Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2nd Cir: Connecticut Franchise Act’s warranty reimbursement provision withstands constitutional challenge, (Apr 7, 2015)

By Linda O’Brien, J.D., LL.M.

An automobile manufacturer trade association’s constitutional challenges to Connecticut Franchise Act (CFA) amendments governing warranty repair reimbursements to automobile dealers were properly rejected, the U.S. Court of Appeals in New York City has ruled. The district court judgment was affirmed (Alliance of Automobile Manufacturers, Inc. v. Currey, April 7, 2015, Per Curiam).

The Alliance of Automobile Manufacturers is a non-profit trade association of major automobile manufacturers. Under the CFA, manufacturers could require automobile dealers to perform certain warranty repair services, even on vehicles they did not sell. From 1982 to 2009, the repairs were to be reimbursed according to a schedule of compensation provided by the manufacturers. In 2009, the CFA was amended to (1) revise the statutory method for determining reasonable compensation paid to dealers (reimbursement provisions) and (2) prohibiting manufacturers from recovering from in-state dealers increased costs incurred as a result of the reimbursement provisions (recoupment bar).

Alliance brought a declaratory judgment action seeking to invalidate provisions of the CFA as amended in 2009 as violations of the Contracts, Commerce, and Due Process clauses of the U.S. Constitution. The district court granted a motion to dismiss, brought by the Connecticut Department of Motor Vehicles, on the grounds that Alliance’s complaint failed to state plausible constitutional claims. Alliance appealed.

Commerce Clause. The appellate court found that the Alliance failed to state a plausible claim under the Commerce Clause. According to the court, Alliance did not allege facts that the 2009 amendments discriminated against interstate commerce. The complaint failed to allege that Alliance members, whose principal places of business were all located outside of Connecticut, competed with any in-state entity in a single market or that the 2009 amendments imposed a burden on interstate commerce that was qualitatively or quantitatively different from that imposed on intratstate commerce. Furthermore, the fact that sales of vehicles to Connecticut automobile dealers may occur outside of the state was insufficient to show that the amendments exerted unconstitutional extraterritorial control over out-of-state commerce.

Contracts Clause. To state a claim for a violation of the Contracts Clause, a complaint must allege sufficient facts to demonstrate that a state law has “operated as a substantial impairment of a contractual relationship,” the court explained. The district court properly determined that Alliance’s complaint failed to allege facts to suggest that the 2009 amendments were unforeseeable to its members. The relationship between automobile manufacturers and Connecticut dealers had long been the subject of close state regulation. Although the recoupment bar was a new provision of the CFA, it was eminently foreseeable that the legislature could seek to close a loophole in the regulatory scheme, the court noted.

Due Process. The Alliance’s argument that the reimbursement provision violated due process by arbitrarily interfering with its members’ right to negotiate reimbursement rates and bore no rational relation to any public purpose was rejected. According to the court, Alliance’s complaint acknowledged that the legislature enacted the CFA to promote fair competition. Although the reimbursement provision may not have succeeded in bringing about the result that the legislature sought to accomplish, there was no empirical evidence that a court could find that the challenged legislation violated substantive due process. Thus, the district court did not err in determining that Alliance did not allege facts from which a factfinder could reasonably infer arbitrary or irrational governmental action.

The case is No. 13-4890-cv.

Attorneys: Daniel L. Goldberg (Morgan, Lewis & Bockius LLP) for Alliance of Automobile Manufacturers, Inc. Michael K. Skold, Office of the Attorney General, and Jason T. Allen (Bass Sox Mercer) for Melody A. Currey.

Companies: Alliance of Automobile Manufacturers, Inc.

Cases: FranchisingDistribution ConnecticutNews NewYorkNews VermontNews