Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Fed. Cir.: Former GM and Chrysler dealers’ claims under Takings Clause for post-bankruptcy terminations can proceed, (Apr 8, 2014)

By Linda O’Brien, J.D., LL.M.

In an action by former auto dealers whose franchises were terminated as a condition for government financial assistance in the bankruptcies of two auto manufacturers, the Claims Court ruling that the dealers’ claims against the government were sufficient to state a claim under the Takings Clause was upheld by the U.S. Court of Appeals in Washington, D.C. However, since the dealers’ allegations of economic loss were insufficient, the matter was remanded to grant the dealers leave to amend (Colonial Chevrolet Co., Inc. v. U.S., April 7, 2014, Dyk, T.).

Colonial Chevrolet and Mike Finnin Motors are former auto dealers whose franchises were terminated by the bankruptcies of General Motors and Chrysler in 2009. The dealers each filed putative class action suits against the government, alleging that the terminations constituted a regulatory taking, since they were a condition of GM and Chrysler receiving government financial assistance in the bankruptcies. The government’s motion to dismiss both complaints for failure to state a claim was denied, and the government appealed.

Property interest. The Federal Circuit found that the dealers had a compensable property interest. The Takings Clause of the Fifth Amendment of the U.S. Constitution guarantees just compensation whenever private property is taken for public use. There was no dispute that the dealers’ franchise agreements were property for purposes of the Takings Clause or that the bankruptcy trustees were allowed to reject executory contracts that predated the creation of their franchise agreements. Since the government action to require dealer terminations as a condition of financial assistance to the automakers did not predate the acquisition of the dealers’ interests, the dealers’ franchise agreements were valid and compensable property interests, the court determined.

Takings liability. The government’s action to offer financing to the automakers as a way to require them to eliminate the property rights of the dealers was sufficient to give rise to takings liability. The dealers alleged that the dealer terminations were the direct and intended result of the government’s actions directed at GM and Chrysler, since the financing was expressly conditioned on the terminations. The dealers also alleged that the action was coercive because the automakers could not survive without the financing. However, declining to determine whether coercion existed, the court noted that there was insufficient evidence in the record at the current state of the litigation and deferred the issue for consideration by the Claims Court.

Economic impact. In order to establish a regulatory taking, a plaintiff must show that his property suffered a diminution in value or a deprivation of an economically beneficial use. Although the dealers failed to sufficiently allege that the economic value of their franchises was reduced or eliminated as a result of the government’s action, their oral arguments before the appellate court disputed the government’s assertion that the franchises were valueless. Declining to dismiss the complaints, the court concluded that the appropriate remedy was to grant the dealers leave to amend their respective complaints to include specific allegations establishing economic loss.

The case is No. 2013-5020.

Attorneys: Roger J. Marzulla (Marzulla Law, LLC) and Harry Zanville (Law Office of Harry Zanville) for Colonial Chevrolet Co., Inc. and Mike Finnin Motors, Inc. Kenneth M. Dintzer, U.S. Department of Justice for United States.

Companies: Colonial Chevrolet Co., Inc.; Mike Finnin Motors, Inc.

Cases: FranchisingDistribution DistrictofColumbiaNews