Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Del. Sup. Ct.: Delaware dealer statute does not require post-termination repurchase of used equipment, (Jun 16, 2015)

By Edward L. Puzzo, J.D.

Under the Delaware Equipment Dealer Contracts Statute, in the event of the termination of a distribution agreement, the supplier is required to repurchase new and unused equipment from the dealer but is not required to repurchase used equipment, according to the Delaware Supreme Court in Dover (Terex Corporation v. Southern Track & Pump, Inc., June 15, 2015, Valihura, K. ).

Terex Corporation, a Delaware construction equipment manufacturer, entered into a distributorship agreement with Southern Track & Pump, a Florida dealership. Subsequently, Southern decided to terminate the distributorship agreement. Based on its interpretation of Delaware’s Equipment Dealer Contracts Statute, Southern argued that Terex was required to repurchase all unwanted inventory it previously sold to Southern. Terex refused to do so, arguing that the dealer statute only required it to repurchase new and unused inventory, and since most of the purchased equipment had entered Southern’s rental fleet, that equipment was used. Nevertheless, Terex agreed to repurchase some of the equipment Southern asked it to repurchase, reserving the right to deduct costs for required parts and repairs. While the parties were in negotiations over the extent of repurchases, GE Commercial Distribution Finance, the party that had financed Southern’s purchases from Terex, repossessed Southern’s inventory for non-payment of Southern’s loans. GE later sold most of the equipment at auction.

Certified Question. The dispute between Southern and Terex over the dealer statute’s repurchase obligations reached the U.S. District Court, which ruled for Southern, holding that Section 2723(a) of the dealer statute required suppliers to repurchase all—not just new and unused—inventory. As a result, the district court ordered Terex to pay the full price of all inventory it had sold to Southern. After Terex appealed to the U.S. Court of Appeals for the Third Circuit, that court certified the following question of law to the Delaware Supreme Court:

“Does a supplier’s repurchase obligation under § 2723(a) of the Dealer Statute extend to used inventory or is it limited to “new, unused, undamaged and complete inventory” under § 2723(b)?”

Repurchase obligation. The Delaware Equipment Dealer Contracts Statute imposes a mandatory repurchase obligation on the supplier whenever a contract between a supplier and dealer is terminated by either party. Section 2723(a) requires the repurchase of “all inventory” without distinguishing between new and used equipment. However, Section 2723(b) specifies two repurchase price formulas—one for “new, unused, undamaged” inventory other than repair parts, and another for “new, unused, undamaged” repair parts—and is silent as to the price for used inventory.

Those portions of the dealer statute are ambiguous, the Delaware Supreme Court conceded, but construing the statute holistically, instead of viewing questionable terminology in isolation, favors one interpretation: that the supplier’s repurchase obligation is limited to “new, unused, undamaged and complete” inventory and not used equipment.

Construction of dealer statute. It is inconsistent with the statute’s overall level of detail to infer that by omission the legislature intended to require that suppliers repurchase used equipment, the court stated. That is especially the case since the General Assembly can be presumed to have understood the heavy construction equipment industry, and therefore understood that dealers typically use equipment in their rental fleets, thereby rendering them not “new, unused, or undamaged.” That they chose not to include a repurchase price formula for rental fleet equipment suggests that the court should decline to supply the alleged omission.

This construction is also consistent with other provisions in the statute. Since a repurchase price formula is provided for “new, unused, undamaged” equipment, and there can be no repurchase without a price, this suggest that the legislature did not intend to require that the supplier to repurchase used equipment.

Comparison to motor vehicle statute. The court also compared the Delaware Equipment Dealer Contracts Statute to the similar Delaware Motor Vehicle Franchise Statute (MVFS) passed four years earlier. The MVFS requires a manufacturer to repurchase vehicles the dealer acquired from the manufacturer or distributor if they are new, unused, undamaged and with less than 750 miles on the odometer. Under some circumstances, such as termination due to cessation of the line-make by the manufacturer, the amount the dealer is entitled to is the fair market value of the franchise. The MVFS establishes a specific procedure for determining the fair market value of the franchise. This specificity in a related context leads to the inference that the legislature did not intend for used inventory to be included in the dealer statute repurchase requirement.

Comparison to dealer statutes in other states. Dealer statutes in several states provide for the repurchase of equipment that is not “new, unused, undamaged and complete” or that has been used in the dealer’s rental fleet, and set the repurchase price at the “average as-is value shown in current industry guides.” The absence of a similar provision in Delaware’s Dealer Statute suggests that the omission was intentional, stated the court.

As to Southern’s argument that the meaning of “all inventory” is plain and includes used equipment, the court answered that “all” modifies inventory “that remains unsold,” meaning that a supplier may not choose to repurchase only a subset of equipment that otherwise qualifies to be repurchased. It does not indicate that used equipment must also be repurchased.

The case is Civil Action No. 13-4279.

Attorneys: John C. Phillips, Jr. and David A. Bilson (Phillips, Goldman & Spence, PA) and Virginia W. Hoptman (Redmon Peyton & Braswell LLP) for Terex Corporation. Peter J. Walsh, Jr. and Ryan M. Murphy (Potter Anderson & Corroon LLP) and Suzanne Hill Holly (Berger Harris, LLC) for Southern Track & Pump, Inc.

Companies: Terex Corporation; Southern Track & Pump, Inc.

Cases: FranchisingDistribution DelawareNews