New 'Dualing' Amendments to Dealer-Protection Laws Pass Legislatures

Impact on Automakers and Possible Legal Issues

A manufacturer makes very significant investments in its branding strategy and its unique image that it tries to convey to customers. The recent amendments could eviscerate those efforts by severely curtailing, if not effectively eliminating, a manufacturer's ability to prohibit a dealer from conducting competitive operations out of the same store. Marketing expenditures to promote a brand over the years may be compromised if the manufacturer is forced to allow a competitor's products to be sold out of the same facility. Manufacturers could also expect to lose confidential competitive information, which manufacturers routinely provide to dealers.

There are several potential legal arguments to challenge the legislation. There is “legitimate reason for a manufacturer's desire to exert control over the manner in which [its] products are sold and serviced.” Cont'l T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 55 n.23 (1977). Exclusivity provisions can be based on a desire to focus a dealer's efforts on the manufacturer's product line(s) and, in turn, on limiting the chances that the manufacturer's marketing and investment efforts in attracting customers will be lost to competitors. See Brattleboro Auto Sales, Inc. v. Subaru of New England, Inc., 633 F.2d 649, 652 (2d Cir. 1980) (party could reasonably have concluded that sales and service of Subaru cars would suffer as a result of simultaneous promotion of several lines of directly competing cars); Hendricks Music Co. v. Steinway, Inc., 689 F. Supp. 1501, 1513 (N.D. Ill. 1988) (“Steinway is wholly dependent on the efforts of its network of exclusive and independent dealers to promote its name and its product line,” and “allowing the existence in one dealership of two competing [concert and artist] programs could create conflicts of interest within the dealership in attempting to represent the two different programs.”). Pro-dualing legislation contradicts those policies and the manufacturer's business judgment concerning the sales and service of its own products.

Trademark law also might provide a basis for objection. “The right to use a trademark is recognized as a kind of property, of which the owner is entitled to the exclusive enjoyment to the extent that it has been actually used.” J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition ' 214 (4th ed. 2008) (internal quotation omitted). As one federal appellate decision noted, “'the cornerstone of a franchise system must be the trademark or trade name of a product.'” Susser v. Carvel Corp., 332 F.2d 505, 516-17 (2d Cir. 1964) (Lumbard, C.J., writing for the majority in part and dissenting in part) (quoting district court). As the same court explained, “[t]he requirement that only Carvel products be sold at Carvel outlets derives from the desirability that the public identify each Carvel outlet as one of a chain which offers identical products at a uniform standard of quality. ' It is in the public interest that products sold under one particular trademark should be subject to the control of the trademark owner.” Id. at 517.

Section 15 U.S.C. ' 1125(a)(1)(A) provides that a civil action may be filed in connection with any goods or services that use a symbol or device that “is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person. '” If the amendments are interpreted to have the effect of limiting or infringing upon the manufacturer's right to control its trademarks, the legislation could arguably be pre-empted in part by federal trademark law. Confusion as to the source of a product or service, even if eventually dispelled, does not necessarily eliminate any trademark issue. See Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13 (7th Cir. 2002) (Lanham Act claim involving use of trademark and discussing “initial interest confusion”; “[c]ustomers believing they are entering the first store rather than the second are still likely to mill around before they leave”; “using another's trademark in one's metatags is much like posting a sign with another's trademark in front of one's store”) (internal quotation omitted)). If the added linemakes are perceived as having lower quality, the commingled operations could also dilute the original manufacturer's trademarks.

The legislation also might be vulnerable to constitutional arguments. In certain cases, intangible property rights protected by state law may deserve protection under the Takings Clause. See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003-04 (1984) (recognizing intangible property rights can be protected by the Takings Clause); Roth v. Pritikin, 710 F.2d 934, 939 (2d Cir. 1983) (copyrights protected by the Takings Clause). A manufacturer could argue that an order allowing a dealer to market other manufacturers' products where the original manufacturer has contracted to operate an exclusive facility would be a misappropriation of the original manufacturer's trademarks, goodwill, or other rights created by state law. Such an order is arguably tantamount to a permanent physical invasion because it “eviscerates the owner's right to exclude others from entering and using [its] property ' perhaps the most fundamental of all property interests.” Lingle v. Chevron U.S.A., Inc., 544 U.S. 528, 539 (2005). Thought could be given to other takings analyses under the balancing test articulated in Penn Cent. Transp. Co. v. New York City, which examines the character of the governmental action and the economic impact of the regulation on the claimant, particularly the extent to which the regulation has interfered with distinct investment-backed expectations. See generally 438 U.S. 104, 123 (1978).

The legislation also might be vulnerable to void-for-vagueness challenges. “It is established that a law fails to meet the requirements of the Due Process Clause if it is so vague and standardless that it leaves the public uncertain as to the conduct it prohibits or leaves judges and jurors free to decide, without any legally fixed standards, what is prohibited and what is not in each particular case.” Giacco v. State of Pennsylvania, 382 U.S 399, 402-03 (1966). See also Bass Plating Co. v. Town of Windsor, 639 F. Supp. 873, 881 (D. Conn. 1986) (“[w]hen persons of common understanding and intelligence must guess at a rule's meaning and differ in its application then it is impermissibly vague.”). Terms in the amendments such as “current economic circumstances” might be subject to challenge because they do not allow a manufacturer to know in advance whether its business judgment will be overturned by an agency on an arbitrary basis. That is particularly concerning, given that some statutes purport to allow or mandate an award of attorneys' fees if the manufacturer's business judgment is determined to be wrong.

Finally, the manufacturer can also challenge the amendments on the merits. If the dealer lacks the facilities, credit, or other criteria under the terms of the statute at issue, the court or agency may deny relief to the dealer seeking to add the competitive linemakes to the same facility under the statute's terms.

Rick J. Gibson, Jeffrey J. Jones, J. Todd Kennard and Douglas M. Mansfield are partners at Jones Day, in the Columbus, OH, office. They can be reached at 614-469-3939 or [email protected], [email protected], [email protected], or [email protected]. 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.

Historically, some automobile manufacturers have sought to focus their own dealers on that manufacturer's brands to the exclusion of competitive brands. Many auto dealer contracts prohibit “dualing,” that is, operating competing linemakes out of the same facility. Under new legislation passed in some states, automobile manufacturers could be forced to allow dualing, notwithstanding any terms to the contrary in written agreements and trademark laws.

The South Carolina legislature added new provisions that make it unlawful for a manufacturer to prohibit a dealer from being involved in managing, investing in, or acquiring any other make or line of new motor vehicles if: 1) “the requirements are unreasonable considering current economic conditions and are not otherwise justified by reasonable business considerations”; 2) the dealer has maintained a reasonable line of credit for each line; and 3) the dealer remains in compliance with reasonable capital standards and reasonable facilities requirements specified by the manufacturer. See S.C. Code Ann. ' 56-15-75. Under the new provision, “[r]easonable facilities requirements shall not include any requirement that a motor vehicle dealer establish or maintain exclusive facilities, personnel, or display space, unless the manufacturer or distributor establishes by a preponderance of the evidence that such requirements are justified by current economic conditions or reasonable business considerations.” Id.

The Illinois legislature passed a provision that makes it a violation for a manufacturer to require a dealer to exclude or remove competitive operations as long as the dealer maintains a reasonable line of credit for each line, the dealer remains in compliance “with any reasonable facilities requirements of the manufacturer,” and the addition of the linemake “would be reasonable,” among other things. See 815 Ill. Comp. Stat. 710/4(d)(8). The amendment expressly provides that “reasonable facilities requirement” “shall not include any requirement that a franchisee establish or maintain exclusive facilities, personnel, or display space,” and places the burden on the manufacturer to overcome the presumption that the dealer's decision is reasonable. Id.

Impact on Automakers and Possible Legal Issues

A manufacturer makes very significant investments in its branding strategy and its unique image that it tries to convey to customers. The recent amendments could eviscerate those efforts by severely curtailing, if not effectively eliminating, a manufacturer's ability to prohibit a dealer from conducting competitive operations out of the same store. Marketing expenditures to promote a brand over the years may be compromised if the manufacturer is forced to allow a competitor's products to be sold out of the same facility. Manufacturers could also expect to lose confidential competitive information, which manufacturers routinely provide to dealers.

There are several potential legal arguments to challenge the legislation. There is “legitimate reason for a manufacturer's desire to exert control over the manner in which [its] products are sold and serviced.” Cont'l T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 55 n.23 (1977). Exclusivity provisions can be based on a desire to focus a dealer's efforts on the manufacturer's product line(s) and, in turn, on limiting the chances that the manufacturer's marketing and investment efforts in attracting customers will be lost to competitors. See Brattleboro Auto Sales, Inc. v. Subaru of New England, Inc., 633 F.2d 649, 652 (2d Cir. 1980) (party could reasonably have concluded that sales and service of Subaru cars would suffer as a result of simultaneous promotion of several lines of directly competing cars); Hendricks Music Co. v. Steinway, Inc., 689 F. Supp. 1501, 1513 (N.D. Ill. 1988) (“Steinway is wholly dependent on the efforts of its network of exclusive and independent dealers to promote its name and its product line,” and “allowing the existence in one dealership of two competing [concert and artist] programs could create conflicts of interest within the dealership in attempting to represent the two different programs.”). Pro-dualing legislation contradicts those policies and the manufacturer's business judgment concerning the sales and service of its own products.

Trademark law also might provide a basis for objection. “The right to use a trademark is recognized as a kind of property, of which the owner is entitled to the exclusive enjoyment to the extent that it has been actually used.” J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition ' 214 (4th ed. 2008) (internal quotation omitted). As one federal appellate decision noted, “'the cornerstone of a franchise system must be the trademark or trade name of a product.'” Susser v. Carvel Corp., 332 F.2d 505, 516-17 (2d Cir. 1964) (Lumbard, C.J., writing for the majority in part and dissenting in part) (quoting district court). As the same court explained, “[t]he requirement that only Carvel products be sold at Carvel outlets derives from the desirability that the public identify each Carvel outlet as one of a chain which offers identical products at a uniform standard of quality. ' It is in the public interest that products sold under one particular trademark should be subject to the control of the trademark owner.” Id. at 517.

Section 15 U.S.C. ' 1125(a)(1)(A) provides that a civil action may be filed in connection with any goods or services that use a symbol or device that “is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person. '” If the amendments are interpreted to have the effect of limiting or infringing upon the manufacturer's right to control its trademarks, the legislation could arguably be pre-empted in part by federal trademark law. Confusion as to the source of a product or service, even if eventually dispelled, does not necessarily eliminate any trademark issue. See Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13 (7th Cir. 2002) (Lanham Act claim involving use of trademark and discussing “initial interest confusion”; “[c]ustomers believing they are entering the first store rather than the second are still likely to mill around before they leave”; “using another's trademark in one's metatags is much like posting a sign with another's trademark in front of one's store”) (internal quotation omitted)). If the added linemakes are perceived as having lower quality, the commingled operations could also dilute the original manufacturer's trademarks.

The legislation also might be vulnerable to constitutional arguments. In certain cases, intangible property rights protected by state law may deserve protection under the Takings Clause. See, e.g., Ruckelshaus v. Monsanto Co. , 467 U.S. 986, 1003-04 (1984) (recognizing intangible property rights can be protected by the Takings Clause); Roth v. Pritikin, 710 F.2d 934, 939 (2d Cir. 1983) (copyrights protected by the Takings Clause). A manufacturer could argue that an order allowing a dealer to market other manufacturers' products where the original manufacturer has contracted to operate an exclusive facility would be a misappropriation of the original manufacturer's trademarks, goodwill, or other rights created by state law. Such an order is arguably tantamount to a permanent physical invasion because it “eviscerates the owner's right to exclude others from entering and using [its] property ' perhaps the most fundamental of all property interests.” Lingle v. Chevron U.S.A., Inc., 544 U.S. 528, 539 (2005). Thought could be given to other takings analyses under the balancing test articulated in Penn Cent. Transp. Co. v. New York City, which examines the character of the governmental action and the economic impact of the regulation on the claimant, particularly the extent to which the regulation has interfered with distinct investment-backed expectations. See generally 438 U.S. 104, 123 (1978).

The legislation also might be vulnerable to void-for-vagueness challenges. “It is established that a law fails to meet the requirements of the Due Process Clause if it is so vague and standardless that it leaves the public uncertain as to the conduct it prohibits or leaves judges and jurors free to decide, without any legally fixed standards, what is prohibited and what is not in each particular case.” Giacco v. State of Pennsylvania, 382 U.S 399, 402-03 (1966). See also Bass Plating Co. v. Town of Windsor, 639 F. Supp. 873, 881 (D. Conn. 1986) (“[w]hen persons of common understanding and intelligence must guess at a rule's meaning and differ in its application then it is impermissibly vague.”). Terms in the amendments such as “current economic circumstances” might be subject to challenge because they do not allow a manufacturer to know in advance whether its business judgment will be overturned by an agency on an arbitrary basis. That is particularly concerning, given that some statutes purport to allow or mandate an award of attorneys' fees if the manufacturer's business judgment is determined to be wrong.

Finally, the manufacturer can also challenge the amendments on the merits. If the dealer lacks the facilities, credit, or other criteria under the terms of the statute at issue, the court or agency may deny relief to the dealer seeking to add the competitive linemakes to the same facility under the statute's terms.

Rick J. Gibson, Jeffrey J. Jones, J. Todd Kennard and Douglas M. Mansfield are partners at Jones Day, in the Columbus, OH, office. They can be reached at 614-469-3939 or [email protected], [email protected], [email protected], or [email protected]. 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.