Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Tex. App.: Jury verdict upheld in Mercedes-Benz dealer fraud case, (Apr 5, 2016)

By Linda O’Brien, J.D., LL.M.

An auto manufacturer’s nondisclosure of its intent to allow the addition of a new dealership in the McAllen, Texas, area prior to its approval of an auto dealer’s takeover of an existing dealership and relocation request to the same area was sufficient to support a jury’s finding of fraud in the inducement and negligent misrepresentation against the manufacturer, a Texas appellate court in Edinburg has decided. Thus, the trial court’s judgment entered in favor of the dealer was affirmed. However, an award of exemplary damages was reduced (Mercedes-Benz USA, LLC v. Carduco, Inc., March 31, 2016, Valdez, R.).

From 1993 through 2009, Autoplex operated a Mercedes-Benz dealership in Harlingen, Texas. In 2007, Mercedes-Benz USA, LLC (MBUSA), the North American distributor and subsidiary of Daimler AG, encouraged Autoplex to relocate to McAllen, Texas. After meeting with Autoplex regarding construction plans for the new location, MBUSA issued Autoplex a termination notice for failure to meet performance standards.

The termination proceedings were mooted when Carduco, Inc. entered into an asset purchase agreement with Autoplex. Carduco was aware of Autoplex’s discussions with two MBUSA sales managers regarding the relocation plans. In June 2009, Carduco became a franchised Mercedes-Benz dealer, completed the purchase of Autoplex’s assets, and executed a dealer agreement with MBUSA. In August 2009, Carduco was advised that MBUSA had appointed another dealer to the new dealership in McAllen and Carduco’s relocation request was rejected.

Carduco filed suit against MBUSA and the two MBUSA sales managers, alleging fraud in the inducement and negligent misrepresentation. A jury found MBUSA liable for fraud and the two sales managers liable for negligent misrepresentation, and assessed benefit-of-the-bargain, out-of-pocket, and punitive damages. MBUSA appealed.

Basis for fraud. The court found that the jury had adequate basis for finding fraud, that Carduco justifiably relied on MBUSA’s misrepresentation that Carduco could relocate the dealership to McAllen, and that MBUSA failed to disclose that Carduco would not be the exclusive dealership in its assigned territory. There was sufficient evidence that : (1) MBUSA sales managers intentionally declined to tell Carduco about MBUSA’s approval to another dealership to operate in McAllen prior to Carduco’s purchase of Autoplex’s assets; (2) MBUSA’s market studies showed that the territory could only support one Mercedes-Benz dealership; and (3) MBUSA reassigned the most affluent areas to the new McAllen dealership.

Additionally, the alleged misrepresentations and nondisclosures did not contradict the dealer agreement. According to the court, although the agreement did not grant Carduco the exclusive right to sell cars in its assigned territory, the agreement did not state that MBUSA could add another dealership to Carduco’s territory even though the area was unable to economically support more than one dealership, and doing so, would cause Carduco to fail. Furthermore, there was evidence that MBUSA had previously given approval to Autoplex to relocate. Therefore, a jury could have reasonably inferred that MBUSA intended Carduco to believe it had prior permission to move to McAllen. There was no clause in the agreement that allowed MBUSA to revoke prior permission to relocate once it was given.

Disclaimer of reliance. MBUSA’s contention that the dealer agreement contained a provision in which Carduco agreed that no representations were made by MBUSA outside of the agreement was rejected. The court noted that the jury found that Carduco was fraudulently induced into entering into both the asset purchase agreement and dealer agreement. Since only the dealer agreement contained an alleged disclaimer of reliance, MBUSA did not show that Carduco “clearly and unequivocally” disclaimed reliance. Moreover, the disclaimer of reliance in the dealer agreement was merely “boilerplate” and there was no evidence that the term was negotiated by the parties.

Punitive damages. The court determined that there was clear and convincing evidence to support the jury’s finding of malice and fraud. There was evidence that the MBUSA sales managers: (1) approved Autoplex’s move to McAllen; (2) were aware of Carduco’s plan on moving the dealership to McAllen after its purchase of Autoplex’s assets; and (3) planned to add another dealership in hopes of negatively affecting Carduco’s business. However, the amount of punitive damages awarded in the case—$115 million—was unconstitutionally excessive and out of proportion to the severity of the offense. The punitive damages far exceeded the amount of compensatory damages awarded and the penalties authorized in similar criminal statutes and in similar cases. Given the relatively low level of reprehensibility, the court reduced the total punitive damages to $600,000.

Dissent. Justice Neida Rodriguez wrote a dissent, concluding that the alleged oral representations and nondisclosures were directly contradicted by the express terms of the dealer agreement. The agreement specified that there was only one approved location for the Carduco dealership—Harlingen—and that Carduco could not relocate without MBUSA’s consent. Therefore, Carduco could not have reasonably relied on representations to relocate or to regional exclusivity, Rodriguez determined.

The case is No. 13-13-00296-CV.

Attorneys: Joseph R. Knight (Baker Botts LLP) and Edward Michael Rodriguez for Mercedes-Benz USA, LLC. Don Cruse for Carduco, Inc.

Companies: Mercedes-Benz USA, LLC; Carduco, Inc.

Cases: FranchisingDistribution TexasNews