Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NYSupCt: Location of New Automobile Dealership Might Breach Franchise Agreements, Not Fiduicary Duty, (Nov 15, 2012)

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

Automobile franchisor Audi of America’s appointment of a new dealership within 13 miles of two existing New York dealerships might breach the parties’ franchise agreements, a New York state appellate court has ruled (Legend Autorama, Ltd. v. Audi of America, Inc., November 14, 2012, Mastro, W.). However, the conduct did not breach any fiduciary duty between the franchisor and its franchisees.

The trial court had properly denied Audi’s motion for summary judgment as to alleged breach of the express terms of Audi’s agreements with the franchised dealers and as to alleged breach of the implied covenant of good faith and fair dealing in those agreements. However, the appellate court determined that the trial court should have granted dismissal of the franchisees’ claim asserting alleged breach of fiduciary duty.

The franchisees, Audi of Smithtown, Inc. and Audi of Huntington, Inc., operated Audi dealerships in Suffolk County, New York. In 2007, Audi entered into an agreement with Atlantic Imports, Inc. to open a new authorized Audi dealership in Suffolk County, within 13 miles of the plaintiff franchisees. The franchisees brought suit, claiming that the establishment of the new dealership breached the express terms of the franchisees’ agreements, the implied covenant of good faith and fair dealing in those agreements, and Audi’s fiduciary duties to the franchisees.

The appellate court concluded that the trial court properly denied Audi’s motion for summary judgment on the breach of contract claims, including those based on Audi’s obligation to “actively assist Dealer in all aspects of Dealer’s Operations through such means as Audi considers appropriate.” The court noted that Audi executives had testified that Audi had not followed its standard procedures for addressing underperformance by a franchised dealership, such as discussing the problem with the dealership and permitting the dealership to institute an “action plan,” and hence triable issues of fact on the claim remained.

The court also agreed with the trial court that Audi had not met its burden to demonstrate a lack of triable issues of fact regarding the franchisees’ cause of action alleging breach of the implied covenant of good faith and fair dealing in the franchise agreements. The court determined that the claim could proceed, despite a provision in the agreements expressly permitting Audi to place newly franchised dealers within the territory of existing franchisees, noting that “even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party’s right to the benefit under the agreement.” In light of this standard, the court determined that triable issues of fact remained.

However, the appellate court disagreed with the trial court’s assessment of the action regarding Audi’s breach of fiduciary duty to the franchisees. The court ruled that the franchisees had failed to demonstrate “special circumstances” that would have transformed their relationship with Audi into a fiduciary one. The court cited the general rule that “there is no fiduciary relationship between a franchisee and a franchisor.” Even a relationship characterized by a franchisee’s dependency on a franchisor is insufficient to establish a confidential relationship. The court therefore granted Audi’s motion for summary judgment on the fiduciary duty claim.

The case is No. 2011-07531.

Russell P. McRory (Robinson Brog Leinwand Greene Genovese & Gluck, P.C.) for Legend Autorama, Ltd. John J. Sullivan (Hogan Lovells US LLP) for Audi of America, Inc.

Cases: FranchisingDistribution NewYorkNews