Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDMich: Auto Dealers’ Counterclaims Against Ford for Violation of Michigan Dealer Act Dismissed, (May 16, 2013)

By Peter Reap, J.D., LL.M.

Counterclaims brought by two auto dealers, one with its principal place of business in Syria and one in Iraq, against their franchisor, Ford Motor Company, for violation of the Michigan Dealer Act (MDA) were without merit because the Act did not apply to dealerships located outside of Michigan, the federal district court in Detroit has decided (Ford Motor Co. v. Ghreiwati Auto, May 15, 2013, Edmunds, N.). Further, the dealers’ counterclaims for breach of fiduciary duty, and taking of trade secrets and corporate opportunities were also dismissed. However, counterclaims for unjust enrichment and promissory estoppel could proceed.

Background. After terminating the two dealers for a variety of reasons, including citation to an Executive Order prohibiting the exportation from the United States of any Services to Syria, Ford brought suit. Ford sought to enjoin arbitration proceedings it alleges are subject to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., but for which 15 U.S.C. § 1226 only allows the arbitration to take place when both parties to the manufacturer-dealer contract consent, and Ford has withheld its consent. Ford also requested a declaratory judgment that it has no obligation to arbitrate the controversies between itself and the dealers, and to enjoin the dealers from their alleged "continued and unauthorized use of Ford’s trademarks."

The two dealers, Ghreiwati Auto and Orient Development General Trading Co., LLC, each filed five counterclaims against Ford: (1) breach of contract; (2) violation of the MDA; (3) taking of trade secrets, taking corporate opportunity and breach of fiduciary duty of loyalty; (4) unjust enrichment, and (5) promissory estoppel. Before the court was Ford’s motion to dismiss all of the counterclaims except for breach of contract.

Michigan Dealer Act. The dealers alleged that Ford violated various provisions of the MDA. They alleged that Ford breached the MDA by: (1) failing to act in good faith; (2) wrongfully cancelling/terminating/or failing to renew their dealer agreements; (3) failing to give the required notices of termination, cancellation, or non-renewal of the contracts; (4) failing to compensate for termination of the dealer agreements; and (5) falling to compensate for other expenses incurred by the breach.

The MDA governs the relationship between the manufacturers and dealers of new motor vehicles, the court noted. But the MDA has "no application to dealers located outside the state of Michigan," "[n]otwithstanding the terms, provisions, or conditions of a dealer agreement[.]" Mich.Comp.Laws §445.1582. To qualify as a "new motor vehicle dealer," the MDA requires that the dealer have "an established place of business in [Michigan.]" Mich.Comp.Laws § 445.1565, s. 5 (2).

The dealers argued that the court should apply the MDA to this case for three reasons: (1) there was no rational basis to exclude the dealers from the protections the MDA provides to dealerships, and excluding them so would violate public policy "under the unique facts of this case;" (2) applying the law, as Ford analyzed it, to the dealer agreements, demonstrated Ford’s bad faith in drafting the agreements and made the choice-of-law provision in the adhesion contracts unconscionable; and (3) Ford was estopped from taking an inconsistent position regarding the MDA.

The dealers’ arguments were rejected, the court held. The MDA was clear that its provisions did not apply to dealerships that were not physically located in Michigan. Because the two dealers’ dealerships were not physically located in Michigan, they could not avail themselves of the MDA’s provisions.

Although the dealers pointed to several cases to support their argument that the MDA should apply extra-territorially, these cases failed to persuade the court. The caselaw offered by the dealers was distinguishable from the circumstances of this case, according to the court.

The dealers also contended that judicial estoppel and/or the doctrine of preclusion prohibited Ford from alleging that the MDA did not apply. The dealers stated that Ford has maintained, under the Automobile Dealer’s Day in Court Act (ADDCA), which only applied to residents of the United States, prohibited the dealers from saying that the MDA did not apply.

In its reply, Ford acknowledged that it has taken the position, under 15 U.S.C. §1226, that it was not obliged to arbitrate the dispute with the dealers. But Ford also maintained that its position was not inconsistent with the argument that the MDA only applied to dealerships in Michigan.

The court agreed with Ford. The issue as to whether the ADDCA applied was not slated for adjudication at the moment.

Breach of fiduciary duty, illegal takings. The dealers did not make allegations that took this case’s controversy outside of a commercial setting, the court determined. Their allegations arose from the dealer agreements.

The dealers alleged that Ford crafted the dealer agreements’ broad terms so that a course of performance would fill in the open terms of the contracts based on the dealers’ localities’ religions, traditions, laws, and historical cultures. They also alleged that a fiduciary relationship existed because Ford had access to all of the dealers’ confidential and proprietary business information. And the dealers maintained that their agreements gave Ford the ability to unilaterally change the scope of the agreements and threaten termination if the dealers did not comply with its demands. These allegations supported a breach of contract claim, but they did not create or allege a fiduciary relationship from which a breach of fiduciary relationship claim could derive, the court ruled.

In addition, the dealers’ breach of fiduciary duty claims were not well-pleaded. Aside from conclusorily stating that they placed their trust and confidence in Ford and that Ford had access to their confidential information, the dealers did not allege how they relied to their detriment or how they suffered. The dealers also did not allege what confidential information Ford had access to that would create a confidential relationship, according to the court.

Ford also pointed out that the dealers did not plead the elements of any trade secret or corporate opportunity claim. It also argued that the dealers did not plead sufficient facts to support their allegations of using the dealers’ confidential business practices and marketing plans in expanding in the Middle East. The dealers failed to allege what "confidential" information was misused or how it was misused; have never alleged to whom the information was disclosed, or when, or why, and never identified the other Middle Eastern countries into which Ford allegedly expanded or the competitive dealers with whom Ford expanded.

The dealers did not address the trade secrets or corporate opportunity issues in their response. If the dealers meant to assert these claims, they did not do so properly and they were dismissed with prejudice.

Unjust enrichment, promissory estoppel. To sustain an unjust enrichment claim, a plaintiff must allege (1) the receipt of a benefit by the defendant from the plaintiff that (2) results in an inequity to the plaintiff due to the defendant retaining the benefit. Promissory estoppel requires: (1) a promise (2) that the promisor should reasonably have expected to induce action of a definite and substantial character on the part of the promisee and (3) that, in fact, produced reliance or forbearance of that nature (4) in circumstances requiring enforcement of the promise if injustice is to be avoided.

Although the dealers were correct that they could plead alternative claims, in some instances, a breach of contract claim would preclude unjust enrichment or promissory estoppel claims, the court noted. Because the breach of contract claim was not before the court, the court was somewhat hampered in the adjudication of the unjust enrichment and promissory estoppel claims. Facially, the dealers alleged the elements of those claims and additionally summarily alleged facts that appeared to align themselves with the elements of those claims.

The dealers’ allegations in support of their unjust enrichment and promissory estoppel theories were intertwined with the contracts: the confidential marketing plan; the expenses for building, starting, and maintaining the dealerships, the promises of an extended duration, and the alleged agreement to permit the sale of vehicles to third party traders, etc., the court reasoned. But, even given the intertwinedness, dismissal was not appropriate, the court ruled.

Ford has raised the defense of impracticability of the contracts, the court observed. Given that defense and the fact that the breach of contract claims were not before the court, the court could not find that the equitable theories were out of the realm of possible outcomes on a motion to dismiss. While Ford stated that neither party was going to dispute that express contracts existed between the parties, Ford did not show how the dealer agreements’ provisions overlapped with the dealers’ allegations in the unjust enrichment and promissory estoppel claims. Without a careful parsing of the contracts and appropriate factual development, the court could not say that the dealers failed to state a rough plausible claim to relief.

The case is No. 12-14313.

Attorneys: Thomas S. Bishoff (Dykema Gossett) for Ford Motor Company. Daniel E. Myers (Fuller & Myers) for Ghreiwati Auto.

Companies: Ford Motor Co.; Ghreiwati Auto.

Cases: FranchisingDistribution MichiganNews