Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Defenses to Claim That Rent-A-Wreck Franchise Exclusivity Provision Violated California Unfair Competition Law Are “Premature”, (Jan 28, 2013)

By Tobias J. Gillett, J.D., LLM.

Resolution of various defenses to a claim that an exclusivity provision in an agreement between an implied franchisee of a used car rental franchise and the franchisor violated California’s Unfair Competition Law as an illegal restraint on trade must await further trial proceedings, the federal district court in Greenbelt, Maryland, has ruled (Schwartz v. Rent-A-Wreck of America, Inc., January 22, 2013, Messitte, P.).

David Schwartz and Rent A Wreck, Inc. (collectively, “Schwartz”) had an agreement with Rent-A-Wreck of America, Inc. (RAWA) that contained a provision stating that RAWA would not grant any franchises or open any RAWA-affiliated operations within a certain territory in Los Angeles, California where Schwartz had a used-car rental business. In 2007, Schwartz sued RAWA seeking a declaratory judgment that Schwartz could operate a “Los Angeles Rent-A-Wreck franchise, royalty-free, and without interference.”

Following a jury trial, RAWA filed a post-judgment motion asserting that the contract provision violated California’s Unfair Competition Law (UCL) as an illegal restraint on trade, and hence was “void ab initio.” The court rejected that motion, but on appeal the Fourth Circuit reversed that decision in a not-for-publication decision (468 Fed.Appx. 238, 2012-1 Trade Cases ¶77,823).

The Fourth Circuit explained that “the exclusivity provision [was] valid if it (1) is a franchise agreement and (2) does not foreclose competition in a substantial share of the affected line of commerce.” The Fourth Circuit found that the agreement was a franchise agreement, but that the second element was an issue of fact that a jury had to decide, and remanded the case with instructions that the court should “submit to a jury the question of whether the exclusive territory provision forecloses competition in a substantial share of the market for rental cars.”

In the present action, Schwartz asserted that RAWA’s claim under the UCL was barred by the statute of limitations, that RAWA did not have standing to pursue its claim, that certain affirmative defenses defeated RAWA’s claim, that the rule of reason rendered the exclusivity agreement valid, and that the court should uphold the exclusivity agreement on equitable grounds even if RAWA had a valid claim. RAWA responded by arguing that all of these defenses were either rejected by the Fourth Circuit or waived as not raised on appeal.

The court declined to address these arguments, noting that the Fourth Circuit’s decision did “not take a position on the merits of the California competition law issue one way or another; it says simply that the issue must be tried to a jury.” Therefore, in the court’s view, the litigation would have to proceed “as would any other lawsuit—with pleadings, discovery, dispositive motions that narrow the issues, and ultimately trial.”

Pursuant to this conclusion, the court ordered RAWA to file an amended-counter-claim setting forth its UCL claim against Schwartz, and ordered Schwartz to file an amended answer. The court stated that the parties could “file dispositive motions after the close of discovery.”

The court also rejected an argument by RAWA that the case could not proceed to trial unless Schwartz signed the franchise agreement, concluding that the Fourth Circuit had affirmed the court’s judgment that the parties had an implied franchise agreement, not an express one. Although the Fourth Circuit had held that Schwartz was subject to the same benefits and obligations as other franchisees, “the current Rent-A-Wreck Franchise Agreement [was] relevant only insofar as one may glean from it appropriate terms and conditions of Schwartz’s implied contract.”

The case is No. PJM 07-1679.

Attorneys: Roger Charles Simmons (Gordon and Simmons LLC) for David Schwartz. John Christopher Hanrahan (Law Offices of John C. Hanrahan LLC) for Rent-A-Wreck of America, Inc.

Companies: Rent-A-Wreck of America, Inc.; Rent A Wreck, Inc.

Cases: FranchisingDistribution Antitrust StateUnfairTradePractices MarylandNews