Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NJAppDiv: Preliminary Order Requiring Audi to Deliver a Guaranteed Number of Vehicles to a Terminated Distributor Pending Litigation Vacated, (Dec 18, 2012)

By Tobias J. Gillett, J.D., LLM.

A New Jersey Appellate Division court has reversed an order of a trial court that had required Audi of America to send a terminated franchise dealership a guaranteed number of new vehicles each month (Foulke Management Corp. v. Audi of America, Inc., December 18, 2012, per curiam). In a decision not intended for publication, the court determined that the lower court had misapplied New Jersey’s Franchise Practices Act (FPA) in ordering Audi to send the franchisee a set number of vehicles each month rather than requiring it to continue to apply the formula it generally used to distribute vehicles among its dealerships, and that disputed issues of fact precluded mandatory preliminary injunctive relief.

Audi manufactures vehicles, parts, and accessories and sells them through a network of authorized Audi dealers in the United States, including Atlantic Audi, a Pleasantville, New Jersey automobile dealership. Under the agreements Audi has with its dealerships, Audi would distribute new vehicles to the dealerships according to a formula based on the dealerships’ present inventory and the rate at which it sells vehicles.

On November 22, 2011, Audi sent a termination notice to Atlantic, stating that Atlantic’s dealer agreement with Audi would be terminated within sixty days, due to Atlantic’s purportedly poor customer service ratings, below average sales performance, and change of ownership without Audi’s prior approval.

On January 19, 2012 Atlantic filed suit in a New Jersey Law Division court, seeking to prevent termination of the dealer agreement and an immediate stay of the termination pursuant to the FPA. The FPA provides that a termination of a dealership will be automatically stayed pending resolution of an action to prevent the termination, “and the motor vehicle franchisor shall accord the motor vehicle franchisee all rights and privileges of a franchisee as if notice of termination had not been given.” Atlantic alleged that Audi had not provided it vehicles in the manner required under the dealer agreement, and had sent the vehicles it should have allocated to Atlantic to another New Jersey dealership instead.

In its decision, the trial court determined that Atlantic had demonstrated that it had not received “a fair and equitable inventory of cars” from Audi, finding that Atlantic would not be able to meet Audi’s sales expectations with the number of vehicles it had been given. The court found that an appropriate order would “fix a business relationship between the parties as reasonably envisioned by them.” Therefore, the court ordered Audi to deliver a set number of vehicles each month that would represent a pro rata portion of the average number of vehicles Audi would expect a dealer in that region to sell each year.

On appeal, the court overturned this decision, determining that the trial court had misapplied the FPA. The court referred to the New Jersey legislature’s concern with leveling the playing field between franchisors and franchisees in enacting the law. The court concluded that the FPA requires a franchisor, following institution of a terminated franchisee’s lawsuit to enjoin termination, to treat terminated franchisees the same as all other franchisees during the pendency of the litigation. The court read this requirement as providing only that the status quo must be maintained.

The court concluded that the trial court had exceeded its mandate under the FPA, by ordering Audi to send Atlantic a set number of vehicles rather than to allocate vehicles according the formula described in the dealer agreement. The court found this decision “radically” changed the parties’ business relationship from that maintained prior to the termination notice. The court noted that the trial court had made no finding that Audi had not continued to distribute vehicles to Atlantic according to that formula.

Atlantic further contended that, even if the FPA did not support the trial court’s decision, the trial court could still issue mandatory injunctive relief to address Audi’s refusal to follow the allocation formula and to prevent Atlantic from going out of business. The court chose not to decide whether the FPA provided the only injunctive remedy to franchisees, instead finding that in this case the court could not have appropriately granted such relief on the basis of the evidence before it.

When the trial court granted the injunction, the court found, it only had before it an affidavit from Atlantic’s vice-president, a certification from Audi’s regional general manager, the dealer agreement, and a few other exhibits. It had not conducted a plenary hearing prior to granting the injunction.

The court observed that many of the facts underlying each of the parties’ claims “were sharply disputed,” and found that an evidentiary hearing should have been held to resolve the conflicting claims. Moreover, Atlantic had provided no financial records to support its contention that it would go out of business without the order, and Audi had asserted that Atlantic’s Audi sales constituted less than ten percent of its business.

In the court’s view, the trial court could not have properly addressed the factors, such as irreparable harm, a settled legal right, substantially undisputed material facts, a reasonable probability of success on the merits, and a balancing of the equities between the parties, that a party must demonstrate by clear and convincing evidence before a New Jersey court will enter a mandatory preliminary injunction.

As the court found that the trial court had misapplied its discretion in issuing the mandatory preliminary injunction, the court reversed the trial court’s decision, vacated the paragraph of the order relating to the allocation of vehicles to Atlantic, directed the issuance of an amended order that would require Audi to “accord Atlantic all rights and privileges of a franchisee as if notice of termination had not been given,” and remanded the case for further proceedings.

The case is No. A-4717-11T2.

Randall L. Oyler (Barack, Ferrazzano, Kirschbaum & Nagelberg, L.L.P.) for Audi of America, Inc. William M. Tambussi (Brown & Connery, L.L.P.) for Foulke Management Corp., d.b.a. Atlantic Audi.

Cases: FranchisingDistribution NewJerseyNews