Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Two-year limitation upheld for ban on governmental relocation assistance to auto dealer, (Feb 10, 2014)

By Edward L. Puzzo, J.D.

An injunction against a municipality’s ability to offer relocation financial assistance to an auto dealership, for moving from a local jurisdiction in the same market area, should not be indefinite and was properly limited to a two year period, the California Court of Appeals in Los Angeles has ruled (City of Palmdale v. City of Lancaster, February 6, 2014, Rubin, J.).

Background. Juan Lou Gonzales, previously owner of a Saturn dealership in Palmdale that closed when General Motors (GM) ceased the production of Saturn automobiles, sought a Chevrolet franchise from GM. GM required his potential Chevrolet lot to meet certain criteria, so Gonzales sought to purchase such a lot from the City of Palmdale at their auto mall. The trial court found that the City of Palmdale refused to lease or sell a lot to him, based on their preference that another person operate the Chevrolet dealership in their city.

During the negotiations with the City of Palmdale, Gonzales also entered into negotiations with the neighboring City of Lancaster to purchase a lot from them at their auto mall. During these negotiations, the Lancaster City Council authorized $604,000 in financial incentives to Gonzales to attract his dealership.

The City of Palmdale then sought a declaratory judgment against the City of Lancaster, claiming that their offer of relocation financial assistance to an auto dealer from one local jurisdiction to another local jurisdiction in the same market area violated state law. In September 2010, the trial court issued a preliminary injunction barring the City of Lancaster from providing any financial assistance to Gonzales. Gonzales then completed negotiations with the City of Lancaster for a lot without financial assistance from that city. In July 2012, judgment was entered against the City of Lancaster, voiding any financial assistance agreement with Gonzales, and enjoining the city from providing Gonzales any financial assistance for two years after the November 9, 2010 opening of his Chevrolet dealership. A few days after the expiration of the injunction’s two-year ban, the City of Lancaster provided $300,000 in financial assistance to Gonzales for his covenant to refrain from using the lot for any purpose other than an auto dealership.

Time limit on financial assistance prohibition. On appeal, the City of Palmdale argued that the lower court erred in limiting to only two years the ban on the City of Lancaster offering financial assistance to Gonzales. Palmdale claimed that the state statute in question, Government Code section 53804 and Health & Safety Code section 33426.7, permitted no time limit on the prohibition of financial assistance to a relocated auto dealership.

The court noted that the statute in question used the term “is locating from the territorial jurisdiction of one local agency to the territorial jurisdiction of another local agency.” In the view of the appellate court, this phraseology suggested that a city must not offer financial assistance to an auto dealer while the dealer is relocating to the city, but says nothing about the period after the relocation is complete. The legislative history, explained the court, indicated the statute was intended to prevent the “poaching” of dealerships from municipality to another, with resultant misuse of tax money for activities which did not increase overall economic activity in the region.

The City of Palmdale argued that the prohibition on financial assistance for relocation cannot have a time limit because the time limit can be waited out, as, they contend, happened in this instance. The appellate court disagreed. If a city’s financial assistance does not induce relocation, the court stated, then the statute’s purpose has been served. A never-ending ban on all financial assistance is unnecessary to achieve the legislature’s purpose of stopping a city from luring an auto dealer from a neighboring city, the court found.

Moreover, banning all future financial assistance could have unintended consequences such as preventing a city from offering, as part of an economic revitalization plan, financial assistance to a relocated dealership no matter how long it had done business in the city. The statute does not indicate such a far-reaching effect of the legislation was intended, the court opined. For these reasons, the appellate court ruled that the trial court had not erred when it limited the ban on financial assistance to two years.

The case is Civil Action No. B243802.

Attorneys: Murray O. Kane and Guillermo A. Frias (Kane, Ballmer & Berkman) for City of Palmdale. David R. McEwen, Allison E. Burns and David C. Palmer (Stradling Yocca Carlson & Rauth) for City of Lancaster. Robert W. Thompson and Bryan S. Owens (Callahan, Thompson, Sherman & Caudill) for Antelope Valley Chevrolet, Inc., 7 Jays LLC, and Juan Lou Gonzales.

Companies: General Motors; Antelope Valley Chevrolet, Inc.; 7 Jays LLC

Cases: FranchisingDistribution CaliforniaNews