Court Watch

Prior to the present ruling, the case had been before the Federal Circuit, which held that the dealers needed to establish that in a “but-for world,” where the government did not require the manufacturers to terminate the dealerships, the dealership agreements would have retained economic value. On remand from the Federal Circuit, the government argued that, absent intervention GM and Chrysler would have been liquidated, rendering the plaintiffs' dealerships worthless.

The dealerships collectively advanced three theories of but-for causation worthy of special attention: 1) Chrysler was financially able to survive absent intervention and, furthermore, that Chrysler would have kept its dealerships open; 2) some or all of GM and Chrysler would have been purchased by a third party in bankruptcy and the dealerships would have been kept open; and 3) even if GM and Chrysler entered bankruptcy, the dealerships would have retained value by continuing dealership operations during a wind down.

In advancing the argument that Chrysler could have survived the economic downturn absent receiving TARP financing, the dealers pointed out that in 2008 and 2009, Ford Motor Company, like Chrysler, was in a dire financial situation. Nevertheless, unlike Chrysler, Ford survived without TARP financing. While Ford's cash holdings were significantly larger than Chrysler's ' $6.3 billion for Ford, compared with $1.9 billion for Chrysler ' the court reasoned that expert testimony was necessary to determine whether Ford and Chrysler were apt comparisons. Thus, the court decided this theory could advance.

Next, two of the three dealers asserted that Fiat Automobiles or Daimler AG would have purchased Chrysler in bankruptcy; according to the dealers, in either event they would have been allowed to continue operations. In this regard, the dealers noted that in 2008 and 2009, Chrysler and Fiat were engaged in talks for a potential partnership, which culminated in a non-binding merger agreement giving Fiat a 35% stake in Chrysler. The dealers also brought forth evidence that Fiat was in a more secure financial position, having $4.8 billion cash on hand in 2008. Alternatively, the dealers asserted that Daimler, which owned 19.9% of Chrysler and had $6 billion cash on hand in 2008, would have purchased Chrysler. Given the evidence of possible suitors for Chrysler, the court allowed the theory that Chrysler would have been purchased to proceed. On the other hand, the court granted the government's motion to dismiss insofar as it concerned the theory of GM dealers that GM would have been purchased in bankruptcy. Fatal to this claim was the GM dealers' inability to identify a specific potential buyer.

Finally, the dealers alleged that even if the manufacturers were in bankruptcy, the dealers could have continued operating and therefore retained value. For instance, the dealers could sell existing inventory and parts, and could continue to repair and service vehicles. There was a precedent for this. When American Suzuki Motor Company entered bankruptcy, Suzuki kept its dealerships open. The court ruled the dealers' allegation that there was financial incentive to keeping the dealerships open was plausible, relying heavily upon the Suzuki example.

A number of interesting questions remain unresolved after this ruling in Colonial Chevrolet . One key question is whether the loss of the dealership agreements should be treated as a per se physical appropriation, or whether it should be addressed under the factors outlined in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978). In many cases, the distinction is dispositive; when a court applies Penn Central, the plaintiff must prove a reasonable investment-backed expectation that was interfered with. This is often fatal to takings claims in highly regulated industries. Interestingly, a footnote in Colonial Chevrolet suggests that the court thought the distinction made little discernible difference in the case. Specifically, the court opined that if the dealers could establish an economic loss on a but-for theory of causation, that would ” necessarily have also shown ' that they had a reasonable investment-backed expectation that their [dealership] agreements would not have been cancelled.” (Emphasis added.) If the case reaches the summary judgment stage, the issue of the proper characterization ' per se or regulatory taking ' will almost certainly be addressed then.

Michigan Court Transfers Case Brought By 41 Franchisees to Franchisor's Home State

In the case of Family Wireless #1, LLC v. Automotive Tech., Inc., 2015 U.S. Dist. LEXIS 115810 (E.D. Mich. Sept. 1, 2015), the Michigan Court not only applied the teachings of the U.S. Supreme Court's Atlantic Marine case, but went even further to transfer a case in the interest of judicial economy. In Family Wireless, 41 separate franchisees of Wireless Zone retail stores filed a lawsuit in federal court in Michigan against their Connecticut franchisor. The plaintiff franchisees owned more than 100 Wireless Zone stores in 13 different states. The defendant franchisor moved to transfer venue under 28 U.S.C. '1404(a) for the entire case to its home state of Connecticut or, in the alternative, to sever the case and transfer some plaintiffs' claims to Connecticut.

Every plaintiff's franchise agreement included a forum selection clause, designating that litigation “will only be brought in either the state or federal courts of Connecticut.” The parties agreed, however, that the forum selection clause was not valid for the Michigan and Indiana plaintiffs, because state statutes prohibited the application of such clauses. The parties disputed whether the Minnesota franchisees' forum selection clauses were valid, and agreed that the forum selection clauses were valid for all of the other plaintiffs.

Analyzing the defendant's motion to transfer venue, the court first considered whether it had personal jurisdiction over defendant, which is a threshold requirement for application of Section 1404(a). Defendant is a Connecticut company with its principle place of business in Connecticut. Although it had contacts with Michigan with respect to some plaintiffs, these contacts were not sufficient to confer general jurisdiction over the defendant. In addition, the claims brought by the plaintiffs located outside of Michigan were insufficient to establish specific jurisdiction. Even though the court found that it lacked personal jurisdiction under a traditional analysis, it concluded that the defendant had waived any objection to personal jurisdiction by not objecting to it at the time of the motion.

Finding personal jurisdiction, the court then turned to an analysis of Section 1404(a). For this analysis, it was necessary to divide the franchisees into two groups ' those with valid forum selection clauses and those without. The parties agreed that the clause was valid for most plaintiffs, but invalid under applicable state statutes for the plaintiffs from Michigan and Indiana. The only plaintiffs in dispute were those from Minnesota. The court interpreted Minnesota law as prohibiting a franchisor from “requiring litigation to be conducted outside of Minnesota.” It further interpreted the forum selection clause in the applicable franchise agreements to require litigation in Connecticut, which violated the Minnesota statute and was therefore invalid. Thus, the non-forum selection clause plaintiffs included the franchisees from Michigan, Indiana, and Minnesota.

The court then applied Section 1404(a) to determine whether to transfer the entire case to Connecticut, sever the case and transfer only the forum selection clause plaintiffs, or keep the entire case in Michigan. An analysis of Section 1404(a) includes consideration of private interests, such as the convenience of witnesses, the location of documents, the convenience of the parties, the locus of the operative facts, the relative means of the parties, and the plaintiff's choice of forum. The court also considers public factors, such as the forum's familiarity with the governing law, the trial efficiency and interests of justice.

Regarding the 24 plaintiffs with valid forum selection clauses, the court applied the United States Supreme Court case of Atlantic Marine Const. Co. Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S.Ct. 568 (Dec. 3, 2013), which requires that the private interest factors be given no weight where there is a valid forum selection clause.

For the other plaintiffs, the court acknowledged that normally a plaintiff's choice of forum is given substantial weight. That weight is lessened, however, where a plaintiff has little or no connection to the chosen forum. Here, the Indiana and Minnesota plaintiffs had no connection to Michigan. The Michigan plaintiffs obviously did, but the locus of operative facts, convenience of the parties, convenience of the witnesses, and location of documents all favored Connecticut. Therefore, the private interest factors weighed in favor of a transfer of the whole case to that state.

The public interest factors require the court to balance its interest in judicial economy with the bargain the parties made in the forum selection clause and the private interest factors that support a transfer. The court determined that it would be best to transfer the entire case in order to avoid duplicative litigation in two forums and the resulting inconvenience if the case were severed. Even with respect to the Michigan plaintiffs, who had the best argument for litigating in Michigan, the interests of justice favored a transfer of the case.

This case is a good outcome for franchisors who are sued by groups of franchisees outside of the franchisor's home state. Before answering the complaint and participating in litigation, the franchisor may want to consider a motion to transfer, instead of, or in addition to, a motion to dismiss for lack of personal jurisdiction and a motion to sever.

Cynthia M. Klaus is a shareholder with Larkin Hoffman and a member of this newsletter's Board of Editors. She can be reached at [email protected]. Bryan Huntington is an attorney with the firm. Reach him at [email protected].

Franchisees and Dealers Should Plead Causation In Actions Against The Government

In a decision that may significantly expand the ability of franchised entities to bring Fifth Amendment claims, the United States Court of Federal Claims has held that dealerships have stated plausible causes of action against the federal government in the case of Colonial Chevrolet Co., Inc. v. United States, Nos. 10-647C, 11-100C, and 12-900C, 2015 WL 5268941 (Fed. Cl. Sept. 9, 2015). The decision solidifies that claims against the government may lie where the government's conduct vis-'-vis a third party effects a taking of a plaintiff's property right ' which may include a franchise or dealership agreement. The ruling offers a roadmap that franchisees and dealers advancing takings claims should follow, and will likely be of interest to former General Motors and Chrysler Group dealers that lost their dealerships as a result of the Troubled Asset Relief Plan (TARP).

In 2009, as part of TARP, the federal government offered GM and Chrysler an aggregate $38 billion in financing in exchange for the manufacturers' agreement to terminate 2,243 dealerships. As a consequence, the three groups of dealers in Colonial Chevrolet had their dealerships terminated.

Prior to the present ruling, the case had been before the Federal Circuit, which held that the dealers needed to establish that in a “but-for world,” where the government did not require the manufacturers to terminate the dealerships, the dealership agreements would have retained economic value. On remand from the Federal Circuit, the government argued that, absent intervention GM and Chrysler would have been liquidated, rendering the plaintiffs' dealerships worthless.

The dealerships collectively advanced three theories of but-for causation worthy of special attention: 1) Chrysler was financially able to survive absent intervention and, furthermore, that Chrysler would have kept its dealerships open; 2) some or all of GM and Chrysler would have been purchased by a third party in bankruptcy and the dealerships would have been kept open; and 3) even if GM and Chrysler entered bankruptcy, the dealerships would have retained value by continuing dealership operations during a wind down.

In advancing the argument that Chrysler could have survived the economic downturn absent receiving TARP financing, the dealers pointed out that in 2008 and 2009, Ford Motor Company, like Chrysler, was in a dire financial situation. Nevertheless, unlike Chrysler, Ford survived without TARP financing. While Ford's cash holdings were significantly larger than Chrysler's ' $6.3 billion for Ford, compared with $1.9 billion for Chrysler ' the court reasoned that expert testimony was necessary to determine whether Ford and Chrysler were apt comparisons. Thus, the court decided this theory could advance.

Next, two of the three dealers asserted that Fiat Automobiles or Daimler AG would have purchased Chrysler in bankruptcy; according to the dealers, in either event they would have been allowed to continue operations. In this regard, the dealers noted that in 2008 and 2009, Chrysler and Fiat were engaged in talks for a potential partnership, which culminated in a non-binding merger agreement giving Fiat a 35% stake in Chrysler. The dealers also brought forth evidence that Fiat was in a more secure financial position, having $4.8 billion cash on hand in 2008. Alternatively, the dealers asserted that Daimler, which owned 19.9% of Chrysler and had $6 billion cash on hand in 2008, would have purchased Chrysler. Given the evidence of possible suitors for Chrysler, the court allowed the theory that Chrysler would have been purchased to proceed. On the other hand, the court granted the government's motion to dismiss insofar as it concerned the theory of GM dealers that GM would have been purchased in bankruptcy. Fatal to this claim was the GM dealers' inability to identify a specific potential buyer.

Finally, the dealers alleged that even if the manufacturers were in bankruptcy, the dealers could have continued operating and therefore retained value. For instance, the dealers could sell existing inventory and parts, and could continue to repair and service vehicles. There was a precedent for this. When American Suzuki Motor Company entered bankruptcy, Suzuki kept its dealerships open. The court ruled the dealers' allegation that there was financial incentive to keeping the dealerships open was plausible, relying heavily upon the Suzuki example.

A number of interesting questions remain unresolved after this ruling in Colonial Chevrolet . One key question is whether the loss of the dealership agreements should be treated as a per se physical appropriation, or whether it should be addressed under the factors outlined in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978). In many cases, the distinction is dispositive; when a court applies Penn Central, the plaintiff must prove a reasonable investment-backed expectation that was interfered with. This is often fatal to takings claims in highly regulated industries. Interestingly, a footnote in Colonial Chevrolet suggests that the court thought the distinction made little discernible difference in the case. Specifically, the court opined that if the dealers could establish an economic loss on a but-for theory of causation, that would ” necessarily have also shown ' that they had a reasonable investment-backed expectation that their [dealership] agreements would not have been cancelled.” (Emphasis added.) If the case reaches the summary judgment stage, the issue of the proper characterization ' per se or regulatory taking ' will almost certainly be addressed then.

Michigan Court Transfers Case Brought By 41 Franchisees to Franchisor's Home State

In the case of Family Wireless #1, LLC v. Automotive Tech., Inc., 2015 U.S. Dist. LEXIS 115810 (E.D. Mich. Sept. 1, 2015), the Michigan Court not only applied the teachings of the U.S. Supreme Court's Atlantic Marine case, but went even further to transfer a case in the interest of judicial economy. In Family Wireless, 41 separate franchisees of Wireless Zone retail stores filed a lawsuit in federal court in Michigan against their Connecticut franchisor. The plaintiff franchisees owned more than 100 Wireless Zone stores in 13 different states. The defendant franchisor moved to transfer venue under 28 U.S.C. '1404(a) for the entire case to its home state of Connecticut or, in the alternative, to sever the case and transfer some plaintiffs' claims to Connecticut.

Every plaintiff's franchise agreement included a forum selection clause, designating that litigation “will only be brought in either the state or federal courts of Connecticut.” The parties agreed, however, that the forum selection clause was not valid for the Michigan and Indiana plaintiffs, because state statutes prohibited the application of such clauses. The parties disputed whether the Minnesota franchisees' forum selection clauses were valid, and agreed that the forum selection clauses were valid for all of the other plaintiffs.

Analyzing the defendant's motion to transfer venue, the court first considered whether it had personal jurisdiction over defendant, which is a threshold requirement for application of Section 1404(a). Defendant is a Connecticut company with its principle place of business in Connecticut. Although it had contacts with Michigan with respect to some plaintiffs, these contacts were not sufficient to confer general jurisdiction over the defendant. In addition, the claims brought by the plaintiffs located outside of Michigan were insufficient to establish specific jurisdiction. Even though the court found that it lacked personal jurisdiction under a traditional analysis, it concluded that the defendant had waived any objection to personal jurisdiction by not objecting to it at the time of the motion.

Finding personal jurisdiction, the court then turned to an analysis of Section 1404(a). For this analysis, it was necessary to divide the franchisees into two groups ' those with valid forum selection clauses and those without. The parties agreed that the clause was valid for most plaintiffs, but invalid under applicable state statutes for the plaintiffs from Michigan and Indiana. The only plaintiffs in dispute were those from Minnesota. The court interpreted Minnesota law as prohibiting a franchisor from “requiring litigation to be conducted outside of Minnesota.” It further interpreted the forum selection clause in the applicable franchise agreements to require litigation in Connecticut, which violated the Minnesota statute and was therefore invalid. Thus, the non-forum selection clause plaintiffs included the franchisees from Michigan, Indiana, and Minnesota.

The court then applied Section 1404(a) to determine whether to transfer the entire case to Connecticut, sever the case and transfer only the forum selection clause plaintiffs, or keep the entire case in Michigan. An analysis of Section 1404(a) includes consideration of private interests, such as the convenience of witnesses, the location of documents, the convenience of the parties, the locus of the operative facts, the relative means of the parties, and the plaintiff's choice of forum. The court also considers public factors, such as the forum's familiarity with the governing law, the trial efficiency and interests of justice.

Regarding the 24 plaintiffs with valid forum selection clauses, the court applied the United States Supreme Court case of Atlantic Marine Const. Co. Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S.Ct. 568 (Dec. 3, 2013), which requires that the private interest factors be given no weight where there is a valid forum selection clause.

For the other plaintiffs, the court acknowledged that normally a plaintiff's choice of forum is given substantial weight. That weight is lessened, however, where a plaintiff has little or no connection to the chosen forum. Here, the Indiana and Minnesota plaintiffs had no connection to Michigan. The Michigan plaintiffs obviously did, but the locus of operative facts, convenience of the parties, convenience of the witnesses, and location of documents all favored Connecticut. Therefore, the private interest factors weighed in favor of a transfer of the whole case to that state.

The public interest factors require the court to balance its interest in judicial economy with the bargain the parties made in the forum selection clause and the private interest factors that support a transfer. The court determined that it would be best to transfer the entire case in order to avoid duplicative litigation in two forums and the resulting inconvenience if the case were severed. Even with respect to the Michigan plaintiffs, who had the best argument for litigating in Michigan, the interests of justice favored a transfer of the case.

This case is a good outcome for franchisors who are sued by groups of franchisees outside of the franchisor's home state. Before answering the complaint and participating in litigation, the franchisor may want to consider a motion to transfer, instead of, or in addition to, a motion to dismiss for lack of personal jurisdiction and a motion to sever.

Cynthia M. Klaus is a shareholder with Larkin Hoffman and a member of this newsletter's Board of Editors. She can be reached at [email protected]. Bryan Huntington is an attorney with the firm. Reach him at [email protected].