Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NHSupCt: Nissan’s Settlement Agreement with Dealer Was Unenforceable, Violated Anti-Waiver Provisions of New Hampshire Dealer Law, (Apr 15, 2013)

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

A settlement agreement between motor vehicle franchisor Nissan North America, Inc. and its dealer Strike Four, LLC was unenforceable to the extent that portions of the agreement violated the New Hampshire motor vehicle dealer law, RSA Chapter 357-C, establishing a dealer’s right to procedural protections that cannot be waived in advance, the New Hampshire Supreme Court has decided (Strike Four, LLC, v. Nissan North America, Inc., April 12, 2013, Conboy, J.). Therefore, those portions of the agreement providing for a severance of the manufacturer-dealer relationship without the statutory discontinuance procedures were unenforceable.

Because the statutory franchise discontinuance requirements had not been satisfied, the state supreme court affirmed a decision of a state trial court that "to the extent that the Agreement seeks to remove [the Dealer’s] right to protest the franchise-ending process embodied in the Agreement – language that effectively creates a refusal-to-do-business timeline – the Agreement is void," and the trial court’s order vacating a New Hampshire Motor Vehicle Industry Board’s order to the extent that it ruled otherwise.

Should Nissan initiate termination proceedings, and should the dealer opt to protest any discontinuance under RSA 357-C:7, I(d)(1), the Board could consider the terms of the agreement and the actions of the parties, as well as any other evidence that may properly bear on the issues of good faith and good cause, in making its determination, according to the supreme court.

Background. On July 8, 2005, Nissan issued to the dealer a notice of termination of its dealership franchise. The dealer filed a protest with the Board. The parties jointly moved to stay Board proceedings to allow for settlement negotiations and the Board granted this motion.

After two years of settlement negotiations, with both parties represented by counsel, on October 15, 2007, the parties entered into a settlement agreement that provided that the dealer and Nissan would execute a new two-year term agreement, and the dealer would withdraw its protest. The combined terms of the settlement agreement and the term agreement included relocation provisions (and a construction schedule for an exclusive Nissan sales facility), exclusivity provisions, and "Dealer Minimum Sales Performance" (MSP) requirements. The term agreement provided that if the dealer failed to meet any of its obligations by the specified deadlines, or otherwise materially breached the agreements, the dealer would within six months execute an agreement to sell its dealership to an acceptable third party and within 12 months consummate that sale.

Essentially, the Agreement required the dealer, if it did not meet the agreement’s relocation, MSP, and other requirements, to divest itself of the dealership "by sale or forfeiture" within a certain timeframe.

In 2008 and 2009 the parties amended the Agreement by extending its expiration date, but on November 12, 2010, Nissan advised the dealer that it was "highly unlikely" that the dealer would be able to fulfill its MSP obligations under the Agreement by the March 11, 2011 deadline and suggested that the dealer "begin now to actively [look] for potential buyers" for the dealership’s assets. Interpreting the November 12 letter as a notice of termination, the dealer filed a protest with the Board on December 29, 2010.

The dealer argued that the sales performance obligations under the agreement were unreasonable, and challenged the enforceability of the agreement’s provisions requiring the dealer to voluntarily divest itself of the dealership assets as inconsistent with the protections of RSA chapter 357-C. On February 3, 2011, Nissan filed a counter-protest, alleging that the dealer’s actions – including initiation of the 2010 protest challenging the enforceability of provisions contained in the agreement, which Nissan had signed in reliance upon the dealer’s express agreement that the dealer would not challenge its provisions – constituted bad faith conduct in violation of RSA 357-C:3, I.

On May 31, 2011, the Board dismissed the Dealer’s protest and sustained Nissan’s counter-protest. The Board found that both parties had entered into the Agreement in good faith and that Nissan had not cancelled or failed to renew the franchise agreement.

The Board reasoned that the Agreement resolved a previous dispute, and therefore did not violate RSA 357-C:6 (2009), which provides that all agreements between a manufacturer and dealer are "subject to the provisions of the chapter, and provisions of such agreements which are inconsistent with this chapter shall be void as against public policy and unenforceable." See RSA 357-C:6. The Board specifically found that the Agreement did not deny the Dealer its right to file a termination protest if Nissan were to issue a new notice of termination. As to Nissan’s counter-protest, the Board found that the Dealer’s filing of the 2010 protest despite the waiver provisions of the Agreement constituted bad faith in violation of RSA 357-C:3, I.

Analysis on Appeal

The Dealer appealed to the New Hampshire Superior Court and the court the court vacated the Board’s decision, granted the Dealer’s petition, denied Nissan’s motion for summary judgment, and dismissed Nissan’s counterclaims. Nissan appealed to the New Hampshire Supreme Court.

Estoppel. Nissan first argued that the Dealer should be estopped from arguing that the Agreement was not valid. However, estoppel did not preclude the Dealer from challenging the enforceability of the Agreement, according to the Supreme Court. As a general rule, a party was not estopped from asserting the illegality of a contract because of his participation in or encouragement of the illegality.

The New Hampshire motor vehicle dealer law. Nissan argued that RSA chapter 357-C did not preclude enforcement of the Agreement as written, and that the superior court erred when it invalidated portions of the Agreement as contradicting the statutory scheme. It asserted that RSA chapter 357-C was not intended to regulate settlement agreements, but rather to promote settlement in accordance with New Hampshire’s common law and public policy favoring voluntary resolution of disputes. Nissan further maintained that the Agreement was not inconsistent with RSA 357-C:7, governing the discontinuance of a franchise.

The Dealer, responded that the superior court correctly interpreted RSA chapter 357-C to establish a dealer’s right to procedural protections that cannot be waived in advance, and that the portions of the Agreement providing otherwise – i.e., providing for a severance of the manufacturer-dealer relationship without the statutory discontinuance procedures – were therefore unenforceable. The New Hampshire Supreme Court agreed with the Dealer.

The statute required four prerequisites to a manufacturer’s or distributor’s discontinuance of its relationship with a dealer: (1) notice; (2) good faith; (3) good cause; and (4) either the Board’s determination of good cause or the dealer’s acquiescence to the discontinuance, expressed either by its written consent or by its failure to protest the discontinuance in a timely manner, the court noted.

Although the superior court noted that voluntary termination would "not directly or overtly violate the technical language of the statute," it ruled that the Agreement’s provisions purporting to define "good cause" and to avoid RSA chapter 357-C’s pre-termination requirements were "exactly the type of procedure contemplated and prohibited by the statute," and were therefore invalid. The superior court ultimately ruled that "to the extent that the Agreement seeks to remove [the Dealer’s] right to protest the franchise-ending process embodied in the Agreement – language that effectively creates a refusal-to-do-business timeline – the Agreement is void." The supreme court agreed with the superior court’s reasoning.

The severance of the manufacturer-dealer relationship "by sale or forfeiture" by virtue of the Settlement Agreement amounted to a de facto discontinuance of that relationship without statutory protections, the court observed. Regardless of whether the sale of the Dealer’s assets was characterized as "voluntary" or otherwise, it was clear that Nissan was seeking the discontinuance of the franchise. It was similarly apparent that RSA 357-C:7, I(d), requiring either the Board to find good cause or the dealer to acquiesce to the discontinuance by filing a consent form or by allowing the protest period to lapse, was not satisfied.

Nissan argued that RSA chapter 357-C is not applicable to settlement agreements, since both the statutory scheme and public policy support the validity and enforcement of settlement agreements.

The supreme court noted that some jurisdictions exempt settlement agreements from statutory anti-waiver provisions in the franchise context. However, because it interpreted legislative intent from the statute as written and would not consider what the legislature could have said or add language that the legislature did not see fit to include, the supreme court read RSA chapter 357-C to govern "[a]ll written or oral agreements of any type between a manufacturer or distributor and a motor vehicle dealer," RSA 357-C:6, I, including settlement agreements.

Nissan next argued that the statute was inapplicable to the Agreement because RSA 357-C:7 distinguished between voluntary waivers and releases by dealers, including the Agreement, and those which a manufacturer requires. That argument was without merit.

The cases Nissan cited for the proposition that voluntarily-entered releases did not violate dealer protection statutes were inapplicable to the analysis, the supreme court held. The Dealer did s not allege that Nissan violated the statute by requiring it to sign the Agreement, but rather contended that certain provisions of the Agreement were unenforceable because they conflict with RSA 357-C:7.

The supreme court was also not persuaded by Nissan’s next argument, that RSA 357-C:7, I, does not apply to the Agreement because a separate subsection, RSA 357-C:7, VI, imposes dealer protections in the form of manufacturer buyback requirements after termination, cancellation, or nonrenewal of a franchise, either "as provided for in this section, or . . . by the motor vehicle franchisee."

Whether a purely franchisee-initiated discontinuance would be subject to the statutory discontinuance procedures of subsection I, was not an issue before the court. Here, Nissan informed the Dealer that it was obligated to divest itself of its Nissan assets and that "[i]n no event shall Dealer be authorized to conduct Nissan Dealership Operations" after the franchise sale deadline provided in the Agreement. Under these circumstances, the Dealer did not initiate the discontinuance, according to the court. Therefore, the provisions of RSA 357-C:7, I, controlled. Nor was the court persuaded that the legislature’s 2009 amendment of subsection VI, which enhanced dealer protections under RSA 357-C:7 by requiring the manufacturer to buy back its inventory upon discontinuance regardless of which party initiated the franchise termination, in any way limited the procedural discontinuance requirements of RSA 357-C:7, I.

Nissan’s argument that the Agreement was not subject to the statutory discontinuance procedures because it reflected a mutual, rather than unilateral, discontinuance, was similarly unavailing, the court ruled. RSA 357-C:7, I, was not limited to unilateral terminations. The legislature’s intent, that a manufacturer comply with the statutory discontinuance procedures even in cases where the dealer acquiesces to the discontinuance, is apparent from reading subsection I(d) in connection with section IV.

Because the court’s holding was based upon a conflict between the terms of the Agreement and the language of the controlling statute, it was not persuaded by the argument that the result here represented an "unsound public policy" discouraging parties from agreeing to settlements. Under the provisions of the statute, parties could still agree to a wide range of settlement terms; they could not, however, contract to waive the protections of the statute itself, according to the court.

Having determined that RSA 357-C:7 applied, the court turned to Nissan’s argument that the requirements of RSA 357-C:7, I, were satisfied. Nissan contended that the Agreement itself constituted the Dealer’s "written consent" for the purposes of RSA 357-C:7, I(d)(2), and that the Agreement also stipulated to "good cause."

However, the Agreement did not satisfy the statutory discontinuance procedures, the court determined. RSA 357-C:7, I, provides:

Notwithstanding the terms, provisions, or conditions of any agreement or franchise, and notwithstanding the terms or provision to any waiver, no manufacturer, distributor, or branch or division thereof shall cancel, terminate, fail to renew, or refuse to continue any franchise relationship with a licensed new motor vehicle dealer unless [the following requirements are satisfied].

Given this explicit anti-waiver provision, the specified discontinuance requirements could not be satisfied by agreement predating a notice of discontinuance. Further, the notice requirement could not be "built into" an agreement; it must be provided at the time the manufacturer actually determined to seek discontinuance of the franchise, the court held.

Likewise, the "written consent" that would satisfy RSA 357-C:7, I(d) could not be granted by agreement in advance of a manufacturer’s notice of discontinuance of the franchise because such would constitute an invalid waiver under the statute. Thus, although the statute permitted franchise terminations by consent, such consent could be given only after proper notice.

Here, the Agreement could not be regarded as a "consent" to discontinuance because the agreement does not, in fact, discontinue the franchise. To the contrary, the Agreement contemplated that the franchise will continue; the termination provisions were contingent upon certain conditions not being met by the Dealer within a set time period. Because the Agreement set forth the terms of a continuing manufacturer-dealer relationship, the provisions relating to discontinuance of that relationship constituted an impermissible prospective waiver.

Attorney fees. Nissan argued that it was entitled to an award of attorney fees and costs because it was the prevailing party on its counter-protest under RSA 357-C:3.

The court’s conclusion regarding the unenforceability of the franchise-ending provisions of the Agreement did not necessarily vitiate Nissan’s bad faith claim, the court decided. Nissan alleged that the Dealer forestalled its termination from 2005 through two years’ worth of negotiations, at the conclusion of which it agreed that the Agreement’s terms were fair and reasonable; that the Dealer then forestalled termination for another four years (during which time it received Nissan’s approval for extensions of time and relocated twice); and that, only after receiving many years’ worth of the benefits attributable to its status as a Nissan dealer did the Dealer "reveal its plan to avoid its obligation to sell the dealership, by claiming – for the first time – that the Agreement was illegal and unenforceable." Because Nissan’s statutory claim for fees was based upon the Dealer’s alleged bad faith conduct, the unenforceability of certain of the provisions of the Agreement did not necessarily dictate the result of that claim.

Whether the Dealer acted in bad faith under these circumstances was a factual determination. Because the record reflects a genuine issue of material fact on this question, remand to the Board was necessary. Thus, the superior court’s dismissal of Nissan’s claim for attorney’s fees was vacated and the dispute remanded for further proceedings.

The case is No. 2012-193.

Attorneys: Gregory A. Holmes (Holmes Law Offices PLLC) for Strike Four, LLC. William N. Berkowitz (Bingham McCutchen LLP) for Nissan North America, Inc.

Companies: Strike Four, LLC.; Nissan North America, Inc.

Cases: FranchisingDistribution NewHampshireNews