Friday, January 12, 2007

Franchise Anti-Encroachment Law Survives Constitutional Attack

The anti-encroachment provision of the Illinois Motor Vehicle Franchise Act—which requires good cause to add or relocate a franchise within 10 miles of an existing franchise—passes constitutional muster, according to a January 8 decision of the Illinois Supreme Court. The statute survived a challenge that it was unconstitutionally vague, violated the Commerce and Equal Protection Clauses, and constituted special legislation.

Like legislation in many other jurisdictions, the Illinois Motor Vehicle Franchise Act (815 Illinois Compiled Statutes 710/1-32) is designed to protect existing motor vehicle dealers and consumers from “the negative impact of aggressive franchising practices by automobile manufacturers,” the state high court found.

Specifically, the Act requires a franchisor wishing to establish an additional franchise to provide 60 days’ notice to existing franchisees of the same line make located within 10 miles of the proposed location. The dealers have 30 days in which to file a protest with the Motor Vehicle Franchise Board. The manufacturer then has the burden of proving “good cause” for the addition of the franchise. “Good cause” means commercial reasonableness under 11 enumerated factors (including whether establishment of the franchise is in the public interest).

In this case, General Motors provided notice that it intended to open two new franchises in the Chicago area. Existing franchises challenged both locations within 30 days. A hearing was conducted, after which the hearing officer recommended that the protests be upheld. The Board followed the recommendations and barred the establishment of the two locations.

On appeal, General Motors claimed that there was good cause for the addition of the franchises and that the Act was unconstitutional on various grounds. The circuit court confirmed the decision of the Board, and the appeals court affirmed that judgment. The Illinois Supreme Court held as follows:

Good cause. The Motor Vehicle Board’s decision that the new franchises were not warranted by economic and marketing conditions was not clearly erroneous or against the manifest weight of the evidence. There were already three GM dealers within less than 10 miles of the proposed locations, there was little projected growth around the dealership, and the existing dealers were underperforming.

Vagueness. A contention that the Act was unconstitutionally vague because “a manufacturer cannot determine in advance when a dealership can be added to the market” was without merit. The Franchise Act is more detailed than some similar statutes that have been upheld in that it provides 11 factors for assessment in determining the existence of “good cause.”

Commerce Clause. The court rejected GM’s assertion that the statute impermissibly favors purely local interests over interstate commerce. A state statute is valid under the Commerce Clause if it evenhandedly effectuates a legitimate local public interest, the effect on interstate commerce is only incidental, and the burden on commerce is not clearly excessive to the local benefits. The court held that the Act serves the legitimate public interest of promoting fair dealing and protecting small business and consumers and found that GM failed to show any effect other than a restriction on intrabrand competition.

Equal protection and special legislation. GM claimed that there is no basis for conferring market protection on motor vehicle franchises but for denying this protection to other types of franchises. While the Motor Vehicle Franchise Act treats existing motor vehicle franchisees differently from other kinds of franchisees, the classification is related to “the legitimate government purposes of redressing the disparity in bargaining power between automobile manufacturers and their existing dealers and of protecting the public from the negative impact of harmful franchise practices by automobile manufacturers.” Furthermore, requiring a neutral body to determine whether there is good cause to establish an additional franchise is rationally related to the purposes served by the statute, the court concluded.

The decision is General Motors Corp. v. The State of Illinois Motor Vehicle Review Board, Docket No. 101585, January 8, 2007.

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