Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D.N.Y.: Dispute over failure to approve sale of Hyundai dealership dismissed in part, (Sep 9, 2024)

By Donielle Tigay Stutland, J.D.

It was not unreasonable for a franchisor to consider a prospective purchaser’s prior car dealership experience in approving the sale of a Hyundai car dealership.

A federal district court in New York City granted in part a motion for summary judgment by Hyundai Motor America (“HMA”) in a case brought by the owner of a Hyundai dealership in New York. The dispute was related to the dealership owner’s, Arthur Glick Truck Sales, Inc.’s (“Glick”), proposed sale of the dealership and HMA not approving the transfer of the dealership to a prospective purchaser due to the buyer’s lack of any prior experience of owning a car dealership. Glick brought a suit against HMA alleging that the withholding of consent to the transfer was unreasonable and violated the Federal Automobile Dealers’ Day in Court Act (“ADDCA”), New York’s Franchised Motor Vehicle Dealer Act, and breach of contract. The court granted HMA’s motion for summary judgment on claims one and three, after concluding that it was not unreasonable for HMA to consider a prospective purchaser’s prior car dealership experience in approving the sale of a Hyundai car dealership. The court did deny the motion for summary judgment with respect to the breach of contract claim after finding that there was a genuine issue of material fact as to HMA’s basis for withholding consent to the transfer (Arthur Glick Truck Sales, Inc. v.Hyundai Motor America, No. 7:22-cv-01213-PMH (S.D.N.Y. Aug. 29, 2024)).

Background. HMA is the manufacturer of vehicles for the consumer-oriented passenger vehicle market, including sport utility vehicles, crossover vehicles, sedans, and compact cars. Arthur Glick Truck Sales, Inc. (“Glick”) is the owner of a HMA dealership. HMA and Glick were parties to a series of Hyundai Motor America Dealer Sales and Service Agreements (the “Dealer Agreement”) from 2006 through 2020, pursuant to which Glick owned and operated a Hyundai dealership in Monticello, NY. The Dealer Agreement specifies that any change in ownership of the dealership “requires the prior written consent of HMA, which HMA shall not unreasonably withhold.”

In February 2020, Glick entered into an Asset Sale Agreement (the “ASA”) to sell its business assets, including its Hyundai franchise, to Gabrielli Kenworth, LLC (“Gabrielli”). HMA turned down the proposed transfer of the Hyundai franchise to Gabrielli via letter dated March 19, 2020, on the grounds that “[Gabrielli] and its principals do not meet HMA’s normal, reasonable, and uniformly applied standards for the appointment of a new Hyundai dealer” and “HMA... requires that dealer owner applicants have significant and successful experience owning and operating new car dealerships. The Proposed Owners of the Proposed Buyers do not meet this requirement. Indeed, while the Proposed Owners have experience operating heavy-duty truck dealerships, they do not have experience owning or operating a new car dealership.” As a result, Glick and Gabrielli modified the ASA to exclude the Hyundai assets and reduce the purchase price by $350,000.

In December 2020, Glick notified HMA via email that it was terminating the HMA franchise, stating “[h]aving not heard from you and given certain time constraints, [Glick] has had to make the difficult decision of terminating the Hyundai franchise effective close of business on December 9, 2020.”

ADDCA. Under the ADDCA, “[a]n automobile dealer may bring suit against any automobile manufacturer... by reason of the failure of said automobile manufacturer... to act in good faith in performing or complying with any of the terms or provisions of the franchise....” Moreover, in looking at the standard for good faith, courts have found that, “[a] dealer must show[] that the manufacturer coerced the dealer, and that the coercion was calculated to achieve a wrongful objective.”

Glick argued that HMA failed to act with “good faith” with respect to the provision of the Dealer Agreement requiring Defendant not to unreasonably withhold consent to change in ownership. HMA argued that the claim fails because there is no evidence that it made any wrongful demands that were enforced by threats of coercion or intimidation. Glick countered that HMA used its authority over the proposed transfer as a means for circumventing the statutory requirements for terminating a franchise. The court agreed with HMA, finding, “Even assuming arguendo that Defendant had the ulterior motive to terminate Plaintiff’s franchise, Plaintiff does not offer evidence of any coercive conduct enforcing a wrongful demand made by Defendant.” The court determined that Glick’s failure to produce any evidence of coercive conduct or a wrongful demand constitutes a failure of proof and is insufficient to create a genuine dispute of material fact. The court granted HMA’s demand for summary judgment on this claim.

Breach of contract. The court next turned to the claim for breach of contract. Glick alleged that HMA unreasonably withheld consent to the transfer in violation of Section 5 of the Dealer Agreement, which provided that any change in ownership of the dealership “requires the prior written consent of HMA, which HMA shall not unreasonably withhold.” HMA asserted that this claim fails because “(i) Defendant’s denial based on Gabrielli’s lack of car dealership experience was reasonable as a matter of law; and (ii) the evidence does not support that Defendant had an ulterior motive or that Defendant would have approved the transfer “but for” such ulterior motive.”

Looking at HMA’s first argument, the court examined the “reasonableness” standard. It was noted that, “at least one court in this Circuit found the consideration of a prospective dealer’s prior experience to be reasonable,” and that, “the specific circumstances of this case do not render prior car dealership experience an unreasonable consideration.” The court was not persuaded that it was unreasonable for HMA to withhold consent, given that “the advantages of a proposed dealer of a car dealership having prior experience operating a car dealership are obvious.”

However, with respect to the argument of whether Gabrielli’s lack of new car dealership experience was the “true reason” for the denial, or “merely pretext” for HMAs ulterior motive of dissolving the primary market area that encompassed Glick’s dealership in Monticello, the court concluded that a genuine issue of material fact remains as to HMA’s basis for withholding consent to the transfer. As such, the court denied the motion for summary judgment on the claim of breach of contract.

Violation of the Dealer Act. Finally, the court analyzed Glick’s claim that “Defendant unreasonably restricted Plaintiff’s ability to transfer the Dealership assets to Gabrielli” in violation of Section 466 of New York’s Dealer Act. Glick argued that HMA acted unreasonably under Section 466 by basing its denial on the lack of new car dealership experience. However, just as had been discussed when looking at the ADDCA claim, the court found that Glick failed to show how HMA’s imposition of the prior car dealership experience requirement unreasonably restricted its ability to transfer. The court again concluded that it was not unreasonable for Defendant to consider a prospective dealer’s prior car dealership experience and granted the motion for summary judgment for this claim.

The Case is No. 7:22-cv-01213-PMH.

Judge: Halpern, P.

Attorneys: Timothy N. McMahon (Bond, Schoeneck & King, PLLC) for Arthur Glick Truck Sales, Inc. John Joseph Sullivan (Hogan Lovells US LLP) for Hyundai Motor America.

Companies: Arthur Glick Truck Sales, Inc.; Hyundai Motor America

Cases: FranchisingDistribution NewYorkNews