Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz.: Auto dealership manager had standing to challenge termination as franchisee, (Apr 21, 2014)

By Edward L. Puzzo, J.D.

An Arizona automobile dealership’s general manager and board member had standing to challenge his termination under federal and state law as a franchisee, the federal district court in Phoenix has ruled (Smith v. Chrysler Group LLC, April 18, 2014, Wake, N.).

Alfonzo Smith challenged his termination by Chrysler Group LLC as General Manager and member of the Board of Directors of an Arizona Chrysler dealership. He brought claims under the federal Automobile Dealers’ Day in Court Act (ADDCA), and under state law regulating automobile dealer franchises. Chrysler responded by alleging that Smith was an at-will employee of the dealership who did not have standing to bring claims as either an “automobile dealer” or as a “franchisee”.

Chrysler argued that the franchise agreement with them was executed by the dealership, not by Smith. Smith conceded that he was not a direct party to the franchise agreement, but argued that he did have standing because his relationship to Chrysler, including financing and management arrangements, resembled a franchise in substance.

Standing under the ADDCA. The court explained that some courts have granted standing under the ADDCA to individuals whose agreements amounted to a franchise in substance, if not in form, while other courts have not. The inquiry into whether an individual who was not a party to the ostensible franchise agreement had standing required a fact-intensive examination of the entire transaction, the court continued.

In Kavanaugh v. Ford Motor Co., 353 F.2d 710 (7th Cir. 1965), the Seventh Circuit ruled that formation, sales and management contracts, as well as other written agreements, could be read together to pierce the corporate veil and establish that a corporate dealership agreement with a manufacturer was, in substance, an individual who was an automobile dealer operating under the terms of a franchise agreement within the meaning of the ADDCA.

The court noted that Smith could not bring a claim on behalf of the dealership because Chrysler controlled all of the dealership’s voting stock. Accordingly, the court continued, similarly to Kavanaugh, it must look not only at the language in all the relevant contracts but also at the economic substance of the entire transaction to determine whether the separate agreements were so inexorably linked that, together, they established a franchise between Chrysler and Smith.

The court noted that one agreement between Smith and Chrysler recognized that Smith’s abilities, expertise, and substantial continued personal participation in management of the dealership were material to Chrysler and recognized him as an integral part of the franchise. Also, in his role as a General Manager, Smith undertook many of the responsibilities of a franchised dealer, including negotiating inventory financing with lenders and abiding by Chrysler franchise terms and conditions.

The court concluded that the contracts between Smith and Chrysler, Chrysler and the dealership, and the dealership and Smith were interrelated and in combination could be read as forming a franchise between Smith and Chrysler. The actual determination of whether Smith had standing as an automobile dealer for purposes of the ADDCA required a fact-intensive inquiry which was not amenable to resolution on the pleadings, the court stated. But for now, Smith had alleged enough facts to survive Chrysler’s motion to dismiss, the court ruled.

State law claims. Smith also alleged that Chrysler’s actions violated Arizona law that required a franchisor to notify the appropriate state agency of their intention to terminate a franchise and to show good cause for the termination. Chrysler responded that Smith was not a franchisee under state law and was instead a “qualified person in a bona fide relationship” with Chrysler due to certain financing arrangements between Smith and Chrysler.

The court stated that nothing in the statutory scheme prevented an individual from qualification under both “franchisee” and “qualified person” roles. The Arizona dealership statutes, which generally prohibited manufacturers from owning dealerships, did not limit the ability of person in a bona fide relationship with the manufacturer to become a franchisee as they acquired ownership in the dealership, the court stated. As with the ADDCA claim, the court ruled, Smith had alleged enough facts to survive Chrysler’s motion to dismiss as to claims brought under the state dealership statutes and, for the same reasons, Smith’s claim for a declaratory judgment that he was a franchisee under state law.

Counts dismissed. The court did grant Chrysler’s motions to dismiss Smith’s tortious interference with contract and breach of contract claims, based on the termination of his contract with the dealership. Chrysler was given the right to terminate Smith as part of that agreement, the court ruled.

The case is Civil Action No. CV-13-01732-PHX-NVW.

Attorneys: Hamid Jabbar (Tiffany & Bosco PA) for Alfonzo Smith. Kevin J. Bonner (Fennemore Craig PC) for Chrysler Group LLC.

Companies: Chrysler Group LLC

Cases: FranchisingDistribution ArizonaNews