Auto Dealer Can Bring 'Bad Faith'

Audi moved to dismiss Parktown's administrative proceeding, arguing that the “capricious, in bad faith, or unconscionable standard” in '407.825(1) could not be the basis of a protest because another provision of the statute ('407.817) deals specifically with protests related to proposed additional dealerships. Parktown was too far away under the statute to block the additional dealership under the latter provision. The agency agreed with Audi and dismissed Parktown's administrative action. It concluded that '407.817 was a later-enacted and more specific provision that controlled over the general prohibitions of '407.825(1). Therefore, the agency lacked jurisdiction to hear the application.

Reversal Problematic

In reversing the dismissal, the court of appeals found “[t]here is little doubt” that a dealership could have challenged a manufacturer's conduct in proposing a new dealership “damagingly close” to the existing dealership as conduct that was capricious, in bad faith, or unconscionable before the statute was amended in 2001 to include '407.817, the provision specifically related to protests of new dealerships. The court found that the two sections “do not address the same subject matter.” The new provision regulates any plan to add a dealership when existing dealerships are within the relevant market area (with notice and protest provisions). The older provision ('407.825(1)) provides relief only from conduct of a manufacturer that is capricious, in bad faith, or unconscionable and does not require notice to the dealership of proposed additional dealerships.

The court also found that even if there were overlap in the subject matter of the two provisions, this overlap would not establish that '407.817 was the sole means to challenge an additional dealership, even though it deals specifically with additional dealerships. The court concluded that there is no necessary repugnancy between the provisions because the geographical standing and timing requirements of '407.817 do not extend to Parktown the procedural advantages reserved by the statute. That provision remains available only to those dealerships falling within the relevant market area and filing their administrative actions in the allotted time frame. In so ruling, the court explained that it took into account the purpose of the statute, which the court found was to protect dealerships from “the harsh economic inequities inherent in the relationship between dealerships and manufacturers.” The court found it “difficult” to reach the conclusion that the legislature intended the addition of '407.817 to limit protections granted to dealerships rather than to expand them. The additional dealership provision was apparently drafted “as a preliminary roadblock to protect dealerships from unnecessary competition in markets that would not support additional sales points.” The court found that the section presumes that dealers would be injured unnecessarily by such competition and places the burden of notifying the dealership and showing good cause before acting on the manufacturer: “It would be absurd for this court to hold that, simply because the conduct of a manufacturer is related to the establishment of a new sales point and the dealership is without standing to bring an add-point protest under '407.817, the manufacturer would not be bound by the limitations placed on its conduct by '407.825(1).” The court also rejected Audi's constitutional arguments, including the argument that allowing a complaint under '407.825(1) would essentially create a statewide automatic add point protest right, reasoning that only dealerships with standing under '407.825(1) are those that have been dealt with in a manner designated as unlawful and that have been directly damaged.

The matter is now before the Missouri Supreme Court. The Parktown decision should be troubling to automobile manufacturers and other franchisors that deal with statutes that regulate the establishment of additional dealerships or franchise locations. One potential issue, which the Parktown court did not address, is what could happen when a dealer that has no standing under the additional dealership statute and was therefore not required to be given notice of the proposed additional dealership (within the 30-day timing requirement for filing a protest) nevertheless tries to block an additional dealership or relocation under the “generic” “bad faith” provision. Because there is apparently no expedited time frame for resolving “generic” claims for claimed capricious, bad faith, or unconscionable conduct, the protesting dealership could tie up the litigation, which could affect the new or relocating dealership's plans. Under Parktown's reasoning, the claim would not necessarily be barred as a matter of law, and the manufacturer (and perhaps the new or relocating dealer) could face substantial claims for damages and perhaps injunctive relief to try to shut down the new dealership. Even under the best-case scenario, the manufacturer would potentially have to hire attorneys, endure expensive and burdensome discovery, win on a motion for summary judgment, and defend appeals for several years.

Douglas M. Mansfield and J. Todd Kennard are partners in the Columbus, OH, office of Jones Day. They can be contacted at 614-281-3943 or 614-281-3989, and [email protected] or jtkennard@jones day.com, respectively. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated.

An appellate court recently ruled that an automobile dealership that could not file suit to enjoin an additional dealership under the statute's specific additional “add-point” statute could nevertheless file an administrative proceeding based on a “generic” statute that prohibits conduct by a manufacturer that is “capricious, in bad faith, or unconscionable.” See Parktown Imports, Inc. v. Audi of America, No. 2008 WL 2651175 (Mo. Ct. App. W.D. July 8, 2008). The Missouri Administrative Hearing Commission dismissed the dealer's application for review, but the court of appeals reversed the dismissal. The appellate decision (which is on further appeal) sets a precedent with potentially serious implications for automobile manufacturers and other franchisors or distributors because it allows actions to block network changes on a mere claim of “bad faith” even when there is no standing to bring suit under a specific provision governing network changes.

The protesting dealer, Parktown Imports, Inc. (one of two Audi dealerships in the St. Louis area), filed an application for review contesting Audi's decision to establish a new motor vehicle dealership within 10 miles of Parktown's dealership. The application alleged that Audi engaged in conduct that was capricious, in bad faith, or unconscionable and therefore violated '407.825(1) of the Missouri Revised Code. Parktown further claimed that in 2004, Audi had invited Parktown to submit an application to acquire a new stand-alone dealership west of St. Louis. Parktown responded that it did not want to relocate and that it did not think the market could support three Audi dealerships. Audi then sent a letter explaining that the third dealership location was not a final decision and that it would base its decision on the proposals received from area dealerships. Parktown also asserted that in May 2005 Audi suggested that if Parktown were to replace its current facility with a new stand-alone facility of Audi's design, the manufacturer would not establish the third dealership. At a subsequent meeting, Audi proposed that if Parktown were willing to buy Plaza Motors (the other St. Louis dealership), Audi would grant Parktown a right of first refusal to open a new sales point in the area west of St. Louis. Parktown did not accept the proposal and claimed that in the fall of 2005 Audi told Parktown that it was no longer pursuing a third dealership.

About a year later, Audi attempted to buy Plaza Motors. When Plaza refused Audi's offer, Audi informed Parktown that the third location would be re-opened. Parktown claimed it was told that a third dealership would be operated within 10 miles of Parktown's dealership on the same road, and that the dealership would be established because of Audi's dissatisfaction with Parktown's location and sales capacity. Parktown asserted that the proposed facility would not meet Audi's original specifications for a third dealership for two reasons: It was not in the area originally proposed, and it would not be a stand-alone facility. Parktown claimed that another applicant (that Audi rejected) was willing to open an exclusive dealership in the location Audi had originally designated. Parktown alleged that the decision to open the new dealership was in retaliation for Parktown's rejection of Audi's proposals and that Audi's conduct was capricious, in bad faith, and unconscionable.

Audi moved to dismiss Parktown's administrative proceeding, arguing that the “capricious, in bad faith, or unconscionable standard” in '407.825(1) could not be the basis of a protest because another provision of the statute ('407.817) deals specifically with protests related to proposed additional dealerships. Parktown was too far away under the statute to block the additional dealership under the latter provision. The agency agreed with Audi and dismissed Parktown's administrative action. It concluded that '407.817 was a later-enacted and more specific provision that controlled over the general prohibitions of '407.825(1). Therefore, the agency lacked jurisdiction to hear the application.

Reversal Problematic

In reversing the dismissal, the court of appeals found “[t]here is little doubt” that a dealership could have challenged a manufacturer's conduct in proposing a new dealership “damagingly close” to the existing dealership as conduct that was capricious, in bad faith, or unconscionable before the statute was amended in 2001 to include '407.817, the provision specifically related to protests of new dealerships. The court found that the two sections “do not address the same subject matter.” The new provision regulates any plan to add a dealership when existing dealerships are within the relevant market area (with notice and protest provisions). The older provision ('407.825(1)) provides relief only from conduct of a manufacturer that is capricious, in bad faith, or unconscionable and does not require notice to the dealership of proposed additional dealerships.

The court also found that even if there were overlap in the subject matter of the two provisions, this overlap would not establish that '407.817 was the sole means to challenge an additional dealership, even though it deals specifically with additional dealerships. The court concluded that there is no necessary repugnancy between the provisions because the geographical standing and timing requirements of '407.817 do not extend to Parktown the procedural advantages reserved by the statute. That provision remains available only to those dealerships falling within the relevant market area and filing their administrative actions in the allotted time frame. In so ruling, the court explained that it took into account the purpose of the statute, which the court found was to protect dealerships from “the harsh economic inequities inherent in the relationship between dealerships and manufacturers.” The court found it “difficult” to reach the conclusion that the legislature intended the addition of '407.817 to limit protections granted to dealerships rather than to expand them. The additional dealership provision was apparently drafted “as a preliminary roadblock to protect dealerships from unnecessary competition in markets that would not support additional sales points.” The court found that the section presumes that dealers would be injured unnecessarily by such competition and places the burden of notifying the dealership and showing good cause before acting on the manufacturer: “It would be absurd for this court to hold that, simply because the conduct of a manufacturer is related to the establishment of a new sales point and the dealership is without standing to bring an add-point protest under '407.817, the manufacturer would not be bound by the limitations placed on its conduct by '407.825(1).” The court also rejected Audi's constitutional arguments, including the argument that allowing a complaint under '407.825(1) would essentially create a statewide automatic add point protest right, reasoning that only dealerships with standing under '407.825(1) are those that have been dealt with in a manner designated as unlawful and that have been directly damaged.

The matter is now before the Missouri Supreme Court. The Parktown decision should be troubling to automobile manufacturers and other franchisors that deal with statutes that regulate the establishment of additional dealerships or franchise locations. One potential issue, which the Parktown court did not address, is what could happen when a dealer that has no standing under the additional dealership statute and was therefore not required to be given notice of the proposed additional dealership (within the 30-day timing requirement for filing a protest) nevertheless tries to block an additional dealership or relocation under the “generic” “bad faith” provision. Because there is apparently no expedited time frame for resolving “generic” claims for claimed capricious, bad faith, or unconscionable conduct, the protesting dealership could tie up the litigation, which could affect the new or relocating dealership's plans. Under Parktown's reasoning, the claim would not necessarily be barred as a matter of law, and the manufacturer (and perhaps the new or relocating dealer) could face substantial claims for damages and perhaps injunctive relief to try to shut down the new dealership. Even under the best-case scenario, the manufacturer would potentially have to hire attorneys, endure expensive and burdensome discovery, win on a motion for summary judgment, and defend appeals for several years.

Douglas M. Mansfield and J. Todd Kennard are partners in the Columbus, OH, office of Jones Day. They can be contacted at 614-281-3943 or 614-281-3989, and [email protected] or jtkennard@jones day.com, respectively. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated.