Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDGa: Dealer’s Claims Against U.S. Subsidiary of Indian Vehicle Manufacturer Survive Dismissal, (Mar 13, 2013)

By Peter Reap, J.D., LLM

Claims brought by five car dealers against Mahindra USA, Inc., the wholly-owned United States subsidiary of Indian vehicle manufacturer Mahindra & Mahindra, Inc., (“Mahindra”) based on an alleged fraudulent scheme by the parent and subsidiary (collectively, the “defendants”) to induce the dealers into dealership contracts to sell and service Mahindra Scorpio pickup trucks, while all along the defendants never intended to bring its vehicles to the U.S. market, survived a motion for dismissal by Mahindra USA, the federal district court in Atlanta has decided (Coast Buick GMC Cadillac, Inc. v. Mahindra & Mahindra, Ltd., March 6, 2013, Thrash, T.).

Background. In September 2006, Mahindra and Global Vehicles, U.S.A., Inc. executed a dealership network agreement to sell and service Mahindra Scorpio pickup trucks and SUVs in the United States after the vehicles had been certified to meet U.S. emissions and safety standards. The dealers allege that the defendants never intended to meet U.S. emissions and safety standards before the deadline specified in its contract with Global Vehicles, which allowed them to void the contract with Global Vehicles.

The dealers allege that Mahindra and Mahindra USA conspired to fraudulently and negligently induce them into transferring funds and trade secrets to nonparty Global Vehicles in return for the privilege of joining an automobile distribution network that Global Vehicles was forming to distribute trucks and SUVs manufactured by Mahindra in the United States. The defendants allegedly benefitted from the dealership network agreement being temporarily in place, as they received $9.5 million and trade secrets from the dealers during the interim.

The dealers’ complaint alleges that Mahindra USA committed fraudulent inducement, negligent misrepresentation, and civil conspiracy, and seeks punitive damages and attorneys’ fees.

Fraudulent inducement. In order to establish a claim for fraudulent inducement, the dealers must allege: (1) a false representation by Mahindra USA; (2) scienter; (3) intent to induce the dealers to act or refrain from acting; (4) justifiable reliance by the dealers; and (5) damage to the dealers, the court noted. The dealers must present their allegations with the particularity required under Rule 9(b).

The dealers pled several misrepresentations by Mahindra USA with sufficient particularity, the court held. First, the dealers sufficiently pled misrepresentations by Mahindra USA executives Robert Masone and Derek Johannes.

The dealers alleged that Johannes and Masone advised Global Vehicles that Mahindra USA would help build excitement for the Mahindra vehicle launch, and that Mahindra USA would assist Global Vehicles with setting up an assembly line for Mahindra trucks in Georgia. If Johannes and Masone knew that Mahindra did not plan to conduct a vehicle launch and did not plan to set up an assembly line for Mahindra trucks in Georgia, these statements were false representations, the court observed.

The dealers alleged that the fraudulent representations were made to a third party, Global Vehicles, in order to indirectly defraud the dealers. Georgia law supported an indirect fraud claim. In such a case, a plaintiff could establish fraud where the defendant “intends to defraud the plaintiff, the defendant knows the plaintiff will rely on a third-party, the defendant fraudulently induces the third-party to act, and the plaintiff relies on the act or actions of the third-party and, as a result, is defrauded.” Lawson v. Smith and Nephew Richards, Inc., No. 4:96-CV-297, 1999 WL 1129677, at *7 (N.D. Ga. Sept. 30, 1999).

The dealers also sufficiently pled many misrepresentations by Goenka and Shah. Goenka is “President of Mahindra’s Automotive Sector” and a director of both Mahindra and Mahindra USA. Shah is “Mahindra’s Chief Executive of International Operations” and a director of both Mahindra and Mahindra USA. For example, during a Dealer trip to India in February 2006, Goenka and Shah “assured the dealers that the Scorpio would be certified for U.S. standards and ready for distribution by 2008.”

In asking the court to conclude that Goenka and Shah made these misrepresentations pursuant to their employment relationship with Mahindra and not their relationship with Mahindra USA, Mahindra USA asked the court to decide a question of fact on the Motion to Dismiss, the court determined.

The dealers sufficiently alleged scienter. The dealers alleged that Mahindra USA’s officers and directors played an active role in the alleged fraud. The dealers pled that Mahindra USA officers and directors highlighted Mahindra USA’s successful tractor business and the timeline for Mahindra vehicles’ entry into the U.S. while knowing that Mahindra had no intention of entering the U.S. market.

The dealers also pled justifiable reliance, the court ruled. They alleged that “[b]ut for the misrepresentations made by the Mahindra Defendants, Plaintiffs would not have paid a premium amount to the Mahindra Defendants and spent millions of dollars acquiring, retrofitting and/or constructing their facilities for the introduction of Mahindra vehicles.”

As a general rule, the issue of whether a party’s reliance was reasonable and justified was a question of fact to be determined by the factfinder. Therefore, the court declined to resolve the reasonableness issue on the Motion to Dismiss.

Mahindra USA argued that the dealers did not allege what Mahindra USA gained by the alleged fraud. Alleging what the defendants obtained as a consequence of the fraud was a Rule 9(b) pleading requirement, but was not an element of a claim for fraudulent inducement in Georgia, which instead required the dealers to demonstrate harm to themselves, according to the court.

Here, the dealers stated that the “Plaintiffs handed more than $9.5 Million and trade secrets to the Mahindra Defendants.” The dealers used the inclusive term “Mahindra Defendants” to refer to Mahindra and Mahindra USA. It was impossible for the dealers to know which moneys and trade secrets were obtained by Mahindra and which were obtained by Mahindra USA without discovery, the court explained.

Negligent misrepresentation. To establish a claim for negligent representation, the dealers were required to prove: (1) Mahindra USA’s negligent supply of false information to foreseeable persons, known or unknown; (2) such persons’ reasonable reliance upon that false information; and (3) economic injury proximately resulting from such reliance.

As stated above, the dealers pled knowing misrepresentations by Mahindra USA to the dealers directly and to third parties upon which Mahindra USA knew the dealers would rely. The dealers pled justifiable reliance on these misrepresentations, and economic harm from these statements. Thus, they pled a claim for negligent misrepresentation, the court decided.

Civil conspiracy to commit fraud. To recover damages based on a civil conspiracy, a plaintiff must show that two or more persons combined either to do some act which is a tort, or else to do some lawful act with methods which constitute a tort.

The dealers adequately pled claims for fraudulent inducement and negligent misrepresentation, and they also alleged a common design establishing that two or more persons in any manner, either positively or tacitly, arrived at a mutual understanding as to how they would accomplish an unlawful design, the court reasoned. The dealers alleged that Mahindra and Mahindra USA engaged in a common design to mislead the Plaintiffs to believe that Mahindra would bring its vehicles to the U.S. market by making false representations, and thereby gain money, trade secrets, and free advertising.

Mahindra USA argued that, pursuant to the intracorporate conspiracy doctrine, a parent company could not conspire with its wholly owned subsidiary. The intracorporate conspiracy doctrine was federal law, developed while interpreting the Sherman Antitrust Act, the court noted. However, the civil conspiracy claim was a Georgia state law claim, brought under diversity jurisdiction. Under Georgia law, a corporation and its agents could conspire with one another, the court stated.

Punitive damages and attorney fees. The dealers pled a claim for fraudulent inducement, and if there was evidence of fraud, punitive damages could be awarded under Georgia law. Further, in a suit for fraud and deceit the plaintiff was entitled to have submitted to the jury the matter of allowance of attorney fees.

The case is Civil Action File No. 1:12-CV-1935-TWT.

Attorneys: Brant C. Hadaway (Diaz, Reus & Targ, LLP) for Coast Buick GMC Cadillac, Inc. Brian Avery White (King & Spalding, LLP-ATL 40) for Mahindra & Mahindra, Ltd.

Companies: Coast Buick GMC Cadillac, Inc.; Mahindra & Mahindra, Ltd.; Mahindra USA, Inc.

Cases: FranchisingDistribution GeorgiaNews