Business Disputes in Automotive Industry Can Present Unique Issues

April 10, 2014

A recent decision from the United States District Court in Massachusetts illustrates how business disputes in the automotive industry may be subject to specific laws that can have an effect on substantive claims as well as the enforcement of arbitration agreements to resolve such disputes. In Aston Martin Lagonda of North America, Inc. v. Lotus Motorsports, Inc., laws specific to automotive business disputes led the federal court to dismiss various claims brought by dealership franchisee Lotus Motorsports, Inc. (Lotus) against franchisor Aston Martin Lagonda of North America, Inc. (Aston Martin).

After entering into an automobile dealership franchise agreement with Aston Martin in 1996, Lotus served as the only Aston Martin dealer in New England, except for southern Connecticut. Around 2003, Aston Martin advised Lotus that the showroom at Lotus's dealership was insufficient for the anticipated increase in volume, and assured Lotus that it would sell 75 to 100 units per year when Aston Martin's new volume model was released. Based on these statements and encouragement from Aston Martin, Lotus moved its dealership to a larger facility in which it invested more than $700,000, and passed on other business opportunities. In 2013, Lotus learned that another Aston Martin authorized dealership would be opening 8.7 miles from Lotus's new location.

When a dispute arose between the parties as to whether it was unlawful for Aston Martin to authorize the opening of the new Aston Martin dealership so close to Lotus's location, Aston Martin sought a declaratory judgment from the federal court, declaring both that the parties were not obligated to arbitrate the dispute, notwithstanding the existence of an arbitration clause in the parties' franchise agreement, and that it has the right to create the authorized dealership at the intended location. Lotus brought several counterclaims against Aston Martin, based upon Aston Martin's statements and assurances that led Lotus to make a substantial investment in the new location, which was now threatened by the new competing dealership. Aston Martin filed a motion to dismiss these counterclaims.

The court dismissed Lotus's claim under the federal Automobile Dealers Day in Court Act (ADDCA). Although the ADDCA permits automobile dealers to sue automobile manufactures who fail to act in good faith in complying with terms of a franchise agreement, it requires a showing of actual or threatened coercion or intimidation. Lotus failed to sufficiently allege such conduct its counterclaim. Moreover, to the extent that Lotus claimed that Aston Martin had demanded that it assent to the appointment of the new dealership, the court noted that imposing conditions on a continued business relationship did not necessarily rise to threatening penalties or coercion.

Likewise, the court dismissed Lotus's claim pursuant to M.G.L. c. 93B (93B). 93B is akin to M.G.L. c. 93A in that it prohibits specific unfair methods of competition and unfair and deceptive acts or practices, but it applies specifically to such methods, acts, or practices in the automotive industry. 93B provides in part that it is a violation of the statute for a manufacturer, "without good cause, in bad faith or in an arbitrary and capricious manner . . . to permit the relocation of an existing motor vehicle dealer to a site any boundary of which is within the relevant market area of an existing motor vehicle dealer which is not relocating...." The statute defines "relevant market area" as "the entire land mass encompassed in a circle with a radius of 8 miles from any boundary of the [existing] dealership." Because Lotus alleged that the new dealership would open 8.7 miles from Lotus's location, Lotus's allegations did not amount to a claim under 93B. Additionally, no other provision of 93B permitted Lotus to challenge the establishment of a competing dealership.

The court also dismissed Lotus's claim for breach of contract relative to the arbitration provision in the franchise agreement. Although arbitration provisions are favored and widely enforced, a provision of the ADDCA requires that, "whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy." The court held that the statute superseded the parties' arbitration clause. Thus, because there was no allegation that the parties agreed in writing to arbitrate after the dispute arose, the court dismissed the breach of contract claim.

However, the court allowed Lotus to pursue its remaining claims. First, it found that Lotus had sufficiently pleaded a claim for breach of fiduciary duty against Aston Martin, because Lotus had alleged that the parties had developed a fiduciary relationship, that it had placed tremendous trust in Aston Martin, and that the course of conduct created more than a mere franchisor/franchisee relationship. Second, the court held that Lotus's promissory estoppel claim was proper, as Lotus had alleged that, based upon its reliance on Aston Martin's implied and express promises, which were reasonably expected to - and did in fact - induce Lotus to rely on those promises, that Lotus should be entitled to the enforcement of those promises. Finally, the court permitted Lotus's claim for breach of the implied covenant of good faith and fair dealing to proceed, based upon Lotus's allegations that Aston Martin undermined the parties' franchise agreement by encouraging Lotus's investment in the new facility and making but failing to deliver on promises of increased sales, while acting to grant another franchise to another local dealer in competition with Lotus.