CONNECTICUT DEALERS PREVAIL AGAIN OVER MANUFACTURERS’ ATTACK ON STATE FRANCHISE LAWS

From: David Stevens. Chairman of the Board, Jim Fleming President of CARA 
Date: April 15, 2015 

CONNECTICUT DEALERS PREVAIL AGAIN OVER MANUFACTURERS’ ATTACK ON STATE FRANCHISE LAWS On April 7, 2015, the United States Second Circuit Court of Appeals affirmed the trial court’s dismissal of the Alliance of Manufacturers’ complaint arguing that certain Connecticut motor vehicle franchise laws were unconstitutional under the United States Constitution.

The Alliance still has some legal options open to it, but this ruling is truly monumental and our dealer body must be advised and take heart. We feel that you need to hear the details of what has happened and we have asked our attorneys to put together a summary of the events leading up to and including this major decision by the federal courts. But first a few notes of thanks are in order. As Chairman and President of CARA we salute and thank Richard Sox and Jason Allen of Bass Sox Mercer (BSM) and Thomas Murphy and James Healy of Cowdery and Murphy, the law firms that represented the Connecticut Automotive Retailers Association in the case to defend our franchise law. These gentlemen truly took on a David vs. Goliath battle against some of the largest multinational corporations in the world. We gratefully acknowledge and thank Connecticut Attorney General George Jepson and Assistant Attorney General Michael Skold for taking on this massive task to defend our law and the actions of our Legislature back in 2009.

We also need to recognize the support we received from NADA and NADA Legal staff, in particular attorney Jim Moors. Furthermore, thanks must go to CARA board members, CARA staff and our two NADA directors Gary Reynolds who passed away in 2013 and present Director Jeff Aiosa. The time, stress and effort they put in to taking up this challenge says so much about our Association. Most of all, we are thankful and proud of our members of CARA, who generously and faithfully agreed to help us fund the CARA legal defense fund. We are hopeful once the mandatory appeals process timeline passes to finally put this matter behind us, get on with our mission to serve our dealers and be able to return any unused funds to those dealers who contributed. The Alliance attacked the Connecticut provision put into law in 2009 requiring manufacturers to reimburse dealers for warranty work at rates equivalent to retail rates and the corresponding provision which prohibited the manufacturers from levying a surcharge against dealers to take back the increase reimbursement payments.

The Alliance argued that the warranty reimbursement provisions of Connecticut law violated three separate provisions of the United States Constitution – the Commerce Clause, the Contract Clause and the Due Process Clause. This is an important decision for CARA and our members but also for every dealer in the United States. So, why does this matter to dealers outside of Connecticut? Because the claims brought by the Alliance attacking the Connecticut franchise laws are the same claims that could have been brought against franchise laws in ANY other state. The Alliance’s claims were bed upon violations of the United States Constitution which apply to all state laws. As to the Commerce Clause, the Alliance contended that the warranty reimbursement provisions burdened the flow of commerce as a result of the additional cost to out-of-state manufacturers in compensating Connecticut dealers for warranty work. The Appeals Court, however, affirmed the trial judge’s ruling that the Alliance failed to show that the warranty reimbursement provisions favored an in-state competitor (i.e. another manufacturer) or otherwise had any different impact upon commerce within Connecticut as versus states outside of Connecticut. As to the Contract Clause, the Alliance argued that the requirement to reimburse dealers at the equivalent of retail rates unreasonably interfered with the dealer agreements which contained lower reimbursement rates.

The Appeals Court, however, affirmed the trial judge’s ruling that the actions by the Connecticut Legislature was not unreasonable as it was not unforeseen that the State would step in and regulate warranty reimbursement as the relationship between the manufacturers and dealers has been the subject of state regulation since 1982. As to the Due Process Clause, the Alliance argued that the warranty reimbursement provisions were illogical and served no legitimate public purpose. Again, the Appeals Court agreed with the trial court’s ruling that the Alliance’s arguments failed because all that is required is that the challenged law have a “plausibly” legitimate purpose which does not have to be based upon any empirical evidence. In this regard, the trial court found that the law was rational and could certainly accomplish its intended benefit of increasing reimbursement to dealers while benefitting citizens by preventing dealers from having to increase non-warrantyrepair costs to subsidize dealers’ cost to perform warranty work.

The Alliance also filed a similar lawsuit attacking several Florida franchise laws (warranty reimbursement, limitations on export chargebacks, etc.) prior to the Connecticut lawsuit. Although the Alliance brought virtually identical claims in the Florida lawsuit, the federal trial court in Florida did not dismiss the case but instead allowed the case to move forward. Fortunately, the Florida dealers put up a strong fight which resulted in the Alliance walking away from the lawsuit late last year in the midst of depositions and document production.

The Alliance has been using the Connecticut and Florida lawsuits as scare tactics in their attempts to stop enactment of further franchise protections in a number of states. In BSM’s representation of CARA and several state dealer associations, it has witnessed first-hand the Alliance representatives threatening legislators with a similar lawsuit if new franchise laws are passed. With the Connecticut dealer’s latest victory over the Alliance, that threat has now been removed.