S & P Brake Supply, Inc. v. Daimler Trucks N. Am., LLC

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:
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(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