Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDWVa: West Virginia Motor Vehicle Dealer Law Could Not Protect Dealer from GM’s Post-Bankruptcy Termination , (Nov 30, 2012)

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

The West Virginia motor vehicle dealer law could not protect a General Motors dealer, which was not selected to be part of GM’s post-bankruptcy dealer network, from termination under a settlement agreement that allowed the dealer to continue for a period of time under particular conditions, according to the federal district court in Elkins, West Virginia (General Motors, LLC v. Bill Kelley, Inc, November 29, 2012, Bailey, J.).

The dealership was subject to termination for failing to achieve sales performance goals contained in the settlement agreement, entered after the dealer brought an arbitration claim pursuant to the federal Dealer Arbitration Act, which allowed non-retained GM dealers to seek reinstatement.

Bill Kelley, Inc. was an authorized Pontiac, Buick, and GMC truck dealer when GM filed a voluntary Chapter 11 petition for relief in U.S. Bankruptcy Court on June 1, 2009. GM sold the bulk of its assets to a new company (General Motors LLC). In connection with the bankruptcy proceedings, GM reviewed dealer performance to identify poorly performing dealerships that would not become part of the post-bankruptcy revamped dealer network. The non-retained dealers were offered Wind-Down Agreements, which would allow them to continue for a time before termination.

In bankruptcy proceedings, GM determined not to retain Bill Kelley, Inc. and offered it a Wind-Down Agreement, which Kelley accepted. Kelley agreed to cease its dealership operations no later than October 21, 2010. Subsequently, non-retained dealers sought relief from Congress, which passed legislation (the Dealer Arbitration Act), giving them the opportunity to seek reinstatement through binding arbitration. Kelley took advantage of this process, filing a demand for arbitration. GM agreed to settle Kelley’s arbitration claim and executed a settlement agreement, allowing Kelley to continue to operate as a dealer for an additional period but requiring it to waive all rights in connection with its arbitration claim.

As part of the settlement agreement, the parties executed a 2010 General Motors LLC dealer sales and service agreement, requiring it to achieve an aggregate Retail Sales Index of at least 85 for 2011. The agreement provided that Kelley would sell its assets if it failed to meet the requirement. It also said that if Kelley instituted any proceeding against GM LLC, the manufacturer was entitled to an immediate permanent injunction.

Kelley failed to meet the aggregate Retail Sales Index of 85 for 2011. On June 8, 2012, GM LLC gave notice that it was exercising its option to purchase Kelley’s assets. Kelley refused to comply with the terms of the settlement agreement, leading GM to bring this lawsuit.

West Virginia Motor Vehicle Law

In seeking to avoid its obligations under the settlement agreement, Kelley raised two arguments: (1) that GM LLC’s actions violated the West Virginia motor vehicle dealer law (West Virginia Code §17A-6A-4) and (2) that the settlement agreement was null and void under a provision of the West Virginia motor vehicle dealer law (West Virginia Code §17A-6A-18).

With respect to the first argument, the district court explained that West Virginia Code §17A-6A-4 prohibited a manufacturer from cancelling, terminating, or failing to renew a motor vehicle dealer agreement except under specified conditions. One of the required conditions was providing 120 days notice of termination by certified mail. However, this argument “failed to recognize that Kelley entered into the Settlement Agreement which specifically provided for the exercise of an option to purchase Kelley’s assets in the event that it failed to reach the performance standards set forth in the agreement.” The Fourth Circuit has upheld a freely executed letter agreement between a manufacturer and dealer that the dealer later claimed constituted termination when enforced, according to the court.

Kelley asserted that the exercise of the option in the settlement agreement was tantamount to termination, while GM LLC contended that it was not terminating the agreement. “The resolution of this dispute is not required in this case because Kelley agreed that the option could be exercised if it failed to meet the performance standard,” the court observed.

Contrary to the dealer’s contention, the 2010 dealer sales and service agreement did not subject the parties to the West Virginia motor vehicle dealer law, since it was executed pursuant to the settlement agreement and Kelley failed to meet the agreed-to performance standards. Having induced GM LLC into entering the settlement agreement to remain in the dealer network rather than risk losing the arbitration, Kelley was estopped from challenging the application or validity of the settlement agreement.

Injunctive Relief

GM LLC was granted specific performance of the settlement agreement and an injunction against Kelley. GM LLC demonstrated that it would suffer irreparable harm in the absence of injunctive relief. Kelley, in contrast, would not be irreparably harmed by GM LLC’s mere exercise of its option to purchase certain assets under the settlement agreement, the court held. Kelley waited more than two years after signing the settlement agreement to challenge it. During that time, it enjoyed the benefits of continuing to operate the dealership, unlike other dealers who lost their arbitration proceedings.

An injunction would serve the public interest, since the enforceability of settlement agreements is strongly favored as a matter of public policy. Furthermore, the issuance of an injunction upholding the validity of the settlement agreement supported the principles of equity. “It would have been unjust to allow Kelley to essentially void or rescind the Agreement after enjoying the benefits of operating under it for more than two years,” the court reasoned.

However, the district court stayed the effect of its order for a period of 30 days to permit Kelley to apply for a stay of proceedings with the U.S. Court of Appeals in Richmond, Virginia.

The case is Civil Action No. 2:12-CV-51.

J. Todd Kennard (Jones Day) for General Motors LLC. Johnnie E. Brown (Pullin Fowler Flanagan Brown & Poe PLLC) for Bill Kelley, Inc.

Cases: FranchisingDistribution WestVirginiaNews