Thursday, April 23, 2009

Motor Vehicle Dealer Not Damaged by Phase-Out of Oldsmobile Line

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A motor vehicle dealer's breach of contract claim against General Motors (GM) for phasing out its Oldsmobile line of vehicles necessarily failed because, as a result of the dealer's actions to mitigate its damages, it suffered no loss, the U.S. Court of Appeals in Richmond, Virginia, has held.

GM had entered into an agreement authorizing a dealer to operate an Oldsmobile dealership from November 2000 through October 2005. Only weeks later, GM announced its decision to terminate the Oldsmobile line, the court observed.

After being informed of the decision, the dealer, without consulting GM, purchased a nearby Nissan dealership in order to mitigate the anticipated loss of Oldsmobile sales. The dealer purchased the goodwill of the Nissan dealership for $1 million and entered into a Nissan dealership agreement that required it to separate its GM and Nissan facilities after a period of time.

In December 2001, the dealer informed GM of the dealership acquisition and the fact that the Oldsmobile dealership would be sharing the building with the Nissan operation for two years. Soon thereafter, GM sent the dealer a letter agreement, stating that the addition of the Nissan dealership without GM’s approval was a material breach of the dealership agreement.

Contract, Statutory Claims

In September 2005, the dealer filed an action against GM, alleging actual and anticipatory breach of the dealership agreement and violations of the West Virginia motor vehicle dealer law. The action initially claimed $2.47 million in “mitigation costs.”

The trial court dismissed the damage claim based on the fact that the dealer had profited from its mitigation. The dealer then added a claim for lost profits. An expert’s testimony on lost future profits, based on sales during a single baseline year, was excluded for failure to meet the standards of Federal Rule of Evidence 702, as clarified by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999). Because the dealer lacked any evidence of lost future profits, the trial court entered judgment as a matter of law in favor of GM.

On appeal, the dealer argued that it was entitled to the $1 million it paid for the goodwill for the Nissan dealership, the $526,641 it paid to separate the Nissan and Oldsmobile dealership facilities, plus $1,972,985 in lost profits during the remaining term of its Oldsmobile dealership, for a total claimed loss of $3,499,626.

Lack of Economic Loss

Through its efforts at purported mitigation, the dealer had acquired a Nissan dealership with a total value of $5 million by the end of the term of its Oldsmobile dealership agreement in 2006, according to the appeals court. The $5 million figure did not even take into account the dealer's profits from the sale of at least 2,000 Nissan vehicles.

Based on the dealer's own appraisal of the value of the Nissan dealership in 2006, the Nissan dealership's increase in value more than compensated the dealer for all of its alleged mitigation damages and lost profits. It was clear that the dealer suffered no economic loss and therefore no legally cognizable damage as a result of GM's alleged breach, the appeals court held.

West Virginia Dealer Law

GM did not violate the West Virginia motor vehicle dealer law by enforcing facility requirements that were "unreasonable considering current economic conditions" or "not otherwise justified by reasonable business considerations," the court determined. Under the agreement with GM, the dealer was required to obtain GM's prior written consent before it added the Nissan line, and the dealer failed to do so.

In addition, the dealer specifically agreed in its contract with Nissan, entered into over four months prior to GM's sending of the letter agreement, that it would maintain separate facilities for the Nissan dealership. Thus, the dealer could not claim the GM's insistence that GM and Nissan dealerships be separated within two years violated the statute, the court reasoned.

The unpublished decision is C&O Motors, Inc. v. General Motors Corp., CCH Business Franchise Guide ¶14,110.

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