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  • Tom Holman

Appeals Court Interprets Federal Arbitration Statute Permitting Reinstatement of Rejected GM and Chr

In a recent Sixth Circuit Court of Appeals decision, Chrysler Group LLC v. Fox Hills Motor Sales, Inc., 2015 FED App. 0008P (6th Cir. Jan. 16, 2015), the U.S. Court of Appeals for the Sixth Circuit (jurisdiction over federal District Courts in Kentucky, Michigan, Ohio and Tennessee) upheld the Michigan District Court’s decisions that (1) the dealerships that prevailed in arbitrations under §747 (of Consolidated Appropriations Act of 2010) were only entitled to the issuance of a “customary and usual” letter of intent; (2) the Michigan and Nevada Dealership Acts were preempted by §747; and, (3) §747 did not violate the separation of powers doctrine. The appellate court determined that the “relevant universe” utilized by the District Court in determining what was “customary and usual” was inappropriate; Despite utilizing the wrong “relevant universe,” the appellate court upheld the District Court’s decision that the LOIs issued to several dealerships were “customary and usual.” However, the Circuit Court vacated the District Court’s decision and remanded the case for reconsideration with respect to one provision of one of the letters of intent.

Section 747 of the Consolidated Appropriations Act of 2010, Pub. L. No. 111-117, 123 Stat. 3034, 3219-3221, created an arbitration procedure for automobile dealerships to seek continuation or reinstatement of franchise agreements that had been terminated by Chrysler during its bankruptcy proceedings. Section 747 provides that “[a] covered dealership that was not lawfully terminated under applicable State law on or before April 29, 2009, shall have the right to seek, through binding arbitration, 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.” If the arbitrator found in favor of one of the rejected dealers “the covered manufacturer shall as soon as practicable, but not later than 7 business days after receipt of the arbitrator’s determination, provide the dealer a customary and usual letter of intent to enter into a sales and service agreement.”

Over 400 Chrysler dealers elected to arbitrate against Chrysler. While Chrysler prevailed in 76 of the arbitrations, only 32 dealers prevailed in arbitrations with the remaining arbitrations settled “through other means.”

In Chrysler Grp. LLC v. S. Holland Dodge, Inc., 862 F. Supp. 2d 661 (E.D. Mich. 2012), the District Court construed §747 and addressed the constitutional issues raised by the parties. First, the District Court rejected any claims by the parties for monetary damages holding that the only remedy provided by §747 was a “customary and usual letter of intent to enter into a sales and service agreement with New Chrysler.” Second, the District Court found that § 747 does not entitle prevailing dealers to unconditional “reinstatement,” because “subsection (e) explicitly required only that Chrysler issue a ‘customary and usual letter of intent’” At an April 11, 2013 bench trial, the District Court determined that “customary and usual” would be determined by “comparing the prevailing dealers’ letters of intent to a ‘relevant universe’ of letters of intent” which included the letters of intent issued by Chrysler to new dealer candidates through July 2010, when the last of the disputed letters of intent was issued. By the time of the July 9, 2013 bench trial to determine whether Chrysler supplied the prevailing dealers with “customary and usual” letters of intent, most of the dealers involved had reached settlements with Chrysler. The remaining disputes involved Fox Hills Motor Sales, Inc., Village Chrysler Jeep Incorporated, Jim Marsh American Corporation and Livonia Chrysler Jeep, Inc. The District Court determined that Fox Hills, Village, Jim Marsh and Livonia had all received “customary and usual” letters of intent.

Three appeals were filed after the District Court rendered its July 2013 decision. In one appeal, Fox Hills, Village, and Jim Marsh argued that § 747 preempts state dealer laws and that the District Court erred in defining the “relevant universe” of letters of intent when determining whether their letters of intent were “customary and usual.” In a separate appeal, Livonia argued that § 747’s remedy is unconditional reinstatement, that state dealer protest laws are preempted, and that Chrysler’s letter of intent to Livonia was not “customary and usual.” In the third appeal, one of the existing like-line dealers that was not terminated, argued that the District Court erred by not considering its constitutional challenge that § 747 runs afoul of separation-of-powers principles by reopening the bankruptcy court’s final judgment.

The appellate court upheld the District Court’s decision that §747 does not entitle the prevailing dealers to an unconditional reinstatement and only required Chrysler to issue the “typical letter of intent, legally enforceable as a contract entered into in good faith.”

The appellate court also upheld the District Court’s decision that § 747 does not violate the separation of powers doctrine because “§ 747 does not interfere with a final court judgment, it simply reverses the effects of a court order through prospective relief.” The appellate court held that “Article III of the Constitution forbids congressional or executive interference with the final judgments of courts, Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 223-24, 115 S. Ct. 1447, 131 L. Ed. 2d 328 (1995), it does not forbid the granting of prospective relief intended to mitigate the perceived negative effects of a court order.”

The appellate court also upheld the District Court’s decision that §747 preempts the operation of Michigan and Nevada dealer protest laws, which authorize state officials to review the federal arbitral decisions. The court determined that the state dealer protest laws ultimately frustrate Congress’s purpose in enacting §747 because they permit state officials to delay and possibly nullify the effect of federal arbitration. “If the purpose of the act cannot otherwise be accomplished…the state law must yield to the regulation of Congress.” The appellate court held that “Congress, consistent with the retrospective intent of the act, deliberately chose not to weigh very heavily the interests of existing dealers, who would have had no state-created rights at the time of termination anyway.” They further held that “[t]he preemption in this case moreover does not substantially interfere with state policies, since §747 is generally consistent in purpose with the whole scheme of state dealer laws” in that it was intended to “ensure that these protections from no-good-cause termination had not been unduly circumvented by the bankruptcy court’s rejection authorization.”

However, the appellate court differed with the District Court’s determination of what was “customary and usual” in the letters of intent that Chrysler issued the dealers prevailing in the §747 arbitrations. The appellate court decided that the “relevant universe” for determining what was “customary and usual” should not have been the letters of intent that Chrysler issued to dealers from June 9, 2009 to July 31, 2010. The Court of Appeals found that “there is very little that is ‘usual’ about the letters of intent issued by Chrysler in accordance with a § 747 arbitration, the proper set of letters of intent used to ascertain what is ‘customary and usual’ should not include those required by a § 747 arbitration.” The Court of Appeals stated, “[a] typical letter of intent follows a lengthy process of strategizing, negotiating, and vetting, after which Chrysler has almost no reservations committing to a sales and service agreement” and “[a]n ordinary, run-of-the mill dealership installation does not occur at the behest of the federal government after a politically contentious government buyout of the industry following a global financial calamity.” In short, “Chrysler would not usually or customarily issue a letter of intent to a dealership that it did not want to enter its dealer network.” Finding support from the Second and Ninth Circuits, the appellate court limited the “relevant universe” to those letters of intent issued by Chrysler in the ordinary and voluntary course of business. They determined that the letters of intent “must constitute a meaningful intention to enter into full sales and service agreement, rather than a merely illusory promise that may not materialize.”

The appellate court agreed with Livonia’s challenge to the site-approval provision in its letter of intent and decided that Livonia’s argument had merit because the site-approval provision, as applied to Livonia, may not be “customary and usual.” They found that because Livonia already had a successful dealership and owned its intended location, the location of the reinstated dealership should be “pre-approved,” and if Chrysler were granted a veto it could render the promise of a dealership merely illusory. The appellate court vacated the judgment of the District Court dismissing Livonia’s claim and remanded for the District Court to reconsider whether Livonia’s site-approval provision is permissible under § 747’s “customary and usual letter of intent” standard.

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