Post-Dealer Arbitration Act Litigation Nearing An End

In the aftermath of the Chrysler and GM bankruptcies, Congress enacted section 747 of the Consolidated Appropriations Act of 2010 (“Dealer Arbitration Act”), which created an arbitration process by which Chrysler dealers could challenge their rejection and GM dealers could challenge their being wound down. Under the Dealer Arbitration Act, a successful dealer could obtain the following relief: “continuation, or reinstatement of a franchise agreement, or to be added as a franchisee to the dealer network of the covered manufacturer in the geographical area where the covered dealership was located when its franchise agreement was terminated, not assigned, not renewed, or not continued.” In other words, a successful dealer could be continued, reinstated, or added. In such event, the manufacturer was required to “provide the dealer a customary and usual letter of intent to enter into a sales and service agreement.”

Now, disfavored dealers were treated differently in the Chrysler and GM bankruptcies. In the Chrysler bankruptcy, the franchise agreements of disfavored dealers were formally “rejected” under section 363 of the Bankruptcy Code. On the other hand, in the GM bankruptcy, the franchise agreements of disfavored dealers were actually assumed, but subject to wind-down agreements executed during the bankruptcy. Under these wind-down agreements, GM’s disfavored dealers received a modest payment and were given time to sell off their remaining inventory and close down operations in an orderly manner. In other words, rejected Chrysler dealers were left behind in the bankruptcy whereas GM’s wind-down dealers continued on post-bankruptcy for a time with so-called New GM. That difference – outright rejection in the Chrysler bankruptcy versus assumption and wind-down in the GM bankruptcy - would prove critical in the arbitration process to come.

Following the arbitrations, successful rejected Chrysler dealers were presented with letters of intent that many of them argued violated the Dealer Arbitration Act because they did not simply reinstate those dealers but rather imposed all sorts of conditions and limitations, such as facility upgrades. In addition, a conundrum was created in instances where New Chrysler had inserted a new dealer into the territory previously assigned to the rejected dealer and that new dealer had territorial rights under their state’s automobile franchise act.

Several lawsuits were commenced around the country and the consistent result was that, although GM’s wind-down dealers could be “continued” or “reinstated,” rejected Chrysler dealers could only be “added.” This is because wind-down GM dealers were operating under existing franchise agreements with New GM, whereas rejected Chrysler dealers had no legal relationship with New Chrysler. Thus, they could only be “added” to New Chrysler’s dealer network and all they were entitled to was a “customary and usual letter of intent to enter into” a franchise agreement. From this ruling, courts also consistently held that the Dealer Arbitration Act did not pre-empt state automobile franchise laws, meaning that existing New Chrysler dealers could challenge the addition of a successful rejected dealer under a state dealer act’s relevant market area provision.

These issues are playing out in United States District Court for the Eastern District of New York in Eagle Auto Mall Corp. v. Chrysler Group LLC, Case No. 10-cv-3875 (Wexler, J.). By order dated December 23, 2011, Judge Wexler held that the plaintiff dealers were only entitled to be “added” to New Chrysler’s subject to “a customary and usual letter of intent.” Judge Wexler “interpreted this to mean that Plaintiffs were entitled to an offer under terms that were usual and customary at the time of the offer, and not those governing Plaintiffs’ pre-bankruptcy dealership agreements.” However, Judge Wexler went on to hold that whether the letters of intent offered by New Chrysler were usual and customary was a question of fact for trial and denied summary judgment. New Chrysler’s motion for reconsideration was also denied.

After close of discovery, New Chrysler again moved for summary judgment, based on the decision of the court in Los Feliz Ford, Inc. v. Chrysler Group LLC, 10-cv-6077 (C.D. Ca. April 9, 2012), which held that no issues of fact existed as to whether the letter of intent at issue there was “customary and usual”. However, by order dated September 28, 2012, Judge Wexler disagreed and adhered once again to his prior holding that issues of fact remained:

…the issue is whether the letters of intent offered to Plaintiffs here were substantially the same as those offered to dealers who were given the opportunity to be added as new franchisees to the dealer network during the same period. The court has reviews the parties submissions and cannot hold, based upon those papers alone, whether such terms were offered to the Plaintiffs here.

Eagle Auto Mall proceeded to a bench trial of December 3, 2012 and is awaiting decision following the submission of post-trial briefs.

Rejected/Wind-Down Dealer Arbitration Bill Signed into Law

The bill granting rejected or wind-down dealers the right to arbitrate for potential reinstatement was signed into law on December 16, 2009. The various deadlines set forth in the statute are as follows:

• no later than January 15, 2010: manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..."
• no later than January 25, 2010: a covered dealership must elect to pursue the right to binding arbitration provided in the legislation.
• no later than June 14, 2010: the case must be submitted to the arbitrator for decision

Once the matter is submitted, the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules that the dealership must be reinstated, the manufacturer must offer a letter of intent within 7 business days after the decision in rendered. The arbitrator has the authority to extend these deadlines for up to 30 days.

Congress Approves Dealer Arbitration Procedure

The House and Senate passed a bill that would give arbitration rights to the 789 Chrysler, Dodge and Jeep dealers whose sales and service agreements were rejected in the Chrysler bankruptcy and to the Chevrolet, Buick, Cadillac and GMC dealers who signed deferred termination agreements in the GM bankruptcy. The legislation does not benefit those dealers whose brand is disappearing, such as Saturn, Pontiac and, likely, Saab.

Basically, a covered dealership shall have the right to seek, through binding arbitration, the restatement of its franchise or the award of a new franchise in the same geographical area.

The legislation provides for a series of deadlines measured from the date of enactment (the "DoE") of the legislation. Within 30 days of the DoE, the manufacturer must provide each covered dealership with "the specific criteria pursuant to which such dealership was terminated, was not renewed, or was not assumed and assigned..." Within 40 days of the DoE, a covered dealership must elect to pursue the right to binding arbitration provided in the legislation. Within 180 days of the DoE, the case must be submitted to the arbitrator for decision and the arbitrator must issue a written decision within 7 business days thereafter. If the arbitrator rules in favor of the dealership, the manufacturer must provide a letter of intent within an additional 7 business days thereafter. The arbitrator may extend the arbitration deadlines for up to 30 days.

The legislation provides that the arbitrator shall balance the economic interests of the dealership, the manufacturer and the public at large. The factors to be considered include: 1) the dealership's profitability from 2006 through 2009; 2) the manufacturer's overall business plan; 3) the dealership's current economic viability; 4) the dealership's satisfaction of performance objectives as found in the franchise agreement; 5) the demographic and geographic characteristics of the relevant market territory; 6) the dealership's satisfaction of the criteria used by the manufacturer to select the dealer for termination; and 7) the length of experience of the dealership.

The arbitration shall be conducted in the state where the dealership is located and the arbitrator shall be selected from regional lists maintained by the American Arbitration Association. If the factory and dealer cannot agree, the AAA will select the arbitrator. There will be no depositions and only limited discovery. If both parties agree, the arbitration may be conducted electronically or telephonically. Each party shall be responsible for their own costs and expenses, including the fees for the arbitration. No money damages may be awarded.

38 Dealers to be Rejected By GM

GM filed a motion to reject the franchise agreements of 38 dealers that refused to sign a Wind-Down Agreement. The rejection motion covers 70 individual franchise agreements. The motion can be found here.

Bankruptcy Court Grants GM's 363 Sale Motion

Not unexpectedly, Judge Gerber granted GM's motion to sell substantially all of its assets to "New GM," an entity majority owned and controlled by the United States Treatury. A copy of the decision is found here and a copy of the final order is found here.

GM Files First Day Motion Affecting Dealers

Among GM's First Day Motions in its Chapter 11 bankruptcy proceeding is its motionfor an order authorizing GM to honor prepetition obligations to customers and dealers and to continue warranty, customer and dealer programs in the ordinary course of business. That motion is found here. The order was signed the same day and is found here.

GM seeks the authority to, in its sole discretion, honor, perform, replace, renew, amend or terminate its Customer Programs (defined to include warranty programs, recall programs, sales incentive programs, dealer support programs, and customer rebates and allowances). The warranty programs include both customer warranties and dealer reimbursement for warranty parts and labor. Sales incentive programs include both consumer and dealer focused programs. Dealer support programs include payments of hold-backs, floor plan assistance, regional marketing support, vehicle delivery and handling, etc.

GM Files Chapter 11 Bankruptcy

In a one-two punch, on the same day that Chrysler's 363 Motion was granted, General Motors Corporation (together with its affiliates Saturn, LLC and Saturn Distribution Corporation filed a proceeding seeking reorganization under Chapter 11 of the Bankruptcy Code. General Motors' petition is found here.