Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Mass.: Establishment of new franchise outside dealer’s market area would not violate federal, Massachusetts motor vehicle dealer laws, (Mar 24, 2014)

By John W. Arden, J.D., LL.M.

A Massachusetts automobile franchisee’s allegations that its franchisor wrongfully demanded that it assent to the appointment of a new franchise outside of its relevant market area failed to state a claim that the franchisor violated the federal Automobile Dealers Day in Court Act, violated the Massachusetts motor vehicle dealer law, or breached the franchise agreement, according to the federal district court in Boston (Aston Martin Lagonda of North America, Inc. v. Lotus Motorsports, Inc., March 18, 2014, Casper, D.). The franchisee did state claims for breach of fiduciary duty, promissory estoppel, and breach of the implied covenant of good faith and fair dealing.

Lotus Motorsports, Inc. had served as the sole Aston Martin dealership in New England since entering into a franchise agreement in 1996. In 2003 or 2004, Aston Martin advised the dealer that its showroom space was insufficient to service the increased sales Aston Martin anticipated from the upcoming release of a “volume car,” which would sell 75 to 100 units a year. Allegedly based on these representations, Lotus spent $700,000 on a new facility.

In 2013, the dealer heard rumors of Aston Martin’s intent to open a new franchise 8.7 miles from Lotus’s primary business location. When questioned about this, Aston Martin responded that it was exploring a potential second location in the New England market that would be outside of the eight-mile radius provided to dealers under the Massachusetts motor vehicle dealer law. Lotus alleged that, at some point, Aston Martin demanded that it assent to the appointment of the new dealership. Lotus alleged that any such assent would have destroyed its business operation and effectively terminated the franchise agreement.

Aston Martin brought an action for a declaration that it was not obligated to arbitrate the dispute and that it had a right to establish a dealership outside of Lotus’s “relevant market area.” Lotus brought counterclaims, alleging that Aston Martin violated the federal Automobile Dealer Day in Court Act; violated the Massachusetts motor vehicle dealer law; breached the implied covenant of good faith and fair dealing; breached a fiduciary duty owed Lotus; and committed promissory estoppel and breach of contract.

Automobile Dealer Day in Court Act. This federal statute allows dealers to sue manufacturers that fail to act in good faith in performing or complying with any terms or provisions of the franchise or in terminating, cancelling, or not renewing the franchise. According to the First Circuit, an aggrieved dealer must produce evidence that the manufacturer made a wrongful demand coupled with sanctions or a threat of sanctions. The court concluded that Lotus had not plausibly alleged that Aston Martin engaged in such conduct. “While Lotus pleads in a conclusory fashion that Aston Martin wrongfully ‘demanded that [Lotus] assent to the appointment of the new dealership’ … Lotus has made no factual allegations supporting the conclusion that Aston Martin sanctioned, penalized or threatened to sanction Lotus for failing to comply with such assent.”

Lotus further did not show how the establishment of the new dealership would destroy its business operation or terminate its franchise agreement. The face of the franchise agreement did not prohibit Aston Martin from establishing a second dealership. Nor did it require Aston Martin to obtain Lotus’s approval before opening a second dealership. Since Lotus provided insufficient factual support for its claims, the Automobile Dealer Day in Court Act claim was dismissed.

Massachusetts motor vehicle dealer law. The Massachusetts statute prohibits specific unfair methods of competition and unfair or deceptive acts or practices in the automobile industry. Aston Martin moved to dismiss Lotus’s claims under two theories: (1) Lotus’s claim failed because the new dealership was located outside Lotus’s eight-mile relevant market area and (2) the proposed dealership would not violate any other provision of the statute.

The Massachusetts law prohibits the establishment of an additional dealership within the relevant market area of an existing dealership. However, “relevant market area” was defined as eight-mile radius from any boundary of the existing dealership. In this case, Lotus did not allege that the new dealership was to be located fewer than eight miles from its primary business location. Thus, the claim was dismissed.

Breach of fiduciary duty. To establish a breach of fiduciary duty, Lotus had to plead four elements: (1) Aston Martin owed a fiduciary duty to Lotus; (2) Aston Martin breached that duty; (3) Lotus incurred damages; and (4) the breach caused Lotus’s damages. To prove the existence of a fiduciary duty, Lotus had to show that the relationship was one of trust and confidence; that Lotus relied on the specialized knowledge or judgment of Aston Martin; and that Aston Martin was aware of that reliance. While a franchise relationship typically does not create a fiduciary duty under Massachusetts law, Lotus could establish such a duty if it could show that the parties had a relationship of trust and confidence; that it relied on Aston Martin’s specialized knowledge and judgment; and the franchisor was aware of that reliance.

Lotus claimed that Aston Martin developed such a relationship, encouraged Lotus to invest $700,000 in the new facility, and provided proprietary customer information so that it placed “tremendous trust” in Aston Martin. These allegations were sufficient to state a plausible claim for breach of fiduciary duty, the court found.

Promissory estoppel. Lotus pleaded a plausible claim for promissory estoppel by alleging that Lotus promised that its annual sales would increase based on a region-wide demographic and that, as a result of these express and implied promises, Lotus spent $700,000 on a new facility.

Implied covenant of good faith and fair dealing. Lotus sufficiently pleaded a claim for breach of the implied covenant of good faith and fair dealing. A claim that Aston Martin made an implied promise to maintain Lotus as its sole dealership in New England was sufficient to withstand a motion to dismiss.

The case is Civil Action No. 13-cv-11213.

Attorneys: Carl J. Chiappa (Hogan Lovells US LLP) and William H. Kettlewell (Collora LLP) for Aston Martin Lagonda of NA, Inc. Robert S. Sinsheimer (Sinsheimer & Associates) for Lotus Motorsports, Inc.

Companies: Aston Martin Lagonda of NA, Inc.; Lotus Motorsports, Inc.; Aston Martin of New England

Cases: FranchisingDistribution MassachusettsNews