Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2nd Cir.: Franchisor not required to provide opportunity to cure incurable breach, (Jun 26, 2014)

By Edward L. Puzzo, J.D.

An automobile franchisor was entitled to terminate its franchise agreement without first providing the dealer the opportunity to cure the breach, as provided by the New York Franchised Motor Vehicle Dealer Act, when the breach was an adjudicated violation of the law incapable of cure, the U.S. Court of Appeals in New York City has ruled (Giuffre Hyundai, Ltd. v. Hyundai Motor America, June 25, 2014, Sack, R.).

Background. After the New York Attorney General accused franchised Hyundai dealer Giuffre Hyundai of "strong-arm sales methods and unethical conduct," a state court ruled that Giuffre Hyundai had engaged in fraudulent and illegal business practices, deceptive acts, and false advertising. Restitution and civil penalties were imposed.

Under the terms of the franchise agreement between Giuffre Hyundai and franchisor Hyundai Motor America (HMA), the franchise could be immediately terminated due to any violation of the law by Giuffre which, in HMA's sole opinion, affected the reputation of Hyundai. Violations of the law were further defined in the agreement to include any court finding that Giuffre engaged in any misrepresentation or unfair or deceptive trade practice. On this basis, HMA terminated its agreement with Giuffre.

However, Giuffre then brought an action in federal district court, seeking to enjoin the termination. The dealer alleged that the termination had been improper under the New York Franchised Motor Vehicle Dealer Act because it had not been given an opportunity to cure the breach. The district court ruled against Giuffre, finding that the breach was not capable of being cured, and the appeal to the Court of Appeals ensued.

Opportunity to cure the breach. Regardless of the terms of the franchise agreement, Section 463 of the New York Franchised Motor Vehicle Dealer Act required 90 day written notice of termination to the dealer, and gave the dealer the right to challenge the termination in court. Under the Act, the franchisor must show good cause for the termination and provide the dealer with the opportunity to cure the breach. However, the district court had reasoned that the Act did not displace the state common law principle that a party commits a material breach of its contract with another party when it violates a provision going to the root of their agreement, and the aggrieved party can terminate the agreement without providing the other party the opportunity to cure. The district court concluded that, considering Giuffre's "egregious breach," an opportunity to cure was not required because no cure was possible.

The appellate court agreed. New York law permitted a party to terminate a contract immediately—without affording the breaching party notice and the opportunity to cure—when the breaching party's malfeasance is incurable, the court noted. Here, Giuffre's breach was material and not susceptible of cure. The unappealed adjudicated fact that it had engaged in fraudulent and illegal business practices, deceptive acts and false advertising were clearly violations of the law that were a valid basis for terminating the franchise agreement. In addition, the agreement spoke in terms of adjudicated malfeasance, rather than simple conduct, so the breach was not one which subsequent good behavior could correct. The Act did not require that HMA provide Giuffre with an opportunity to cure "reputation poisoning" breaches incapable of cure. Therefore, the appellate court concluded, HMA's termination of the franchise agreement was lawful.

The case is Civil Action No. 13–1886.

Attorneys: Eric L. Chase (Bressler, Amery & Ross, PC) for Giuffre Hyundai, Ltd. Frederick Liu (Hogan Lovells US LLP) for Hyundai Motor America.

Companies: Giuffre Hyundai, Ltd.; Hyundai Motor America.

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