted legislation which provides that neither a franchisee nor an employee of a franchisee will not be considered an employee of a franchisor.  Through Senate Bill No. 422 approved on March 1, 2016, and effective March 3, 2016, Wisconsin enacted new statutory sections for several areas of the law, including: fair employment law, worker’s compensation, wage and hour laws and unemployment insurance.  A new provision was added to each of those areas which provides that a franchisor is not the employer of a franchisee or of an employee of a franchisee unless: (1) the franchisor has agreed in writing to assume that role; or (2) the franchisor has been found by the governing authority to have exercised control over the franchisee, or its employees, that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.  Wisconsin’s new legislation follows several other states in attempting to statutorily address the joint employer issue and the potential new standard arising from the National Labor Relations Board’s decision in the Browning-Ferris matter issued in August 2015.


RECENT CASE LAW

Wisconsin Court Enforces Forum Selection Clause and Orders WFDL claim to be decided in Florida

Plaintiff Brava Salon Specialists, LLC (Brava) filed a lawsuit in Wisconsin against Label.M USA, Inc. (Label.M) asserting claims of breach of contract, tortious interference with contract and violations of the Wisconsin Fair Dealership Law (WFDL). Pursuant to 28 U.S.C. §1404(a), Label.M filed a motion to transfer the case to the Southern District of Florida, arguing that the asserted claims arose under a distribution agreement which contains a forum selection clause requiring disputes to be resolved in Florida. The District Court relied on the recent U.S. Supreme Court decision noting that when a party seeks to transfer a case pursuant to a contractual forum selection clause “a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.” Atlantic Marine Construction Co. v. U.S. District Court for Western District of Texas, 134 S.Ct. 568, 575 (2013). Brava’s sole argument against the motion was that enforcing the forum selection clause would conflict with the “strong public policy behind the WFDL.” The District Court noted that Brava’s argument was really a choice of law argument and not a forum selection clause argument. The court held that Brava had failed to identify any reason why a Florida court could not apply the WFDL if it was found to apply to the facts of the case. Cases cited by Brava in which a Wisconsin court had refused to enforce a forum selection clause when the plaintiff had asserted a WFDL claim where not applicable, according to the court. In those cases, the court gave weight to the plaintiff’s choice of forum and the other court’s lack of familiarity with the WFDL. The District Court held that under Altantic Marine the court can no longer consider either of those factors if there is a valid and enforceable forum selection clause agreed to by the parties. Because there were no §1404(a) factors to support an argument that the forum selection clause should not be enforced, the District Court granted the motion and transferred the case to Florida. Brava Salon Specialists, LLC v. Label.M USA, Inc., No. 15-CV-631-BBC, 2016 WL 632649 (D. Wis. Feb. 16, 2016).  

Florida Court Holds That Florida Motor Vehicle Department Does Not Have Exclusive Jurisdiction over Adequacy-of-Representation Determination

Plaintiff Pompano Imports, Inc. d/b/a Vista Motor Co. (Vista) filed a lawsuit in state court against BMW of North America, LLC (BMW) and BMW of Delray Beach (Delray) seeking to enjoin BMW from establishing Delray as a new BMW dealer. BMW removed the action to federal court claiming that Delray had been fraudulently joined as a defendant and should be disregarded. If Delray was not in the case, diversity of citizenship exists and removal to federal court was proper. BMW then moved to dismiss, while Vista moved to remand. Under Florida law if a motor vehicle manufacturer seeks to establish a new dealer it must give notice to the Florida Department of Highway Safety and Motor Vehicles (Department). Notice is then provided to other dealers of the same line-make within a certain radius of the proposed new dealership. Those dealers can protest the establishment of the new dealer and if they do the Department must deny the new dealership unless the manufacturer demonstrates that the existing dealers are not providing adequate representation of the line-make of motor vehicles in the territory. When Vista learned of BMW’s intent to establish Delray as a new dealer in its territory it filed this lawsuit seeking, inter alia, a declaratory judgement against BMW and Delray that they could not satisfy the adequate representation requirement under Florida law. Vista later filed protests with the Department, thereby prohibiting BMW from licensing Delray as a new dealer until it could demonstrate the lack of adequate representation. The protests were pending and had not yet been heard at the time the motion was heard by the court. The primary issue addressed by the court was whether or not Vista had a valid claim against Delray – if not, then Delray should not be joined in the action and remand should be denied. BMW argued there was no claim against Delray because: (1) Vista failed to exhaust its administrative remedies and the Department has exclusive jurisdiction over the adequacy-of-representation issue; and (2) the court has no jurisdiction under the Florida Declaratory Judgment Act because there was no bono fide, present controversy. The court rejected the first argument holding that it was not clear that Vista was required to exhaust its administrative remedies prior to filing the lawsuit. The court noted that no Florida court has held or found that the Department has exclusive jurisdiction over the adequacy-of-representation determination. The court further noted that Florida courts have held that the Department does not have exclusive jurisdiction to make other determinations relating to motor vehicle dealership issues. As to the second argument, the court indicated that it had doubts about whether or not Vista had a bona fide controversy that needed a declaration, especially given the fact that Vista had already filed the required protests, had prevented the licensing of Delray and had a pending hearing for the adequacy-of-representation determination. However, the court found that given the broad, “almost unlimited scope,” of Florida’s Declaratory Judgment Act, it could not find that there was “no possibility” of Vista establishing a bona fide need for the declaration. As such, the court held that Vista had not fraudulently joined Delray and the case was remanded to state court. Pompano Imports, Inc. v. BMW of North America, LLC, No. 15-23491-CIV-MORENO, 2016 WL 958629 (S.D. Fl., March 8, 2016).

Illinois Court Dismisses Franchisees Fraudulent Misrepresentation Claim

Franchisee PSTEVO, LLC (PSTEVO) filed several counterclaims against franchisor Fantastic Sams Salons Corp. (Fantastic Sams), including a claim for fraudulent misrepresentation. PSTEVO claimed agents of Fantastic Sams represented that PSTEVO’s salon would be profitable after three months of operating the salon. Fantastic Sams moved to dismiss this claim asserting that it was barred by two disclaimers set forth in the agreements signed by PSTEVO. The first disclaimer stated: “No oral, written or visual claim or representation which contradicted the disclosure document was made to me, except: ________.” The second disclaimer stated: “No oral, written or visual claim or representation which stated or suggested any sales, income or profit levels was made to me, except: ________.” After each disclaimer, PSTEVO wrote “none” and initialed the response. Fantastic Sams argued that given these disclaimers, PSTEVO could not have relied on any alleged representation and reliance is a necessary element of a fraudulent misrepresentation claim. PSTEVO argued that the first disclaimer was not applicable because it was not alleging that the misrepresentation contradicted the disclosure document and, in fact, claimed that the same alleged misrepresentation was contained in the disclosure document. The court agreed and concluded that the first disclaimer did not bar the fraudulent misrepresentation claim. PSTEVO argued that the second disclaimer did not apply because it was not claiming that a representation of profitability was made but rather that a representation of “minimum viability” was made.  The court rejected this argument and held that the second disclaimer expressly disclaims and bars the precise representation which PSTEVO now alleges was made. As such, the court dismissed the fraudulent misrepresentation claim with prejudice. Fantastic Sams Salons Corp. v. PSTEVO, LLC, No. 15 C 3008 (E.D. Illinois, January 15, 2016).

Minnesota Court Dismisses Claim Under the Minnesota Agricultural Equipment Dealer Act

Plaintiff LTJ Enterprises, Inc. (LTJ) manufactured and sold a product called the LevAlert. The LevAlert was a device used to determine the level of material in a grain bin. Defendant Custom Marketing Co., LLC (CMC) is a dealer that sold grain and bin equipment in the agricultural industry. CMC initially purchased the LevAlert from LTJ’s distributor and then sold it to its end-use customers. When the distributor went out of business CMC was able to purchase the LevAlert directly from LTJ and received preferred pricing from LTJ, the only company in the United States that received such preferred pricing. In 2011, LTJ discontinued the preferred pricing to CMC and began selling direct to CMC’s customers. CMC developed its own product, similar to the LevAlert, called the Grain Gauge. LTJ filed a lawsuit alleging that the Grain Gauge infringed on its patent for the LevAlert, along with various other claims including trademark infringement, unfair competition, deceptive trade practices and tortious interference. CMC filed a counterclaim for tortious interference and for violation of the Minnesota Agricultural Equipment Farm Dealership Act (MAEFDA) for unilaterally terminating the preferred pricing on the LevAlert. The parties filed cross motions for summary judgment. The court granted CMC’s motion for summary judgment and dismissed all of LJT’s claims.  The court also granted LJT’s motion for summary judgment and dismissed all of CMC’s counterclaims, including the MAEFDA claim. In dismissing the MAEFDA claim the court examined the issue of whether LJT was a farm equipment manufacturer which required a determination of whether or not the LevAlert fell within the definition of “farm equipment.” The court held that an item is considered farm equipment if it satisfies one of two definitions. The first definition is “equipment and parts for equipment including, but not limited to trailers, combines, tillage implements, balers, skid steer loaders, attachments and repair parts for them.” The court held that the LevAlert did not fall within the category of these items as they all refer to large, expensive pieces of machinery, while the LevAlert was a small, mostly plastic, non-motorized device that retails for about $100. Moreover, the court held, that the LevAlert was not an “attachment” or “repair part” for such a device. The second, alternative definition of “farm equipment” under the act is “other equipment, including attachments and repair parts, used in the planting, cultivating, irrigation, harvesting and marketing of agricultural products.”  The court held that the LevAlert is designed to be used by affixing it to a side of a bin. It is not used in the planting, harvesting, irrigation, cultivating or marketing of agricultural products. As such, the court held that while the LevAlert is used in an agricultural setting it does not fall within the definition of “farm equipment” as set forth in the MAEFDA. As the LevAlert is not farm equipment, LJT is not a farm equipment manufacturer. As such, the court held that CMC’s counterclaim under the MAEDA fails as a matter of law. LTJ Enterprises, Inc. v. Custom Marketing Co., LLC, No. 13-CIV-2224 (ADM/LIB), 2016 WL 916368 (D. Minn. March 10, 2016).

Ninth Circuit Refuses to Enforce Arbitration Clause in Franchise Agreement

Plaintiff ItalFlavors, LLC (ItalFlavors) and Defendant Casa Del Caffe Vergnano S.P.A (Caffe Vergnano) entered into a Franchise Agreement dated September 23, 2010, during a three hour meeting in Italy. The Franchise Agreement granted ItalFlavors the right to open a franchise in California. The Franchise Agreement also contained an arbitration clause which required any dispute, controversy or claim arising out of or in connection with the agreement, or the breach, termination or validity thereof, to be resolved in arbitration. Later during the same three hour meeting, the parties entered into a Hold Harmless Agreement which provided that the Franchise Agreement, previously entered into by the parties, does not have any validity or effectiveness between the parties. Caffe Vergnano had concerns that the Franchise Agreement did not conform with United States franchise laws and wanted to shield itself from liability by making the contract void, but allowing the individual owners of ItalFlavors to use the Franchise Agreement to obtain a visa. The parties testified that they planned to later enter into and sign a binding agreement as to the operation of the franchise. They never did. ItalFlavors opened the franchise in San Diego in April 2011, but by December 2011, the franchise was closed due to financial struggles. ItalFlavors sued Caffe Vergnano in California asserting violations of the California Franchise Investment Law alleging that Caffe Vergnano failed to provide the promised support. Caffe Vergnano moved to compel arbitration based on the arbitration clause in the Franchise Agreement. The District Court held that given the broad arbitration clause the decision on whether the arbitration clause in the franchise agreement survived after the Hold Harmless Agreement should be submitted to the arbitrator and, therefore granted Caffe Vergnano’s petition. ItalFlavors appealed the decision. On appeal, the Ninth Circuit held that the threshold issue to be determined is whether the Franchise Agreement constituted a binding agreement at all – if it did not, the arbitration clause is not enforceable. The Ninth Circuit stated that looking at the Franchise Agreement and the contemporaneously executed Hold Harmless Agreement it is clear that the Franchise Agreement was a sham agreement and that the parties did not manifest their intent to be bound by the Franchise Agreement. As such, the Ninth Circuit held that the arbitration clause was unenforceable and reversed the decision of the District Court. Case Del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, No. 13-56091, 2016 WL 1016779 (9th Cir. March 15, 2016).