Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Pa. Cmmw.: Dealer board’s blocking of new Arctic Cat dealership reversed, (Feb 24, 2015)

By Edward L. Puzzo, J.D.

A state board determination that the addition of an authorized Arctic Cat dealer near the relevant market area of an existing dealer would likely lead to the withdrawal from the market or financial failure of one or both dealers must be reversed because it was not based on substantial evidence, a Pennsylvania commonwealth court has ruled (Arctic Cat Sales, Inc. v. State Board of Vehicle Manufacturers, Dealers and Salespersons, February 23, 2015, Leavitt, M.).

Arctic Cat Sales is a licensed distributor of Arctic Cat products in York County, Pennsylvania, including snowmobiles and all-terrain vehicles (ATVs). Neiman is an authorized Arctic Cat dealer in Dover, Pennsylvania. The most recent franchise agreement between Arctic Cat Sales and Neiman is a three-year agreement executed in March 2012. Kennedy, formerly an authorized Arctic Cat dealer in Dillsburg, Pennsylvania, sold Arctic Cat snowmobiles but discontinued sales of Arctic Cat ATVs in 2006 when Arctic Cat Sales appointed Bass Pro Shops of Harrisburg Pennsylvania as a dealer of Arctic Cat ATVs, and Kennedy surrendered its franchise.

In January 2014, Arctic Cat Sales notified Neiman and Kennedy that it intended to offer a full line of Arctic Cat products through each of them. Neiman objected, contending that the relevant market area could not support two dealers. After Arctic Cat Sales refused to reconsider its decision, Neiman filed a protest with the State Board of Vehicle Manufacturers, Dealers & Salespersons.

Board. The State Board found that Neiman and Kennedy were 9.2 miles apart, placing them within the same relevant market area, and that Bass Pro was outside of that relevant market area. Given that Bass Pro was 20 miles from Neiman and 17 miles from Kennedy, in a sparsely-populated rural area, the Board found that Neiman, Kennedy or both were likely to fail financially or withdraw from the ATV market, resulting in less competition for Bass Pro in selling Arctic Cat products. Thus, Bass Pro—rather than consumers—would be the beneficiary of any price war between Neiman and Kennedy. The Board thus ruled that Neiman had met its burden of proving good cause for not permitting Kennedy to enter the relevant market area as a dealer of Arctic Cat products. Arctic Cat Sales then appealed the Board’s decision to the state court.

Court review. Under the Dealer Act, the Board’s role in the dealer appointment process was limited. It did not have authority to give prior review and approval of a dealer appointment. It took a protest in order for the Board to intervene in a new dealer appointment. Notably, the burden was on the party protesting a dealer appointment to establish “good cause” for not permitting the appointment of a new dealer.

Arctic Cat Sales complained that the Board’s critical finding of fact on the long-term harm to competition was not supported by substantial evidence. Specifically, it argued that the record lacked any evidence to support the Board’s findings that: (1) the appointment of Kennedy would result in the financial failure of either or both Neiman and Kennedy; or (2) it was Arctic Cat Sales’ intention to force the financial failure of Neiman and Kennedy in order to set up Bass Pro Shops as the exclusive dealer of Arctic Cat products in South Central Pennsylvania.

Financial failure. The court noted that the testimony cited by the Board to support its decision included one of Kennedy’s owners using hearsay to speculate that the reason that the prior owner of Kennedy discontinued the sale of Arctic Cat ATVs was “because of big box stores.” The Board’s decision was also replete with claims that the smaller dealer was “likely” to withdraw from the market due to the “possibility” of diminished profitability. The court was critical of the Board’s decision because it made 61 findings of fact, but only one of them was predictive and expressed in terms of what was likely to occur in the future. The Dealer Act requires the Board to make a prediction about future effects of a proposed establishment of an additional dealer in the relevant market area.

The record evidence cited by the Board did not support its prediction of ruinous competition that will result from Kennedy’s appointment, the court opined. There were already two dealers in the same market area selling ATVs; with Kennedy’s appointment, the two existing dealers would be selling a wider selection of ATV products. The court concluded that the Board’s finding of fact regarding the likelihood of financial failure of one or both dealers was not supported by substantial evidence.

Motive. The court further found that here was no foundation or logic in the record for the Board’s finding that Arctic Cat Sales’ motive for the appointment of Kennedy as a dealer was to leave Bass Pro as its only remaining dealer in the area. It called the Board’s circumstantial evidence “pure speculation.”

The Board claimed that it was reasonable to infer that Bass Pro Shops was one of Arctic Cat’s best customers, but provided no evidence of Bass Pro sales to support that assertion, let alone its ranking among dealers. On the other hand, the record showed that Neiman and Kennedy have been Arctic Cat dealers since the 1980s and that Arctic Cat Sales used small dealers throughout the country.

The court concluded that substantial evidence did not support the Board’s finding that the appointment of Kennedy would lead to ruinous competition and leave Bass Pro Shops the exclusive dealer in South Central Pennsylvania to the detriment of the consuming public. It therefore reversed the Board’s ruling.

The case is Civil Action No. 1151 C.D. 2014.

Attorneys: Robert B. Hoffman (Eckert Seamans Cherin & Mellott, LLC), and Annamarie A. Daley (Barnes & Thornburg LLP) for Arctic Cat Sales, Inc. Christopher K. McNally, Pennsylvania Bureau of Professional & Occupational Affairs, for State Board of Vehicle Manufacturers, and Dealers and Salespersons.

Companies: Arctic Cat Sales, Inc.

Cases: FranchisingDistribution PennsylvaniaNews