S & P Brake Supply, Inc. v. Daimler Trucks N. Am., LLC , 390 Mont. 243 ( 2018 )


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  •                                                                                             02/13/2018
    DA 17-0222
    Case Number: DA 17-0222
    IN THE SUPREME COURT OF THE STATE OF MONTANA
    
    2018 MT 25
    S & P BRAKE SUPPLY, INC.,
    Petitioner and Appellant,
    v.
    DAIMLER TRUCKS NORTH AMERICA, LLC,
    Respondent and Appellee.
    APPEAL FROM:           District Court of the Thirteenth Judicial District,
    In and For the County of Yellowstone, Cause No. DV-15-0788
    Honorable Rod Souza, Presiding Judge
    COUNSEL OF RECORD:
    For Appellant:
    Michael F. McGuinness, Patten, Peterman, Bekkedahl & Green, PLLC;
    Billings, Montana
    For Appellee:
    Marcia Davenport, Crowley Fleck, PLLP; Helena, Montana
    Roberta F. Howell, Foley & Lardner; Madison, Wisconsin
    Submitted on Briefs: November 15, 2017
    Decided: February 13, 2018
    Filed:
    __________________________________________
    Clerk
    Justice Jim Rice delivered the Opinion of the Court.
    ¶1    S & P Brake Supply, Inc. (S&P) appeals from the order upon judicial review entered
    by the Thirteenth Judicial District Court, Yellowstone County, which affirmed the Final
    Decision of the Department of Justice that approved, upon good cause, termination of
    S&P’s franchise agreement with Appellee Daimler Trucks North America, LLC (Daimler).
    We affirm, and address the following issue:
    Did the District Court err by affirming the final agency determination of good cause
    to terminate the franchise agreement?
    FACTUAL AND PROCEDURAL BACKGROUND
    ¶2    S&P is a brake remanufacturing business that also sells trailers. In 2000, S&P
    became an authorized dealer of Western Star Trucks. Western Star is a “high-end” brand
    of semi-trucks. S&P operated its Western Star franchise under the name Rocky Mountain
    Western Star, subject to a Dealer Agreement (the Agreement) with Western Star’s parent
    company, Daimler.
    ¶3    Under the Agreement, S&P was authorized to purchase Western Star semi-trucks
    and their components at a reduced price for resale, and sell and service Western Star
    products under manufacturer warranty. The Agreement permitted S&P to continue its
    other business interests, but required S&P to make its best effort as a franchisee to
    maximize the sale of Western Star trucks in the franchisee’s designated area of
    responsibility (AOR), which was Yellowstone County, Montana. The Agreement was
    supplemented each year with an Annual Operating Requirement Addendum (AORA),
    which provided minimum sale and service targets for S&P.
    2
    ¶4     Between 2009 and 2013, S&P sold a total of 11 Western Star trucks and averaged
    $400,000 in parts and service sales each year. Only two of the trucks in that period were
    sold in Yellowstone County.       In April 2012, Daimler sent S&P a letter identifying
    deficiencies under its franchise that needed to be corrected, including failure to adequately
    promote and sell Western Star trucks, failure to hire necessary personnel, and failure to
    submit required financial statements.
    ¶5     In September of 2013, Daimler, pursuant to the Montana Dealer Act, served S&P
    and the Montana Department of Justice, Motor Vehicle Division (Department), with notice
    of its intention to terminate the Agreement and S&P’s franchise. S&P filed an objection
    with the Department, asserting that Daimler did not have good cause to terminate the
    franchise, as required by the Act.
    ¶6     In January 2015, a contested case hearing on Daimler’s proposed termination of
    S&P’s franchise was conducted before Department Hearing Officer Sarah M. Clerget.
    Hearing Officer Clerget issued finding of facts, conclusion of laws, and a proposed order
    that concluded Daimler had good cause to terminate S&P’s Western Star franchise. S&P
    filed exceptions and, after receiving oral arguments from the parties, the Department issued
    a Final Decision that adopted the proposed order.
    ¶7     S&P filed a petition for judicial review of the Department’s decision in the District
    Court, which affirmed the Department’s Final Decision. S&P appeals, arguing that the
    District Court erred by determining that Daimler met its burden to prove good cause for
    termination of the franchise agreement.
    3
    STANDARD OF REVIEW
    ¶8     Pursuant to the Montana Administrative Procedure Act, a district court’s review of
    an agency decision is confined to the record. Section 2-4-704(1), MCA. “The court may
    not substitute its judgment for that of the agency as to the weight of the evidence on
    questions of fact.” Section 2-4-704(2), MCA. A “court may reverse or modify the decision
    if substantial rights of the appellant have been prejudiced” because:
    (a) the administrative findings, inferences, conclusions, or decisions are:
    (i) in violation of constitutional or statutory provisions;
    (ii) in excess of the statutory authority of the agency;
    (iii) made upon unlawful procedure;
    (iv) affected by other error of law;
    (v) clearly erroneous in view of the reliable, probative, and substantial
    evidence on the whole record;
    (vi) arbitrary or capricious or characterized by abuse of discretion or clearly
    unwarranted exercise of discretion . . . .
    Section 2-4-704(2), MCA. These standards of review apply “to both the District Court’s
    review of the agency’s decision and this Court’s subsequent review of the District Court’s
    decision.” Blaine Cnty. v. Stricker, 
    2017 MT 80
    , ¶ 16, 
    387 Mont. 202
    , 
    394 P.3d 159
    (citations omitted). “A reviewing body’s standard on review ‘is not whether there is
    evidence to support findings different from those made by the trier of fact, but whether
    substantial credible evidence supports the trier’s findings.’” Blaine Cnty., ¶ 26 (citations
    omitted).
    4
    DISCUSSION
    ¶9     Did the District Court err by affirming the final agency determination of good cause
    to terminate the franchise agreement?
    ¶10    The Montana Dealer Act regulates the relationship between new motor vehicle
    dealers and franchisors in the State of Montana. See §§ 61-4-201 et seq., MCA (2013);1
    Rimrock Chrysler, Inc. v. DOJ, 
    2016 MT 165
    , ¶ 36, 
    384 Mont. 76
    , 
    375 P.3d 392
    . “[A]
    franchisor may not cancel, terminate, or refuse to continue the franchise unless the
    franchisor has cause for termination or noncontinuance.” Section 61-4-205(1), MCA.
    ¶11    Upon notice that a franchisor seeks to terminate the franchise, the franchisee may
    file an objection with the Department. Section 61-4-206(1)(a), MCA. If the objection is
    timely filed, the Department must initiate a contested case proceeding pursuant to the
    Montana Administrative Procedures Act. Section 61-4-206(2), MCA. The decision of the
    Department may be reviewed by the district court, § 61-4-206(7), MCA, and the franchise
    agreement continues in effect during the proceedings, including appellate review,
    § 61-4-206(8), MCA.
    ¶12    At the contested case hearing, the franchisor has the burden of proving that good
    cause exists to terminate the existing franchise. Hi-Tech Motors, Inc. v. Bombardier Motor
    Corp. of Am., 
    2005 MT 187
    , ¶ 17, 
    328 Mont. 66
    , 
    117 P.3d 159
    (citing § 61-4-206(3),
    1
    The Legislature amended relevant parts of the Montana Dealer Act several times during the life
    of the subject Franchise Agreement and the related proceedings, including in 2003, 2009, 2013
    and 2017. The parties variously quote different versions of the Act, probably unintentionally, as
    they offer no discussion about which version is applicable. The Department and District Court
    applied the 2013 version of the Act, and neither party challenges this on appeal. Therefore, all
    citations herein to the Montana Dealer Act are to the 2013 version, which includes the changes
    made by the 2013 Legislature.
    5
    MCA). The Department determines whether good cause has been established pursuant to
    “the existing circumstances, including but not limited to,” the following:
    (a) the franchisee’s sales in relation to the market;
    (b) investment necessarily made and obligations incurred by the franchisee
    in the performance of the franchisee’s part of the franchise;
    (c) permanency of the investment;
    (d) whether it is injurious to the public welfare for the business of the
    franchisee to be discontinued;
    (e) whether the franchisee has adequate new motor vehicle facilities,
    equipment, parts, and qualified management, sales, and service personnel to
    reasonably provide consumer care for the new motor vehicles sold at retail
    by the franchisee and any other new motor vehicle of the same line-make;
    (f) whether the franchisee refuses to honor warranties of the franchisor to
    be performed by the franchisee if the franchisor reimburses the franchisee for
    warranty work performed by the franchisee pursuant to this part;
    (g) except as provided in subsection (2), actions by the franchisee that result
    in a material breach of the written and uniformly applied requirements of the
    franchise that are determined by the department to be reasonable and
    material; and
    (h) the enforceability of the franchise from a public policy standpoint,
    including issues of the reasonableness of the franchise’s terms and the
    parties’ relative bargaining power.
    Section 61-4-207(1), MCA. As indicated by the “including but not limited to” language
    of the statute, the listed circumstances, or factors, are not exclusive, and other information
    may be considered. While the Department is thus granted latitude in the good cause
    determination, the statute also provides a list of factors that may not “constitute good cause
    for the termination or noncontinuance of a franchise,” as follows:
    6
    (a) a change in ownership of the franchisee’s dealership;
    (b) the fact that the franchisee refused to purchase or accept delivery of a
    new motor vehicle, part, accessory, or any other commodity or service not
    ordered by the franchisee;
    (c) the failure of a franchisee to change location of the dealership or to
    make substantial alterations to the use or number of franchises or the
    dealership premises or facilities; or
    (d) the desire of a franchisor or a franchisor’s representative:
    (i)   for market penetration; or
    (ii) to reduce the number of the franchisor’s or franchisor’s representative’s
    franchises or dealer locations.
    Section 61-4-207(2), MCA.
    ¶13    S&P argues Daimler did not meet its burden at the contested case hearing to show
    good cause to terminate the franchise, and the District Court erred in its assessment of the
    Department’s determination. Below, we take up S&P’s arguments regarding the good
    cause determination.
    a. S&P’s sales in relation to the market, § 61-4-207(1)(a), MCA.
    ¶14    Noting that § 61-4-201(1), MCA, provides that “the relevant market area of a
    franchise is the county or counties in which the franchisee is located,” S&P argues that an
    analysis of its sales performance is restricted to evidence related to Yellowstone County,
    and that the Department erred by considering Daimler’s analysis of other evidence.
    ¶15    Daimler established that S&P had failed to meet new truck sales objectives under
    its annual AORA for the years between 2009 and 2012, which are set for all Western Star
    dealers using an algorithm that considers market factors and the population of a dealer’s
    7
    area of responsibility. In 2009 and 2010, S&P sold no trucks in Yellowstone County.
    Daimler offered its analysis of S&P’s “dealer market share,” which compared how many
    trucks S&P sold in its AOR to how many Western Star trucks were annually registered in
    Yellowstone County, to measure how well S&P was reaching and serving local customers.
    Of the seven Western Star trucks registered in Yellowstone County from 2009 to 2013,
    only two had been sold by S&P, an indicator to Daimler that S&P was not well serving its
    market, as the majority of customers were purchasing their Western Star trucks elsewhere.
    This evidence was premised upon S&P’s performance in Yellowstone County.
    ¶16     Daimler also argued S&P’s “dealer market share” was low compared to Western
    Star’s “regional market share,” a factor which is compiled from national truck registration
    data to compare S&P’s sales performance in its AOR with Western Star’s regional
    performance. While this assessment included evidence from outside the Yellowstone
    County franchise location, the District Court properly noted that limiting the evidence to
    only Yellowstone County would not allow a comparison to other dealers where there is
    only one dealer in a county, reasoning that “when only one franchisee exists in a market,
    expanded data must be considered. Otherwise, a lone franchisee could never be terminated,
    and the statute would be rendered meaningless.” Further, as indicated above, § 61-4-
    207(1), MCA, permits consideration of additional information beyond the stated factors.
    ¶17    The evidence focused on S&P’s performance in Yellowstone County and was
    properly considered. The Department found, “[t]he bottom line is that S&P’s sales were
    deficient no matter which way one analyzed the data,” and this determination was
    8
    supported by substantial evidence. Thus, the District Court did not err by upholding the
    Department’s determination on this factor.2
    b. Daimler’s desire for market penetration, § 61-4-207(2)(d)(i), MCA.
    ¶18    S&P argues that the sales requirements set forth in the AORA were intended to
    increase market penetration, and therefore violated § 61-4-207(2)(d)(i), MCA, which
    provides that such purpose cannot constitute good cause for termination of the franchise.
    Daimler freely admits that the purpose of the AORAs was to increase market penetration.
    ¶19    The interface between § 61-4-207(1)(a), MCA, which requires consideration of “the
    franchisee’s sales in relation to the market,” and § 61-4-207(2)(d)(i), MCA, which prohibits
    the franchisor’s desire for greater “market penetration” to be a basis for good cause, makes
    application of the statute challenging. We can safely assume that a franchisor’s common
    desire will be to obtain greater market penetration. Interpreting these provisions together,
    we conclude that objective evidence of a franchisee’s deficient sales in relation to the
    market is an appropriate consideration, while a naked desire for a greater market share by
    a franchisor, without more, is an inappropriate basis to establish good cause.
    ¶20    The Department noted that, while “there may have been some evidence that
    [Daimler] had some desire for market penetration,” it was insufficient “to overcome the
    2
    S&P argues the Department erred by considering only the trucks it sold that were registered in
    Yellowstone County in determining its “dealer market share,” because S&P had no control over
    where end users registered their vehicles. We understand the point, especially given that
    Yellowstone County is a service hub for customers in surrounding counties. However, all of
    S&P’s truck sales, wherever registered, were counted toward its sale targets, so all sales were
    considered in some manner. As a whole, the evidence considered by the Department appropriately
    assessed S&P’s Yellowstone County performance.
    9
    substantial evidence of good cause” provided by Daimler. Daimler presented objective
    data that indicated S&P’s sales were deficient, and the “market penetration” factor did not
    preclude consideration of that evidence.
    c. S&P’s investment, § 61-4-207(1)(b) and (c), MCA.
    ¶21      Section 61-4-207(2)(b) and (c), MCA, respectively, require consideration of the
    “investment necessarily made and obligations incurred by the franchisee in the
    performance of the franchisee’s part of the franchise,” and the “permanency of the
    investment . . . .” The Department found that “none of S&P’s investments were Western
    Star specific and S&P can continue to utilize all the investments it made if its Western Star
    Dealer Agreement is terminated.” Additionally, it found that S&P’s investments “have
    never been used exclusively for Western Star,” but were also used for its other business
    interests.
    ¶22      S&P argues the Department erred as a matter of law by considering the “exclusivity”
    of its investments, and whether S&P could use their facilities for other ventures if the
    franchise were to be cancelled, because the statute only requires consideration of whether
    investments were made and their permanency. However, as noted above, these factors are
    not exclusive, and they can be considered in conjunction with other evidence. Further, the
    permanency of the investment under § 61-4-207(2)(c), MCA, can be considered in light of
    § 61-4-207(2)(b), MCA, which considers “investment necessarily made,” a concept which
    could encompass the exclusivity of the investment. Therefore, we conclude there was no
    error.
    10
    d. Material breaches by S&P, § 61-4-207(1)(g), MCA.
    ¶23    Section 61-4-207(1)(g), MCA, requires the Department to consider “actions by the
    franchisee that result in a material breach of the written and uniformly applied requirements
    of the franchise that are determined by the department to be reasonable and material . . . .”
    The Department determined that S&P breached the agreement in at least five ways: by
    failing to use best efforts to promote and sell Western Star trucks, failing to meet the new
    truck sales requires in the AORA, failing to use effective marketing strategies to promote
    Western Star truck sales, failing to adequately staff its sales team by failing to hire an
    outside salesperson, and failing to provide timely financial statements.
    ¶24    S&P argues the grounds cited are not material breaches because Daimler admitted
    that S&P’s failure to meet sales goals was the primary reason for terminating the
    Agreement, and, therefore, the other breaches must be considered secondary. However,
    just because Daimler considered them to be secondary reasons for termination does not
    necessarily mean they were not material. “[A] substantial or material breach is one which
    touches the fundamental purposes of the contract and defeats the object of the parties in
    making the contract.” Norwood v. Serv. Distrib., Inc., 
    2000 MT 4
    , ¶ 29, 
    297 Mont. 473
    ,
    
    994 P.2d 25
    (citations omitted).
    ¶25    S&P argues that using effective marketing strategies, specifically, submitting
    marketing plans and participating in marketing programs, was not a material provision of
    the Agreement, because the fundamental purpose of the Agreement was to sell trucks.
    However, the Agreement required S&P to use “its best efforts to promote and sell Western
    11
    Star trucks . . . .” S&P’s use of the same unsuccessful marketing plan, which relied mostly
    on a sign, phonebook advertisements, and a vague effort of “direct solicitation,” year after
    year, was found by the Department to not provide an advantageous strategy to sell Western
    Star trucks. This determination was properly based on the evidence.
    ¶26    S&P argues it was not a material breach to fail to hire an outside service sales
    person, as it instead designated an in-house service sales person. Daimler responds that,
    even if this was not, by itself, a material breach of the Agreement, this fact also goes to
    § 61-4-207(1)(e), MCA, which analyzes “whether the franchisee has adequate . . . qualified
    management, sales, and service personnel to reasonably provide consumer care . . . .” The
    Department concluded that S&P’s poor sale performance was tied to inadequate personnel,
    making this a related factor favoring good cause. This determination is supported by
    substantial evidence.
    ¶27    S&P argues that failing to consistently send timely financial statements was not
    material because it was not fundamental to the sale of trucks. The District Court concluded
    that “[k]nowledge of a party’s financial ability to perform its obligations under an
    agreement is material to that agreement.” Given S&P’s poor sales performance over a
    period of years, and Daimler’s need to monitor S&P’s progress, we agree with the District
    Court’s conclusion that this was a material requirement under the Agreement.
    e. Injurious to the public welfare, § 61-4-207(1)(d), MCA.
    ¶28    This provision requires the Department to consider “whether it is injurious to the
    public welfare for the business of the franchisee to be discontinued . . . .”
    12
    Section 61-4-207(1)(d), MCA. S&P argues that, because it is the only Western Star dealer
    in the state, Montanans will be forced to go out of state to obtain Western Star dealer
    services. The evidence showed that very few Western Star vehicles were registered in
    Yellowstone County, and the Department found that the public would be better served by
    a franchise that was more engaged with local customers. Consequently, this factor did not
    weigh strongly against termination, if at all.3
    ¶29    The District Court did not err in upholding the Department’s determination that
    good cause existed to terminate the franchise agreement.
    ¶30    Affirmed.
    /S/ JIM RICE
    We concur:
    /S/ JAMES JEREMIAH SHEA
    /S/ LAURIE McKINNON
    /S/ DIRK M. SANDEFUR
    /S/ BETH BAKER
    3
    S&P also offers a conclusory argument that the Department failed to consider its sales of parts
    and service, averaging $400,000 per year. It is correct that Daimler premised its case for
    termination of the franchise upon S&P’s deficiencies in truck sales, rather than parts and service.
    However, S&P fails to demonstrate that its parts and service sales satisfactorily serviced the
    market, and whether these sales could and did play a role in offsetting the established deficiencies
    in its truck sales for purposes of the good cause determination.
    13
    

Document Info

Docket Number: DA 17-0222

Citation Numbers: 2018 MT 25, 411 P.3d 1264, 390 Mont. 243

Judges: Jim Rice

Filed Date: 2/13/2018

Precedential Status: Precedential

Modified Date: 10/19/2024