Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D Conn.: Auto manufacturers constitutional challenges to CFA dealer reimbursement provisions dismissed, (Dec 2, 2013)

By Linda O’Brien, J.D., LL.M.

An automobile manufacturer trade association’s constitutional challenge to Connecticut Franchise Act (CFA) amendments governing warranty repair reimbursements to dealers has been rejected by the federal district court in New Haven (Alliance of Automobile Manufacturers, Inc. v. Curry, November 26, 2013, Hall, J.). The court granted the state Department of Motor Vehicles’ motion to dismiss the trade association’s complaint.

The Alliance of Automobile Manufacturers (Alliance) is a non-profit trade association of major automobile manufacturers. Under the CFA , manufacturers could require automobile dealers to perform certain warranty repair services, even on vehicles they did not sell. From 1982 to 2009, the repairs were to be reimbursed according to a schedule of compensation provided by the manufacturers. The primary factor in determining the reasonableness of the compensation paid to dealers was the prevailing hourly wage rates for labor paid by dealers in the community in which the dealer was doing business. In 2009, the CFA was amended to (1) revise the statutory method for determining reasonable compensation paid to dealers (reimbursement provisions) and (2) prohibiting manufacturers from recovering from in-state dealers increased costs incurred as a result of the reimbursement provisions (recoupment bar). The reimbursement provisions allowed dealers to establish parts and labor rates based on average percentage markup for parts and average of total monthly labor rates. If the dealers and manufacturers disagreed on reasonableness of the dealers’ rates, the dealer could file a protest and an administrative hearing would be held.

Alliance brought a declaratory judgment action seeking to invalidate provisions of the CFA as amended in 2009 as violations of the Contracts, Commerce and Due Process clauses of the U.S. Constitution. Alliance alleged that the reimbursement provisions required manufacturers to pay more for warranty repairs than provided for in their dealer agreements and the recoupment bar prevented manufacturers from exercising their contractual rights to recapture increased costs. Alliance also alleged that the amended provisions increased consumer costs for vehicles and related repairs, and insulated dealers from competition with independent repair businesses. Melody Currey, Commissioner of the Connecticut Department of Motor Vehicles, moved to dismiss the complaint.

Ripeness. The court stated that Alliance’s claims were constitutionally ripe for adjudication. The association’s allegations that its members must bear increased costs and refrain from exercising previously lawful means of recovering those costs presented a real and substantial controversy. Alliance’s claims were also prudentially ripe since the association showed that their challenge was fit for judicial review and its members were potentially harmed from delaying judicial resolution of the issues.

Abstention. Abstention was not justified and would lead to needless delay, since state statutory construction of the amendments would not avoid Alliance’s federal constitutional claims, the court also ruled.

Constitutional claims. Alliance’s complaint failed to state plausible constitutional claims. The amendments did not substantially impair the manufacturers’ contractual relationships with in-state dealers since warranty reimbursement rates had long been governed by the CFA, although different in scope. Additionally, the pertinent contracts between manufacturers and dealers were embodied in the dealer agreements and regulatory changes in the reimbursement rates were foreseeable. In rejecting Alliance’s argument that the amendments were protectionist as conclusory, the court found that the statute did not clearly discriminate against or impose an undue burden on interstate commerce. Finally, Alliance failed to allege facts to show arbitrary or irrational government action in enacting the amendments that would support a substantive due process claim. Absent suspect classifications or impingement of fundamental rights, state legislative decision-making was presumed rational, the court concluded.

The case is No. 3:13-CV-398.

Attorneys: Daniel L. Goldberg (Bingham McCutchen) for Alliance of Automobile Manufacturers, Inc. Mark F. Kohler, Office of the Attorney General, for Melody A. Currey.

Companies: Alliance of Automobile Manufacturers, Inc.

Cases: FranchisingDistribution ConnecticutNews