Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz: Majority shareholder of auto dealership was ‘dealer’, (Mar 29, 2016)

By Edward L. Puzzo, J.D.

The majority shareholder and general manager of an auto dealership, and not the dealership itself, was a "dealer" for purposes of federal and Arizona statutes governing contracts between auto dealers and manufacturers, the federal district court in Phoenix has ruled (Smith v. FCA US LLC, March 24, 2016, Wake, N.).

In 2002, Alfonzo Smith became general manager and part owner of a Chrysler dealership in Mesa, Arizona. FCA US LLC, formerly known as Chrysler Group LLC, terminated that relationship in 2012. Smith alleged that the termination violated (1) the common-law duty of good faith and fair dealing, (2) the Automobile Dealers' Day in Court Act, a federal statute protecting automobile dealers, and (3) various Arizona statutes protecting automobile dealers.

The relationship between Smith and FCA was governed by multiple contracts and managerial policies. In the contract between FCA and the dealership, both FCA and Smith were listed as shareholders of the dealership. FCA had the voting shares; Smith, listed as the General Manager of the dealership, had the non-voting shares.

The contract between the dealership and Smith provided that the dealership would pay a salary and bonus, and their relationship was at-will. FCA, as the holder of the dealership's voting shares, reserved the right to remove Smith as Director and employee of the dealership.

In the contract between FCA and Smith, FCA purchased 9,500 voting shares in the dealership and Smith purchased 500 non-voting shares. The contract required Smith to use his bonus each year to purchase additional shares in the dealership from FCA. Under the contract, shares purchased by Smith would become non-voting shares, insuring that as long as FCA had an ownership interest in the dealership, they would have the only voting shares.

In June 2012, a senior FCA manager requested Smith to submit a plan for completing the remainder of the FCA-held stock in the dealership within 9 months. At that time, Smith only owned approximately 25 percent of the shares of the dealership. His right to purchase the remainder of shares was conditioned on being able to reach certain minimum sales requirements.

In October 2012, four months after the above notice, Smith was terminated as General Manager and Director of the dealership. By that time, he had raised his percentage of ownership of dealership shares to between 59 and 69 percent.

Determining dealer. In franchise contracts between auto dealers and manufacturers, there are additional statutory protections aimed at equalizing the gross disparity in bargaining power between large auto manufacturers and many relatively small retail dealers, the court explained. These statutes protect "dealers," so the threshold question was whether Smith qualified as a dealer.

Dealer as contract term. The court referred to a Seventh Circuit case involving very similar facts, Kavanaugh v. Ford Motor Co., 353 F.2d 710 (1965), in support of its view that to determine dealer status solely by reference to labels in contracts over which the auto manufacturers have dominant influence would allow those manufacturers to contract around the statutes meant to protect dealers. The court, again citing Kavanaugh, found that the fiction of a corporate entity should be disregarded when the form is used to evade the provisions of a statute. To treat the dealership as the "dealer" for purposes of the Federal Dealers Act would effectively insulate the auto manufacturer from liability because the manufacturer controlled the dealership and would not sue itself.

Here, although Smith was part owner and general manager of the dealership, FCA owned all of the dealership's voting stock. As a practical matter, the court stated, the dealership would only sue the auto manufacturer if the auto manufacturer wanted it to. Thus treating the dealership as the "dealer" for the purposes of the Federal and Arizona statutes meant to protect auto dealers would effectively insulate the auto manufacturer from liability. Therefore, the court stated, it must look to the substance of the relationship to determine who the dealer was.

Substance of relationship. The court noted that Smith had applied to FCA for a dealership as an individual applicant and not an applicant on behalf of a corporation. In addition, the contract between the dealership and Smith explicitly relied on the personal abilities of Smith and his active and continuing participation in management of the dealership and his increasing role as a shareholder. The arrangement was essentially a financing device by which Smith could become the dealership's full owner.

The court also noted that by the time of the termination, Smith had served as the dealership's general manger for approximately 10 years and owned the majority of shares in the dealership. Smith was essential to the dealership's operation at the time of his termination, the court found.

The court also noted that Arizona generally prohibits auto manufacturers from having an ownership interest in dealerships, with an exception for manufacturers who "temporarily" own a dealership while in a bona fide relationship with a "qualified person" who has made a substantial initial investment in the dealership, is buying the manufacturer's interest by regular periodic payments, and who expects to acquire full ownership within a reasonable amount of time. That relationship describes Smith's relationship very well. Thus, the court concluded, Smith played an essential role in the dealership's operation and was a "dealer" operating under a "franchise" for purposes of both the Federal Dealers' Act and the Arizona statutes.

Resolution on summary judgment. Assuming that Smith is a "dealer" owed a duty of good faith under the Federal Dealer's Act, the question of whether FCA's actions violated that duty was an issue of fact that could not be resolved on a motion for summary judgment, the court found. Similarly, whether the Arizona statutes were violated by Smith's termination, or whether FCA violated the common-law duty of good faith and fair dealing also cannot be resolved on a summary judgment motion, the court found.

Thus the court ruled that Smith was a "dealer' for purposes of the Federal and Arizona statutes and FCA was liable for whatever damages were incurred as a result of it's termination of Smith.

The case is Civil Action No. 2:13-cv-01732-NVW.

Attorneys: Hamid Jabbar (Hamid Jabbar PLC) and Tina Marie Ezzell (Tiffany & Bosco, PA) for Alfonzo Smith. Kevin J. Bonner (Fennemore Craig PC) and Thomas S. Bishoff (Dykema Gossett PLLC) for FCA US LLC f/k/a Chrysler Group LLC.

Companies: FCA US LLC f/k/a Chrysler Group LLC

Cases: FranchisingDistribution ArizonaNews