Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION —D. N.J.: Auto dealer’s counterclaims in GM’s termination action dismissed, (Sep 10, 2014)

By Linda O’Brien, J.D., LL.M.

In an action by automobile manufacturer seeking declaratory relief to terminate its franchise agreements with an automobile dealership, the dealership failed to allege any specific contractual obligations imposed on the manufacturer to support its counterclaims for breach of contract, the federal district court in Newark, New Jersey has decided (General Motors LLC v. Englewood Auto Group, LLC, September 9, 2014, Martini, W.).

General Motors (GM) manufactures and distributes motor vehicles under various brand names through a network of authorized dealers. Englewood Auto Group (EAG) has been an authorized dealer of Chevrolet automobiles since 1999 under a series of dealer sales and service agreements. In 2002, EAG was granted a Buick and GMC dealership. Under the franchise agreement and business plan, EAG sublet the Buick GMC dealership facility from Argonaut Holdings, a GM affiliate, and would be provided a rent subsidy until 2004 when EAG received a Pontiac franchise. In 2009, GM filed for bankruptcy and discontinued the Pontiac brand.

In connection with the bankruptcy filing, GM and EAG entered into participation agreements that allowed EAG to continue acting as a Chevrolet and Buick/GMC dealer and contained a sales performance requirement, called the Retail Sales Index (RSI). GM filed suit against EAG, seeking a declaration that it could lawfully terminate its franchise agreements on the basis that EAG failed to meet the required RSIs for several years. EAG filed counterclaims against GM and Argonaut, alleging breach of the dealer agreements and reformation of the sublease, among other claims. GM and Argonaut moved to dismiss the counterclaims.

Breach of dealer agreements. The court found that the dealer agreements did not obligate GM to prevent third-party dealers from selling GM vehicles to or through brokers to consumers. To state a claim for breach of contract, a plaintiff must allege (1) the existence of a valid contract, (2) the terms of the contract, (3) the defendant breached the terms of the contract, and (4) the defendant’s breach caused injury to the plaintiff. The language of other provisions in the agreements cited by EAG in support of its claim were general and aspirational in nature and did not impose any contractual duties on GM. Additionally, one provision expressly acknowledged the possibility of a dealer receiving written authorization to engage in brokered transactions. Thus, EAG failed to adequately allege a direct breach of the dealer agreements.

EAG also failed to allege that GM breached any obligation to it as a third-party beneficiary, according to the court. EAG’s argument that it was a third-party beneficiary of GM’s obligations to monitor its dealer network and fairly allocate vehicles, including enforcing a prohibition against brokered sales, was rejected. No provision in the dealer agreements imposed a duty on GM to prevent, or prohibited GM from allowing, brokered sales. Moreover, one provision of the agreements expressly precluded enforcement by third-party beneficiaries.

Reformation of sublease. EAG contented that the dealer sublease should be reformed to provide for a rent subsidy on the grounds of mutual and unilateral mistake. A mutual mistake exists only when both parties were operating under the same misapprehension as to a particular essential fact. In rejecting EAG’s argument that the rental amount in the sublease was based on a mutual understanding that EAG would be permitted to operate dealerships selling vehicles under the Buick, GMC, and Pontiac brands, the court noted that the sublease clearly contemplated the possibility of EAG losing the right to sell a particular brand and did not provide for a rent subsidy in that case.

The court rejected EAG’s alternative arguments that it was operating under a unilateral mistake that it would receive rent abatement if the Pontiac brand became unavailable and Argonaut’s failure to offer abatement was unconscionable. In this case, EAG made no allegations of fraud or unconscionable conduct by GM or Argonaut in connection with the sublease’s formation, the court concluded.

The case is No. 2:13-cv-04666.

Attorneys: Jessica Sara Boar (Bingham McCutchen, LLC) for General Motors LLC. Steven R. Klein (Cole, Schotz, Meisel, Forman & Leonard, PA) for Englewood Auto Group, LLC.

Companies: General Motors LLC; Englewood Auto Group, LLC; Argonaut Holdings, Inc.

Cases: FranchisingDistribution NewJerseyNews