Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Mont.: Dealer’s constructive termination claim was subject to arbitration, (Oct 3, 2013)

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

A snowmobile dealer’s constructive termination claim against its manufacturer under the Montana Motor Vehicle Dealer Act was subject to an arbitration provision in the parties’ dealership agreement, the federal district court in Helena, Montana has ruled (Elk Mountain Motor Sports, Inc. v. Arctic Cat Sales, Inc., September 30, 2013, Lovell, C.). Since the parties had entered into a valid agreement to arbitrate disputes, and the dealer’s claims fell within the scope of that agreement, the constructive termination claim was referred to arbitration and all court proceedings were stayed pending conclusion of the arbitration.

In 2002, Elk Mountain Motor Sports, Inc. signed a dealership agreement to become a non-exclusive, authorized dealer for Arctic Cat vehicles, accessories, and garments. It subsequently executed multiple dealership agreements (one for each product line) on an annual basis. In 2009, Arctic Cat presented Elk Mountain with a “new form contract,” which incorporated all the manufacturer’s product lines and lasted for 33 months. The new dealer agreement also contained a provision calling for arbitration of all disputes, controversies, and claims arising out of or in connection with the execution, interpretation, performance, or breach of the agreement.

The provision required arbitration of disputes under the rules of the American Arbitration Association in Minneapolis, Minnesota, and set forth the binding nature of the agreement, the treatment of any public policy defense, and the survival of the arbitration provision after termination of the dealer agreement.

The relationship between the parties began to fray in 2011, to such an extent that by November 15, 2011, Elk Mountain notified Arctic Cat that it considered the dealership to be constructively terminated. Elk Mountain brought suit in federal district court, seeking damages suffered as a result of the alleged termination. Arctic Cat moved to compel arbitration.

The Federal Arbitration Act applied to this dispute, which involved a transaction implicating interstate commerce. However, state law governed whether the arbitration was valid. Elk Mountain argued that it was entitled to rely on the Montana Motor Vehicle Act to block arbitration. This argument had to be rejected according to a line of U.S. Supreme Court cases, including AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which holds that a state law that stands as an obstacle to the purpose of Congress in enacting the FAA cannot be used to override arbitration agreements.

Challenges that go specifically to the making of the agreement to arbitrate itself should be decided by the court, while challenges to the contract generally must be decided by an arbitrator, the court observed. The party seeking to compel arbitration carries the burden of persuasion by a preponderance of the evidence that a valid arbitration exists. The Montana Supreme Court has ruled that uncertain terms in an arbitration provision will be construed strictly against the party causing the uncertainty and that allegations of fact by the nonmoving party should be taken as true.

Enforceability of Arbitration Clause

Elk Mountain asserted that the arbitration clause in its dealer agreement was unenforceable because Arctic Cat prepared the agreement and Elk Mountain had no opportunity to negotiate the terms of the agreement. Elk Mountain therefore argued that the arbitration provision was unenforceable because it was a contract of adhesion, the clause exceeded Elk Mountain’s reasonable expectations, the clause was oppressive and unconscionable, and the clause was contrary to Montana law and public policy.

Reasonable expectations. The court initially found that the arbitration provision was within the reasonable expectations of a corporation entering into a dealership agreement. The arbitration provision appeared separately, was labeled in bold letters, and was clearly set forth. It explicitly stated that the arbitrator’s decision was binding on the parties and that the parties waived all respective rights to further appeal in any other forum the matters decided by the arbitrator. The court concluded that the owner and president of Elk Mountain did not understand the arbitration provision “primarily because he did not read it.” The court could not find that an agreement exceeded the reasonable expectations of a corporate entity merely because its representative failed to read the contract.

“A corporation’s representatives cannot refuse to read its contracts and then claim to be surprised because the terms contained therein are not within its reasonable expectations,” the court noted. “Neither can a corporate entity avoid the terms of its contracts by complaining that it was not represented by counsel. Unlike some consumers, corporate representatives can control whether they read contracts or obtain the assistance of legal counsel.”

Oppressive or against public policy. Contrary to the dealer’s claim, the arbitration provision did not appear to be oppressive or against public policy (which generally favors arbitration).

Unconscionability. To determine whether a provision is unconscionable, a court must make a two-step inquiry: (1) whether the provision fits the doctrine of a contract of adhesion such that the weaker bargaining party had no meaningful choice but acceptance; and (2) whether the contractual terms are unreasonably favorable to the drafter, usually the party with superior bargaining power. Elk Mountain alleged that it was the weaker bargaining party, with no meaningful choice but to accept the agreement. The court accepted the assertion, but noted that the record would be more persuasive if Elk Mountain could show that it actually attempted to negotiate the contract and its attempts to negotiate were rejected. The mere fact that an agreement is a contract of adhesion did not render it unenforceable.

Elk Mountain argued that the arbitration provision unreasonably favored Arctic Cat because it prevented the dealer from utilizing the courts to assert its state law claims. “This argument is unpersuasive because Elk Mountain can present its claims to the arbitrator and is therefore not deprived of them.”

In this case, the arbitration provision was even-handed and did not favor either party, according to the court. It did not give a unilateral right to the drafter that was denied to the complaining party. “Both parties must arbitrate their claims, both parties waive their rights to appeal the arbitrator’s decision, the arbitrator is to divide arbitration costs between the parties justly and equitably, and the parties agree to make all documents, books, and records available to each other and to the arbitrator, as required by the arbitrator.”

Following Montana law, the court considered the ten-factor unconscionability test. There was little discussion about the contract and no negotiation. The parties had entered into at least seven dealer agreements in the past seven years. Elk Mountain’s representative signed the contract but did not read it. Neither did Elk Mountain’s representative seek advice of counsel, although it easily could have. There was no explicit waiver of the right to a jury trial. The court accepted Elk Mountain’s allegation that there was a disparity in the bargaining power between it and Arctic Cat. However, there was no evidence from which the court could fairly conclude that there was a significant difference in business experience and sophistication of the parties.

“Suffice to say that the Court doubts that Elk Mountain Motor Sports is truly a ‘weaker’ party in need of special protection, or even whether such a distinction is meaningful in a commercial, as opposed to a consumer, transaction,” the court found.

The court concluded that the parties entered into a valid agreement to arbitrate their disputes and that Elk Mountain’s claims fall within the scope of the agreement. Thus, the case was referred to arbitration, and all court proceedings were stayed pending conclusion of the arbitration.

The case is No. CV 13-7-H-CCL.

Attorneys: David B. Gallik (Gallik Law) for Elk Mountain Motor Sports, Inc. John H. Maynard (Crowley Fleck PLLP) for Arctic Cat Sales, Inc.

Companies: Elk Mountain Motor Sports, Inc.; Arctic Cat Sales, Inc.

Cases: FranchisingDistribution MontanaNews