Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Fed. Cl.: Terminated auto dealerships may proceed with unlawful taking claims, (Sep 14, 2015)

By Greg Hammond, J.D.

Three groups of former Chrysler and GM dealership owners could move forward with claims that the federal government’s forced cancellation of certain franchise agreements under the Automotive Industry Financing Program (AIFP) constituted a taking without just compensation, in violation of the Fifth Amendment. The U.S. Court of Federal Claims determined that the former dealership owners pleaded sufficient facts and could therefore be given an opportunity to seek discovery and procure experts to show economic value at the time of the alleged taking and loss of that value as a result of the government’s purported actions (Colonial Chevrolet Co., Inc. v. U.S., September 9, 2015, Firestone, N.).

As part of the AIFP, the government gave GM $30 billion in loans and equity and Chrysler $8 billion in loans to prevent the two manufacturers from having to liquidate in bankruptcy. Both GM and Chrysler were required, however, to cancel many franchise agreements, forcing more than 2,000 dealerships to close. The former dealership owners claim that the forced cancellation of their franchise agreements constituted a taking without just compensation. The United States sought dismissal, arguing that the former owners failed to allege sufficient facts to demonstrate whether they suffered an economic loss as result of the government’s purported taking.

The plaintiffs raised four but-for world scenarios where their franchises would have had value, including but-for worlds (1) where the government gave financial assistance to the manufacturers but did not require the dealerships to close; (2) where Chrysler was financially strong enough to survive the economic downturn even without government assistance, and that the company would have continued to exist and keep its dealerships open; (3) where GM and Chrysler would have been acquired during a bankruptcy proceeding, and where the purchaser would have kept the dealerships open; and (4) where GM and Chrysler entered bankruptcy, but the dealerships would have maintained value during an orderly wind-down period.

The court first agreed with the government that the dealerships were precluded, under the Federal Circuit’s decision in A & D Auto Sales, from alleging the value of their dealerships under a but-for scenario that includes the government loan of $30 billion to GM and $8 billion to Chrysler without requiring dealerships to close. However, the court found that the plaintiffs are allowed to show economic value in but-for scenarios that take into account economic conditions as they were before they were forced to close their franchises, including scenarios where earlier stop-gap loans were not contingent upon the alleged closure of the dealerships.

In addition, the court found that former Chrysler dealership owners sufficiently alleged that their franchise agreements had economic value under the three remaining but-for scenarios. The plaintiffs that alleged a taking of a GM dealership, however, failed to demonstrate that their dealerships had value under the but-for scenario that GM would be purchased by another entity and that the dealerships would therefore survive. Specifically, the court determined that the plaintiffs only alleged conclusory assumptions without any supporting facts, such as negotiations that had actually occurred. The GM dealership plaintiffs were therefore not allowed to attempt to establish economic loss from the closure of their dealerships based on a potential merger between GM and another entity.

Although the court was mindful that the plaintiffs will have to support their allegations concerning a but-for world with sufficient real world facts to prove their cases, it found that this is the sort of information that is appropriately the subject of discovery. The plaintiffs were therefore allowed the opportunity to seek discovery and procure experts to show economic value at the time of the alleged taking and loss of that value as a result of the government’s actions. The motion to dismiss was therefore denied.

The case numbers are 10-647C, 11-100C, and 12-900C.

Attorneys: Richard D. Faulkner (Blume & Faulkner, PLLC) for Colonial Chevrolet Co., Inc. and Mike Finnin Motors, Inc. Nancie G. Marzulla (Marzulla Law, LLC) for Alley’s of Kingsport, Inc. Jonathan A. Michaels (MLG Automotive Law) for Spitzer Motor City, Inc. Kenneth M. Dintzer, U.S. Department of Justice.

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

Cases: FranchisingDistribution