Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION-6th Cir.: Letters of intent to enter auto dealership agreements held customary and usual, (Jan 20, 2015)

By Linda O’Brien, J.D., LL.M.

The U.S. Court of Appeals in Cincinnati upheld a declaratory judgment that Chrysler’s letter of intent to enter into a sales and service dealership agreement—issued to three former auto dealers—satisfied the “customary and usual” requirement of Section 747 of the Consolidated Appropriations Act of 2010 and was the sole and exclusive remedy under the Act. However, the appeals court overturned a ruling that Section 747 did not preempt two state auto dealer protest laws (Chrysler Group, LLC v. Fox Hills Motor Sales, Inc., January 16, 2015, Rogers, J.).

After sustaining declining sales and having an overextended network of dealerships, in 2009, Chrysler sought assistance from the federal government and filed a Chapter 11 bankruptcy petition. As part of the reorganization, a new company was formed which acquired many of the former company’s assets. Chrysler also sought to streamline its business operations and requested approval to terminate the sales and service agreements with 790 of its dealerships in the U.S. The bankruptcy court approved the terminations in June 2009. In response to the terminated dealers’ objections, Congress enacted Section 747 of the Consolidated Appropriations Act of 2010, which provided an arbitration remedy for dealers seeking continuation or reinstatement of the franchise agreement. The section also provided that, when an arbitrator found in favor of a terminated dealership, the auto maker would issue to the dealer a “customary and usual” letter of intent to enter into a sales and service agreement within a certain timeframe.

Fox Hills Motor Sales, Village Chrysler Jeep, Jim Marsh, and Livonia Chrysler Jeep were terminated dealers that sought arbitration and obtained an award directing Chrysler to provide them with a customary and usual letter of intent. Chrysler issued letters of intent to the prevailing dealers. Subsequently, Chrysler filed suit against the dealers, seeking declaratory relief that (1) Section 747 did not preempt state dealer laws; (2) the letters of intent were “customary and usual”; and (3) a letter of intent was the sole and exclusive remedy under Section 747. A district court ruled in favor of Chrysler, and the dealers appealed.

The district court properly determined that a customary and usual letter of intent was the sole remedy provided for a prevailing dealer under Section 747, according to the court. The plain language of the Act indicated that prevailing dealers were not entitled to unconditional reinstatement; rather, they were entitled to a letter of intent, which was legally enforceable as a contract entered into in good faith. In accordance with Congress’ aim to reintroduce prevailing dealers into the manufacturer’s dealership networks, dealers obtained a substantial remedy – contractual entitlement – to the extent they met the operational prerequisites of the letter of intent.

Additionally, the district court properly determined that the letters of intent issued to dealers Fox Hills Motor Sales, Village Chrysler Jeep, and Jim Marsh met the customary and usual standard. Letters of intent must constitute a meaningful intention to enter into a full sales and service agreement and not contain provisions that are unreasonably onerous. In this case, the dealers failed to identify a single burdensome provision in the respective letters of intent from Chrysler.

However, the site-approval provision in the letter of intent issued to dealer Livonia Chrysler might not be customary and usual, in the court’s view. Livonia already had a successful dealership in its existing location so that location might be effectively pre-approved. The site-approval provision granted Chrysler veto power that could render the promise of a dealership merely illusory and undermine Section 747’s intent to provide prevailing dealers with meaningful relief. Thus, the district court judgment must be reversed for a determination of whether the provision was customary and usual as applied to that particular dealer.

Finally, Section 747 preempted state dealer protest laws as they obstruct Congress’ intent to provide a substantial and meaningful remedy to prevailing dealers and permit state officials to delay and potentially nullify the effect of federal arbitration. The appellate court found that federal arbitration was intended to determine whether there was good cause for a terminated dealer to be added to Chrysler’s dealer network and the state dealer protest laws in Nevada and Michigan impermissibly grant state officials the power to review federal arbitration decisions. The state dealer protest laws allow existing dealerships to prevent the entry of new dealerships that could compete with them regardless of an auto maker’s intention in issuing a letter of intent to a prospective dealer.

The case is No. 13-2117.

Attorneys: Michael F. Smith (The Smith Appellate Law Firm) for Fox Hills Motor Sales, Inc., Village Chrysler Jeep Incorporated, and Jim Marsh American Corporation. Robert Charles Davis (Davis Listman Brennan) for Livonia Chrysler Jeep, Inc. Hugh Q. Gottschalk (Wheeler Trigg O’Donnell LLP) for Chrysler Group, LLC.

Companies: Fox Hills Motor Sales, Inc.; Village Chrysler Jeep Incorporated; Jim Marsh American Corporation; Livonia Chrysler Jeep, Inc.; Chrysler Group, LLC

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