Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Disapproval of Franchise Transfer, Exercise of Right of First Refusal Might Violate Maryland, Federal Motor Vehicle Dealer Laws, (Nov 27, 2012)

By John W. Arden, J.D., LLM.

A truck manufacturer’s disapproval of a dealer’s proposed franchise transfer, requirement that the dealer accept a particular transferee, and exercise of its right of first refusal to purchase a franchise might violate the Maryland motor vehicle dealer law and the Federal Automobile Dealers Day in Court Act, breach the franchise agreement, and constitute unfair competition and tortious interference, according to a magistrate judge in the federal district court in Baltimore (Paccar Inc. v. Elliot Wilson Capitol Trucks LLC, November 21, 2012, Gauvey, S.). The manufacturer’s motion to dismiss these claims was denied.

Elliott Wilson Capitol Trucks LLC (Wilson) was a franchised truck dealer for Paccar, Inc., doing business as Peterbilt Motors Company. Wilson maintained two franchises, located in Landover and Easten, Maryland. The dealerships were non-exclusive franchises, selling Peterbilt and other lines of trucks and automotive parts.

In March 2011, Wilson sold its Ford franchise to the Norris Automotive Group. As a result of the sale, Norris assumed control over some aspects of the operation of the Elliott Wilson’s Landover, Maryland dealership. In July 2011, Peterbilt filed suit against Wilson, alleging that a transfer without notice was a material breach of the dealership agreement. It requested declaratory relief under the agreement and the Maryland motor vehicle dealer law.

While the suit was pending, Wilson expanded its deal with Norris to include the Peterbilt franchise. Wilson submitted the proposed deal to Peterbilt in August 2011. Peterbilt rejected the proposed transfer and gave notice of termination of Wilson’s franchise. Wilson continued negotiations with Norris and submitted another proposed transfer to Peterbilt, which again rejected the transaction. In February 2012, Peterbilt withdrew its termination notice and exercised its right of first refusal for the franchise.

In April 2012, Wilson filed a counterclaim to Peterbilt’s lawsuit, alleging that Peterbilt violated its contractual and statutory obligations by (1) failing to use best efforts to approve the proposed transactions with Norris and ultimately rejecting the transactions, (2) coercing Wilson to accept a transfer to a third party (Arscott), (3) wrongfully terminating the franchise, and (4) exercising its right of first refusal in an untimely manner. Peterbilt brought a motion to dismiss the counterclaims.

Accepting all well-pled facts as true and construing them in a light most favorable to the claimant, the magistrate judge found as follows:

Maryland motor vehicle dealer law. Claims that Peterbilt violated its duty to act in good faith under Section 15-206.1 of the Maryland Transportation Code in rejecting Wilson’s proposed transfers, disrupting Wilson’s business relationship with Norris, issuing a termination notice without factual basis, and frivolously attempting to exercise a purported right of first refusal withstood the motion to dismiss. Wilson’s claims were sufficiently specific and plausible and formed the basis for later counts against Peterbilt, according to the magistrate judge. Even Peterbilt acknowledged that some of the allegations of breach of good faith could not be dismissed at this stage. Since this count will rise or fall based on the success of subsidiary counts and since several counts were found to be sufficient at this early stage of the litigation, the claims withstood the motion to dismiss.

Maryland Commercial Code. Wilson adequately alleged that Peterbilt (1) attempted to coerce it to sell its franchises to Peterbilt or Arscott in violation of Section 15-207(b) of the Maryland Commercial Code; (2) coerced Wilson to become an exclusive dealer in violation of Section 15-207(b) of the Maryland Commercial Code; and (3) discriminated among dealers in violation of 15-207(j) of the Maryland Commercial Code. Section 15-207(b) prohibits a manufacturer, distributor, or factory branch from coercing a dealer to make any agreement. “Coerce” is defined as “to compel or attempt to compel by threat of harm, breach of contract, or other adverse consequences including the loss of any benefit made available to other dealers of the same line make.” A second provision defines “coerce” as acting in a manner that violates the good faith clause of §15-206.1.

Wilson claimed that Peterbilt violated Section 15-207(b) by attempting to force it to agree to sell the franchise back to Peterbilt and Arscott rather than to other parties, such as Norris or Hunter. Peterbilt did so by repeatedly suggesting Arscott as a buyer, insisting that it would not approve a sale to any purchaser besides Arscott and itself, and stating that Wilson should give up trying to find another buyer, according to Wilson. The counterclaim further alleged that Peterbilt imposed unrealistic multi-million dollar facility improvement requirements in an attempt to coerce Wilson into selling to Arscott.

Wilson made a plausible claim for relief under Section 15-207(b), asserting detailed allegations regarding Peterbilt’s categorical refusal to consider proposed buyers. This conduct, combined with sanctions or threats of sanctions, is wrongful. It further made plausible claims regarding Peterbilt’s coercion to make the dealerships exclusive under Section 15-207(d) and its discrimination among dealers under Section 15-207(j).

Federal Automobile Dealers Day in Court Act. Both sides agreed that the analysis under the good faith obligation of the Federal Automobile Dealers Day in Court Act was similar to that under Maryland law. Thus, the court found that the federal claims withstood the motion to dismiss just as the state claims had.

Breach of contract. Wilson alleged that Peterbilt breached their dealership agreement by (1) refusing to use best efforts to conditionally approve potential buyers; (2) refusing to allow its personnel to attend programs and training; and (3) purporting to terminate the dealership agreement for the Landover dealership without good cause and then leaving it pending for six months.

The agreement expressly required Peterbilt “to make best efforts to conditionally approve potential buyers to facilitate DEALER’s negotiations.” The court found that, at the least, the best efforts clause required that Peterbilt exercise some diligence in considering a potential buyer for the franchise. Since the manufacturer may not unreasonably withhold consent to a transfer, the diligence must include an obligation to make reasonable efforts to approve a transfer, the court said. The counterclaim unquestionably laid out a plausible claim for relief. Thus, it survived the motion to dismiss.

Unfair competition. Claims that Peterbilt made disparaging remarks to customers, informed them that Wilson was likely to be terminated, and discussed its lawsuit to terminate Wilson’s dealerships formed the basis of a plausible claim for unfair competition, according to the court.

Tortious interference. Wilson’s allegations that Peterbilt interfered with its contractual relationship with Norris could plausibly form the basis of a tortious interference claim, the court concluded.

The case is Civil No. SKG-11-2016.

Jefferson V. Wright (Miles & Stockbridge PC) for Paccar Inc., doing business as Peterbuilt Motors Co. Alan J. Hoff (Sellman Hoff LLC) for Elliot Wilson Capitol Trucks, LLC.

Cases: FranchisingDistribution MarylandNews